Making Money Alert
Assessing the Collective Market Wisdom
12/22/2010
About this time every year, the financial press is replete with predictions for what the market likely will do in the year ahead. This cavalcade of collective opinion was exemplified in last weekend’s edition of Barron’s, where the cover story, simply titled “Outlook 2011,” featured 10 prominent market strategists and investment managers making their calls for 2011.
The collective wisdom this year, according to the pundits featured in Barron’s, sees the S&P 500 finishing 2011 near 1,373. That’s about 10% higher than last Friday’s close of 1,244. Now, I think the call for this kind of solid, yet conservative, gain in the S&P 500 is indicative of the trepidation that most market watchers -- myself included -- harbor when it comes to stocks and the economy.
A slight majority see 2011 as the year when a sustainable economic recovery finally develops, and when the bull market and economic skeptics finally are won over. The thinking here is that if the overall economic climate improves, then companies finally will start putting their accumulated cash to work in new investments and new jobs. In turn, that will precipitate an even greater cascade of economic activity -- and by extension, a big surge in the equity markets.
Certainly, I would like to believe this prognosis. But I have to say that, as of now, I’m going to consider myself part of the crowd of skeptics. This crowd basically argues that factors such as continued slow economic growth, high unemployment, escalating trade tensions, tightening credit conditions in emerging markets, and the outlier events such as military confrontations involving the West and Iran, as well as conflicts on the Korean peninsula, will team up to create another eminently volatile year.
One look at the chart here of the S&P 500 so far in 2010 gives us a true sense of just how much volatility we’ve experienced on our way toward ending the year at new 52-week highs. If the coming year is anything close to the year we’ve just had, then approaching 2011 with a cautious sense of skeptical optimism certainly will serve Alert readers well.
The bottom line here is that when it comes to 2011, I’m hoping for the best, but prepared for the worst. Fortunately, when it comes to investing successfully in the equity markets, this approach is a winning formula in any year.
If you would like to find out more about how I’ve refined my market-beating formula over the past three decades, then I invite you to check out my Successful Investing advisory service today.
The Muni Bond Banter Heats Up
On Sunday, the CBS news show “60 Minutes” did a very interesting segment on the budget crisis facing so many state and local governments. What the segment essentially amounted to was truly an ominous outlook for the municipal bond market going forward.
The program interviewed renowned Wall Street banking analyst Meredith Whitney, who repeatedly has said that the fiscal problems faced by states likely are going to cause a “spate” of defaults among municipalities. According to Whitney, “you could see 50 sizeable defaults -- 50 to 100 sizeable defaults,” amounting to “hundreds of billions of dollars.” What this all translates into, of course, is big selling pressure in the muni bond sector.
In fact, one quick glance of the chart here of the iShares S&P Municipal Bond Fund ETF (MUB) tells you all you need to know about munis. This sector definitely is one to avoid going forward. Until we see more clarity in the space, munis are one asset class every income investor should be very wary of holding.
The other interesting interview in the “60 Minutes” segment was with New Jersey Gov. Chris Christie. Christie, in his characteristically blunt fashion, told “60 Minutes” that the problem with bloated state budgets is not income, but rather the insane amount of public pension benefits his state has promised. “It’s not an income problem from the state. It’s a benefit problem. And so we gotta change those benefits,” Christie said.
Unfortunately, not too many other governors have the kind of political will that Christie has when it comes to taking on state benefits. In fact, most governors cower at the thought of taking on any element of the public-union machines. Until this issue is addressed, we likely are going to see more of the same fiscal hardships plaguing states and municipalities throughout the country. This could lead to a full-blown fiscal day of reckoning for states, and that could mean some disastrous pressure on municipal bonds in 2011.
ETF Talk: Rising Oil Prices Offer Investment Gift
Motorists driving to visit family and friends this holiday season may not like rising oil prices, but the trend does provide investors with another way to profit.
Oil is among the commodities that have been boosted by encouraging reports about a budding economic recovery. One exchange-traded fund (ETF) that’s benefitting from this trend is the United States Oil Fund (USO).
