(This is a podcast summary. Please tune into Doug’s podcast this week for even more details on these topics, and feel free to share this information with others who might benefit from our perspective.)
We believe that right now, investors are being lulled to sleep by the appearance of healthy upward momentum in the markets, which could be a mistake.
There is a distinct, fascinating psychology of investing that it’s wise to be aware of. On one hand, there is the greedy, euphoric, no-risk mentality of an upward-swinging market, and on the other, the fear, hysteria and panic of market lows. Remember the “Tech Bubble” in 2000, when greed took over and investors made unwise and often costly decisions?
Again this year, greed is the dominant emotion in play, but we feel that it’s essential that you be aware of this psychology and how it can affect your capital. Thinking of your investments as impenetrable and letting yourself be lulled to sleep or wooed by greed is a deadly mistake with your investments.
What’s important to note is that there is a lot of global economic weakness. We’ve talked about this in-depth and we will continue to do so, but we still encourage you to pay close attention in the markets because things will change quickly in the near future.
Opportunities are coming, we just need to pay attention to our allocations and our ability to react to an unsteady environment. We wrote back in 2008 that the state of the economy would make all the difference for investors – since the European debt crisis is not yet resolved and there is likely more risk on the way, we need to be aware of the truth that the more things change, the more they stay the same.
For several months now, we’ve believed that there would be a lot of risk in the first part of this year, and some great buying opportunities in the second half of this year. However, the stock market has been performing quite well so far in 2012, so you might have missed some upside opportunity if you followed our advice. There are two belief systems about what this means:
The European debt crisis is either fixed or doesn’t matter, and investors should engage in this market as soon as possible. The economy is improving and markets are rising.
Europe is entering a recession and if Europe is entering a recession, it will effect China and the U.S. and create a global economic slowdown. Risk is high and investors should be cautious and conservative with you capital.
We are in the second group, as we have been for some time, and we are still encouraging our audience to be cautious. We do believe that good investment opportunities are coming soon, but the time to buy is not right now.
If you want more information on this, please check out our special report for more information on how to invest wisely. If you have questions about your personal portfolio, please call us at 888-300-3684 or email askdoug(at)dougfabian(dot)com
Also, you can look back at previous podcasts here or read our blog summaries of the podcasts here.
Stocks are above their 200-day average right now, but we still advise cutting back on stocks and being very cautious in this Bear market. Even if stocks are up 10-15%, you don’t have any assurance that you’ll actually get these profits. Remember that the European debt crisis is going to really effect investors here in the U.S. and we are still of the opinion that caution will be rewarded as we enter this potentially dicey season.
Speaking of Europe’s issues, let’s dig into the news from Europe and try to make sense of what this crisis will mean for us as investors.
We believe that there are a lot of similarities between the U.S. housing bubble and recession of 2007-08, and what’s happening now in Europe. Many people assumed that even if the U.S. had a slight recession, the rest of the world would be OK. Unfortunately, we all learned that there is no such thing as “decoupling” in the financial markets. If Europe enters a serious recession, it will effect the U.S., China and others.
Because it appears that there’s not a way to contain Europe’s crisis, we advise holding off on stock investments for the time being. Many people are a bit complacent about Europe’s issues, but eventually they will realize how serious the problems are, and we think that we will see a sell-off and sharp decline in stock values in 2012 because of this.
Europe Made Simple
Europe’s three main problems:
A large number of countries in the European Union are either insolvent or approaching insolvency
Because of the fear of default, most European banks are seen as insolvent
There is a massive trade imbalance between strong countries and the peripheral countries. (meaning that countries like Italy and Greece can’t compete with a country like Germany, and they can’t get out of this jam by devaluing their currency, because they are stuck in the Euro.)
Remember that Europe is a larger economic force than the U.S., so we think it will eventually effect the global economy.
Our advice is to stay patient and take advantage of the opportunities that are sure to arise when Europe takes a nose-dive and investors panic. That is an opportunity for the smart investor, as long as you know what sectors to watch and how to take advantage in a wise way. If you would like more information on what sectors we are watching this year and our advice on how to handle the crisis in Europe, please listen to our teleconference from January 10, in which we discuss this issue in detail.
