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My Heart's in San Francisco

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10/19/2006

Greetings from beautiful San Francisco! After making my rounds in this great city, I can see why that song was written about leaving your heart here.

I am in town this week for the Money Show, where I get to rub elbows with Bay Area residents who have a keen interest in soaking up as much financial knowledge as possible. Whenever I give seminars at these shows, I am always struck by the many positive testimonials I receive about how the Fabian services have helped people grow their wealth. This is very gratifying to me, and it's what makes my job so fulfilling.

The other thing I get when I'm at these Money Show events is a whole lot of questions on what's going on with the current market. I've had a lot of people ask me if I think this market rally is for real or if we are seeing a peak in stocks.

Regular readers of the Alert, as well as subscribers to my various newsletter services, no doubt already know my answer to this question. In my view, this market currently is forming what's known as a short-term top. Evidence for this conclusion can be seen on the Dow Jones Industrial Average, as the index punched through the psychologically significant 12,000 mark this morning with relative ease, only to back down from those vaunted levels quickly.

The chart below shows the Dow's performance over the past three months, right up through midday today. As you can see, we've had a virtually uninterrupted upward run in the market from about mid-August, with no substantial pullback since. "What goes up, must come down," as the song says, and that certainly holds true for the market.

My opinion here is that you are playing with fire if you are just now thinking about putting money to work in stocks. The picture in the above graphic tells the story perfectly. You don't want to get in at the peak of a rally, as the odds of this kind of stratospheric rise in the Dow continuing are not in your favor.

I know some of you have money burning a hole in your pocket, and some of you feel like you are missing out on the big gains that everyone else is grabbing. My advice is to stay calm and be patient. When the Dow retreats, and when the over-exuberant buying of the past couple of months subsides, you'll be in a good position to get into equities at a much more attractive price.

Of course, the market is more than just the Dow. When it comes to broader measures of the market, one chart in particular is worth a closer look. Below is a picture of the Nasdaq Composite index during the past three months, right up until midday today.

As you can see here, the tech-heavy index's advance has begun to stall a bit. This pause in upward momentum could be the first sign that maybe this extended rally is starting to lose steam. I definitely think that when it comes to the Nasdaq we are seeing the beginning of a short-term top.

The next few trading sessions, along with the next couple of weeks, are going to be interesting to say the least. Will the market finally top out, and will stocks pullback enough to permit a decent entry point for new money? Or, will this rally defy the odds, and history, by continuing to move higher?

Whatever happens, we shall soon get our answer.

ANECDOTES ON AN EARTHQUAKE

I want to relate to you all a little story I heard involving the recent earthquake in Hawaii. A friend of mine told me about a gentleman he knew who recently had retired and moved to Hawaii, after buying his dream home there. This man was in very good shape financially, having invested wisely most of his life and making all of the arrangements necessary to live in style in the tropical paradise.

Well, all of this man's assumptions and plans for a luxury retirement were challenged this week, as the earthquake that hit the islands a few days ago inflicted some serious damage to the man's dream home. Thinking that he was fully insured against such an event, the man's initial reaction was one of resilience and calm. However, that calm evaporated in an instant when he discovered that the insurance policy he thought would cover his home's damage was in fact not the right kind of insurance against earthquakes.

I bring up this cautionary tale for two reasons. First, you should always know exactly what you are getting into when it comes to anything involving an insurance policy, contract, business arrangement, et cetera. Make the effort to determine for certain exactly what the terms are of any agreement you sign. It might take a little extra time, and it might even be a bit of a hassle, but in the long run I guarantee you it will be worth it.

Second, you have to think about buying insurance for any kind of financial eventuality, and I include a falling stock market as one of the things you can insure yourself against. How can you safeguard against market drops? Well, by subscribing to my Successful Investing newsletter.

With Successful Investing, you get the benefit of three decades of market-beating returns, in the form of a plan that protects you against earthquakes in the stock market that are capable of inflicting structural damage to your wealth.

I always tell people that the biggest surge in the popularity of Successful Investing came right after the 1987 market crash. Why? Well, because days before Black Monday we told our subscribers to exit the market. That call, perhaps our best ever, helped thousands of investors sidestep a brutal correction.

Having this kind of plan in place, a plan that tells you when to be in and when to be out of the market, is a virtual insurance policy against a devastating, wealth-crippling event like a serious bear market. If you want some financial earthquake insurance, be smart and get that policy now -- before the earthquake actually hits!

Click here to find out how to get your very own portfolio insurance.

