Making Money Alert
An Opportunity to Fix What's Wrong
03/19/2008
Tuesday's dramatic rally in stocks brought renewed buying vigor back to Wall Street -- at least for one day.
What happened yesterday was, in my opinion, just another day in a long line of big, bear market rallies. No surprise here, as the nature of stocks is that they basically want to go higher.
The proof of this notion can be seen by this stunning statistic. Consider that the 10 largest up days in recent market history occurred during bear markets. That's right; it takes a bear to generate big buying, and the action on Tuesday is no exception to this general rule.
Still, I don't want to downplay the great day we had Tuesday following the Federal Reserve's decision to cut both the federal funds rate and the discount rate by 75-basis-points, respectively. The market responded exceedingly well to the news, with the Dow enjoying a 420-point gain -- its biggest, one-day, point gain since July 2002.
The huge up day also brought about the S&P 500's biggest percentage gain in nearly six years, and the NASDAQ Composite enjoyed its largest, one-day percentage gain since March 2003.
But despite Tuesday's big gains, keep in mind that the major averages are still way off their most recent highs. The Dow has fallen 13% since its October 2007 high. The S&P 500 is down 16% from its high, while the NASDAQ has fallen 21% -- and these big drawdowns include the stellar March 18 performance.
Those still are decidedly bear market numbers, and until we see a sustained return to the upside across the board, I say the bear is still aggressively prowling the woods.
The good thing about the fact that we are still in a bear market -- and that we will get the occasional big rally -- is that it gives you an opportunity to fix what's wrong with your portfolio.
I recommend lightening up on stocks (if you still own them) on those big up days. These bear market rallies give you a chance to get out of stocks at a much better price than you had before the downtrend started.
I attribute much of today's market selling to investors looking to get out of many positions, and the ebb and flow of a big up day followed by several down days is what we are likely to see for some time to come.
Fortunately, there is a way to make money during all of this. The trick is to hold positions for only a short time. That's what we've been doing in my ETF Trader advisory service. Just last week we banked profits in two positions of 11.4% and 27.1%, respectively. Not too shabby, given this market.
If you'd like to find out how to profit fast from this bear market, I invite you to check out my ETF Trader service by clicking here.
Bear Stearns -- Lessons Learned
By now I suspect that most of you are intimately acquainted with the bailout of Bear Stearns (BSC) by the Federal Reserve and rival bank JP Morgan Chase & Co. (JPM). That's why I am not going to rehash the details of this fiasco here. Rather, I think the details of the bank's demise are far-less important than the lessons to be learned by you, the individual investor.
What are those lessons? Well, I'm glad that you asked.
The first lesson here is that the price action in a stock matters. When a stock falls below both its 50- and 200-day moving averages, it's usually headed for trouble. Of course, most stocks don't descend as rapidly as BSC shares did (see chart below), but nevertheless, you always should pay attention when one of the stocks you own falls below both its short- and long-term moving averages.
The second lesson to be learned here is that you should never, ever put all of your retirement eggs in one basket. As a result of the Bear Stearns collapse, many employees of the firm not only lost their jobs; they lost a significant portion of their retirement nest egg.
Many Bear Stearns employees held the company's stock in their 401(k) accounts (the company was nearly 30% employee owned), and as you might suspect, the value of those retirement accounts has been smashed.
I read about one man who owned about $2 million worth of BSC shares just a few months ago in his employee retirement plan. That $2 million is now worth just $38,000. Now, how would you like to grapple with that man's retirement losses? I know I wouldn't, and that's one reason why you should always have a diversified retirement nest egg.
Finally, in a market such as this, you simply have to have a strategy in place that can help you harvest your money out of the equity holdings you own. There is no worse feeling in the world than to see your once-mighty nest egg crumble in value. If the Bear Stearns fiasco has taught us anything at all, it is you must have an exit strategy in place for every investment you own.
The sooner that you put that strategy in place, the safer, wiser and wealthier you'll be.
Lessons learned.
ETF Talk: Water, Water Everywhere
Water seems to be increasing in value by the day, and rising demand worldwide for clean water is a key reason why.
Right now, an estimated 4,500 children worldwide die each day from unsafe water and deficient sanitary facilities. With heightened demand from a growing world population for clean water to drink, to cook, to irrigate crops, and to bathe, water is starting to become a much-appreciated natural resource.
I have been tracking this trend closely since last year. My team and I wrote a special report last August that highlighted the shortage of clean water in China as an investment opportunity. Our research found that 70% of China's waterways and 90% of its underground water were dangerously polluted. But the lack of uncontaminated water doesn't just affect the Chinese.
