Making Money Alert
Fighting the Financial Sector Funk with a Drink of Water
06/04/2008
During the past two weeks, the major market averages have fallen below their long-term, 200-day moving average (red line). This trend does not portend well for equities, but the good news here is that we still are trading above our short-term, 50-day moving average (blue line).
The chart below of the S&P 500 SPDR (SPY) illustrates the purgatory zone equities that we now are bouncing around in.
If we are to see a sustained move to the upside throughout the summer, we must first break back above the 200-day average. Unfortunately, there is one big, huge drag on the market, and that's the financial sector.
Financial stocks have been getting slammed for a long time, and the sector has led this market downward during the past year. I suppose turnabout is fair play, as the saying goes, because for a long time financial stocks actually led the market higher. Well, that's certainly not the case any longer, as the chart below of the Philadelphia Bank Index ($BKX) clearly demonstrates.
Frankly, this sharp decline in financial stocks scares me going forward, as the sector has been the canary in the coal mine for this market for some time. I think the market will be hard-pressed to start moving higher until we can shed the baggage of declining financial stocks. The good news here is that it's tough to see how financial stocks could get any lower. Of course, that's what many so-called market experts were saying back in January.
In the meantime, there are ways to profit from fundamental trends that are operating independently from the overall trend in the general market. One of those trends is water. That's right, water. More specifically, the world's growing need for more clean drinking water is one very profitable trend that investors can take advantage of right now.
The need for cleaner water around the globe was the subject of a recent National Geographic article. The article talked about China's need to build up its water infrastructure, and there were some great photographs showing just how polluted much of China's water supply really is.
How can investors in the United States take advantage of the developing world's thirst for a tall drink of water? Subscribers to my Successful Investing service know, and they're already drinking up the benefits.
An Auction-Rate Securities Tale
Once considered a money-market alternative, auction-rate securities are now anything but safe money market alternatives. Thanks to the pernicious and widespread ramifications of the credit crisis, these once-safe securities now are fraught with peril.
But not all auction-rate securities are created equal. To learn more about what types of auction-rate securities work best right now, I encourage you to read a great article which appeared in the May 26 edition of Barron's.
This subject can get a bit complicated, but if you own auction-rate securities or if you are looking to add them to your portfolio, the article is well worth your time and effort.
ETF Talk: Socially Responsible Investing -- Ixnay on Vice
I have a soft spot in my heart for people who want to invest in socially responsible ways. Life is short and we have limited opportunities to make a difference in this world before our time on earth is up.
One of the great parts of having money to invest is that each of us can pick and choose where to put it. I have noticed that exchange-traded funds (ETFs) have been rolled out that cater to investors who want to deploy their resources to help fund companies that offer socially responsible products and services. If you dislike supporting gambling, tobacco use, alcohol consumption and other good things, oh, I mean other vices; you can do so and still enjoy the benefits of ETFs.
A local church representative recently contacted me and asked me if I could help him develop a socially responsible investment program. I was happy to receive this man's call, and honored to be considered for this opportunity. I put time and research into helping this client and I want to share a little of what I learned about socially responsible ETFs.
Two solid socially responsible ETFs are the iShares KLD Select Social Index (KLD) and the iShares KLD 400 Social Index Fund (DSI). Both funds are part of the iShares family.
The largest sector held by each of the funds is technology. That sector actually has performed reasonably well during the recent market turmoil. Both funds also are diversified in a range of sectors to reduce their vulnerability to any one segment of the market.
The iShares KLD Select Social Index (KLD) is a fund that seeks to match its results to the price and yield performance, before fees and expenses, of the KLD Select Social Index. The fund, launched January 24, 2005, outperformed the S&P 500 since its inception through first quarter 2008, by notching a 16.47% cumulative total return. The S&P 500 returned 13.66% during the same period.
Imagine that. You can invest in companies that are socially responsible and still beat the market!