NEW ON THE ETF FRONT

So far here at the Money Show, my seminars on exchange-traded funds (ETFs) and how to use them have been extremely popular. It seems as though investors can't get enough of ETFs, and given their long list of virtues, I can certainly understand why.

Hey, you all know I am a huge fan of ETFs, so that's why whenever I hear about any new ETF offerings I feel I need to bring the news to your attention.

The first batch of new ETF offerings comes from Claymore Securities, a newbie in the field of ETFs. Last month, the firm launched a quintet of ETFs on the American Stock Exchange, with their salient feature being that they are nearly "actively" managed, although Claymore representatives stop short of calling their ETFs actively managed. Let's take a quick look at each one.

The Claymore/Sabrient Stealth (STH) follows an index developed by investment research firm Sabrient Systems that tracks about 150 U.S.-traded stocks and American Depository Receipts that fly under the radar screen of Wall Street analysts. This ETF seeks to outperform, adjusted for risk, the Russell 2000 Index.

Claymore has enlisted the help of another firm, Zacks Investment Research, for the indexes behind its sector rotation, and its dividend-oriented ETFs. The Claymore/Zacks Sector Rotation (XRO) ETF will hold 100 stocks with the tracking index programmed to overweight outperforming sectors. Using Zacks' 16 market sectors, XRO will overweight cyclical sectors before anticipated periods of economic growth, and load up on non-cyclical sectors prior to expected pullbacks in the economy.

The Claymore/Zacks Yield Hog (CVY) focuses on 125-to-150 companies that provide high income through dividend payouts. The interesting thing here is that this ETF can invest in traditional preferred securities, master limited partnerships and closed-end funds -- all very interesting dividend-paying securities.

The Claymore/Sabient Insider (NFO) is designed for investors who like to follow company insiders. Many people believe that individuals on the inside, i.e., those exposed to company secrets such as senior management or directors, can signal undisclosed good or bad news when they buy or sell unusual amounts of their own company's shares. Determining what is an unusual amount usually requires some filtering, and that filtering process is what you get with NFO.

Finally, there is the Claymore/BNY BRIC (EEB), which gives investors exposure to large developing countries with tremendous potential for expansion: Brazil, Russia, India and China, hence the acronym BRIC. These countries are for investors who aren't averse to high risk in the pursuit of high reward. If this describes you, then fine. More conservative investors should beware.

Not to be outdone by Claymore, ETF giant Barclays also has rolled a few new ETFs in recent weeks, adding to its industry-leading list. Here's a quick look at each:

The iShares S&P Global Materials (MXI) ETF -- consisting of approximately 76% foreign stocks -- seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P Global Materials Index.

The iShares S&P Global Consumer Discretionary (RXI) ETF -- consisting of about 50% foreign equities -- is heavily exposed to auto stocks. It seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P Global Consumer Discretionary Index.

The iShares S&P Global Consumer Staples (KXI) ETF is composed by approximately 44% foreign equities. This dividend-rich ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P Global Consumer Staples Index.

The iShares S&P Global Industrial (EXI) ETF is 43% foreign and has a wide variety of big-cap multinationals. The ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P Global Industrials Index.

The iShares S&P Global Utilities (JXI) ETF is about 60% foreign and invests in some of the biggest energy firms around the world. This ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P Global Utilities Index.

DOUG GOES YOUTUBE 4

The technological advances just never cease! You now can catch a video stream of my live market updates; just click here. This outreach effort is just another way for us to interact with you. Sign up at the web site to comment on my videos, send me a message, and get updates when we post new episodes. I broadcast a market update Monday through Saturday, which is uploaded by 5 p.m. PST. If you want to check out past shows, go to our video archive. Don't forget, you also can listen to the show through our podcast and live streaming whenever it's convenient for you. It's all at the site. It is just another way we are helping you to stay on top of your money.

ARISTOTELIAN LOGIC ON CAPITALISM

"When everyone has a distinct interest, men will not complain of one another, and they will make more progress, because every one will be attending to his own business."

--Aristotle, Politics

Sound's to me like the eminent philosopher was a free-market capitalist! Aristotle went further with his comments on the nature of private property, observing that it does not -- as other thinkers argue -- promote greed. In fact, Aristotle said private property was essential for the exercise of charity.

I always like reading about the history of markets because it makes you realize that no matter what time period you explore, the existence of free markets and free trade (or lack thereof) are essential to understanding any given culture. Aristotle's defense of property rights, along with his brilliant defense of reason and the scientific approach to scholarship, are quite possibly the greatest contributions to humanity ever.

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

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