Making Money Alert
Fed Up or Fake Out?
12/17/2008
Yesterday's surprise Fed move to lower the federal funds rate target to between zero and 25 basis points underscored the lengths the Open Market Committee, i.e., Ben Bernanke, is willing to take to stave off a major recession -- or perhaps the risk of a potential depression.
I suspect the big buying we witnessed in stocks immediately following yesterday's historic Fed announcement will likely taper off -- as it has somewhat today. Still, the market finally got some short-term good news in the midst of an otherwise dismal deluge of disappointing data.
I say short term, because remember it was former Fed Chairman Greenspan's reduction of interest rates to nearly zero that opened up the easy money spigots, and which eventually led to the housing market boom and bust (interestingly, Greenspan still denies his decisions were the chief reason for the housing market boom-to-bust cycle).
The question for the markets now is -- will the Fed's move keep the markets up, or will it just be another in a long line of fake outs we've grown accustomed to seeing throughout 2008?
The answer, of course, remains to be seen. We are sailing in uncharted water right now with respect to the economy and this market. And while I think we are going to see what I've been calling the Obama bounce as 2009 kicks off, this bounce is by no means guaranteed to be more than just another in a series of bear market rallies.
Whatever happens, the one sure bet you can make is that we'll be here to cover all of the action, and to make sense of it all as best we can.
Fed Up or Fake Out? 2
The New Year is just a couple of weeks away, and soon we'll all be resolving to not make the same mistakes we made in 2008. I suspect that many Alert readers can plead guilty to the charge of making bad mistakes this year, as conditions in the market were so treacherous that even the most nimble market dancers likely took a tumble or two.
If you haven't started making your financial New Year's resolutions for 2009, let me give you a little head start. Here's just a sneak peak at what I want smart investors to resolve to do next year:
- I will prepare my family for a tough economic environment in 2009.
- I will have a positive increase in my liquid net worth in 2009.
- I will save in excess of 10% of my gross income in my retirement accounts.
- I will save and safely secure at least three months of living expenses.
- I will stop losing money on bad investments or bad investment advice.
During the past several weeks, I've talked to my radio show listeners about ways to prepare for what I think will be another tough, yet potentially very profitable year.
How can I say "tough, yet potentially very profitable" in the same sentence? That's simple. You see, when you know how to navigate choppy market seas, you are able to profit no matter what the market hands you.
But to accomplish this admittedly difficult task, you need to adopt a new mindset. You need to adopt new investing techniques, and you need to get rid of bad investments and bad investment advisors.
In 2009, you should reassess your goals and investment objectives. Many investors found themselves painfully misallocated when it came to what type of investments they actually owned, versus what kind of investments they should have owned, based on their goals and objectives.
In the coming year, you should have a growth strategy in place that takes advantage of bear-market rallies. You also should know all about the various tools at your disposal, such as broad market exchange-traded funds (ETFs), bear market funds, sector ETFs and, of course, the most underrated and underappreciated asset class -- cash.
Also for 2009, you should know how to generate income from your assets, and you should learn about the various instruments out there that allow you to safely generate the monthly income you're seeking.
And finally, you should start to manage your portfolio in 2009 with an eye toward always minimizing your tax liability. Hey, we all have to pay taxes, and with the new presidential administration in Washington and a favorable Congress at its disposal, you can be certain that we are going to be paying higher and higher taxes in the years to come. Getting prepared for this eventuality in 2009 is just the smart thing to do.
To listen to the latest installment of my radio show series on success in 2009, click here.
Running on Top of The Great Wall of China
The recent resurgence in the domestic equity markets also has been felt in one of the biggest and potentially most profitable market segments around.
The segment is China, and specifically the iShares FTSE/Xinhua China 25 (FXI). This fund is essentially the "Dow" of the China market, as it represents the biggest and arguably the best Chinese companies traded on the Hong Kong Stock Exchange.
As you can see by the chart above, FXI just broke above its 50-day moving average (blue line), and is now headed toward its 200-day moving average (red line). And while FXI has a ways to go before it gets back above the 200-day, its journey there could mean a lot of short-term gains.
