Making Money Alert
Are We Approaching a Low?
07/02/2008
The market suffered through its worst June since the Great Depression, and curiously, it's the seriousness of this sell off that has me cautiously optimistic about the possibility that we are approaching a low in stocks.
If you look at the chart below of the S&P 500 index, you can see that we've nearly hit the lows set back in March.
Usually, this stage of the market game brings about a curious phenomenon that occurs within every bear market, and that phenomenon is called a bear market rally.
I know it's counterintuitive, but within every bear market is the inevitable sharp rally to the upside. These bear market rallies are usually short lived, and they usually break down quickly. Now, in the wake of the most recent downtrend in this market, my next expectation is that stocks will mount one of these bear market rallies.
This bear market rally could be on the order of maybe 3% to 5%. Now I am not saying for certain we are going to have a rally, but given the technical factors in this market -- along with the extremely oversold status in stocks right now -- I do think the chances of a rally are much better than the chances of a sustained decline.
One way to take advantage of what could be a bear market rally ahead is to make some short-term trades in some of the most beaten up market sectors. In my ETF Trader advisory service, we are building a list of the best possible exchange-traded funds (ETFs) that can take quick advantage of a short-lived bear market rally.
To find our more about my ETF Trader service, click here.
If you want a complete list of all the ETFs out there, then simply click here for my ETF report.
This report will tell you all you need to know about how each ETF performed in the second quarter. But be forewarned; the news is not real pretty for the majority of the ETFs on this list.
As we enter into the second half of this difficult year, my advice to you is to be careful. Make sure you lighten up on your long-term holdings, and make sure you always have safety on your mind first before committing any money to this very volatile market.
A "Must Hear" Radio Segment
Now more than ever it's absolutely essential to get defensive with your exchange-traded fund (ETF) portfolio. In a recent radio show segment, my son David and I discussed how to use three defensive ETFs to help ward off the ravages of a declining market.
I encourage all of you to listen to this segment, and find out which three ETFs can give you the upper hand in your battle to preserve capital and to grow your wealth. To listen to this most-excellent, "must hear" radio segment, click here.
ETF Talk: Knowing Your Options
Savvy investors have long taken advantage of the remarkable profits that options can produce in their investment portfolios. But what you may not know is that investing in options is now as easy as choosing the right exchange-traded funds (ETFs).
If you want to invest in ETFs that actually invest using options, you are in luck. The table below lists many of the ETFs that employ options to enhance investor returns.
DBS | PowerShares DB Silver Fund |
DEF | Claymore/Sabrient Defense ETF |
DES | WisdomTree SmallCap Dividend Fund |
DGT | streetTRACKS--DJ Global Titans Index Fund |
| DLN | WisdomTree LargeCap Dividend Fund |
| DSI | iShares KLD 400 Social Index Fund |
One thing to note about ETFs that feature options is that such investments ideally should have a daily trading volume of at least 100,000 shares. Without such volume, an investor runs the risk of not having a liquid enough holding to buy or sell at a reasonable price. Since options inherently are risky, ETFs that focus on the niche must be regarded with caution, especially for inexperienced investors.
For seasoned investors who want exposure to options, ETFs that specialize in such offerings are worth considering. I have yet to recommend any ETFs that specialize in options but I have had success in buying put options on the iShares FTES/Xinhau China 25 Index.
Three different put options that I've recommended in my ETF Trader advisory service generated double-digit percentage gains within the past year, so I know first hand that you can make a bundle of money using options. I will be monitoring the ETF option funds listed above for performance and trading volume, as they can be a great way to increase the overall performance of an aggressive investor's portfolio.
Walking Away a Winner, Part II -- Numbers and Choices
Welcome to Part II in our series on what to do if you find yourself owing more on your real estate than it is currently worth. As promised, we're going to start by showing you how to run the numbers, and then we're going to walk through the options available to you as you seek relief.
The first step in analyzing any financial situation is to know your numbers. In real estate, this means knowing what your home is worth and how much you owe. It's also important to know the terms of your financing, as those terms can impact the options available to you.
I have found that most people forget the terms of the mortgage shortly after they close escrow. To get familiar with your terms, you will need to grab your current monthly statements, along with the loan documents you signed when you took out the loan. Once you have located your loan documents, pull out the note and the deed of trust. If you have a home equity line of credit, the note may be called the line of credit agreement. Each of these documents is prominently labeled in large, bold print at the top of the page.
Add up the current balance on your loans to determine the amount outstanding. Also, check your loan documents to see if there is any prepayment penalty should you pay off the loan either by sale or refinance. If your loan has a variable rate that will change your payment in the future, you will need to make note of the index your rate is tied to and the margin the lender adds to the index to determine the rate you pay.
At this point you should know how much you owe; what your monthly payments are, and if the payment will be changing in the future. To close the loop, you need to find out what your home is worth. An excellent first step is to consult www.zillow.com.
Depending on how similar the homes are in your area, Zillow results vary from highly accurate to not so accurate. Armed with this information, I would strongly advise having a local real estate professional prepare a comparable market analysis (CMA). You may even solicit opinions from local real estate agents.
