Making Money Alert
A Healthy Pullback
05/13/2009
The pullback I've been anticipating for some time now has finally arrived.
Now, those of you who want this market to keep going up, up, up, should actually be heartened by the trading we've seen this week. You see, a strong pullback after such a strong surge in stocks is not only something that should be expected -- it's something that's very healthy.
In order for a market to actually mount a real bull run, it must sell off and then consolidate. The short-term momentum players who've made big profits since the March 9 rally are now selling and raising cash. That cash likely will remain on the sidelines until the market settles down to more stable levels. And when we do see this market settle, that will be the time when the cash on the sidelines is funneled back into equities en masse.
If we look at the chart below of the S&P 500 Index, we see that those more stable levels are somewhere around 850-875. That's above the short-term, 50-day moving average (blue line) of the S&P 500, yet well below the long-term, 200-day moving average (red line).
I've heard a lot of pundits out there talking about how we've finally returned to a bull market. I don't see how they can make this claim, especially since the S&P 500 is still well below its 200-day moving average. Perhaps we'll be able to make that claim soon, especially if stocks mount a big comeback from here. But until such time, any true bull market call is still a solid bit of buying away.
Of course, just because the S&P 500 isn't yet in bull mode doesn't meant that other sectors of the market aren't now officially in bull market territory. Many of the market's international stock indices have breached their long-term moving averages in recent weeks.
In fact, the move higher in international stocks actually prompted me to make a new recommendation to one international exchange-traded fund in my Successful Investing advisory service.
If you'd like to find out how you can start profiting from the new bull in international equities, click here.
ETF Talk: Can Chile Spice Up Your Portfolio?
While I still believe that we are in the midst of a bear market rally, there are plenty of ways to generate profits during this period of unprecedented market volatility. Despite the 33% rally in the S&P 500 since March 9, it is important to remember that the erstwhile index is up only 0.7% year-to-date.
This paltry gain pales in comparison to the rallies in emerging markets. The iShares MSCI Emerging Markets Index (EEM), which duplicates the performance of the stock markets of 26 different countries, is up 23% so far this year. If you typically invest in developed markets, you now may be tempted to buy an exchange-traded fund (ETF) that gives exposure to emerging markets.
For the first time in several decades, economic powerhouses such as the United States, Germany, and Great Britain all saw their GDPs contract by more than 4% last year, when the global economy shrank by 2.1%. During this time, however, Chile's economy actually grew by 4%. While much of the world was binging on subprime lending, Chile's conservative fiscal policies restrained unmitigated borrowing, and instead increased the size of the country's "stabilization fund." With countries such as Japan, the United Kingdom, and the United States borrowing billions to fund economic stimulus packages, Chile is sitting on a reserve of more than $20 billion. This large cash reserve lets Chilean policymakers find easy financing in a difficult market.
Chile also features high levels of personal investment and savings. Almost 43% of Chile's economy relies on exports and it ranks as the world's largest producer and exporter of copper. Indeed, a bet on Chile is also a bet on copper.
Although copper has risen in price nearly 30% this year alone, the commodities bust of 2008 is a cautious reminder of what can happen to bubbles. A slump in demand for copper could be disastrous for Chile's economy. Emerging markets provide the chance for heightened returns, while carrying additional risk.
The chart above shows the iShares MSCI Chile Investable Market Index (ECH), an ETF that seeks to replicate the performance of the Chilean MSCI stock index. Last summer's commodities bust saw a steep decline in the ETF, as can be seen from the downward trend starting last June and July.
While Chile has many good things going for it economically, ECH is not without risk. Those who believe that copper prices are set to fall in the near future and hurt Chile's economy should consider waiting for a more opportune time before considering an investment in ECH. In contrast, those who have more confidence in the fundamentals of the Chilean economy might find a long position in this ETF to be profitable.
As always, I am happy to answer any questions that you may have about ETFs. To send a question for me to answer in a future ETF Talk, please click here.
The Deflation Threat
A few days ago, I had a conversation with a Successful Investing subscriber who had lost 30% of her retirement portfolio in 2008 by not following the service's recommendations. How did she lose that much? She decided to follow a buy-and-hold strategy during the worst market downturn in decades.
