Making Money Alert
No Low Yet
07/09/2008
Last week, we closed out one of the worst quarters for the market in recent memory. In fact, the market's performance in June was the worst it's been since the Great Depression.
The S&P 500 Index (see the chart below) finished the month down nearly 9%, and year-to-date the S&P 500 is down nearly 13%. This kind of steep decline had me thinking that we were due for a big bounce in stocks very soon.
But hold on.
So far, the first week of July actually has seen the market go lower. And despite a few bounce back days, stocks still haven't hit their lows yet. I do think we are due for at least a bear market rally off of the current levels, but to date that snapback rally hasn't yet materialized.
One thing that makes me think we may, in fact, be due for a nice rally soon is the report out today concerning the bearishness of investment advisors. Advisors haven't been this bearish since 1994, and paradoxically, when everyone is bearish it's usually a good sign that a short-term low is very close.
Now, if you have been following my advice during the past several weeks and months, you probably have a high level of cash in your portfolio and a low level of exposure to equities. This strategy has kept your portfolio safe in these uncertain times, and for that I am very pleased.
But even in bear markets like these, there is a way to make some big, short-term profits. That way is by trading in and out of the hottest market segments using leveraged and short positions.
In my ETF Trader service we recently banked big percentage gains in two leveraged, short exchange-traded funds (ETFs). This week, I am readying my ETF Trader subscribers for some new buys that also take advantage of leverage.
Hey, I know it's tough to make money right now in this market, but that's just what we've done in my ETF Trader service.
ETF Talk: The Rise of ETNs
One of the greatest satisfactions that I receive is from highlighting key investment trends and passing them along to you before the rest of the investing world discovers them. A key development that I want to share with you this week is the rapid growth of exchange-traded notes (ETNs).
Any regular reader of my ETF Talk features knows that I love exchange-traded funds. Indeed, if you have any questions about ETFs that you'd like me to answer, click here. Today's focus on ETNs is intended to profile a relatively new way to invest in sectors such as commodities.
ETNs started to surface last year, and they now are beginning to proliferate. How quickly are ETNs growing? NYSE Euronext had just seven ETNs listed on its exchange on June 30 last year. On the same date this year, the exchange had 76 ETNs registered. That's quite a jump!
Why are ETF providers rolling out their own ETNs? One reason is that the structure of ETNs avoids certain disadvantages of ETFs in investing in particular asset classes, such as commodities. ETFs based on commodity futures can incur potentially big tax liabilities before gains have been realized by the shareholder, while ETNs currently only incur tax liabilities upon the sale of shares. As a result, ETNs quickly are becoming viable alternatives to commodity ETFs.
The key is to know when to use ETNs. ETFs still offer enviable diversification and low expense ratios when compared to mutual funds and virtually any other investment. An important consideration with ETNs is that they take the credit risk of the issuer, while ETFs do not. For that reason, you need to be careful to use creditworthy ETN issuers. It is not unlike trying to ensure you only buy an annuity from a financially strong provider.
ETNs, unlike ETFs, do not own a slice of an investment portfolio. ETNs are forward contracts that a provider such as Barclays or Deutsche Bank guarantees to pay off at maturity, based on the performance of an index that the ETN tracks. ETNs, in contrast to ETFs, are issued as senior debt by the fund company. ETNs track the performance of their underlying indexes and the issuer deducts a management fee. ETFs also deduct a management fee but their performance can fall below that of a given index.
In the ETF Talk feature that we distributed on April 30, my team and I reported our discovery of a significant tax problem for individual investors who use taxable dollars for their commodity ETF purchases. If you trade such commodity ETFs in tax-deferred accounts, you should be able to escape the tax problem that affects investors in funds such as PowerShares DB commodity ETFs and others that do not take delivery of the commodity itself.
For commodity investors who want an alternative to ETFs to avoid receiving any K-1 forms that could include high tax liabilities, Deutsche Bank, for example, is offering ETNs that invest in commodities. Barclays is doing so, too. Other fund companies also are getting into the action. A plus for tax-conscious investors is that the returns of ETNs are reported on 1099 forms. In addition, the ETNs have the same investment reporting transparencies as ETFs. Some of you may recall that I highlighted key advantages of commodity ETNs in my April 30 ETF Talk feature, ETF Talk: Avoid the Tax Trap of Commodity ETFs.
The growing popularity of ETNs was on display June 25, 2008, when 11 new Barclays iPath Exchange Traded Notes were listed on NYSE Euronext. Those ETNs included one linked to the global price of carbon. iPath Global Carbon ETN (GRN) is the first ETN designed to provide investors with exposure to greenhouse gas prices tracked by the Barclays Capital Global Carbon Index Total Return.
