Making Money Alert
Digesting the Data
06/23/2010
Equities currently are in what I call “digestion mode.” After the big May sell-off, stocks have made a valiant comeback in June. That comeback now seems to have stalled, and one big reason is that there’s been a bevy of news suggesting trouble on the economic horizon.
Recent home sales data failed mightily to meet expectations, as did the recently anemic retail sales and jobs numbers. Then, we have the continuing uncertainty over the fate of Europe and its debt woes, and the very real possibility that a global economic slowdown could pull us back into recession.
As you can see by the chart here of the S&P 500, stocks now have failed to remain above their long-term, 200-day moving average (red line). This failure to move decisively above this key technical level is not a good sign for the bulls.
From a trading perspective, I think you should be prepared to take either long or short positions, as things literally could go either way when we’re bouncing around the 200-day average.
If, however, you’re a long-term investor, I think supreme caution is mandatory. We still haven’t seen the kind of job growth necessary to pull us fully out of the recession and, as we approach 2011, taxpayers face the prospect of expiring income tax breaks and increased dividend taxes.
Now, I am not saying that the long-term investor can’t make money in this environment. You definitely can, but only if you play your cards right. My Successful Investing advisory service has been helping investors play their cards right for more than three decades, and given the virtual inflection point we’re currently at, having a little help with those cards is a pretty good idea.
To find out more about the service, and to find out how we’ve been protecting investors’ money for more than three decades with the proven -- market-beating -- Fabian Plan, then I invite you to check out Successful Investing today.
On ETFs and the 'Flash Crash'
On May 6, the market experienced something it really never has seen before. The huge “flash crash” that caused the Dow to swing more than 1,000 points in a little more than an hour represented the second-largest, one-day point decline (998.5 points) on an intraday basis in Dow Jones Industrial Average history.
There’s been a lot of speculation about what actually caused the flash crash and, to this day, nobody really knows for sure. I’ve heard all kinds of potential explanations, some more plausible than others. There was the so-called “fat finger” scenario, where it is said that traders in Procter & Gamble inadvertently placed a big sell order that caused the program trades to be triggered. This notion was later proven to be false.
Then we saw a report by the Securities and Exchange Commission that said the flash crash was caused by a confluence of economic events, market forces and trading-system functionality that led to a significant dislocation of liquidity. I think that conclusion is pretty obvious and less than insightful, to say the least. Other reports blame so-called high-frequency trading programs for the huge imbalance in trades. In my opinion, this is the most plausible culprit.
Unfortunately, a lot of people are blaming ETFs for the problems of the flash crash, and this is akin to blaming the victim for a criminal’s actions. Yes, it is true that many ETFs suffered from trading glitches and broken trades, but these were essentially the same problems that rocked individual stocks.
According to a report by Morningstar, about 20% of all ETFs were at least temporarily snarled in the trading glitches that took place that day. At some point on May 6, approximately 210 of the 980 funds in the ETF universe changed hands at prices more than 50% below their ultimate closing price, Morningstar reported. And while this indeed is a big problem, it is more of a market problem than an ETF-specific issue.
I think that the flash crash should be looked upon as a systemic problem with program and high-frequency trading, and not a problem with the trading vehicles at hand. You could say that the market suffered a mild heart attack on May 6 and, rather than trying to get at the root cause of the problem, some pundits would rather blame the victims, which in this case are ETFs and individual stocks.
I say it’s time to look at the high-frequency trading programs and perhaps other computerized trading programs -- not the financial instruments being traded -- for the real cause of the flash crash.
ETF Talk: Is the Promise of Telecommunications Falling Short?
The latest cell-phone innovations and the expanding number of applications available to users are gaining my attention as an investor. What also is on my mind is that the telecommunications company that appears best positioned to profit handsomely from such inventions does not seem to be winning the hearts, minds and financial backing of investors.
With Apple (AAPL) having trouble keeping up with orders for its new iPhone 4, AT&T (T) seems to be missing out on a great opportunity to add to its customer base. Another cautionary red flag is that AT&T’s stock price has been languishing in recent days. A big reason could be that AT&T is fumbling its opportunity to take advantage of its status of exclusively offering the iPhone to U.S. cell-phone users.
