It's A Mad, Mad, Mad, Mad World

09/17/2008

What a week -- and it's only Wednesday!

Monday's market meltdown, followed by today's tremendous selling, reminds us all that when it comes to the equity markets, it's a mad, mad, mad, mad world.

Now, I am not going to go into the gory details of how the numerous government (a.k.a. taxpayer) bailouts have yet to ameliorate the decline in the equity markets. I'll have more to say about that in next week's Alert. What we can say, however, is that right now there is little if any confidence in the financial sector, and I think no matter what the government or anyone else does, the smart money will continue running for the exits until the end is in sight.

Right now, the end is nowhere on the horizon, and so we must deal with more fear, more anxiety, and a lot more selling.

Some people might find the need to be modest here and to utter something like, "I hate to say I told you so, but…" Well, I am going to dispense with that nonsense and tell you that I have been predicting a market meltdown ever since we declared this bear market back on Jan. 8.

In fact, I have been grappling with the mainstream financial press and the Wall Street establishment since then, saying that the chickens must come home to their proverbial roost with respect to the housing market and the subprime fiasco. Well, I told you so, and I am not the least bit coy about pointing it out to you, the Alert reader.

The gratification I get from you is enough to embolden me to keep on speaking my mind about this market, and to keep brazenly pointing out to you that I have been right throughout this tough year.

One happy reader wrote me the other day telling me that ever since the dot-com bust, he has learned that even his 401(k) needs active management. He said that last year he was very nervous about the market, and amidst the chorus of everyone out there who kept saying that the bull market would last forever; I was the only person who was "very realistic about the market, and very on about this downturn."

Here's the money quote straight from this reader's e-mail, which made me feel like what I do is indeed making a real difference out there. "Thank you so much for your voice of reason, while I am sure I could have done things even better with some inverse ETFs or such. I am up 3% in a horrible down year in my 401(k)…Your voice of reason helped me pull the trigger and save my 401(k)."

To this I say -- thank you. I am here to help, and that's what I am going to keep on doing with my brutally honest, sometimes right, sometimes wrong, but always sincere opinions about what's taking place in the market.

So, what's my sincere opinion about how bad things could get from here? To answer that, let's start by looking at the chart below of the S&P 500 index.

Here, we see that we now are well below 1,200, which is a psychologically and technically significant breach of a key support level.

If this market were to fall a third (33%) from its October 2007 high of 1,565, the S&P 500 will fall to 1,048. As of this writing, that would mean just over 100 points lower.

If we witnessed a more pernicious decline of, say 45% from the October 2007 high, we would be all the way down to 860. And what if we had a 60% decline from the most-recent high? Well, that would mean an S&P 500 valued at just 626.

Could we go this low? Yes, we could.

Do I expect us to go all the way down to 626? No, I don't.

But I do expect things to get worse from here before they get better, and that means you simply must be as defensive as you can possibly get with your money.

When Safe Isn't Safe

You know that the market's in trouble when even safe investments aren't safe anymore.

On Tuesday, we found out that one of the first-ever, largest money market funds put a seven-day freeze on investor redemptions after the net asset value of its shares fell below $1. Yikes!

This is called "breaking the buck" in the money fund industry, meaning that a dollar just isn't a dollar anymore. This is exactly what happened in the Primary Fund (RFIXX), managed by New York-based money market fund inventor The Reserve. The company announced late Tuesday that its $785 million holding of Lehman Brothers Holdings debt has been valued at zero. Double yikes!

As of Tuesday's market close, the value of a Primary Fund share was 97 cents. That's most-definitely not good when you expect that share to equal $1. News of the Primary Fund's troubles basically caused a scurry for the exits, evidenced by the fact that at 3 p.m. on Tuesday, Primary Fund's assets stood at $23 billion, a $40 billion hit from the $62.6 billion in the fund on Friday.

This is only the second time that I can remember a money market fund's net asset value falling below $1. In 1994, Denver-based Community Bankers U.S. Government Money Market Fund returned 96 cents on the dollar to investors when bad derivatives investments forced it to liquidate. Well, the same thing, in essence, has happened here, and hopefully, this will be an isolated case.

To help assure its customers that their money is safe, some of the largest money-market fund providers already have tried to calm investors in the wake of The Reserve's revelations.