Personal finance exercises, part 4:
We believe that the most successful people are on top of the issues of the day. Being well-informed and staying well-organized will help you to succeed, so for the next few weeks we will be outlining six exercises for you to stay informed and ready to make good decisions. Those six exercises are:
Making a calculation of your net worth
Taking inventory of financial assets
Understanding your cash flow projections
Examining your expenses
Making sure you have an updated estate plan and living trust
Taking stock of all insurance policies – health, life, long term care, annuities, etc.
Three weeks ago, we took less than an hour to calculate your net worth. Two weeks ago, we talked about taking inventory of your assets. Last week, we figured out how to understand your cash flow projections. If you missed any of these exercises, please go back and listen to those previous podcasts for more detailed information, or you can read the summaries of each exercise on our blog.
This week, we are taking a look at expenses. Every healthy business has a budget and realistic view of their expenses. It’s essential to look at income and expenses and take the time to monitor reality vs their budget.
I recommend taking this same kind of diligence to your personal finances. I suggest that you put together a budget that divides your spending from discretionary spending to essential spending. Many people believe that they can’t cut any expenses, which is more than likely not the case. We advise taking a hard look at your expenses and being realistic about where you can cut and where you can save. We understand that it’s often emotional to look at these things, but it’s much more profitable to look at your budget and expenses now than wait until it’s too late.
All of these exercises are relatively easy, and you need to start the new year off right by looking at this. Again, if you need guidance on what needs to be held or bought, how this inventory works and our advice for your assets, don’t hesitate to get in touch with us.
Once you know what you have to can set clear, reachable goals. Tune in next week for more on Doug Fabian’s Monday Market Update, and the next exercise to preparing yourself for a successful investment future. (Also, if you read this blog and enjoyed it, listen to Doug’s podcast this week for even more details on these topics, and please share this information with others who might benefit from our perspective.)
Investors typically like to avoid stocks that are poised to go down, but I am bringing your attention today to an exchange-traded fund (ETF) that is designed to help you to profit from such situations. The Active Bear ETF (HDGE) offers a way to take a short position on a group of U.S. companies seen to be on the downswing. Such a situation actually may be taking place right now, in light of the recent market pullback.
The Active Bear ETF identifies corporations that have reported low quality earnings or engaged in aggressive accounting to mask deteriorating operations and to bolster reported earnings over a short time period. In addition, the fund’s portfolio management team seeks to identify earnings-driven events that may act as a catalyst to the price decline of a security. Such events could include downward earnings revisions or reduced forward guidance. Overall, the fund seeks to produce capital appreciation through short sales of domestically traded equity securities.
HDGE’s portfolio managers emphasize diversification, and they look for specific companies with a focus on events that hurt stock returns. The portfolio typically will consist of between 20-50 equity short positions, with an average position size of between 2% and 7% of the portfolio’s exposure. The fund’s managers use forensic accounting to dissect a company’s financial statements and to crunch numbers to ferret out indications of operational deterioration or manipulative sales and revenue recognition. The managers also have experience trading and managing short portfolios to allocate tactically to liquid, low short interest stocks of companies that may be masking weakening operations.
The fund’s two managers, John Del Vecchio and Brad Lamensdorf, have years of experience with short selling portfolios. Understandably, it requires special training to find stocks that have the potential to take a fall rather than the usual approach of buying the winners.
HDGE’s top 10 holdings, as of Aug. 2, are Industrial Select Sector SPDR (XLI), 3.63%; Best Buy Co. Inc. (BBY), 3.21%; NetApp Inc. (NTAP), 3.00%; Vulcan Materials (VMC), 2.85%; Rockwell Collins (COL), 2.74%; Spectrum Brands Holdings Inc. (SPB), 2.63%; Medidata Solutions (MDSO), 2.54%; Whirlpool Corp. (WHR), 2.48%; Paccar Inc. (PCAR), 2.47%; and Mohawk Industrials (MHK), 2.45%. Sector exposure for HDGE, according to the most recent data available on June 30, was 26% technology, 19% industrials, 12% financials, 12% consumer cyclical, 12% cash, 7% consumer defensive, 7% healthcare, 2% basic materials, 2% communication services.