KLD's top five sector holdings, as of May 30, 2008, were technology, 19.52%; consumer goods, 15.39%; financials, 14.58%; health care, 11.89%; and oil & gas, 11.16%. In addition, the fund's top five stock holdings on May 30, 2008, were Johnson & Johnson, 4.49%; General Mills, 3.22%; International Business Machines, 3.06%; Exxon Mobil Corp., 2.68%; and Microsoft Corp., 2.41%. The fund has been trending upward during the second quarter, as the chart below reveals.
The iShares SKD 400 Social Index Fund (DSI) began on November 14, 2006, but it incurred a loss along with the S&P 500 since its launch at the end of the first quarter of 2008. Specifically, the fund's share price fell 5.25% during that time frame, compared to the S&P 500's drop of 5.06%. However, DSI's performance has risen so far during the second quarter, as the chart below shows.
The DSI fund seeks results that correspond to the price and yield performance, before fees and expenses, of the Domini 400 Social Index. Its holdings, as of May 30, were concentrated in the following five sectors: information technology, 22.36%; financials, 17.49%; consumer staples, 13.49%; health care, 13.07%; and consumer discretionary, 10.39%. Its top five corporate holdings, also on May 30, were AT&T Inc., 3.94%; Microsoft Corp., 3.71%; Proctor & Gamble, 3.32%; Johnson & Johnson, 3.09%; and Apple Inc., 2.71%.
Although I have not recommended these two socially responsible funds in my paid trading services, I like them both. Those of you interested in socially responsible ETFs also may want to consider funds that mesh with your beliefs. A little research on the Web can help you to find ETFs that meet these objectives. Just be careful with any funds that lack much trading volume or that have underperformed the general market.
In closing, I recognize that I only address a segment of the ETF industry each week. If you have any general questions about ETFs, please send them to me and I'll try to answer them in future ETF Talk features.
To encourage you to do so, I have created a new e-mail address. Send your questions here and you might just see your response featured in a future issue of the Making Money Alert.
A Case of Contrasting Ideas
If you're like me, you love reading all kinds of opinions about where things are headed. I recently read two articles that I thought really showed just how diverse the range of opinion is amongst the experts.
In the bullish camp was famed Wall Street giant, former Morgan Stanley global chief investment strategist and current hedge fund manager, Barton Biggs. In an interview with The Wall Street Journal, published in the May 31 edition, Biggs said that his "intuition" tells him that after the current consolidation is over, the next move for the market will be up, not down.
Here's a great quote from Biggs explaining his view; "Psychology is involved here. I like the fact that the market is worried. I like that The Wall Street Journal runs articles about that. That's all good. But the puke point has been reached, in March. Because of the problems we're living under, the market should be in a trading range for the rest of the year, between 1250 and 1550 in the S&P 500."
Hey, you gotta love a sophisticated Yale graduate who uses the term "puke point."
Biggs goes on to say that if the Federal Reserve has made its last rate cut, then that is a bullish sign for the markets. He also thinks we are close to the bottom in terms of new-home sales and construction, which he says is a definite plus for the economy.
He also points out that we have a huge amount of liquidity on the sidelines that's waiting to be invested. Biggs says that U.S. stocks are, "the cheapest major asset in the world." He did warn, however, that if oil prices continue rising in the short run, "this craziness would be inflationary and very recessionary. Oil rules the U.S. and world stock markets."
And which areas does Biggs see as the most -- and least -- promising going forward?
One area he likes is technology. Biggs says companies have been under-spending on technology for the last few years, but that is about to change. "Tech providers will see earnings grow, and so they will outperform the market." Biggs also likes emerging markets, particularly the Asian ones.
Like me, Biggs says that the financial stocks are a "busted sector." He expects to see a lot more write-offs in the sector, and he describes stocks in the space like this; "The magic age is over. It will be years until their earnings are back."
