Making Money Alert
Still Just a Rat in a Cage
02/04/2009
Despite all my rage I am still just a rat in a cage.
—Smashing Pumpkins, "Bullet With Butterfly Wings"
If you've ever owned a pet rodent, you know that it likes to move about quickly from one side of its cage to the other. Yet despite the rodent's best efforts, it just can't escape the boundaries of its confines.
Well, this market reminds me of a pet rodent. You see, despite all the market's rage --both to the downside and the upside -- it still can't seem to get out of its cage, i.e., its current bear-market trading range.
Let's take a look at where we stand in this market by looking at a chart of the S&P 500 Index.
As you can see, since late November the index basically has traded between 800 and 900, save for a brief time right at the end of 2008 when it surged above 900. It appears as though 850 is the trigger point for catching the market on a short-term uptrend. Yet once we see stocks climb much above that, we've seen a reversal back below that 850 mark.
If we are to finally get out of this bear-market cage, we are going to have to see the S&P 500 move decisively above 850 on substantial trading volume and then remain above that level. Anything less than this will just mean more of the same old song and dance we've witnessed since November.
Next week, we'll get some key news from Washington, D.C., as Treasury Secretary Geithner is slated to unveil his bank rescue plan. Also, we'll get a look at the final version of President Obama's bailout package. Depending on how Wall Street sees it, we could get either the catalyst this market needs to mount a new rally -- or another painful gash from this bear market's claws.
Your 401(k) Rescue Plan
It's no secret that most 401(k)-type retirement plans are in shambles as a result of the recent market meltdown. And while there is no simple, quick-fix solution for an ailing 401(k), 403(b) or 457 plan, if you have the ability to self-direct your retirement assets there is a way to put yourself on the road to recovery.
Here are the dos and don'ts of turning around that big drop in your retirement nest egg.
First of all, you have to fight "city hall." All 401(k) providers want you to buy your investment and hold them in perpetuity. I don't care where your 401(k) is, the mutual fund companies want you to choose a mix of funds and then just leave that mix alone. They have placed rules and restrictions on you, and in many cases they make it hard for you to do what you want with your own money. Your first assignment is to know the rules of your 401(k) plan's fund exchange policies. Hey, it's your money, so don't let anyone talk you out of doing what you want with it.
Second, you need to know your retirement plan fund choices. Usually, these choices fall into three categories; stocks, fixed income or cash. Look closely at your safe choices in the cash category; this could be labeled "stable value" or "money market." As I have been saying for the last year, you need to use this account as your safe harbor in these uncertain times. I'd say you need at least a 50% safe harbor allocation right now.
In the fixed income category, there are some choices that I like. One popular fund is the PIMCO Total Return Fund, a balanced bond fund that posted a total return of 4.2% in 2008. I think you should stay away from those fixed income funds that went down in 2008.
Third, you need to get out of stock mutual funds. I realize that some of you may want to hold on to some of your exposure to stocks, but for me and subscribers to my Successful Investing newsletter, we have zero exposure to equity mutual funds right now. Ideally, if the S&P 500 can recapture 900, we could make a run to 950. If this happens, then it will represent the best opportunity for those still in equity mutual funds to sell into strength.
Fourth, are you able to get some money out of your 401(k) plan? Here's what I mean by that. Traditionally, 401(k)'s are very restrictive. Their very design means you have limited choices and more trading restrictions than you would otherwise have in a self-directed IRA. If you can do so, you should transfer assets out of you 401(k). You can do this if you are over age 59 ½, since you may be able to do what's called an in-service rollover. This is when you transfer all or part of your 401(k) to an IRA rollover account. And while this is perfectly legal, your plan must allow for it.
Also, if you have a 401(k) at a previous employer you should roll that account into an IRA. This will give you the ability to buy and sell exchange-traded funds (ETFs), which come at lower cost than mutual funds -- along with virtually no trading restrictions and with the utmost transparency, so you always know what you own.
Finally, I know what I am outlining here runs counter to establishment thinking, but ask yourself this: are you happy with the results you had in your 401(k) last year? I dare say that the answer for most people is no, and that means it could be time for some radical change.