Exchange-traded funds (ETFs) aimed at water investment opportunities have sprung up and may prove profitable for you and your investment portfolio in the future. Two examples of these "water ETFs" come from the PowerShares ETF fund family: PowerShares Water Resources Portfolio (PHO) and PowerShares Global Water Portfolio (PIO). Two other notable water ETFs are Claymore S&P Global Water Index Fund (CGW) and First Trust ISE Water Index Fund (FIW).
To get you familiar with these water-based funds, here's a brief summary of each.
PowerShares Water Resources Portfolio (PHO) began tracking the performance of the Palisades Water Index in 2005. The fund invests at least 80% of total assets in American Depositary Receipts and common stocks of companies in the water industry. Since its inception, the Palisades Water Index has a return of nearly 25%. Its average daily volume for the past three months is just above 640,000 shares.
PowerShares Global Water Portfolio (PIO), the second PowerShares water ETF, is based on the Palisades Global Water Index. Since the fund's inception on June 13, 2007, the fund is down about 12%. It is averaging volume of just below 167,000 shares a day during the past three months.
The Claymore S&P Global Water Index Fund (CGW) and the First Trust ISE Water Index Fund (FIW) round-out our group of water ETFs. CGW tracks the S&P Global Water Index, while the First Trust ISE Water Index Fund (FIW) seeks to replicate the performance of the ISE Water Index. For the past three months, the daily trading volume is slightly above 124,000 for CGW and not quite 11,800 for FIW.
Now, I am not recommending any of these water related ETFs at this time, but what I do want you to be aware of is the broader trend driving the demand for clean water. Once that demand begins translating into companies that facilitate the flow of clean water, the spigot may indeed get turned on in one or more of these water ETFs.
Blogs Away: A Fabian Aural
Want to hear my latest rant on the state of the financial markets? Well, now listening, and even watching, is as easy as a mouse click.
To listen to the audio blog, simply click here.
Are You Ready for Some "Fabianisms"?
One of the things I learned from my father over the years is how to express to investors what they need to know via the all-important "one liner." A one liner in this case is a key phrase that encapsulates a concept that everybody needs to know, but often evades the presence of everyday thought.
Now I am not talking here about humorous one liners -- although I have been known to offer up a few of those, particularly in social settings where libations are involved. Rather, I am talking more about what might be described as pearls of wisdom -- with a little Fabian twist. The following are some classic Fabianisms used during the years to help educate and inspire.
Dick Fabian
"Every adult in America can be wealthy."
"The power of compounded growth is the eighth wonder of the world."
"People can live with lost opportunity more easily than lost money."
"Never buy a security without knowing when you would sell it."
"The Fabian Plan is the simplest wealth-building plan available."
"You can be your own investment advisor."
Doug Fabian
"If you save 10% of what you make you will be wealthy in retirement."
"Every year you should review your goals, your finances and what you value most in life."
"Keep raising the bar on savings, earnings and knowledge."
"You don't know what you don't know."
"Nobody cares more about your money than you do."
"If you don't ask questions you will flunk the class."
"The most important money you manage is in your retirement accounts."
And finally, here is my all-time favorite Fabianism: "You have the right to be rich."
Thinking about the right to be rich comes with a corollary, which is a corresponding responsibility on your part to make that right a reality. Together, we can fulfill our right to be rich.
The Wisdom of the Scientific Method
"Bausell points out that penicillin cures pneumonia even if you're in a coma, but alternative medicine only seems to work when you are awake."
—Dr. Harriet Hall, M.D.
I recently read a very good article by Dr. Harriet Hall, a.k.a., the "SkepDoc", at the blog site Science-Based Medicine. The above quote is from her review of a book by Barker Bausell titled Snake Oil Science: The Truth About Complementary and Alternative Medicine. Bausell's analysis of what he calls "snake oil medicine", e.g., acupuncture, homeopathy and other clinical trials in alternative medicine, basically challenges the validity of clinical studies in this area and shows how these trials themselves are often so unreliable that many result in seemingly mildly positive reviews.
Now how does this relate to investing? Well, many times you’ll hear someone telling you about how many times they’ve made huge sums of money in a stock or an option. Of course, they won’t tell you the times that they lost money. What these studies all come down to is selectivity in the data set. If you only look at one aspect of the data, you’ll only get one aspect of the truth. Remember, this when you are assessing anyone’s ideas on what to do with your money.