Making Money Alert
Little Green Apples
10/21/2009
God didn't make little green apples
And it don't rain in Indianapolis in the summertime
--Roger Miller, "Little Green Apples"
The chorus from the classic country ditty "Little Green Apples" seems particularly poignant this week. After the closing bell on Monday, quintessential personal technology maker Apple posted blowout earnings results that easily bested not only bottom-line earnings estimates, but also top-line revenue estimates. The strong earnings from Apple helped stocks vault higher, and we now are at another new high in the S&P 500 Index.
As you can see by the chart here of the S&P 500, we currently are knocking on the door of SPX 1,100.
The latest surge in the S&P 500 comes courtesy of companies like Apple and others that have thus far come out with some pretty solid earnings results for the third quarter. Remember, however, that earnings are a backward-looking indicator, while the stock market is a forward-looking mechanism.
And unlike Apple, many companies have failed to beat earnings expectations on both the bottom line and the top line. In fact, I read a statistic that approximately 70% of all companies beating bottom-line earnings estimates this year have done so without either beating top-line revenue forecasts, or without growing revenue from the same period one year ago. This tells you that companies are making profits, but they have done so largely as a result of hefty cost cutting. This cost cutting can only last so long, and this gives me cause for concern when it comes to the future health of the current market rally.
But as the cliché goes; so far, so good for stocks, and until we see this market break down, my advice is to continue riding this bull for all its worth. But whatever you do, ride that bull with a safety net, i.e., with a firm stop loss in place on each of your invested positions.
Right now, subscribers to my Successful Investing , High Monthly Income and ETF Trader advisory services have stop losses on all of their invested positions. If you don't have stops in place to protect your hard-earned wealth, then I invite you to explore each of these services.
How Do We Reduce the Deficit?
Last week, I read a fascinating post on the blog of one of my favorite pundits, Mike Shedlock, better known to his audience as "Mish." In his post, Mish analyzed my friend and fellow market pundit John Mauldin's recent article on how to solve the nation's fiscal mess.
John offers some insightful solutions to our budgetary quandary, and some of them could certainly be considered extreme. Mish takes on each of John's suggestions, and he goes even further in his recommendations on how to get our nation's fiscal house in order.
Interestingly, both John and Mish think our military budget and our foreign entanglements eventually will break us. Both also offer up the radical suggestion that we should drastically slash military budgets; Mish even says up to 70%!
If you want to see two no-nonsense market mavens take on the issue of our fiscal fiasco the way we wish our politicians would, then I strongly urge you to read Mish's blog piece by clicking here.
ETF Talk: Shorting Financials
Financial stocks endured a battering during the credit crisis before a number of them started to recover in recent months. If you're like me, you're probably wondering if that trend will continue. You may also be wondering if banks still have an abundance of bad loans on the books.
Third-quarter earnings reports issued in the last week or so by a number of major banks and credit-card issuers indicate that the credit crisis has yet to end. But continued troubles in the banking industry could put money in your pocket if you can time the share-price movements in the banking sector successfully. Of course, market timing is a big challenge for even the best investors, so tread carefully.
One exchange-traded fund (ETF) that you may want to consider for a short-term trade is the ProShares Short Financials (SEF). This fund seeks daily investment results, before fees and expenses, that correspond to the inverse of the daily performance of the Dow Jones U.S. Financials Index. In other words, if the index falls 2%, the fund is designed to climb 2%. That's good news for those who think that banks still have a long way to go before they fully overcome their problems with bad loans.
The following charts show the index's top ten holdings and top sectors. As you can see, it is heavily weighted toward bank and financial stocks.
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Much of the data released last week tends to bode poorly for banks, with earnings reports warning about further challenges for lenders. The latest financial results of credit card issuers show rising delinquency rates -- a key gauge of future losses -- in the face of increased unemployment.
This negative data comes at a particularly bad time of year, as the holiday season approaches. It can be expected that many cash-strapped consumers may increase spending on their credit cards and fall even further behind on their payments.
The troubles for lenders don't stop there. Issuers of credit cards, including Capital One Financial Corp., J.P. Morgan Chase & Co., Bank of America Corp., Citigroup Inc., Discover Financial Services Inc. and American Express Co., also are coping with sweeping legislation that restricts certain fees and rate hikes. These limits will squeeze their potential income.