But after she realized the error of her ways, she told me that she would be faithfully true to the rules of the Fabian Plan from now on. This subscriber also thanked me for introducing her to the concept of deflation. Until she heard me discuss deflation, all she ever heard about was the fear of inflation. Now to be certain, the threat of inflation is a very real possibility down the road. But what I think is of more immediate concern is deflation.
Federal Reserve Chairman Ben Bernanke doesn't talk about the "D" word, and neither does Treasury Secretary Tim Geithner. But from where I sit, deflation is the angry elephant in the living room waiting to destroy your financial furniture.
How does deflation represent a threat to you? Let me count the ways.
1) Lost Jobs. When the economy shrinks, the number of available jobs shrinks. We have seen more than five million jobs lost in the past year, and more then 500,000 per month in recent months. It doesn't take an economist to see that we are still on the downward slope of the job-loss mountain. In order for deflation to cease, we must get the nation's job engine going again. But this can't be done via government fiat or make-work projects. Until deflation begins to cease, i.e., until there is a loosening up of available credit that allows businesses to hire and expand again, the downward job spiral due to deflation will continue.
2) Falling Incomes. Both interest income and real wages are in decline, which means more people have less money to spend. This deflationary condition will put pressure on the economy, as fewer dollars coming in mean fewer dollars being spent. Sure, the upside means prices of everyday goods and services will drop, but the downside means a lack of business spending, lower corporate earnings and lower dividend payouts.
3) Declining Real Estate Values. I know there are signs of recovery in some real estate markets, but the overall trend in the country is still way down. The problem with real estate is access to money. It is very difficult to get a loan now right now, and we still are seeing a continuation of foreclosures and home loan defaults as the employment picture weakens. The fact is that all deflationary roads lead back to the problem of credit destruction and a lack of available credit -- and that spells trouble for real estate values.
4) Declining Stock Values. We all know about the stock market decline of 2008. From the October 2007 high to the March 2009 low, the S&P 500 Index plunged 56.78%. Sure we made up about 15% of that total decline in the rally that began on March 9, but we still remain in a bear market despite the latest rally.
These deflationary conditions represent real threats to your wealth, and they are the chief reasons why you should be more concerned about deflation than inflation -- at least for now.
Now is the Time to Refinance
The Federal Reserve is keeping interest rates artificially low. How long will they be able to do so? Well, that's the million dollar question. And while nobody knows for certain, one thing you should realize is that it won't last forever. That's why now is the best time for you to take advantage of these historically low mortgage rates.
A few months ago, I purchased a new home. To facilitate this purchase, I had to get a jumbo mortgage. I needed the loan in December, and that meant that I had to put in my loan application last November. As you probably remember, this was at the very height of the mortgage and banking crisis.
As you might imagine, getting a jumbo mortgage during the worst financial crisis since the Great Depression was anything but easy. In fact, this was one of the most difficult business transactions I have ever undertaken.
Thankfully, I had a real professional on my team helping to guide me through the entire process. His name is Josh Lewis, and he's been a close personal friend, as well as a sponsor of my radio show for many years.
I know many listeners, and many Alert readers, have used Josh's expertise to get mortgage loans done for them. With Josh's help, even complex jumbo loans like mine can get done in a fast and efficient manner.
If you're in the market for a home refinance, a jumbo loan or virtually any other type of real estate loan, then I strongly recommend contacting Josh Lewis.
You can find Josh via his Web site. You also can call him at 888. 944.5674 ext. 1 or you can email him.
Do yourself a favor and put a true professional on your real estate team.
Wisdom from the Basketball Court"These young guys are playing checkers. I'm out there playing chess."
-- Kobe Bryant
Anyone who knows me knows that I am a big Los Angeles Lakers fan. And now that the NBA playoffs are in full swing, I thought I'd present you with one of my favorite sports quotes, courtesy of Lakers' star Kobe Bryant. You see, when you're investing for your future, you want to make sure you make sound strategic decisions. You don't want to be playing checkers with your money when you should be playing chess. So, the next time you feel compelled to react abruptly to the market's machinations, remember that long-term investing success is a game of strategy like chess, not a reactive game like checkers.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else. Click here to Ask Doug.