The other interesting article I read was from the May 30 online edition of U.S. News & World Report. The magazine did an interview with the ever-bearish Peter Schiff, president of Euro Pacific Capital. Schiff spent the past decade urging his clients to jump ship from the American economy ahead of what he views as inevitable pain caused by a lax monetary policy, wayward spending and tougher global competition.
Schiff sees nothing but downside ahead for U.S. markets, the dollar and the economy. When asked if he could say something good about the U.S. economy, he responded by saying, "There's nothing good to say about our situation. The policies both the Fed and government are pursuing are making the situation worse. We've been getting a free ride on the global gravy train. Other countries are starting to reclaim their resources and goods, so as Americans are priced out of various markets, the rest of the world is going to enjoy the consumption of goods Americans had previously purchased."
Schiff says he's buying natural resources and energy funds, along with gold, silver and industrial metals. His main theme is that the global economy will survive, even if the U.S. economy becomes a disaster. If you insist on investing in U.S. markets, Schiff recommends sticking with exporters and resource companies and avoiding retailers, home builders and financials.
When asked for his predictions about the market and the economy, the bear's claws really came out; "I think the stock market is headed lower. Gold is going to be $1,200 to $1,500 by the end of the year. That puts the Dow at a less-than-10-to-1 price ratio to gold. Right now, it's about 13 to 1. That's another 30% drop in the real value of stocks by the end of the year if you price them in gold. The Dow was worth 43 ounces of gold in 2000. It'll get to 10 by the end of the year and continue to fall from there."
And what of the future fate of the greenback? "At a minimum, the dollar will lose another 40 to 50% of its value. I'm confident that by next year we'll see more aggressive movements to abandon the dollar by the [Persian] Gulf region and by the Asian bloc. That's where the stuff really hits the fan."
Never shying away from apocalyptic rhetoric, Schiff offered up the following scary gem; "The other problem we'll have during those years is civil [unrest]. There will be a big increase in crime. People are going to be hungry. People are going to be cold. There's a sense of entitlement in this country, and when a lot of people used to having things suddenly don't, everybody looks for someone to blame."
As you can see, while there is some agreement between Biggs and Schiff on financial stocks, one clearly thinks we are well on our way to recovery while the other is literally predicting blood in the streets.
Who'll be right, and who'll be wrong? We'll find out in the months ahead.
In the meantime, I am going to let the market tell me whether it is safe to stay in the equity waters, or whether it's time to head for shore.
Income Investors: Pick Up Your Phones NOW!
On Saturday, May 10, I presented part II of my three-part Retirement Income Conference Call series. If you are in retirement, approaching retirement or are in charge of the financial assets of parents or grandparents, I invite you pick up the phone right now and listen to the replay of this call.
In our first call we covered the basics of retirement income investing such as: getting organized; understanding your income streams; essential and discretionary expenses; the threats to your income, and how to create new lifetime income streams. Now we have moved into a new discussion about two very important topics for retirees.
The first is income investing, and just how it is done. We discussed what vehicles you should use, and where the best opportunities are today for income investors. Second, I spoke in much greater detail about the new living benefits within today's variable annuities. There is a new breed of no-load annuity available that allows you to receive income without annuitization -- and while still maintaining control of your assets.
This type of annuity could be a great choice for a portion of your 401(k) or IRA. We covered all this and much more in this dynamic and informative conference call.
If you didn't have the chance to call in, then now is your chance to listen to the replay at your own convenience. Just click here to listen to part II of my Retirement Income Conference Call.
The Wisdom of the Rings
"If more of us valued food and cheer and song above hoarded gold, it would be a merrier world."
—J. R. R. Tolkien
The creator of the Lord of the Rings novels understood that what really matters in life is happiness. Reveling in a meal with family and friends can be just as important, if not more important, than your quest for wealth. Don't get me wrong, wealth certainly helps you enjoy life's pleasures, but hoarded gold should be the means to a life well lived, not its overriding purpose.