Making Money Alert
Oily Volatility Remains
03/29/2007
Since last week's Alert, we've seen a marked spike higher in oil prices. As I write this report, the price of a barrel of crude oil is trading above $64. We have our "friends" from Iran to thank for ratcheting up the hostility in the Persian Gulf that kicked off this latest surge in oil prices.
If you've had to put gasoline in your tank of late, you already know first-hand the effects higher crude prices are having on your own pocketbook. Gas now is at more than $3 a gallon nationwide. In Southern California where I live, we're paying over $3.50 a gallon for gasoline.
In the above chart of the Energy Select Sector SPDR (XLE) -- an exchange-traded fund (ETF) that contains the biggest energy companies -- we can see that just a few weeks ago we bounced off the 200-day moving average (red line) and then quickly broke above the short-term 50-day moving average (blue line). This surge above the 50-day moving average acted like a springboard to much higher values in XLE. And, we now are very close to the multi-year highs we set in December.
Things are quite the opposite, however, in the overall market. Take a look at the chart below of the Total Market VIPERs (VTI), an ETF that measures the overall price movement in the entire market.
As we can see, volatility reigned supreme in March, with wild fluctuations in the market that don't appear to be over just yet. In fact, today the VTI fell below its 50-day moving average (blue line), which is a potential harbinger of more selling ahead.
The key support level in VTI now is the 200-day moving average (red line). If VTI continues to fall toward, or even breaks below the 200-day average, you will want to steer clear of nearly all segments of the market -- except for investments such as XLE that are bucking the general market trend.
Right now, subscribers to my Successful Investing advisory service are profiting from an allocation to energy stocks via XLE. To find out how you can profit from this oily volatility, click here.
A WORST-CASE SCENARIO ON HOUSING
There's been a lot of buzz lately about the subprime lending market woes and how this could negatively affect the economy and stocks. As news of a slowdown in the housing sector continues coming in, we now are witnessing what I think is the beginning of a larger downtrend in not only the housing and subprime lending markets, but also the overall economy and the stock market at large.
So how bad could things get? Well, here is what I speculate could be a worst-case scenario. This scenario has the potential to adversely affect your wealth, but if you prepare ahead of time you could actually make lemonade out of the subprime lemon.
Here are my 10 worst-case scenario points on the housing and subprime debacle you need to be aware of right now:
1. Home values could fall 15-30%
If you are going to be in your home for the next 10 or 15 years, this reduction in the value of your home probably won't affect you too much. If, however, you need to access the value of your home anytime soon, you are going to be in trouble. If the health of your financial picture relies on future refinancing of your home, or if you are planning a near-term sale of your home for income and profit purposes, then you likely will need to prepare differently.
2. The ability to borrow could change significantly
If you are a prime borrower, you should be able to weather the storm of tightening lending standards. If, however, you are a second-tier borrower or a subprime borrower, you are most likely not going to have access to easy money the way you did in the past. I want all of you out there who are prime borrowers to take care and to make sure that your credit scores are intact and that you keep tabs on any changes in this front. Now more than ever, your credit worthiness will determine the cost of doing business.
3. The value of stocks could go down, including your 401(k) and IRA
As the subprime debacle heats up, and as it causes the housing sector to get progressively worse, we could see banking and financial stocks get dragged down. These two sectors comprise much of the S&P 500 and a spillover of the weakness in financials could hurt this broad market index. As most people have some equity exposure to the market via the S&P 500 in their 401(k) and IRA plans, it won't be long before people get their statements showing how much money they lost in their retirement accounts.
4. The United States could go into recession
I suspect most of you haven't had much experience dealing with the pernicious effects of a recession. It's not surprising, since the past couple of recessions we've had haven't really been all that severe. But as the subprime and housing sectors implode, and if this action pushes the overall economy into recession, you will have to be prepared to manage your finances in a completely different manner than you do during times of economic growth.
