Making Money Alert
Summertime, and the Rally Is Raging
07/15/2009
It's summertime and the living is easy
Fish are jumping and the cotton is high
Your daddy's rich and your mama's good-looking
Hush, little baby don't you cry
--Sam Cooke, "Summertime"
I live in Southern California, and out here you definitely can tell that summer has arrived. The heat's been raging here for the past couple of days, and so has the heat on Wall Street. During the past two trading sessions, the market has been red hot. I think we could be seeing the start of the highly anticipated summer rally.
Look at the following chart of the S&P 500 Index, and you can see that we've bounced off both the 50-day moving average (blue line), as well as the 200-day moving average (red line).
From a technical perspective, the move above 920 is a very strong signal that we could be headed above the coveted 950 mark relatively soon.
Some of the catalysts for Wall Street's buying spree have been strong earnings from bellwether firms, such as Goldman Sachs (GS) and Intel (INTC). Both companies blew through consensus Street estimates for the second quarter, and that augurs well for stocks, not only in the financial and tech sectors, but also across the board.
And while I think it is a bit premature to say that the rally now is firmly in place and that Wall Street isn't going to look back again, I don't think it's premature to say that this rally could be the start of a very nice move to the upside.
Still Hazardous to Your Wealth
Yesterday, I read a somewhat troubling report on the big surge in mutual fund inflows during the second quarter. According to mutual fund industry consulting firm Strategic Insight, investors shifted the largest amount of money into stock and bond mutual funds in more than two years.The report said a total of $136 billion flowed into stock and bond funds during the April- June period. That's the biggest flow since the first quarter of 2007, when the total was nearly $150 billion.
Now, I am not troubled by money coming back into the market. What I am troubled about is that it is flowing into mutual funds rather than into exchange-traded funds (ETFs).
I wrote the following article for Marketwatch.com, and it originally was published February 15, 2009. I am presenting it again here, as I think it explains quite nicely why I think that mutual funds are a far inferior choice for achieving your financial goals than ETFs.
Mutual Funds are Hazardous to Your Wealth 2
Most investors sustained serious damage to their wealth last year -- damage that, in many cases, will be difficult to overcome. Certainly, Wall Street titans, reckless lenders and irresponsible home buyers all deserve their share of the blame.But one part of the financial world has not received much scrutiny for its role in the evaporation of investor wealth, and that is the mutual fund industry.
Mutual funds control the majority of Americans' retirement assets through 401(k)s, IRAs and annuities. Sadly, a gullible public has bought into the idea that steady investments in mutual funds, regardless of market conditions, are the way to make financial dreams come true.
This is one of the biggest fallacies of investing, and a reason why mutual funds are hazardous to your wealth.
To give you a sense of just how flawed the buy-and-hold philosophy advocated by the mutual fund industry was in 2008, just look at the numbers. According to the mutual fund industry's own Investment Company Institute, investors lost almost $3.7 trillion in mutual funds in 2008. Yet, how often do you read about mutual funds leading the public down a losing path? How often do you hear about a fund manager whose performance was drastically lower than the benchmark?
Fundamentally Flawed
My problems with mutual funds don't stop merely at poor performance or inept fund managers. There are serious problems with mutual funds that have more to do with the design and structure of these investment vehicles. In fact, there are so many fundamental flaws inherent with mutual funds that they have become obstacles to successfully growing your investment portfolio -- chiefly:1. The fund's interests are at odds with yours
Mutual fund companies have one primary objective: to make a profit. Unfortunately, this profit is not for you, but for them. While I will never disparage a company for having a self-interested goal of making a profit, when that profit comes at the expense of your best interests, it deserves condemnation.
2. No transparency of holdings
A murky understanding of what securities you own at any given moment is another fundamental flaw of mutual funds. This lack of transparency essentially leaves you guessing about what you own and why. I can't think of a more unsettling feeling in a bear market than not knowing if you have exposure to toxic assets.
3. No transparency of fees
Here again, we have a lack of clarity, but this time it's about what kind of fees you are paying. Sure, mutual funds are required to tell you that they charge fees, but do you really know what you're paying for? In this bear market, the last thing you need is to be hit with some obscure cost you don't understand. But mutual funds are able to bury the specifics of their often very high management fees, which means that you really have no idea what you are being charged.
4. All invested, all the time
The charter of most equity mutual funds compels the fund's manager to be allocated to stocks in virtual perpetuity. Most funds must maintain a significant allocation to the market no matter the conditions. It doesn't matter if stocks descend to near Depression-era values. According to their charter, most fund managers must remain almost fully invested. To be sure, a small percentage of funds don't have that restriction, but most do.
5. Peddling bad advice
Perhaps the most onerous of these flaws is the bad advice that mutual funds dish out. Fund companies have incentive for you to be in the market all of the time because that's how they make money. It doesn't matter if the market undergoes a downward spiral the likes of what it did in 2008. The mutual fund folks want you to stay the course, and that's what they'll advise you to do.