Join me on Saturday, March 6, at 12:00 p.m. (noon) Pacific Standard Time, for a FREE update on the financial markets in 2010. In this teleseminar, titled “Return of the Bear Market,” I will be offering my opinion on how you should be managing your assets as we navigate these choppy market waters.
Let’s face it, the last two years have been a wild ride for both stock and bond investors. What I call Phase One began in 2008 with the biggest decline in stocks since the Great Depression. Phase Two saw a recovery of more than 50% for the S&P 500 Index. Most investors now have been pacified by Wall Street and Washington, and many think the worst is behind us.
I believe that we are close to entering Phase Three of this investment cycle, and that could mean another devastating wave of wealth destruction. The good news, however, is that there is time to prepare, as well as clear signals on the road ahead that will give us time to adjust before any real damage is done.
Four key points you’ll learn in this seminar are:
Why stocks and bonds have the potential to enter a new bear market
What are the warning signs to look for in the markets
Where investors can seek safety during the next 12 months
How you can profit from the crisis
This FREE, one-hour teleconference will be held exclusively for the first 800 registrants, and judging by the participation in our last teleconference, we will reach capacity quickly. We urge you to take advantage of this opportunity and reserve your spot today.
Millions of people have seen their 401(k)s, IRAs and stock market portfolios hammered by the current bear market. As the S&P 500 and the Dow slid further and further last year, many investors flocked to so-called bear market funds. The general philosophy behind bear market funds is to take advantage of market slumps by investing in positions that go up when the market goes down.
Bear market funds use various strategies to profit, although the chosen method usually is through short positions. Certain exchange-traded funds (ETFs) now are beginning to use derivatives and options to replicate the inverse of market indexes instead of simply shorting them.
In 2008, several bear market funds — shorting all kinds of stock exchanges — performed well. They rose while the global markets slumped. However, history shows that bear market funds have been long-term laggards. While bear market funds are not permanent fixtures in most portfolios, since the stock market tends to rise over time — they are a great way to seek short-term gains in a sagging market.
Depending on the ETF you choose, for every 1% dip in the market, you can turn a profit of 1%, or even 2% if you use a leveraged position. Now, let me introduce you to a handful of bear market funds.
The ProShares Short S&P 500 (SH), which shorts the S&P 500, was up 39.21% last year. More aggressive investors bought the twice-leveraged UltraShort S&P 500 ProShares (SDS), which returned 61.36% in 2008.
For investors interested in international bear market funds, ProShares Short MSCI EAFE (EFZ) shorts European, Australasian and Far Eastern markets. This ETF had a one-year return of 38.90%. Risk-taking investors may be interested in the twice leveraged ProShares UltraShort MSCI EAFE (EFU), which had a 51.92% one-year return.
While bear market funds are a great way to profit during market slumps, beware of bear market rallies such as the one we’ve had recently. SH and EFZ both are down more than 20% since the rally started on March 9. As leveraged funds, SDS and EFU each dropped nearly 40% in the last month.
The market’s extreme volatility and uncertainty during the last month leaves an open question about how to play the rally. For those investors who think the rally will extend further into the year, a long position might be a good idea. Investors who think that the rally is going to fizzle may decide that a short position is best.
As my dad would say, there are two kinds of money: your serious money and your play money. I know that many investors have been with me in sheltering their serious money from risk by having a high cash position and waiting for the opportunity to get back into stocks. Those that subscribe to my trend-following advice know that we are a very long ways from putting our serious money back to work in the next bull market.
For the past few weeks, there have been short-term opportunities on Wall Street to put some of your play money to work. I have five tips for those of you who are looking to put a portion of your investment capital into trading positions to produce profits in your portfolio while we wait out this Bear Market:
1. Use only a portion of your portfolio. I recommend that you trade using only 10-20% of your total investment capital.
2. Commit to trading with discipline. Losses must be kept small and the best way to do that is by using trailing stop losses on every position that you take.
3. Use Exchange Traded Funds. There is no easier way to trade than with exchange-traded funds (ETFs). They give you the best combination of liquidity, flexibility, low-cost, and diversification.
4. Monitor Your Gains and Losses. You must put in place a system to track your performance so that you know the scoreboard at all times.
