Making Money Alert
A Little Tired, A Little Stressed
05/06/2009
The ebullient rally that's taken this market by storm has grown a little tired in recent days, as traders await the final results of the Federal Reserve's bank stress tests. Results of the test are due to be released late Thursday, but already there have been some leaks about which banks are in good shape, and which are likely to face an uphill battle.
It will be interesting to see the market's reaction to the government's two-month evaluation of the nation's 19 largest banks. What these hypothetical scenarios are designed to do is determine their revenue, losses and capital needs, should economic conditions deteriorate even further than economists' estimates.
Will the official report on the banks cause the market to surge, or will we see a sell off?
Has the recent run in stocks in anticipation of the stress test results been a case of "buy the rumor, sell the news," or are we in for more buying once the government's cards are on the table?
We'll know in a day or so, but until then the market is going to remain a little tired, and a little stressed.
The Deflation Threat 2
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 worse 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 over 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 means 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 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 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.
The Five Keys to Investment Success
Over the last 18 months, most investors have suffered near-catastrophic portfolio losses.
The recent rebound in the equity markets has given many people at least a semblance of relief and hope that the future may be improving, but there is still a huge cloud of concern wafting in the economic atmosphere.
How your money is managed going forward will be critically important --particularly if you want to avoid getting caught in the same portfolio traps of the recent past.
No matter where you are invested, you owe it to yourself to make the best decisions possible. That's why I put together a brief video I call, "The Five Keys to Investment Success."
Now more than ever, you need to determine if your advisor has prepared your assets for the bumpy financial road ahead.
I invite you to click here and watch this brief video.
I guarantee it will be a veritable smorgasbord of food for thought.
ETF Talk: Unveiling Triple Leveraged Treasuries
Since World War I, buying U.S. Treasury bonds has been one of the surest, safest and most popular bets an investor could make. In almost every recession, as stocks fall, shrewd investors turn to the safety and security of U.S. government backed T-bills. The current recession has been no exception.
T-bills and gold were the only two sectors that ended 2008 with a profit. Long-term Treasuries returned an astonishing 27.1% last year, with short-term Treasuries growing an impressive 4.7%. With the markets as volatile as ever, Treasuries have been a safe bet so far. With those returns, you might be tempted to add them to your portfolio through an exchange-traded fund (ETF). In fact, a bond ETF I recommended for my High Monthly Income service has yielded strong dividends and is up about 8% since my buy signal.
This week, I wanted to introduce you to the Direxion Funds family's four new, triple-leveraged ETFs that go either long or short on 10- to 30-year Treasury bonds. That means that these new ETFs return 300% of the daily long, or short, return of the NYSE current 10- and 30-year bond indexes.
Investors interested in trading these ETFs should realize that they are meant for short-term holding only. To gain an appreciation for the volatility of these funds, look at the chart below of the benchmark NYSE Current 10 Year US Treasury (^AXTEN), which offers a comparison with the Direxion Daily 10-Year Treasury Bull 3x Shares (TYD). In five days of trading, a long position through TYD would have resulted in a 5% loss.
On the other hand, shorting 10-year T-bills through the Direxion Daily 10-Year Treasury Bear 3X Shares (TYO) would have netted a short-term profit.
My son David recently told Investor's Business Daily, "because of the complex underlying derivatives and compounding effects, these indexes will be susceptible to tracking error over longer periods of time." Over longer periods of time, not only will the market's volatility hurt your chances of making a profit with these heavily leveraged funds, but the accuracy in the tracking of these ETFs themselves will be affected as well.
These funds are going to be effective for traders when prices or yields reach extremes.
The table below lists Direxion's new ETFs.
Long | Short |
Direxion Daily 10-Year Treasury Bull 3X Shares (TYD) | Direxion Daily 10-Year Treasury Bear 3X Shares (TYO) |
Direxion Daily 30-Year Treasury Bull 3X Shares (TMF) | Direxion Daily 30-Year Treasury Bear 3X Shares (TMV) |
As always, I am happy to answer any questions you may have about ETFs. To send a question for me to answer in a future ETF Talk, please click here.
It's Time to Squeeze Some Lemons
It's time again for our quarterly lemon-squeezing ritual. That's right, it's time for us to expose the worst-performing mutual funds for what they really are -- sour investment vehicles that will make your portfolio pucker.
For Q1, 2009, the Mutual Fund Lemon List contains 2,335 mutual funds totaling $718 billion in assets! Now to be classified as a lemon, the fund must pass strict screening criteria: it must underperform its peer group average for the last 12 months, as well as for the last three and five year periods.
Incredibly, out of this quarter's universe of 2,335 lemon funds, over 30% (a total of 730) actually had negative annualized returns over the past 10 years. Even historical stalwarts like Fidelity Magellan (FMAGX) and Fidelity Growth & Income (FGRIX) failed to outperform the S&P 500 (SPY) over the past 10 years.
It's becoming increasingly clear to me that investors need to wake up to the reality that many mutual fund managers just can't perform as well as many exchange-traded funds (ETFs) with the same investment objective. Sadly, the result is that many investors are losing money that they really cannot afford to lose.
The following table shows examples of how much you could have saved if you invested $100,000 over the past five years in ETF equivalents instead of these 10 Lemon List laggards.
Mutual Fund | Ticker | What $100K invested for 5 years would be today | ETF Equivalent | What $100K Invested in an ETF would be today | Difference between MF and ETF |
Fidelity Growth & Income | FGRIX | $53,360.96 | SPY | $77,308.96 | $23,948.01 |
American Funds Bond Fund of Amer A | ABNDX | $99,529.63 | AGG | $118,727.25 | $19,197.62 |
Putnam Vista A | PVISX | $67,461.26 | IJK | $86,277.08 | $18,815.82 |
Fidelity Emerging Markets | FEMKX | $118,791.31 | EEM | $135,647.90 | $16,856.58 |
Longleaf Partners | LLPFX | $64,080.10 | VTI | $79,239.24 | $15,159.14 |
Bernstein Tax-Managed Intl Port | SNIVX | $75,200.58 | EFA | $87,357.66 | $12,157.07 |
Janus Worldwide | JAWWX | $69,432.53 | IOO | $78,385.90 | $8,953.37 |
Fidelity Magellan | FMAGX | $70,931.34 | IVW | $79,325.37 | $8,394.03 |
Fidelity Mid-Cap Stock | FMCSX | $77,983.10 | MDY | $84,492.13 | $6,509.03 |
T. Rowe Price International Stock | PRITX | $82,302.77 | EFA | $87,357.66 | $5,054.89 |
As you can see, there really is no reason to continue investing in under-performing mutual funds. To find out if you own a lemon fund, then simply go to www.MutualFundLemonList.com for my complete Q1 Lemon List.
The Wisdom of "Still"
Lost in an abstract thought
Dazed and distracted
Winded yet still I'm caught
With a fragment of doubt
Slowed by reflection, but
These moments will pass
Still, halfway up the hill
My fingers may bleed
But I've got to get there
Still
-- Geddy Lee, "Still"
Sometimes the most beautiful things in life come from unsuspecting sources. That's the case with the lyrics from the solo effort of the sublimely talented Geddy Lee, bassist/vocalist extraordinaire of the rock band Rush, which tell the tale of how we all must struggle to achieve our purpose in life. Yes, your fingers may bleed, but whatever the struggle demands you must always fight your way up that hill. Anything less is unacceptable.
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.