Making Money Alert
Voting With Their Pocketbooks
02/25/2009
The bulls saw a glimmer of hope in Tuesday's trading session, with the major averages enjoying one of their best days in a very long time. Tuesday's bounce came courtesy of Federal Reserve Chairman Ben Bernanke, who said that our nation's banks would not be nationalized and that we could be out of this recession by the fourth quarter of 2009 -- if all goes right.
The prospect of a recovery in 2009 is indeed a very big if, but even the possibility of a recovery was all Wall Street needed to finally start buying again.
Ah, but what a difference a day makes.
On Wednesday, sellers returned to the trading floor, and the major averages returned to their bearish ways. One reason the markets are back in the red -- and the main reason they've been in the red since November -- is due to the unprecedented level of economic uncertainty permeating the entire globe.
The broad decline during the past few months tells us that investors continue to believe things will get worse before they get better. Investors are voting with their pocketbooks, as it were, and their collective voice is loud and clear. The economy and the markets have a long and bumpy road to travel before there is a real recovery, and the measures coming from Washington D.C., are not inspiring much confidence in our ability to navigate that road.
The only truly safe place to be right now is in cash, and cash is precisely what I've been preaching is your best friend in times of market turmoil.
For those active traders out there looking to profit from all of the sharp moves in this market, I do see a really big move coming soon. This move may come in the form of new multi-year lows, followed by some strong buying. If this scenario starts to play out, traders will want to take advantage of the action by buying and selling specific exchange-traded funds (ETFs) designed, in some cases, to move twice as fast as the overall market.
Right now, I think the key level to watch for on the S&P 500 is 785. If we can fight back to that level, we may see a spurt back up to 800 and beyond. If, however, we break Monday's lows -- then look out below.
It could mean another round of multi-year lows -- and a lot of pain and suffering for investors who continue to ride out this storm fully invested in equities.Want to learn how to read this market correctly, and how to profit from the big swings in stocks? Then you need to check out my ETF Trader advisory service by clicking here.
Obama's Speech: The Good, the Bad and the Ugly
It's been a while since we heard from my good friend and commentator extraordinaire Jim Woods. Today, Jim gives us his take on President Obama's first address to a joint session of Congress.
By Jim Woods
The oratory was indeed beautiful.
The mellifluous voice of our 44th president filled the House chamber with excitement last night, and I must admit that in terms of style, it doesn't get any better than Barack Obama. But style is one thing; substance is a whole other issue.
My take on the president's first major address to the nation is that it contained a few good lines, a few more bad lines, and unfortunately some downright ugly lines.
Let's start with a few of what I consider to be "the good" excerpts from the speech.
The Good
"But while our economy may be weakened and our confidence shaken, though we are living through difficult and uncertain times, tonight I want every American to know this: We will rebuild, we will recover, and the United States of America will emerge stronger than before."
I love this sense of optimism, and I think it represents the resilience and fortitude that's at the heart of what makes our country strong.
"Now I know there are some in this chamber and watching at home who are skeptical of whether this plan will work, and I understand that skepticism. Here in Washington, we've all seen how quickly good intentions can turn into broken promises and wasteful spending. And with a plan of this scale comes enormous responsibility to get it right."
I'm glad the president realizes that Americans are skeptical about what goes on in Washington. Admitting you have a problem is truly the first step in fixing what's wrong.
"These education policies will open the doors of opportunity for our children, but it is up to us to ensure they walk through them. In the end, there is no program or policy that can substitute for a parent, for a mother or father who will attend those parent-teacher conferences, or help with homework, or turn off the TV, put away the video games, read to their child. I speak to you not just as a president, but as a father, when I say that responsibility for our children's education must begin at home."
This is perhaps one of the best comments I've seen a politician make about individual responsibility and the role parents need to play in the education of their children. Bravo, Mr. President.
So much for the praise, now let's turn to some of "the bad" of the speech.
The Bad
"A surplus became an excuse to transfer wealth to the wealthy instead of an opportunity to invest in our future. Regulations were gutted for the sake of a quick profit at the expense of a healthy market."
This is one of the big myths of the financial crisis. Namely, that a lack of government regulation is at the root of the financial system meltdown. It wasn't a lack of government regulation that caused the problems we are grappling with today. To put the blame on a lack of regulation perpetuates two myths; first that the government can legislate against bad decision making, and second that the government bears no responsibility for its role in helping to create the current economic mess. There is plenty of blame to go around when it comes to whom and what is responsible for the current mess, but to blame a lack of government regulation is just a cheap copout.
"As soon as I took office, I asked this Congress to send me a recovery plan by Presidents Day that would put people back to work and put money in their pockets, not because I believe in bigger government -- I don't -- not because I'm not mindful of the massive debt we've inherited -- I am."
It's hard to take this comment seriously from a president who, in his first 30 days in office, has expanded government intervention in the economy more than nearly every president in history with the exception of FDR.
"Now, I understand that, on any given day, Wall Street may be more comforted by an approach that gives bank bailouts with no strings attached and that holds nobody accountable for their reckless decisions, but such an approach won't solve the problem."
Mr. President, Wall Street would be much more comforted if your Treasury Secretary would come out with some specifics on what you plan to do about the banking situation. Until we know the level of control you plan to exercise on banks, neither Wall Street nor corporate America will be able to make sound investment decisions.
The Ugly
Unfortunately, there were several truly ugly lines in the president's speech that made me squirm with fear when I heard them.
"I reject the view that says our problems will simply take care of themselves, that says government has no role in laying the foundation for our common prosperity, for history tells a different story. History reminds us that, at every moment of economic upheaval and transformation, this nation has responded with bold action and big ideas."