Advocating buy-and-hold investing is the backbone thesis of most mutual funds. A fund company will never tell you to move to cash when things get tough because it's just not in their best interest. Because most mutual funds must stay fully invested all the time, their concern for managing risk is secondary to their concern for keeping you fully invested.
My Top 3 Themes for the Individual Investor 2
On Saturday, June 20, I had the pleasure of making a presentation to a local chapter of the American Association of Individual Investors, or AAII. I always like speaking to this group, as their enthusiasm and intelligent questions help me get a real sense of what investors are most concerned with. My presentation to the group covered my top three investment themes for the individual investor.The first of my themes was the current bull raging in the emerging markets. Now, those of you who subscribe to my Successful Investing advisory service know that I've been recommending one ETF designed to move higher along with the emerging markets. I think there is real economic growth going on in the world, but unfortunately that growth isn't taking place here at home. It is, however, taking place in countries like China, India and other emerging markets. For investors, this economic growth means your gain -- if you know where to invest.
The second of my themes is the rising cost of commodities. Because the aforementioned emerging markets have such a strong appetite for agricultural products, we are likely to see a rise in commodity prices going forward. Fortunately, taking advantage of this trend is easy, as subscribers to my ETF Trader advisory service can attest.
Finally, my third strategy for individual investors revolves around new and innovative ways to generate income in their portfolios. Thanks to the burgeoning ETF market, income investors have more ways than ever to gain exposure to dividend-paying equities, bonds and other income-generating assets. Subscribers to my High Monthly Income advisory service know firsthand about many of these funds, but I want all of my Alert readers to know about them, too.
If you'd like to get a copy of my AAII presentation, all you have to do is to send us an email. I will email you back a copy of my presentation, which includes a discussion of the specific ETFs that can help you achieve your financial goals.
To get your copy of the presentation, click here
ETF Talk: Learning to Love Leverage
If you want to maximize the return from making a wise investment in an exchange-traded fund, then you soon may love the leveraged funds that Direxion has rolled out.Direxion launched eight ETFs during November 2008 that are leveraged to help both bullish and bearish investors triple the daily performance of the four indexes that they combine to track. The chance to earn a return that is three times the performance of an index could be especially enticing if you are confident about where the market is heading next. These ETFs not only are intended to triple an investor's exposure to the market on the upside, but also on the downside.
These triple-leveraged investments are capable of extreme volatility, so they are not the place to put the college money for your kids and forget about it until they are mailing in their applications. As a result, you'll want to be careful to limit how much of your hard-earned dollars you plan to invest. However, these types of funds may interest aggressive investors who don't mind taking a risk with a small portion of their savings.
Leveraged long Direxion ETFs seek to triple the daily performance of an underlying index, such as the Russell 1000. In contrast, Direxion's leveraged short ETFs try to triple the daily inverse performance of an underlying index. In short, if the index performs well, the long ETF is designed to magnify that performance. If the index does poorly, the long ETF is supposed to triple the losses.
Direxion has created two funds for investors to go either long or short in the Russell 1000. The first is Direxion Daily Large Cap Bull 3X Shares (BGU), which seeks daily investment results that are 300% of the price performance of the Russell 1000 Index. That particular index measures the performance of the large-cap segment of the U.S. equity universe. The fund has $267.8 million in assets and an average daily trading volume of 11 million shares.
The counterpart is the Direxion Daily Large Cap Bear 3X Shares (BGZ), which seeks to replicate, net of expenses, 300% of the inverse daily performance of the Russell 1000 Index. The fund, with $370 million in assets and average daily trading volume of 12.8 million shares, invests at least 80% of assets in securities that comprise the index.
The volume and liquidity offered by the funds add to their appeal. By the end of November 2008 -- only one month after trading began -- the eight funds had accumulated a total of more than $510 million assets. That is fast growth.
Leveraged funds, when used in hedging, may lower your risk portfolio. Of course, you must be able to accept the risks that come with leveraged funds. One potential risk arises from the tracking error between the funds and their underlying index. Especially during times of high volatility in the market, an investor cannot expect the funds to triple the performance of the index, either going long or short. It is yet another reason to use such funds as short-term trading tools rather than to buy and hold.
These funds can be deployed in three key ways:
- You can place small, short-term bets when the markets are volatile.
- When the market takes off and you find yourself left behind, these ETFs can help you to catch up.
- You also can use the funds as hedging tools.
Boxer Wisdom
I've squandered my resistance for a pocketful of mumbles
Such are promises, all lies and jest
Still the man hears what he wants to hear
And disregards the rest
--Simon and Garfunkel, "The Boxer"
Hearing what we want to hear and disregarding the rest is a common attribute of human psychology. Sometimes that attribute serves us well, and sometimes it can cause us problems. When you're investing, you actually want to seek out ideas that confirm your theory. However, you don't want to ignore the arguments on the other side. More importantly, you don't want to find yourself swimming upstream. Or, to put it in pugilistic terms, you don't want to be boxing an opponent that's bigger, stronger and faster than you.
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.