Right now in my ETF Trader advisory service, we have an allocation to FXI, which is up sharply during just the past few trading sessions. If you'd like to find out how you can participate in the upside provided by FXI and other ETFs, click here.
A Compelling Correspondence
I recently received a letter from a subscriber to my Successful Investing newsletter that I wanted to share with you.
Dear Doug,
I hope you have an answer for me.
In July of 2007 I stupidly broke just about all of your investment
rules. My wife and I invested a total of $250,000 with Northwestern
Mutual Investment Services -- an IRA for each of us and a regular mutual
fund investment for her.Though we have three accounts with this firm, the money is in just two funds: Capital Income Builder Fund and Income Fund of America. At present the accounts are worth about $160,000.
My question is, should I sell these funds and put the money in cash, or wait and hope to make back some of our losses?
Sincerely,
A frustrated investor
Frustrated indeed, and I suspect that this subscriber isn't the only one holding on and wondering what to do about big losses. Fortunately, there are a few ways to help remedy this situation.
My current outlook on the market is that I am anticipating higher prices in the short term. The markets still are deeply oversold, and we may get a strong rally through the end of the year.
In my opinion, this rally should be viewed as an opportunity to lighten up on some of your invested positions. The market metrics are still very poor, and that means we are likely in for more trouble in 2009. So, when the market does give you a chance to sell into strength, take it.
Finally, my frustrated subscriber was sold very high-fee, high-commission products, and judging by what he's told me he was sold these products without any risk protection in place. Let this be a lesson to you to not fall into the trap of listening to the biased advice of a commission broker.
Remember that only your judgment can prevent you from making a big mistake, so always exercise that judgment with ruthless logic -- and with an unflinching allegiance to reality.
To find out how my Successful Investing advisory service can help you avoid costly investing mistakes, click here.
A Healthy Dose of Skepticism
As the world learns the details of the tangled tale of lies and deceit perpetrated by the now infamous Bernie Madoff, the New York broker and former chairman of Nasdaq who admitted that his money management business was a fraud, the question now becomes how can you prevent becoming a victim of this type of scam in the future?
The answer, of course, is to swallow a healthy dose of skepticism whenever you hear about someone who claims their strategy and tactics will always net you high, safe returns. Much as I would like to claim differently, no investment advisor will be right all of the time and nobody can guarantee your money will be safe and sound no matter what happens.
Anyone who tells you this should be castigated immediately as full of manure.
The antidote to this ill-smelling claim is to be skeptical. Don't believe someone just because he or she looks good, wears a nice suit, drives a nice car or belongs to the same country club.
In the case of Madoff, it appears that he used his religious and ethnic identification with the Jewish community to basically bilk investors out of hundreds of millions of dollars. Just because someone is a member of your group does not give that person a claim on truth, nor does it make him truthful or trustworthy.
The overriding lesson here is that you should always be skeptical, and always have your guard up when your money is at stake. You should always seek out the most transparent, open and honest people you can find to make up your financial team.
Remember, in any pursuit in life, a healthy dose of skepticism will act as a tonic against the claims of charlatans, looters and scammers that seek to benefit from your virtues.
Don't let them make you a victim.
Give Yourself a Holiday Present
"Don't work for my happiness, my brothers -- show me yours -- show me that it is possible -- show me your achievement -- and the knowledge will give me courage for mine."
-- Ayn Rand, in a passage from "The Fountainhead"
It's the holiday season, and perhaps the greatest present a man can give to the world (this includes himself) is to achieve greatness. You see, by achieving great things via a great struggle, he provides an example to others that life is worth living. He shows the world that values are achievable here, on this earth, and in one's lifetime. This is why man needs heroes, both psychologically and philosophically. So, why not choose to be a hero for yourself, your family and the world? It's the best present you'll ever give, or receive.
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 that you have about my radio show, newsletters, seminars or anything else. Click here to Ask Doug.