5. U.S. interest rates will fall
As trouble continues brewing in the housing market, the Federal Reserve will be more inclined to either leave interest rates unchanged or even cut rates as we head into the latter part of 2007. Believe me, Mr. Bernanke and his band of central bankers won't want the blood of recession on their hands. As such, they will do the only thing in their power to stave off a slowing economy fueled by a housing slump, and, of course, that will require them to keep a lid on higher interest rates.
6. The U.S. dollar will fall
If the Fed does cut rates, this will further knock down the value of the U.S. dollar vs. rival foreign currencies. The greenback has been trending downward for the last three years and more weakness in the dollar will continue to bloody our currency. The good news here is that you can profit from investments designed to move higher when the dollar falls.
7. Banks and financial institutions could be in for real trouble
We mentioned it earlier, but one of the sectors leading this recent bull market higher has been banking. One of the biggest and most widely held banking stocks is Bank of America (BAC). We already are seeing clear signs of trouble in BAC, with the stock dipping below its 200-day moving average. When bull market leaders falter, it often is the first sign of trouble not only for that sector, but for the bull market at large. If BAC runs out of steam due to lending woes, you can bet the bull will run out of steam, as well.
8. Consumer sentiment and the negative wealth effect
People spend money when they feel good, when the value of their home is rising and when the value of their stock portfolio is increasing. Conversely, people curtail spending when they feel uneasy about the financial climate, when the value of their home has declined precipitously and when their portfolio is in a tailspin. This negative wealth effect has the potential to feed on itself, causing a slowdown on the consumer spending side of the economy and perpetuating an overall slowdown in the economy at large.
9. Bear market fund tools
If you want to avoid the ravages of a decline in stocks, fueled by the subprime mess, then you either need to stay on the sidelines and/or employ tools designed to let you profit while the rest of the equity markets are going down. That's where bear market funds come to the rescue. Bear market funds are engineered to take advantage of the weakness in various sectors of the equity market. It is weakness that we could very well see if the worst-case scenario plays out in the housing sector. The first step in using these bear market funds to your advantage is to become familiar with what your options are and how they actually work.
10. Preparation is the key
Now we've come to where I think we can help you the most if this worst-case housing scenario hits us. You see, any market environment is navigable IF you have the right tools and the right strategies. That's where the Fabian services really help you. Whether it's taking advantage of short-term trading opportunities in our ETF Trader service or increasing your income stream by using the dividend-paying investments in our High Monthly Income service, you can be sure that we'll have all of the bases covered when it comes to picking out the proper profit opportunities for you.
Click here to learn more about ETF Trader
Click here to learn more about High Monthly Income
Finally, I want to start a dialogue with you, my Alert readers, on this whole subject of housing. How is the housing market where you live? Are you concerned about the negative wealth effect on your own spending? Do you feel there is too much concern over this issue?
Your comments are exceedingly valuable to me personally, and I know they would be very valuable to many of your fellow Alert readers. I invite all of you to send me your thoughts on this issue. There's nothing like a good dialogue to take the mystery out of a potentially frightful unknown. And, that's just what I plan on doing in the weeks and months ahead on this issue.
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THE HITCHHIKER'S GUIDE TO WISDOM
"He shifted his weight from foot to foot, but it was equally uncomfortable on each."
—Douglas Adams
The great science fiction writer Douglas Adams, author of the Hitchhiker's Guide to the Galaxy series -- a must read for anyone with even a modest sense of humor -- shows us why he's so adept (without even knowing it) at encapsulating how a lot of people feel about their investment picture. Many investors constantly change styles or methodologies based on the latest rumor, hot tip from a TV talking head or promotional piece promising big returns overnight. So is it any wonder why they feel equally uncomfortable on each foot?
If you want to properly manage your serious money, you need to align yourself with a proven, simple system that you can understand and follow easily. That's what we've been doing in the Fabian services for three decades now. Why not let us help you get your footing?
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.