While it is true that at every moment of upheaval, American's have responded with bold action. What is not true; however, is the notion that government's role in that response actually helped the situation. The greatest example here is FDR's New Deal, which did not get us out of the Great Depression. In fact, government intervention in the economy was primarily responsible for prolonging the economic distress our nation went through in the 1930s. I invite anyone who disputes this thesis to read Austrian economist Murray N. Rothbard's seminal work on the subject, America's Great Depression.
"From the turmoil of the Industrial Revolution came a system of public high schools that prepared our citizens for a new age."
Huh? Mr. President, aside from the Renaissance, the Industrial Revolution was the greatest period of wealth creation and positive social change the world has ever witnessed. Using the term "turmoil" to describe this period where the world flourished like never before -- and never since -- is a terrible denigration of the historical record.
"In order to save our children from a future of debt, we will also end the tax breaks for the wealthiest 2 percent of Americans."
Ah, here we have what could be the ugliest words contained in the president's speech. It's also one big reason why stocks are likely to be lower in the months -- and even years -- to come. The administration wants to spend, spend, spend, and it wants the most productive members of our society to foot the bill.
This is classic, soak-the-rich liberalism that's unfortunately popular with the majority of Americans who buy into the notion that wealth creation is a zero-sum game in which somebody wins at the expense of somebody else.
Sadly, President Obama is using all of his truly gifted communication skills to repurpose the tired old class warfare content that's the backbone of the Democratic Party's approach to American politics.
Philosopher and novelist Ayn Rand called this kind of class envy the "hatred of the good for being good." I hope for the sake of the markets, the economy, and our country's well being, this hatred of the good for being good doesn't become the new law of the land.
Jim Woods is a free-lance financial journalist specializing in the economy, the markets and politics. He welcomes your comments, and can be contacted here.
Mutual Funds are Hazardous to Your Wealth 3
I wrote the following article for Marketwatch.com, and it was originally published Feb. 15, 2009. I am presenting it here for the benefit of you, the Alert reader.
Most investors sustained serious damage to their wealth last year -- damage that, in many cases, will be difficult to recover from. 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, is the way to make financial dreams come true.
This is one of the biggest fallacies of investing, and 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 interest, 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 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.
If you have a portfolio worth $250,000 or more that's currently locked up in flawed mutual funds, my advisory firm, Fabian Wealth Strategies, can help. Contact us today at 1-800/ 391-1118 or visit www.fabianwealth.com to discuss how we can help you break away from the confines of mutual funds -- and the antiquated strategy of buy-and-hold.
ETF Talk: Hungry for Profits?
The ongoing recession has forced people to reevaluate many facets of their lives. Things such as a steady job, luxury goods, and a comfortable lifestyle should not be taken for granted by anyone. While people may be cutting expenses, they still need to eat. As a result, the demand for food should stay fairly steady and exchange-traded funds (ETFs) that invest in agriculture may be worth considering as a way to profit in the midst of a recession.
One factor to consider is that consumers may substitute lower-priced food items for more expensive ones. Prime rib and filet mignon are tasty but you could scale back by enjoying Italian sausage and Polish kielbasa or even hamburgers and hot dogs. In fact, the substitution could extend further if cost-conscious people begin consuming less meat and more agricultural products, such as healthy fruits and vegetables.
In addition, consider the potential of soybeans as a source of high-protein animal feed. With meat consumption increasing in developing countries such as China and India, demand for soybeans worldwide could rise.
There is no reason to think that the food supply will change significantly in the short term. Do not expect much help from biotech crops, at least in the near-term. The International Service for the Acquisition of Agri-Biotech Applications reports that global plantings of genetically modified corn, soybeans, and other crops grew only 9.4% in 2008. Although President Obama may increase research funding for corn and ethanol-based fuels when he releases his first budget, it should not have any immediate effect on the corn supply.
However, one risk to the food supply could occur if farmers are unable to obtain credit due to the current financial crisis. If lending to farmers slows, they may need to curtail their activity by reducing plantings, delaying the purchase of new equipment, and cutting back in other ways. A significant reduction in credit availability might leave farmers struggling to buy fertilizer to grow their crops. As a result, do not expect much, if any, short-term increase in the food supply.
Demand for food only should rise, especially with the world's population still growing. In addition, people in China and India are enjoying improved standards of living and now are able to afford better quality food and more of it. For example, the 2008 per capital income in China reached $6,000 (USD) in purchasing power parity (PPP), which measures the cost of goods and services if each country used a common currency. It marks a dramatic jump from China's per capita income of just $439 (USD) in 1987, according to U.S. government sources.
How do you, as an investor, profit from this knowledge? Well, take a look at the following chart of the Market Vectors Agribusiness ETF (MOO), which appears to be close to bottoming out and soon may be ripe for a rebound.
Since everyone needs to eat, agriculture always will be somewhat recession resistant. With expanding food consumption in developing countries, this sector may well escape the worst ravages of the current recession. While I am not recommending any agribusiness ETFs right now, you may want to monitor the sector. If it begins to flourish, you'll still have time to position yourself to profit. In that case, Bon Appétit!
If you want further guidance about which ETFs to trade, check out my ETF Trader service by clicking here. As always, I am happy to answer any questions that you have about ETFs. To send me your questions, simply click here. I will try to follow up in a future ETF Talk.
Telegraphing Economic Hardship
I used to like to go to work but they shut it down
I got a right to go to work but there's no work here to be found
Yes and they say we're gonna have to pay what's owed
Were gonna have to reap from some seed that's been sowed
--Dire Straits, "Telegraph Road"
It's funny how you can find gems of wisdom from unlikely sources. In the Dire Straits song " Telegraph Road," we get prescient and thoughtful words that describe, in essence, our current state of economic hardship. Hopefully, we'll be able to draw on some happier tunes to describe the economy in the months ahead -- but I'm not holding my breath.
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.