Fidelity Investments, a company I really like, said that its money market funds are sound. "We can state unequivocally that Fidelity's money market funds and accounts continue to provide security and safety for our customers' cash investments," said Anne Crowley, a Fidelity spokeswoman.

That's good news, and very reassuring, especially if you are like me, and you have a substantial percentage of your investment portfolio allocated to cash.

The bottom line here is that safe is indeed safe when it comes to most money funds. However, as an investor, it is always your responsibility to make sure you find out what your money fund holds, and to make sure it isn't about to break the buck.

Just Ride It Out???

Amidst all of the turmoil in the market right now, you still hear the inevitable chorus of financial advisors telling everyone to just ride it out.

To this I say -- are you kidding me? But alas, they aren't kidding, and in my view, most advisors couldn't be more wrong.

The Associated Press ran a piece today quoting financial advisers about what investors should be doing right now with their money. The question asked was: Should I be considering changes in my 401(k) in response to the rapidly changing financial services sector?

In what was a typical financial industry response, the prevailing sentiment was not to sell stocks off in a "knee-jerk fashion." Even more typical were the screeds to not try to time the market, because when the market starts to come back "…you're going to be out…"

Now, if you know me, you'll know that I advocate putting money into the market when the trend is in your favor -- i.e., when the market is heading higher -- and I recommend being out of stocks when the market is trending downward.

For the past eight-plus months, I've been warning investors here in the Alert, and in my Successful Investing advisory service to keep their equity exposure low, and to invest in safe instruments like long-term U.S. Treasury bonds and cash.

The last thing I would do is tell you to just sit there with your losses and let them accumulate in the hope that someday the market will come back and bring you back to where you once were.

I can't think of a more unthinking strategy, nor can I conjure up a bigger abdication of responsibility by a financial advisor than to tell you to keep playing your fiddle while Rome is burning.

If you want to find out how to protect yourself from the ravages of this bear market, then you must subscribe to Successful Investing.

Drop your current advisor and start putting reason on your side by clicking here.

ETF Talk: Presidential Election Plays

It's decision time again.

Every four years, America goes into election mode and the consequences of choosing a new president always have repercussions for the economy and for investors. But perhaps more than any election year that I can remember, the choice between Democrat and Republican this time around offers up a stark contrast in visions for the country's future -- particularly in the realm of economics. That's why, in this week's ETF Talk, I am going to help you prepare your investment dollars for the outcome of either candidate moving into the White House in January by looking at one sector that's getting a lot of attention as of late -- energy.

If you want to read more about what I think the best exchange-traded funds (ETFs) to invest in will be after this election, you can subscribe to my Successful Investing newsletter and receive my new special report. And as always, if you have any general ETF-related questions that you'd like me to answer in an upcoming ETF Talk, please contact me by clicking here.

When it comes to energy, we already have seen that presidential candidate John McCain is a big fan of oil drilling. It is thus not a stretch to think that oil services and oil drilling firms are likely to thrive if the Republican takes power. That means that ETFs in the oil and gas exploration and production sector have a strong chance of seeing significant upside during a McCain presidency. One such fund is the SPDR S&P Oil & Gas Exploration & Production Index (XOP).

This ETF seeks to replicate the performance of an index derived from the oil and gas exploration and production segment of a U.S. total market composite index. Specifically, the fund uses a passive management strategy to track the total return performance of the S&P Oil & Gas Exploration & Production Select Industry index.

One of the key planks in the Obama platform of change is to wean America off of oil. To do so, he'll have to pour a lot of money into solar, wind and other alternatives to petroleum-based energy sources. That's good news for stocks in the alternative energy space, and fortunately, there are many great ETF choices that give investors exposure to this up-and-coming sector. My favorite ETF in this space is the PowerShares WilderHill Clean Energy (PBW).

PBW seeks results that correspond generally to the price and yield of an equity index called WilderHill Clean Energy. The fund normally invests at least 80% of total assets in common stocks of companies engaged in the business of clean energy and energy conservation. The ETF may invest at least 90% of total assets in common stocks that comprise the Clean Energy Index.

With PBW, you get the best-of-the-best in the solar, wind power, fuel cell and power management device makers. If Obama wins in November, I would certainly want to start building a position in one or more alternative energy ETFs.

