Making Money Alert
It's Time for a Check of the Four Horsemen
08/04/2010
There’s been a big change in the tenor of the financial markets over the past couple of months. We witnessed a lot of fearful selling in stocks in June, but by the end of July, those fears had morphed into some rather bodacious buying. The turning away from bearish sentiment in favor of bullish feelings has caused a dramatic alteration in the charts of our “Four Horsemen” -- the S&P 500, the FTSE/Xinhua China 25, 30-Year Treasury Bond Yields and the U.S. Dollar Index. Let’s look at these sectors in a little more detail to see just how far the pendulum has swung in each.
As of this morning, the S&P 500 was up less than 1% for the year. At its high point in 2010, the index was up 8% for the year, and at its lowest point, it also was down about 8%. What this means is that we are right in the middle of a trading range at about 1,125.
Technically, we are back above both the 50- and 200-day moving averages -- clearly a positive sign going forward. Still, there are a lot of fears over growth prospects for the U.S. and global economies, and there’s still a whole lot of angst over what’s going to happen with tax policy in 2011. My best advice when it comes to equities is to start dipping your toes in the water, but do it judiciously, and do it with a stop-loss order on every long position you take.
As for China, the iShares FTSE/Xinhua China 25 (FXI) now finally has reversed course after a horrendous start to 2010. The chart below clearly shows just what a beating this market segment took at the beginning of the year. Now, however, FXI has fought its way back above both the 50- and 200-day moving averages, a clear signal that international investors have regained their collective appetite for stocks in this fast-moving emerging market nation.
On the bond front, yields finally started to edge higher in July. As you can see by the chart here of the 30-Year Treasury Bond Yield, there was literally a collapse that took place in this metric from April through June. Yields have since come off of their lows, but bond yields remain well below their short- and long-term moving averages. Will bond prices continue to climb (forcing yields lower), or will there be a new bond sell-off that sends yields back up to technical support? I suspect the answer will unfold clearly in the weeks ahead.
The value of the U.S. dollar vs. rival foreign currencies has come nearly full circle. After a resounding move higher from January through early June, the greenback has come way off of its highs. It’s clear to me that the U.S. policymakers want a weaker dollar, as that is generally good for multinational companies and for propping up asset prices. Yet the market hasn’t cooperated with that notion very well over the past couple of months. The greenback now is close to breaching its long-term technical support at the 200-day moving average, and that’s not good for fans of the dollar.
I’ve said this in the past, but if you pay close attention to the charts of the “four horsemen,” you can keep yourself abreast of the most relevant issues facing your money. Of course, I will be here every week to help you interpret the winds of change, and make no mistake about it; in 2010, those winds have blown frequently and furiously.
The Deflation Threat: I'm Not the Only One
Over the course of the last several years, I’ve been telling you about the threat that deflation (as opposed to inflation) may pose to your serious money. Well, it seems as though now I am not the only money manager concerned with the threat of inflation.
According to an article in The Wall Street Journal aptly titled, “Big Investors Fear Deflation,” many prominent investors now are becoming concerned over the prospect of deflation and how it could take a bite out of investor wealth. The article specifically calls out PIMCO bond-fund manager Bill Gross, investment manager Jeremy Grantham and hedge-fund managers David Tepper and Alan Fournier as among the best-known investors preparing for a potential deflationary wave.
The article also points out that these investors are growing increasingly concerned that relatively weak economic data, along with a general consensus that global policymakers are unable to take further steps to stimulate their respective economies, will bring about a new deflationary future.
“Deflation isn’t just a topic of intellectual curiosity, it’s happening,” Bill Gross told The Wall Street Journal. I respect Mr. Gross’ opinion on just about every economic issue, even when I don’t agree with him. On the deflation issue, however, I find myself unable to object to his logic. That logic includes the citing of an annualized 0.1% decline over the past two years in the U.S. consumer-price index. This kind of aggregate price decline may not seem like much, but as Gross points out, “It’s an uncertain world that’s tipping toward deflation.”
Now, you may remember that after the 2008 financial crisis, many people feared that a deflationary spiral would take hold of the global economy. That didn’t happen, of course, and part of the reason is that governments around the globe infused the financial system with hordes of new capital. But like these investors in the article point out, how long are governments going to be able to prop up their respective economies before the whole house of cards come crashing down?
Before we go any further, I must say that I do not think we are on the precipice of disaster or on the verge of a deflationary meltdown in the global economy. If I truly thought that, then I wouldn’t own any stocks in any of my investment advisory services.
What I am saying is that there is a growing chorus of some very smart minds out there that have now become aware that deflation is no pie-in-the-sky abstraction or fear-mongering rant designed to scare you into a bunker. Rather, deflation is a potentially dangerous scenario, not just for global policymakers but for anyone who is trying to manage their serious money.
I know I am going to continue monitoring economic conditions so that I can identify any warning signs of a pending deflationary wave. If I do see a real threat materializing, then I won’t hesitate to act in defense of my money -- and the serious money entrusted to me via my Successful Investing advisory service. If you’d like to find out exactly how we are playing the market’s latest move, then I invite you to check the service out now.
ETF Talk: Consumer Staples Offer Growth Opportunity
Bullish market signals, combined with a weakening economy, complicate investing decisions; however, I do have an exchange-traded fund (ETF) that you may want to consider. This fund tracks companies that have consumer products that people need in both good and bad economic times. It’s the Consumer Staples Select Sector SPDR (XLP).
