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Don’t Go Tempting a Tempest

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04/22/2009

Even a casual market observer can't escape the barrage of talking heads on TV and in the print media who now are claiming that the recent rally is the beginning of a new bull market.

Now I admit that the substantial surge in the market over the past six weeks has been much stronger than I expected, and if this is the start of another bull market, then I'll admit it when the time comes.

But make no mistake about it -- that time has yet to come.

Calling this rally the start of a new bull market ignores the fact that the market is still way below its long-term, 200-day moving average. It also denies the reality that we are still nearly 100 S&P 500 points away from where we were at the start of the year. Take a look at the chart below of the S&P 500.

As you can see, we've come way, way up since hitting the recent lows in March. But despite such a big rise in the sector during the past six weeks, we still are way below the 200-day moving average (red line).

Before we go calling this bear market a bull market, and you go headfirst into stocks with your hard-earned investment capital, at the very least we should wait until we get back above the long-term moving average.

As we saw last week, the market can turn around in a heartbeat. One day you could see strong buying, while the next day witness a 4% drop across the board. So I caution you not to tempt this market tempest. Remember that the last thing you want to do is get caught going long in a market with so much downside volatility.

Beware of Deflation

Many of my Fabian Wealth Strategies clients have expressed a big fear about the threat posed to their financial well-being from inflation. This justifiable fear has been engendered by the huge expansion of the federal budget, and the huge increase in government spending.

This governmental intervention in the economy ostensibly was done to ratchet us out of recession (at least that's what the White House, the Treasury Department and the Federal Reserve tell us). But what the government's actions are more likely to do is to cause a huge amount of monetary inflation down the road, as the rising cost of food and energy prices will eventually hit consumers worldwide like an uppercut from Iron Mike Tyson.

Now I say eventually, because so far we haven't seen the huge spike in the goods and services you'd expect as a result of monetary expansion and the Keynesian influx of government "stimulus" in the economy.

And while I do think that inflation is a pernicious beast lurking about the financial forest, what I think is the more immediate threat to investor wealth is deflation. Now when I say deflation, I need to be a little more specific.

First off, I am not talking solely about deflation in terms of falling asset values. Certainly, the sharp decline in real estate values along with the decline in stock values is one form of deflation, but the real long-term menace of deflation has more to do with the term's wider, macro-economic connotations.

According to Investorwords.com, the definition of deflation is, "a decline in general price levels, often caused by a reduction in the supply of money or credit."

The key concept here is a reduction in the supply of credit.

If deflation is caused by a lack of willingness to lend money due to circumstances such as the current credit crunch, bad things could be in store for the economy. Given that money is the lifeblood of any economic system, a lack of supply, i.e., a lack of the willingness to lend, could mean a deepening of the recession.

The evidence for deflation occurring on a global basis is already present. According to one of my favorite financial bloggers, Mike "Mish" Shedlock of Mish's Global Economic Trend Analysis, deflation went global long ago.

Mish points out that in March, wholesale prices in both Japan and Germany fell sharply. In Japan, wholesale prices fell at their fastest pace in nearly seven years. In Germany, wholesale prices witnessed the biggest year-on-year decline since January 1987.

In China, the Consumer Price Index (CPI) and the Producer Price Index (PPI) are now in negative territory for the year, a clear indication that asset prices in one of the world's largest economies have been hit hard by deflation.

Here in the United States, we've seen a similar phenomenon. The Consumer Price Index actually increased 0.2% in March, but over the last year the CPI has decreased 0.4%. This is the first 12-month decline in the CPI since August 1955!

As I mentioned earlier, many of my managed clients are afraid that inflation will eat away at their wealth. But what I think they should be more worried about -- at least for now -- is deflation.

I know the concept of deflation is more difficult to understand than inflation, and it's also more difficult to feel. I mean, you know what inflation is. You feel it right at the gas pump, cash register or whenever you buy something. Everything just gets more expensive. For sure, this is not good.

What I think is worse though is that during deflationary periods, you see the areas where you keep your real wealth, i.e., your investment portfolio, your home and other valuable assets, decrease in value. This decrease in the value of your true wealth reservoirs is why I think deflation is the bigger boogey man to fear right now than inflation.

The Five Keys to Investment Success 3

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: Is the Health Sector a Cure For Market Sickness?