The other 10 new Barclays ETNs unveiled on June 25 also offer investors exposure to sub-indices of the Dow Jones-AIG Commodity Index Total Return. The following table lists all of the new funds and their individual tickers.
| New Barclays ETNs | Ticker |
| iPath Dow Jones-AIG Global Carbon Sub-Index | GRN |
| iPath Dow Jones-AIG Tin Total Return Sub-Index | JJT |
| iPath Dow Jones-AIG Sugar Total Return Sub-Index | SGG |
| iPath Dow Jones-AIG Softs Total Return Sub-Index | JJS |
| iPath Dow Jones-AIG Precious Metals Total Return Sub-Index | JJP |
| iPath Dow Jones-AIG Platinum ETN Total Return Sub-Index | PGM |
| iPath Dow Jones-AIG Lead ETN Total Return Sub-Index | LD |
| iPath Dow Jones-AIG Cotton Total Return Sub-Index | BAL |
| iPath Dow Jones-AIG Coffee Total Return Sub-Index | JO |
| iPath Dow Jones-AIG Cocoa Total Return Sub-Index | NIB |
| iPath Dow Jones-AIG Aluminum Total Return Sub-Index | JJU |
A Lemon List Preview
My quarterly list of the worst performing mutual funds will be released very soon, but I wanted to give you, the Alert reader, a little preview example of the kind of lemon funds we've uncovered.
Believe me; you don't have to look very hard to find some very big, widely held mutual funds that have found their way onto the Lemon List.
One of those widely held funds is the Fidelity Growth and Income Fund (FGRIX). This large-cap core equity fund has assets over $15 billion, and an expense ratio of 0.68%. In Q2 the fund lost a whopping 10.1%. During the past 52 weeks FGRIX lost 24.08%.
Now compare this lemon fund with a comparable ETF like the SPDR S&P 500 (SPY). This ETF has $78 billion in assets, and an expense ratio of just 0.08%. In Q2 the fund lost 7.03%. Not great, but much better than FGRIX. During the past 52 weeks SPY fell 15.6%.
As you can see, you would have been much better off investing in SPY than investing in FGRIX, and it would have cost you a lot less. Of course, in hindsight you would have been much better off with a 100% cash position during that same time period.
Next week, we'll have a link to the complete Lemon List for Q2, and I assure you, the list is both long and infamous.
What's The Market Telling Us?
I was interviewed yesterday by my Los Angeles radio affiliate regarding my views on the economy and the stock market. In the interview, I explained that stocks are a leading indicator for the overall economy.
When you focus on the long-term trend in prices, rising stocks indicate that economic times are good. Conversely, falling stock prices generally tell us that bad times are ahead. For the general economy, I think we should be preparing ourselves for slower growth and a tenuous job market.
I think now is the time to circle the wagons with your personal finances and be more conservative in all things related to your money. I have published the following list before, but since the market recently fell to new lows it's even more important to keep the following tips in mind for making it through these difficult economic times.
1) Eliminate all consumer debt. Financial independence will not be achieved carrying a big debt load. It's obvious that you should not be paying interest on credit cards or student loans, so one of the best investments you can make right now is the paying down of debt.
2) Manage your taxes. Higher taxes are coming, and the more you make the more they'll take. The smart money employs every strategy allowable to beat back the tax man.
3) Fully fund your retirement plans. By maxing out your 401(k), IRA and other plans, you'll lower your taxable income and increase savings.
4) Manage your risks. Make sure you have adequate insurance in place to protect your assets and your family.
5) Positive cash flow. Most Americans live above their means, so if you find yourself in financial trouble, it's a good bet that you are outspending your income.
6) Get financially literate. Managing your assets in uncertain times requires energy and expertise. If you are so inclined, get an education in the financial markets. Read books, newsletters and Web sites, and follow the markets carefully. If you're not inclined to do it yourself, hire a fee-only advisor to manage your money and stay away from firms that charge high commissions.
7) Minimize fees. Mutual funds, annuities and high-cost advisors are ripping off millions of Americans. Know what things should cost and avoid all products with high surrender charges.
8) Get real about real estate. I predict more money will be lost in real estate in the coming years, and just like the tech bubble of the 1990s, there will be more losers than winners.
9) Get real about government promises. Do you expect to receive a Social Security check when you retire? How about Medicare, will it be there for you? I suggest you plan to be self-sufficient, that way you won't have to rely on the capriciousness of political promises.
10) Start planning for a realistic retirement. Many Americans feel they are entitled to a condo in Florida and four rounds of golf per week. It will take a million dollars to safely generate $50,000 per year in income, so if you want to retire with more income than that, you'll have to plan accordingly right now.
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Skeptical Wisdom
Look right here
Into the eyes of a man without fear
Into the eyes of a skeptic face
Into a mind that won't accept your waste
Holding up that book that you think is proof
Trying to get everyone to believe it's truth
But words from you mean nothing to me
Won't take it as proof until I actually see—Mind of Substance, "Take It From Me"
The 1990's rock band Mind of Substance was a ray of light in an otherwise dreary decade replete with bellowing teenage angst. As the song suggests, skepticism -- in all of its best forms -- can and should be applied to every area of life, and your investments are no exception. So, before you decide to take that stock tip from someone you barely know, do yourself a favor and put on your skeptic face. I guarantee you'll feel much better about your decision.