Well, those are some of my thoughts about opportunities that investors will find, depending on who is elected our next president. Remember, no matter who wins in November, you've got to be prepared. You've got to know where your money will be protected, and where your money could benefit most as the inevitable winds of political change blow onto Wall Street.

Estate Planning Mistakes: Not Making The Most of Your Trust

During the last three weeks, we've discussed the seven biggest estate-planning mistakes made by investors. In week one, we reviewed each of the seven. But in case you missed it, here's a quick list of each of these big mistakes:

Not having an estate plan
Not reviewing your plan annually
Not placing your assets in your trust
Not having the liquidity your estate needs to pay estate taxes
Delaying decisions and planning due to tax policy uncertainty
Not taking advantage of tax planning and wealth transfer strategies
Failure to properly utilize life insurance as a planning and liquidity tool

Last week, we talked about the importance of reviewing your estate plan annually. But, what if you already have an estate plan and just aren't using it properly? What good is having an estate plan and setting up a trust if you fail to actually put your biggest assets in that trust?

If you have an estate plan and a trust, then congratulations! The next step is to learn how to get the most of the tools you've already set up.

If you have substantial assets, you need to have the right estate plan in place. Fortunately, my friend and colleague Kevin Yurkus, president of Fairway Capital, is an expert at helping high-net-worth investors manage their estate plans. Fairway Capital is a sponsor of my weekly radio show, and one reason why is because I trust Kevin's judgment when it comes to all things estate planning.

If you have assets over $2 million, you MUST listen to my new audio special report. In this report, we cover each of the seven biggest estate-planning mistakes, and we explain how easy it is to correct each one.

To listen to this FREE audio special report, click here.

A Simple Solution for Today's Volatile Markets 2

Today's stock market beast is not the same animal it was a decade ago. In fact, the pace of change has been relentless in recent years, and even the most conscientious individual investor has had a tough time keeping up with all of the financial market upheaval.

If you're managing your own money, are you getting the results you think you should?

If your answer is no, then you need to make a change, and a good place to start is by checking out Fabian Wealth Strategies today. All you have to do is click here for your introduction to our money management services.

As I always say, the only thing you have to gain is the life you desire.

The Election, the Markets, and Your Money 5

The presidential election polls are gyrating like the stock market these days. Sen. Obama had an eight-point lead after the Democratic Convention, only to see it slip away after Sen. McCain's surprise selection of Gov. Sarah Palin at the Republican Convention.

McCain has the momentum now, and he's actually in the lead in the national polls. But what if the financial markets get worse? How will plummeting stock prices influence this election? More importantly, are you prepared for change in the economy no matter who moves into the Oval Office?

If you're worried about the election, the markets and your money, then I have just the seminar for you.

Join me and Fairway Capital President Kevin Yurkus on Thursday, Sept. 18, 2008, from 2:00 p.m. to 5:00 p.m. at the Ritz-Carlton, Phoenix hotel for the most important financial seminar of the year.

The risks and opportunities heading into this voting season have made this the most important election in recent memory. That is why Kevin and I are so concerned about the future of taxes, the markets, and your investments.

If you are a high-net-worth investor who also is concerned about the current economic environment, you must come out on Sept. 18 and hear how you can prepare for the inevitable winds of change blowing into Washington, D.C.

Ritz-Carlton, Phoenix 2401 East Camelback Road Phoenix, AZ 85016

This seminar is co-sponsored by Fabian Wealth Strategies and Fairway Capital. To register for this event, simply fill in your information by clicking this link , or call 800-391-1118 Monday through Friday from 8 a.m. – 4 p.m. Pacific.

On Bending with the Wind

"Notice that the stiffest tree is most easily cracked, while the bamboo or willow survives by bending with the wind."

--Bruce Lee

The greatest martial artist in modern history knew that when you stay too rigid in life, you'll easily be broken. His advice to "bend with the wind" is quite apt when it comes to investing. You see, when you become too rigid, and when you get too attached to a specific dogma -- e.g., the "buy-and-hold" ideas of most financial advisors -- your money can easily crack. My advice to you is to be like bamboo, or the willow, and bend with the wind.

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