I am sympathetic toward any investors who may feel a little ill when looking at their beaten-down investment portfolios. Since the market's stomach-churning plunge last October and its subsequent volatility, I know many people are nervous and looking for a way to calm their fears. Could health care offer a solution?

Well, there are several healthcare exchange-traded funds (ETFs) that may be able to help soothe queasy stomachs. The healthcare sector has been growing rapidly in the last decade, with the industry's portion of the national economy doubling to nearly 16% of gross domestic product (GDP). Coupled with the Obama administration plans to inject $634 billion into the sector during the next 10 years, now may be a good time to examine the industry's outlook.

Healthcare historically is somewhat recession-proof. People who get sick need treatments -- period. It doesn't matter if the economy is weak. For those who have an appetite for risk, the healthcare industry offers many opportunities for investment.

Now keep in mind that the performance of health-care funds can fluctuate widely. While healthcare ETFs such as iShares S&P Global Healthcare (IXJ), Vanguard Health Care ETF (VHT) and WisdomTree International Health Care Sector Fund (DBR) fell more than 20% in 2008, they all beat the Dow, which lost 33%. However, Healthcare Select Sector SPDR (XLV) had the worst performance of them all with a 56% reversal. With the market starting to head upward, healthcare is one of the sectors that could soar.

I am not yet convinced that the healthcare sector is an elixir for anybody's ailing portfolio. Although the Obama administration is championing a plan to expand the government's role in providing healthcare, it is unclear to me and probably many others what truly is affordable for a country that is running massive deficits. Plans that sound great in concept sometimes lose support when their actual long-term cost becomes clear.

Regulatory changes and policy shifts certainly could change the entire landscape of the pharmaceutical industry as we know it. For example, there has been a period of remarkable instability in the prices of drug manufacturers since President Obama took office. This volatility can be seen from the chart below comparing Merck (MRK) and Boston Scientific (BSX).

With the changing political landscape and doubts about the potential profitability of new pharmaceuticals under development, the industry's future remains uncertain. As a result, patience is required for anyone who wants to invest in this sector.

If you are cautious -- and I certainly hope you are -- waiting for the right time to get into the market might be a good way of mitigating risk. If the healthcare and pharmaceutical sectors look enticing to you, then a long position in one of these ETFs just might be what the doctor ordered.

If you want further guidance about which ETFs to trade, check out my ETF Trader service by clicking here. As always, I am happy to answer any questions that you have about ETFs. To send me your questions, simply click here. I will try to follow up in a future ETF Talk.

Come Meet with Me in Phoenix

Would you like to do any of the following?

Would you like a short list of the most promising investments we are considering for our client portfolios?

If you answered "yes" to any of the above, it may be time that we sit down to discuss how you can improve your investing plan during these difficult times. No matter what your current situation, there's a very good chance I can help you see what to do more clearly.

On Thursday, April 23 and Friday April 24, I will be personally meeting one-on-one with investors to discuss their current investment situation.  I will be hosting these meetings at the beautiful JW Marriott Desert Ridge Resort in Phoenix, Ariz.

I will offer my recommendations on changes that can be made to fortify investor portfolios for the current difficult times -- and well beyond.

Meeting times are limited!

I have made arrangements to open another two appointments. That means that if you want to get a second opinion on your portfolio, you must call me right away.

Due to the big response we've had in Phoenix, these two new appointments will be booked very quickly.

If you have a portfolio in excess of $250,000 and want to meet with me, simply click here to contact our offices, or better yet, call me toll free at 800.391.1118 right away. The two remaining appointments will be scooped up soon, so act now!

P.S. If you're serious about creating a better positioned portfolio, then call me today so I can get started on your situation. This way I'll be better prepared to discuss your concerns in detail when we get together in the desert.

It's Time to Refinance 2

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 Web site, you can call him at 888.944.5674 ext. 1, or you can email him at by clicking here.

Do yourself a favor and put a true professional on your real estate team.

Jeffersonian Science

"Freedom is the first-born daughter of science."

-- Thomas Jefferson


Jefferson is, of course, best known as a learned writer, politician and Founding Father. But what we have to remember is Jefferson also was a man of science. He held a strong belief in the science of reason, and reaching conclusions based on evidence and logic. It is only when we pursue truth via reason and logic -- as Jefferson so eloquently asserts in the above quote -- that true freedom is born.

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.

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