5. Dedicate Time. You need time to research investment ideas, select your positions and allocations, monitor the market, and execute your plan. If you don’t have the time, don’t venture into the game.
If you are interested in learning more about how I manage ETF portfolios for my clients at Fabian Wealth Strategies, simply click here.
Now that the election is in the books, Wall Street can refocus on corporate America’s books. Unfortunately, those books aren’t going to be an uplifting read.
All of the major economic metrics will likely be much lower in the fourth quarter, and that’s following an already dismal third quarter. The unemployment rate will likely continue rising, corporate earnings will probably come in well below expectations, and consumer and capex spending is forecast to be the worst it has been in many years.
These recessionary conditions mean one thing for the market—more bearish sentiment, more selling, and a whole lot more risk baked into the investment cake.
In the midst all of the negativity pervading Wall Street right now, there is one theme common to nearly every mainstream investment advisor out there. That theme is a reluctance to embrace what I call the forgotten asset class—cash.
The chart here of the S&P 500 certainly proves that equities aren’t the place for your serious money. Yet despite the pernicious declines in the market, most advisors are still telling their clients to stay the course.
Look at the table below, which outlines the performance of the major indices throughout multiple time frames.
As you can see, no index has been safe from the mass sell-off that’s hammered so many investors for so long. The real problem here, as I see it, is the column here in yellow. That column shows how far below the all-important, 200-day moving average each respective index is currently trading. The fact that equities are so far below the 200-day average means that it will be a long, long time before it’s safe to go back into the equity waters.
Despite the overwhelmingly negative economic metrics, and despite the current state of the major market averages, most advisors are telling clients they have too much cash in their portfolios.
I recently talked with a client that had over $1 million in cash generated from the sale of a home. She told her broker she wanted to stay conservative with the money, but his first reaction was to sell her some kind of product. He told her cash wasn’t a good place for her money. Instead, he sold her corporate bonds, some of which are now worth only 2 cents on the dollar!
This kind of financial malpractice is a symptom of not wanting to embrace the forgotten asset class of cash. Cash is absolutely king when it comes to surviving a big market downturn, and if you haven’t done so already, I recommend you take a serious look at increasing your cash allocation.
So, why do most mainstream advisors avoid cash? Simple, there’s nothing in it for them.
You see, you can’t charge big fees on cash. You can’t charge a commission on a money market fund, and because a broker doesn’t make any money for himself when you are in cash, there is no incentive for him to recommend you stay there.
Fortunately, I don’t have that incentive. My only incentive is to help you safely navigate this market storm. If your advisor does not want to move you to cash, consider another alternative. Fabian Wealth Strategies actively manages client assets using exchange traded funds. We are now accepting new clients in both our growth and income portfolios. Call 800-391-1118 or visit www.fabianwealth.com for more information.
As a subset of my lemon list research I have decided to pick out a broadly held mutual fund family and rate their funds according to objective criteria. The American Funds is one of the biggest fund family’s in the nation with thousands of investors assets in their care.
I have ranked these funds by Lemon Funds (the worst performers), Average Funds (the mediocre group), and Good Funds (those who consistently beat their benchmarks). I was not surprised to see that the number of funds is almost equally split between under performers and out performers.
As I tell my listeners and readers each week – you have to know what you own and you have to be monitoring the performance of your fund holdings on a regular basis. Especially in a Bear Market environment! That way you are able to make informed decisions about your retirement assets.
If you have investable assets of more than $250,000, my offer to you is to schedule a free, no-obligation, one-on-one conversation with me about your current mutual fund holdings. I will go over your portfolio with you in detail, and let you know what I believe is the best course of action to help protect and grow your money.
Fabian Wealth Strategies is currently accepting new clients in both our actively managed growth and income portfolios. We are asset managers that invest almost exclusively in exchange-traded funds (ETFs) for our clients, and we can help you create a vision of success for your financial future. Contact us today at 800-391-1118 or visit www.fabianwealth.com.
If you’re like me, you love reading all kinds of opinions about where things are headed.I recently read two articles that I thought really showed just how diverse the range of opinion is amongst the experts.
