Making Money Alert
A Ready, Steady Fed
04/29/2009
Today the Federal Reserve held its key lending rate at a record low of between zero and 0.25%. The Fed's steady stance on interest rates came complete with a gingerly bullish assessment of the economy.
Here's the money quote from today's Open Market Committee statement, "The economy has continued to contract, though the pace of contraction appears to be somewhat slower."
The Fed also kept steady its intention to buy $300 billion in long-term U.S. government debt, and increase purchases of debt and securities issued by government-supported mortgage agencies by $850 billion in a bid to lower mortgage and other interest rates.
There was no change in the Fed's stance regarding the purchasing of debt, which was originally announced at their last policy meeting on March 17-18.
The market was enjoying a big run preceding the Fed's announcement, and nothing the Fed said seemed to deter the rally once the news hit Wall Street.
When I look at the charts of what still must be considered a bear-market rally, I see that the NASDAQ 100 (QQQQ) is now trying to break above its 200-day moving average (see chart below).
If we take a look at the stocks that make up the S&P 500, we still are decidedly below the 200-day average (see chart below).
I think this market is going to attract a lot of hitherto cautious money, as many professional money managers don't want to be accused of missing the bull-market boat.
Unfortunately, I think the bear isn't yet in hibernation, and that means that a headlong rush into equities now is a perilous proposition.
As I said last week on my radio show, if you are one of those investors who is still holding 40%-50% losses in your portfolio, or if you are still fully invested, you should look upon this rally as a chance to lighten up your equity exposure. You should be raising cash into this rally, and you should make sure you have at least 25% of your portfolio in cash.
I believe we need a correction in the order of about 10% if we are going to have any chance of seeing the current rally morph into something steady. If, however, we break below 780 on the S&P 500, then all bets are off.
Of course this volatile market doesn't have to be a treacherous minefield. If you know how to put the power of leverage on your side via specialized exchange-traded funds (ETFs), then you can make money when the market is on its way up -- and when its on its way down.
If you'd like to find out how you can start making big profits regardless of the direction the market is headed, then you need to check out my ETF Trader advisory service.
Click here now and I'll send you my new DVD on how to trade ETFs absolutely free with your subscription to ETF Trader.
It's Time to Squeeze Some Lemons 2
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 funds just can't perform as well as those 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, simply go to www.MutualFundLemonList.com for my complete Q1 Lemon List.
The Five Keys to Investment Success 2
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: Do You Have Nerves of Steel?
The strength of steel is so renowned that it often is used metaphorically to describe unwavering soundness. At the same time, steel is a key input in the manufacturing of cars, buildings and household appliances.
As the economy starts to recover, the price of steel could climb along with demand from fast-developing countries like China and India. Indeed, a shift in market sentiment in favor of steel already may be occurring. A sharp rise in demand for the metal during the last month may be a signal that the time has arrived to consider investing in a steel exchange-traded fund (ETF). However, the decision is not an easy one. The investment case for steel is not nearly as sturdy as the metal itself.
Here's a brief assessment of the current situation to help you make your choice. Commodities have been trending upward since last summer when the sector took a big hit. Of course, no sector escaped the sharp teeth of the ferocious bear market back then.
Downturns in the housing and automotive industries -- both big users of steel -- caused the demand for the metal to weaken almost overnight. Steel companies cut production drastically last year as prices slumped from their record highs of mid-2008. As a result, Market Vectors Steel ETF (SLX) dropped 67% last year.
However, the steel market may have finally bottomed out. A big reason is China's increasing demand for steel. The country accounts for 35% of global steel demand and its government recently injected $585 billion in stimulus money into its domestic economy. As the world's largest user of steel, China may help to lead the sector to a recovery. Indeed, China's loan and infrastructure investments are rising 27% annually. Credit Suisse analysts took notice and recently boosted their investment rating on steel to "overweight." China's rising demand for the metal caused SLX to jump nearly 50% since the March 9 rally.
However, there still is reason why you may want nerves of steel to invest in this metal. Despite China's strong demand for steel, many analysts fear that higher Chinese export subsidies may undercut global prices. In fact, outside of China, worldwide steel output is down 37% from last year.
If you ask me, there is much riding on the export and spending decisions of the Chinese government. When conventional market forces are circumvented by government policies, predicting which direction an investment will go becomes more difficult. Personally, I am holding back on investing in this sector right now.
If, however, you are convinced that Chinese demand for steel will drive both production and prices up, then a long position in SLX gives you a chance to profit. If you prefer to wait and see what China actually does, holding off on investing in SLX might give you a more restful night's sleep.
As always, I am happy to answer any questions you may have about ETFs. To send a question for me to address in a future ETF Talk feature, please click here.
It's 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.
Now 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 through during the worse financial crisis since the Great Depression was anything but easy. In fact, this was one of the most difficult business transactions I have ever been a party to.
Thankfully, I had a real professional on my team helping 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 website, you 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.
Comedic Wisdom
"Men who do things without being told draw the most wages."
-- Rodney Dangerfield
There's nothing funny about the humorous wisdom of the great Rodney Dangerfield. Here, he jokingly states a truism about the value of being a self-starter in the workplace. If you are the kind of person who only does what you're told to do, then you probably aren't earning the wages you could be if you were a little more proactive.
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.