The fund is designed to track oil prices, but essentially it reflects the changes, in percentage terms, of the spot price of light, sweet crude oil. As you may know, crude oil is one of the most important physical commodities, as it literally fuels global economic activity. Well, WTI light, sweet crude oil futures contracts are the measure by which traders assess the supply, demand and price of this vital commodity. The WTI light, sweet crude oil futures contracts also are regarded as the primary U.S. benchmark for crude oil prices.
There is a unique risk with USO that I want to bring to your attention. The risk is called a “roll penalty” and it occurs when an ETF sells out of expiring futures contracts and pays a premium for the following month’s contracts. In well-supplied markets, each month’s contract is a little more expensive than the previous month’s contract. The difference helps to cover the cost of storing a commodity. That disadvantage should not necessarily deter you from investing in an ETF such as USO, which still could help you to profit from a jump in oil prices. Click here to read a Nov. 30 article from The Wall Street Journal that addresses this particular risk.
However, USO also offers strong benefits. It provides an investment vehicle to hedge crude oil movements or to take directional positions on oil prices. It also gives you commodity-like exposure without having to open a commodity futures account.
If you are afraid of climbing aboard a bandwagon that already has left the station, allay your concerns. The chart above of USO shows that the fund has not taken off to stratospheric levels. You therefore still can buy USO at a reasonable price.
For advice about which ETFs to buy and to sell, I urge you to sign up for my ETF Trader advisory service. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to contact me if you have one. To send a question to me, simply click here. You may just see your question answered in a future ETF Talk.
My Gift to You this Holiday Season
Hello and happy holidays!
Now that we’ve entered the final month of what has been a very volatile, and extremely eventful, year in the financial markets, I thought it would be an appropriate time to start thinking about the best way to get ready for what I suspect will be both a challenging and a rewarding year ahead in the equity markets. But rather than give you a predictive outlook on what’s likely to happen in 2011, I want to take a step back and look at perhaps the biggest lesson investors should have learned this year.
You see, so many market participants got caught up in the wild ride that was the stock market in 2010. They chased performance after the big gains already were made, and they sold right after stocks already had tanked. This is what I call being reactive to the market, and it most definitely is not the rational way to manage your serious money.
In speaking with literally thousands of investors this year, I’ve come away with the sense that many have become needlessly frustrated with the performance of their stock and bond portfolios. Certainly, I understand this frustration, as it’s been a tough year of riding this market’s choppy waves.
So, to provide you with a little sense of calm this holiday season, I want to offer you what I think is one of the best holiday presents that you can give yourself -- a complimentary second opinion on your investment portfolio.
As the year winds down, right now is an excellent time to have a professional take a second look at your holdings. The team here at Fabian Wealth Strategies will provide you with a complimentary portfolio review that includes a comprehensive assessment of your investment goals, along with a full analysis of all the securities in your portfolio.
Contact us today for a brief introduction, and we’ll schedule you for your complimentary portfolio review. This offer is available for households with $250,000 or more in their investment portfolios. You can call our offices direct at 800/391-1118, or you can register online at www.fabianwealth.com.
Here’s to a very happy, healthy and wealthy holiday season.
Sincerely,
Doug Fabian
President, Fabian Wealth Strategies
NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.
A Little Holiday Humor
“The proper behavior all through the holiday season is to be drunk. This drunkenness culminates on New Year’s Eve, when you get so drunk you kiss the person you’re married to.”
-- P. J. O’Rourke
The great conservative commentator/humorist brings an off-color sense of levity to what sometimes can be a stressful season. Of course, I don’t want you to think I literally endorse his view of the holiday season, but I do think that sometimes a relaxing drink and amorous attention toward your spouse can take the edge off of even the worst holiday stress. Now, let’s all enjoy the holidays!
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.
Sincerely,
Doug Fabian
P.S. The Alert will not be published next Wednesday, Dec. 29. Our next issue will be published on Wednesday, January 5. Happy New Year!
P.P.S. Don’t miss out on The World MoneyShow Orlando, February 9-12, 2011, at The Gaylord Palms Resort. This event will be your one-stop resource for the education, research and advice that you need to make smart investment decisions in 2011 and beyond. Join me there and hear leading experts reveal where they see growth opportunities in stocks, bonds, ETFs, commodities and options. Click on this link to The World MoneyShow Orlando to register or call 800/970-4355. Be sure to provide priority code 020753.