Remember that success in anything doesn't come without a little effort, and real success almost never comes about by following the conventional wisdom. In order to rescue your 401(k), you simply have to get involved and start thinking for yourself.
ETF Talk: Is the Boom in Treasuries About to Bust?
The U.S. national debt is more than $5 trillion and those of us who pay taxes are on the hook for it. To give you an idea about the gargantuan U.S. debt load, the government owes its creditors more money than the annual gross domestic product of any other country in the world. To finance the debt, the U.S government borrowed nearly $550 billion last quarter and $530 billion in the previous quarter -- funded by U.S. Treasury bonds. Although the Treasury market boomed in 2008, it soon could bust. Investors need to decide which side of the Treasury market to take and when.
Here's my view. The growing Treasury debt could fuel inflation as the U.S. government boosts the money supply by printing additional dollars. The current low bond yields do not offer investors any protection from inflation. My recommendation is for you to maintain a high cash position in the short-term.
I also would avoid making any new investments in Treasury bonds. The need of the U.S. government to issue Treasury bonds looms large during the next couple of years. The federal government's expansive borrowing is destined to grow further as President Obama's economic stimulus package is estimated to cost more than $2 trillion in 2009 alone.
If the economy begins to recover by late 2009 or 2010, watch for interest rates to climb and the price of Treasury bonds to drop. Since I expect the economy to recover sooner or later, a decline in the Treasury market seems inevitable and already may be starting. As a result, you may want to look for an opportunity to "short" Treasuries. An investor can short Treasuries through an exchange-traded fund ( ETF) that seeks to profit when such government bonds fall in value.
There are several ETFs that short Treasuries of varying maturities that include 7-10 year bonds, 20+ year bonds and others. One ETF, UltraShort Lehman 20+ Treasury ProShares (TBT), rose 28.7% in the month of January. The UltraShort nature of the fund indicates that it delivers twice the inverse of the long-term U.S. Treasury Index.
If you buy an UltraShort fund at the right time, you double your profits. If you buy at the wrong time, brace yourself for double the losses. Indeed, choosing how and when to invest in Treasuries are important decisions.
If you'd like to learn more about shorting the Treasury markets or if you have any questions about ETFs that you'd like me to answer in an upcoming ETF Talk feature, please click here .
20 Questions to Ask Your Advisor 3
I recently came across a statistic published by the SEC's Office of Investor Education, which stated that more than 50% of investors seek the advice of some type of advisor when making financial decisions.
But the problem here, as I see it, is that most investors really don't know the right questions to ask their advisors. How do you know that your interests are being served by your advisor? How do you know if your goals comport with the kind of investments your advisor recommends? The only way to know is to ask the right questions.
Unfortunately, it's just a fact that most investors aren't as financially literate as they need to be, and this is a situation I won't stand for any longer.
To help you better understand your financial relationships, I have compiled my list of 20 questions to ask your advisor. A complete list of questions can be found by clicking here.
If you find your advisor unable or unwilling to give you satisfactory answers to any of these questions, you may want to rethink your relationship.Wrestling with Life
Have you ever seen a one-armed man punching at nothing but the breeze?
If you've ever seen a one-armed man then you've seen me
Then you've seen me, I come and stand at every door
Then you've seen me, I always leave with less than I had before
Then you've seen me, bet I can make you smile when the blood, it hits the floor
Tell me, friend, can you ask for anything more?
—Bruce Springsteen, "The Wrestler"
Perhaps the best film of 2008 is director Darren Aronofsky's masterpiece, "The Wrestler." The film, which stars the great Mickey Rourke, depicts the struggle of a physically and emotionally battered professional wrestler vainly attempting to cling to the glory days of his past. The title song from the film is also a masterpiece, and yet another brilliant feather in the cap of one of the greatest songwriters of our generation, Bruce Springsteen. If you want to feel the emotional power of a man literally wrestling with life, then you need to see Aronofsky's film and listen to Bruce's song. Both will remind you that life is a beautifully intense struggle worth every drop of blood that hits the floor.