In the bullish camp was famed Wall Street giant, former Morgan Stanley global chief investment strategist and now hedge fund manager, Barton Biggs.In an interview with The Wall Street Journal, published in the May 31 edition, Biggs said that his “intuition” tells him that after the current consolidation is over, the next move for the market will be up, not down.
Here’s a great quote from Bigg’s explaining his view; “Psychology is involved here. I like the fact that the market is worried. I like that The Wall Street Journal runs articles about that. That’s all good. But the puke point has been reached, in March. Because of the problems we’re living under, the market should be in a trading range for the rest of the year, between 1250 and 1550 in the S&P 500.”
Hey, you gotta love a sophisticated Yale graduate who uses the term “puke point.”
Biggs goes on to say that if the Federal Reserve has made its last rate cut, then that is a bullish sign for the markets.He also thinks we are close to the bottom in terms of new-home sales and construction, which he says is a definite plus for the economy.
He also points out that we have a huge amount of liquidity on the sidelines that’s waiting to be invested. Biggs says that U.S. stocks are, “the cheapest major asset in the world.”He did warn, however, that if oil prices continue rising in the short run, “this craziness would be inflationary and very recessionary. Oil rules the U.S. and world stock markets.”
And which areas does Biggs see as the most—and least—promising going forward?
One area he likes is technology.Biggs says companies have been under spending on tech for the last few years, but that is about to change. “Tech providers will see earnings grow, and so they will outperform the market.”Biggs also likes emerging markets, particularly the Asian ones.
Like me, Biggs says that the financial stocks are a “busted sector.”He expects to see a lot more write-offs in the sector, and as he describes stocks in the space like this; “The magic age is over. It will be years until their earnings are back.”
The other interesting article I read was from the May 30 online edition of U.S. News & World Report.The magazine did an interview with the ever-bearish Peter Schiff, president of Euro Pacific Capital.Schiff spent the past decade urging his clients to jump ship from the American economy ahead of what he views as inevitable pain caused by a lax monetary policy, wayward spending and tougher global competition.
Schiff sees nothing but downside ahead for U.S. markets, the dollar and the economy. When asked if he could say something good about the U.S. economy he responded by saying, “There’s nothing good to say about our situation. The policies both the Fed and government are pursuing are making the situation worse. We’ve been getting a free ride on the global gravy train. Other countries are starting to reclaim their resources and goods, so as Americans are priced out of various markets, the rest of the world is going to enjoy the consumption of goods Americans had previously purchased.”
Schiff says he’s buying natural resources and energy funds, along with gold, silver and industrial metals. His main theme is the global economy will survive, even if the U.S. economy becomes a disaster. If you insist on investing in U.S. markets, Schiff recommends sticking with exporters and resource companies and avoiding retailers, home builders and financials.
When asked for his predictions about the market and the economy, the bear’s claws really came out; “I think the stock market is headed lower. Gold is going to be $1,200 to $1,500 by the end of the year. That puts the Dow at a less-than-10-to-1 price ratio to gold. Right now, it’s about 13 to 1. That’s another 30% drop in the real value of stocks by the end of the year if you price them in gold. The Dow was worth 43 ounces of gold in 2000. It’ll get to 10 by the end of the year and continue to fall from there.”
And what of the future fate of the greenback? “At a minimum, the dollar will lose another 40 to 50% of its value. I’m confident that by next year we’ll see more aggressive movements to abandon the dollar by the [Persian] Gulf region and by the Asian bloc. That’s where the stuff really hits the fan.”
Never shying away from apocalyptic rhetoric, Schiff offered up the following scary gem; “The other problem we’ll have during those years is civil [unrest]. There will be a big increase in crime. People are going to be hungry. People are going to be cold. There’s a sense of entitlement in this country, and when a lot of people used to having things suddenly don’t, everybody looks for someone to blame.”
As you can see, while there is some agreement between Biggs and Schiff on financial stocks, one clearly thinks we are well on our way to recovery while the other is literally predicting blood in the streets.
Who’ll be right, and who’ll be wrong?We’ll find out in the months ahead.
In the meantime, I am going to let the market tell me whether it is safe to stay in the equity waters, or whether it’s time to head for shore. If you want to learn more about my asset management company, Fabian Wealth Strategies, simply click here or call 800-391-1118.