The reason for this is that agents have their fingers on the pulse of the local market. They know what homes are selling for, how quickly they are selling and how rapidly prices are declining. If possible, consult an agent who specializes in short sales (selling homes where the bank agrees to take a less than full payment to avoid the trouble of foreclosure.)
Now that you know the scope of the problem, it's time to consider your options:
1. Loan Modification: If you want to stay in your home and you have a reasonable expectation of being able to make at least some of your house payment, you may want to contact your current lender and explore the possibility of a loan modification. This is where the lender voluntarily changes the terms to your loan to enable you to stay in the home. Changes that lenders often consider are: temporary or even permanent reductions to the rate, changing a variable rate to a fixed rate, and accepting interest-only or less than full payments for a period of time. Sometimes, the modification will include a combination of these options.
Why would a lender do this? Well, for the same reason that they would agree to a short sale. It's better to modify the terms and have a performing loan on the books than a defaulted loan. Contrary to popular belief, lenders do not want to take your property. They are not in the business of owning real estate, and they will go to great lengths to avoid it.
2. Short Sale: If you conclude that there is no way that you can make the payments on your home, or you are turned down for a loan modification, the next step is to see if your lender will work with you on a short sale. Again, in a short sale the lender agrees to accept less than full payment as a payoff on your home to avoid the trouble of taking the home from you. In addition to saving the bank the legal costs of foreclosing, short sales sell on average for 5% more than bank-owned homes. This can be a win-win situation as the bank minimizes its loss and you save your credit from the black mark of a foreclosure.
Complications can arise when you have a first and a second mortgage with different lenders. Unless the second lender can share in the profits, they are likely to block any short pay. These negotiations can be long and tricky, which is the primary reason to involve a real estate agent who specializes in these cases.
3. Deed in Lieu of Foreclosure: If your lender won't agree to a short sale, or the home just won't sell, the next best option is the deed in lieu of foreclosure. If your lender agrees, you can deed the property back over to them, saving them the hassle and cost of the foreclosure process. It is important that you negotiate with them to determine what they will do with any balance remaining after they dispose of the property. You don't want to be liable for a deficiency balance and be forced to continue paying on a home you don't own.
If there is secondary financing, the deed in lieu is probably not an option as any secondary financing would remain an encumbrance on the property and become the responsibility of the new owner, i.e., the bank.
4. Bankruptcy: Filing for bankruptcy can be used to forestall the foreclosure process if the owner wants to maximize the length of time he or she can stay in the home, or if the owner believes that a reorganization of debt may allow the home to be kept rather than sold.
5. Foreclosure: When all else fails, there may be no option but foreclosure. You can make it easy by moving out and mailing the keys to the lender. Or, you can choose the hard route and wait until the sheriff comes to evict you, but either way the result is the same. The bank takes the home back and you are left with a negative mark on your credit.
This should give you a solid idea of the options available to homeowners who find themselves underwater in this tough real estate market. Be sure to join us next week as we discuss how each of these options impacts your credit, your ability to qualify for a mortgage in the future, and your overall cost of credit.
The Starbucks Indicator
It seems as though many people have taken my advice and stopped spending all of their extra money at Starbucks.
Today, even Starbucks (SBUX) came out and said times are getting very tough. The company announced that it will close 600 company-operated stores in the next year.
Sorry guys, but it seems as though people are realizing that $4 for a 12-ounce latte is just not worth it -- especially when we're paying more than $4 for 128 ounces of gasoline!
The Seattle-based beverage merchant did not say which stores will be closed, but they did say that the stores are spread out throughout the country. In what I think is a very telling sign, the company also said that 70% of the stores slated for closure had opened after the start of 2006.
To put that in percentage terms, Starbucks is closing 19% of all U.S. company-operated stores that opened in the last two years. Ouch!
The Starbucks indicator is clearly bearish right now (in fact, I don't even think a bear would drink a cup of Starbucks at this point), and I don't see it getting any better anytime soon.
But when people do start going back to Starbucks in a big way, it may be a sign that the economy has begun to recover.
Retirement Income Conference Call, Part III -- Register Now!
Have you ever had the desire to increase your lifetime income streams? Would you like to have more pension and Social Security-style income in retirement, that is to say, income you cannot outlive?
Join me as I conduct the Retirement Income Conference Call -- Part III. I will speak on the new features of today's annuities that can help you to create those lifetime income streams. I also will address the ridiculous commissions being charged on most index annuities, and how you can avoid them.
If you are in retirement, are close to retirement, or have a loved one in retirement, you need to join me on this FREE call, to be held Saturday, July 12, at 3:00 p.m. Pacific time. And, if you own an existing annuity, you simply must hear what I have to say about the new no-load, no-commission annuities that allow for lifetime income without annuitization.
To register for this call, just click here.
A Jeffersonian Warning
"All tyranny needs to gain a foothold is for people of good conscience to remain silent."
—Thomas Jefferson
On this Fourth of July week, it helps to remember the brilliant words of a truly brilliant man. You see, you must always reject tyranny in all of its forms. The corollary here is that you must always stand up for your rights in all walks of life, and this includes your right to be rich. Happy Fourth of July, everyone!