Companies in the consumer staples sector primarily are involved in the development and production of consumer products that cover food and drug retailing, beverages, food products, tobacco, household products and personal products. The fund’s top ten holdings, as of August 3, were: Procter & Gamble (PG), 15.53%; Wal-Mart Stores (WMT), 9.58%; Philip Morris (PM), 8.69%; Coca-Cola Co. (KO), 6.85%; PepsiCo (PEP), 4.79%; Kraft Foods (KFT), 4.59%; CVS Caremark (CVS), 4.23%; Altria Group (MO), 4.14%; Colgate-Palmolive (CL), 3.76%; and Walgreen Co. (WAG), 2.68%. These are the best-known and most well-established consumer products companies in the world.
As you can see from the following chart, the fund has climbed decisively higher after hitting its July lows.
Unlike high-flying growth stocks that might make you feel like you’re on a roller-coaster ride, XLP tracks companies that tend to provide investors with fairly stable returns. The large size of the companies tracked by XLP does limit the prospects of the fund surging in value when the market turns bullish. However, the companies also should hold their share prices reasonably well during a market pullback.
The old adage of investing in companies that sell products that people want and need fits this fund perfectly. You typically will continue to use soap, shampoo and toothpaste, regardless of economic conditions. Likewise, you’ll continue to eat and drink to ensure you survive until better times are here.
In sum, XLP is a fairly conservative equity investment that gives you the chance for capital appreciation, but it’s one that is less prone to big drops than most other stock funds. If you like excitement, XLP may not give it to you. But if you want to stay invested in equities and still sleep at night, XLP may be just what you are looking for right now.
To obtain my latest ETF advice and my stop prices for each recommendation, I recommend that you to subscribe to my ETF Trader service. As always, I am pleased 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.
Don't Get Caught with Lemons in Your Mouth
Summer is in full swing, and the weather has really heated up all across America. To cool off, many people will pour themselves a tall glass of ice-cold lemonade. Hey, I think it’s fine if your lemons get squeezed into lemonade, but what isn’t fine is if you have lemons in your investment portfolio.
The lemons I’m talking about here are underperforming mutual funds that have earned a spot on the infamous Mutual Fund Lemon List, the list of the worst-performing mutual funds. To be classified as a lemon, a fund must pass strict screening criteria: it must underperform its peer group average for the last 12 months, as well as for the last three- and five-year periods.
The second-quarter, 2010, Lemon List includes 1,584 mutual funds totaling $715 billion in assets, and if one of the funds you own is on the list, you need to squeeze that lemon from your holdings.
Here’s a list of this quarter’s 10 sourest offenders, ranked by assets.
|
Ticker |
Name |
Assets ($mil) |
|
FDIVX |
FIDELITY DIVERSIFIED INTL FD |
25880.83 |
|
VWNFX |
VANGUARD |
20888.82 |
|
VFSUX |
VANGUARD S/T INVEST GR-ADM |
18668.30 |
|
VFSTX |
VANGUARD S/T INVEST GR-INV |
15943.64 |
|
VWNAX |
VANGUARD |
12571.79 |
|
RGACX |
AMERICAN GRW FD OF AMER-R3 |
12008.25 |
|
FDEQX |
FIDELITY DISCIPLINED EQUIT |
9440.18 |
|
TRBCX |
T ROWE PRICE BLUE CHIP |
9288.47 |
|
CIBCX |
AMERICAN CAP INCM BUILDER-C |
7689.00 |
|
FSHBX |
FIDELITY SHORT TERM BOND FD |
7513.03 |
To see the latest edition of the Lemon List, just go to the Lemon List website.
Hey, all you have to lose is that sour taste in your portfolio.
Radio Show Update: The Worst Investment Products Sold by Brokers
In last Saturday’s radio show, my sons David and Michael did a great job filling in for me, so I just want to say thank you very much, gentlemen, you did me proud.
The topic so adeptly covered by David and Michael was how to manage the million-dollar portfolio. If you didn’t get a chance to listen to this informative hour, then don’t worry. As an Alert reader you have FREE access to my Radio Show archive, and all you have to do is go to the website and listen for yourself, at your convenience.
This week, I am back at the broadcast helm, and I’ve got several great topics to discuss. First, we are going to cover the deflation issue in a bit more detail. Then, we’ll look at some great dividend-paying ETFs designed specifically for income investors. Finally, I’ll tell you about the worst (i.e. most expensive) investment products sold by brokers. This show promises to be rollicking, so be sure to tune in.
To listen to the show live each Saturday morning from 10 a.m.-11 a.m. Pacific Time, just go our website.
Remember also that we are back live on the air in Phoenix, with the show airing every Saturday morning, 10 a.m. Pacific Time, on KFNN 1510, Arizona’s premier financial radio network. If you live within listening range of KFNN 1510, then I invite you to tune in.
On Training to Survive
“We all knew there was just one way to improve our odds for survival: train, train, train. Sometimes, if your training is properly intense it will kill you. More often -- much, much more often -- it will save your life.”
-- Richard Marcinko, author and former U.S. Navy SEAL Commander
The incomparable best-selling author, business trainer and former frogman par excellence is one tough customer bearing a lot of rock-solid wisdom. Here he tells us about the necessity to train as if your life depended on it, because in the world of military special operations, it literally does. Yet, training to manage your serious money is just as important. Whenever you do any paper trading, or whenever you test out someone’s theories on how to make money, be sure you do it as realistically as possible -- because when you think about it, your financial life literally could depend on it.
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. It’s not too early to start making plans to join me at the MoneyShow in San Francisco, August 19-21. This year’s event will be held at The Marriott Marquis and will feature 50 of the world’s smartest investors, traders and analysts. To join me in San Francisco, you can register FREE of charge by calling 800/970-4355 and mentioning priority code 018509 or by visiting the MoneyShow’s website at The MoneyShow San Francisco!
P.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.