AT&T’s share-price recovery during March and April seems to have run out of steam. The chart below tells the story.
News stories in mid-June reported that Apple and AT&T encountered major problems in taking orders for the newest iPhone model. First, buyers reported trouble registering their orders. Second, an apparent glitch in AT&T's website reportedly gave certain customers access to the accounts of others. It is the continuation of a pattern of problems that AT&T has incurred in trying to keep up with demand for new iPhones. To use a World Cup analogy, AT&T appears to be misfiring on a great scoring opportunity. In the investment arena, it might be the right time to consider shorting the telecommunications sector with the UltraShort Telecommunications ProShares (TLL).
When a bellwether company that should be excelling is faltering, it is a bad sign. The Dow Jones U.S. Select Telecommunications Index that TLL is designed to mirror tracks providers of fixed-line and mobile telephone services. Fixed-line includes regional and long-distance carriers. Mobile includes cellular, satellite and paging services. It is not possible to invest directly in or against an index, so TLL is an exchange-traded fund (ETF) that offers a way to short telecommunications. For each $2 that the index falls, TLL is designed to gain $4.
Yet another concern of mine that heightens my interest in short positions such as TLL is that the economy is not picking up the way that many observers had hoped. Today, the U.S. Department of Commerce reported that U.S. home sales sank 33% in May from April to hit a seasonally adjusted annual sales pace of 300,000. It marks the lowest level of home sales on record since the government started keeping track in 1963. It also is the largest monthly drop on record. Home sales now have plunged 78% from their July 2005 peak. With the expiration of the April 30 deadline for homebuyers to qualify for a federal tax credit, the housing crisis appears far from over. The artificial stimulation of tax credit on the housing market may have hidden the sector’s weakness and lulled investors into a false sense of security.
I also have concerns about the impact on the corporate profits of multi-national companies due to the weak euro and warnings of slackening consumer demand from McDonald's (MCD), Best Buy (BBY), Federal Express (FDX) and Nokia (NOK). In addition, potential losses for BP (BP) are mounting as its Gulf Coast oil spill remains uncapped. And, Spain may need to tap the Europe bailout fund. With each piece of negative news, it points to further risk in the stock market.
Factor in the standard risks of telecommunications providers that include increasing competition from incumbent competitors, regulatory uncertainty, complex corporate structure, macroeconomic factors and the challenges of operating in foreign countries, you have plenty of reasons to justify taking a short position in the sector. Since telecommunications is an area where people can reduce usage voluntarily or delay upgrading to newer and better phones, it is vulnerable to economic weakness. Below is a chart of TLL that shows its recent rise.
To receive specific advice about my latest ETF picks, you should subscribe to my ETF Trader service. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.
Father's Day Radio Thoughts
If you missed last Saturday’s radio show, you missed a very special homage to my father, Dick Fabian. This great investment thinker taught me nearly everything I know about how markets really work, and I still consider him my finest mentor.
As a father myself, I think it’s important to try and impart life’s lessons to your children, and in last Saturday’s show, I offered up a few of the lessons I’ve learned in my nearly three decades of helping investors grow their wealth.
If you didn’t get a change to listen to this special Father’s Day show live, then don’t worry. Alert readers have FREE access to my Radio Show archive, and all you have to do is go to the website and listen for yourself, whenever you have time.
Coming up on this Saturday’s show, we have a discussion on:
• What’s ahead for equities in the second half of 2010
• Why your municipal bond assets are at risk
• What to do if your currently out of the market
• Your phone calls
It all goes down live, this Saturday from 10 a.m.-11 a.m. Pacific Time. To find out how you can listen to the show live, simply click here.
The Peril of Good Taste
“Good taste is the worst vice ever invented.”
--Edith Sitwell
The British poet reminds us that the finer things in life can indeed become addictive. Our solution to that, of course, is to increase your wealth so that you can service that worst vice ever invented.
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. My publisher, Eagle Financial Publications, is now on Facebook. Click here to see our page and be sure to become a fan when you get there.