In particular, Bank of America Corp. reported Friday that it lost more than $2.2 billion in the third quarter as loan losses keep mounting. That bad news provides further evidence that consumers still are struggling to pay their bills.
Bank of America's earnings follow the pattern set earlier in the week by Citigroup Inc. and JPMorgan Chase & Co., which also reported more loan losses during the third quarter as consumers strained to keep up with credit card and mortgage payments. Bank of America's CEO Ken Lewis said, "Based on (the) economic scenario, results in the fourth quarter are expected to continue to be challenging as we close the year."
So, while a recovery may be on its way, it doesn't seem to be here quite yet, making SEF all the more attractive as a short-term play.
While I am not recommending this particular fund right now, SEF could offer investors a chance to profit from the ongoing turmoil in the banking industry. However, timing a move into such a fund is dicey. Ideally, you make such a purchase before bad news is announced, then sell the position at a profit once the rest of the investment community becomes aware of the latest problems. If you buy too early or sell too late, such a purchase can backfire on you. If you choose to buy this fund, be sure to monitor your position closely.
For those of you who want advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here. As always, I am happy to answer your questions about ETFs. To send me a question, please click here. You may just see your question covered in a future ETF Talk.
Get Your Q3 Intelligence Report Now
As regular readers of the Alert know, I am a huge fan of exchange-traded funds (ETFs). An ETF is like a virtual basket of stocks that usually tracks a specific index or sector. To put it another way, ETFs are like a homologous species of mutual funds that allow investors to buy into a specific area of the market without all of the hassles, management fees and trading restrictions imposed by traditional mutual funds. You could say that ETFs are a kind of mutual fund without any of the downsides.
Got Mortgage Questions? Call Me
All right, I am going to make a prediction right now: interest rates are going to go up.
Of course, it doesn't take a rocket scientist to figure this one out. With the unprecedented amount of government borrowing, a tremendous amount of pressure is being imposed on the U.S. dollar. This pressure inevitably will make long-term rates go higher.
But how does this affect you and your assets? There are many ways that higher interest rates affect you and there are different types of interest rates that you need to be aware of. Right now, I am talking about long-term rates. These are the yields of 10- and 30-year Treasury securities. These are the rates that the Fed doesn't control. Sure, the Fed can influence these rates, but ultimately the marketplace decides what interest rate levels make sense.
We are now in no man's land when it comes to budget deficits. So far this fiscal year, we are over spending our tax revenue on a national basis by $1.4 trillion dollars! Yes, that's trillion with a "T." We don't yet know what this will bring in terms of economic pain and disaster down the road, but we do know that right now, mortgage rates are at all-time lows. How long they can remain this low is a question that I can't answer. One thing I do know is that for most of you, your mortgage payment may be the largest payment you make each month.
Do you know the answers to the following questions?
- Do you have the lowest mortgage interest rate possible?
- Could there be better loan options available to you today?
- Are you enjoying the benefits of an adjustable-rate mortgage now, but worried about what the future will bring?
- Are you retired and worried that you may not qualify for a new loan?
- What about a reverse mortgage to supplement your retirement income?
These are complicated questions, but I'm here to help you get the answers.
This Saturday, Oct. 24, at 12 p.m. (noon) Pacific, I will be hosting a one-hour conference call to answer these questions and many more. Joining me will be John Doan, president of Miracle Mortgage. Miracle Mortgage is a sponsor of my radio show, Doug Fabian's Wealth Strategies.
To register for this FREE conference call, click here.
I believe the window of opportunity to take advantage of the current low interest-rate environment is right now. If you want to find out what your options are, then be sure to join us at 12 noon PDT, this Saturday, Oct. 24.
Wisdom from "The Art of War"
"If you know the enemy and know yourself you need not fear the results of a hundred battles."
-- Sun Tzu, "The Art of War"
There is a ton of wisdom to be found in the Chinese military strategist's classic work, and if you haven't read it, then you need to immediately. Knowing the principles that govern conflict will help you to prevail in business, investing, and even in your personal relationships. To maximize all three of these areas, you must know the enemy -- and know yourself.
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.