Making Money Alert
We Don't Get Fooled Again
04/01/2009
I'll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I'll get on my knees and pray
We don't get fooled again
-- The Who, "Won't Get Fooled Again"
It's April Fool's Day, and this year there are plenty of left-wing fools in London yelling, screaming and carrying on over the state of the world economy. Now it's tempting to make a joke here that I am not referring to the protestors outside the walls where the G-20 summit is taking place, but rather to the heads of state that seem intent on doing their best to prop up the world financial system.
Yes, it's tempting to make that joke, but I'll refrain.
The more important point here is to realize that the circumstances in the streets of London reveal a decided hatred toward capitalism and the trade that has made the world prosperous, particularly since the end of World War II. Unfortunately, it seems like there are those in high places throughout the globe who don't fully comprehend this.
This lack of economic knowledge -- or worse, aversion to that knowledge -- likely will mean trouble ahead for a global economy already in trouble. What will happen, and how will it play out on Wall Street? Well, we'll soon find out.
Today, the market seems to have shrugged off the G-20 unrest by moving higher. Those gains largely can be attributed to decent factory and home sales data that could point to a healthier economy later in the year. There also is optimism on the Street that some kind of revamping of the much-maligned "mark-to-market" accounting rule will be announced soon.
If we take a look at the chart below of the S&P 500, we get the sense that this market still has some upward momentum.
The fact that we've remained above the short-term, 50-day moving average (blue line) on the index is a good sign for a continuation of this bear market rally. For market participants, the opportunities at this juncture are twofold, depending on if you are a trader or an investor.
For traders, there is a lot of action out there both on the upside and the downside. There are also a lot of sectors out there on the climb, and many more on the slide. There are currency plays you can go long on, and those which you can short. There are leveraged, long ETFs doing very well, and some levered short ETFs doing just as well.
Taking advantage of the current market moves is no easy task, but one way to do so is by checking out my ETF Trader advisory service. Right now, we have a position in one of the aforementioned currency plays, and so far we've made healthy gains in a very short time.
Now if you are an investor, the best way to look at these sharp bear market rallies is as opportunities to extricate yourself from your biggest losing positions. Here you will want to sell into the rally and raise cash.
When the time comes to go long again, you'll be able to do so with a clean slate. And when that time to get back in arrives, you, as an Alert reader, will be amongst the first to hear about it.
To find out how to get your money positioned for short-term profits, click here.
ETF Talk: Is the Latest Financial Stock Rally Sustainable?
Recent rallies in the stock market and reports of profits at Citigroup and Bank of America during the first two months of the year are positive signs for financial stocks. However, it still may be premature to resume investing in the financial sector.
One reason is continuing risk that further economic fallout is ahead. The Congressional Budget Office (CBO) reported March 20 that deteriorating economic conditions will cause the federal deficit to soar past $1.8 trillion this year and leave the nation in a deeper financial hole than the White House had previously estimated. The nonpartisan CBO predicted that the administration's agenda would produce deficits averaging nearly $1 trillion a year for the next decade -- $2.3 trillion more than the president predicted when he proposed his spending plan in February. Folks, that's a really big hole.
Bank stocks may have been even more volatile than the topsy-turvy market lately. The Financial Select Sector SPDR (XLF), an ETF that tracks the financial stocks in the S&P 500, rose 6.3 % Tuesday to recover from Monday's drop of more than 8%. Since the rally started three weeks ago, beaten-down sectors such as oil are finally trending upward.
But let's not get carried away by the modicum of good news.
The Federal Reserve's March 18 announcement that it plans to buy more mortgage securities and $300 billion in longer-term Treasuries during the next six months might have been just a short-term catalyst for the market. The next piece of good news for banks could come this Thursday when bankers find out if the Financial Accounting Standards Board approves a move to give auditors more flexibility in valuing illiquid mortgage assets that may have long-term value and strong cash flow.
A few years ago, financial stocks such as Merrill Lynch, Goldman Sachs and JP Morgan, among others, rose strongly. Bankers and Wall Street traders in 2005-06 received big bonuses and global markets soared. Unfortunately, the subprime foundation of this boom began showing cracks in 2007. By 2008, the shaky structure collapsed and dragged the financial sector down with it.
The Financial Select SPDR (XLF) was one of the most beaten-down ETFs last year, when it lost 54.91%, compared to the 36.68% drop of the S&P SPDR (SPY). Investors who shorted financials through UltraShort Financials ProShares (SKF) would have gained 3.61% in 2008.
The real question is whether the latest rally is sustainable. The financial sector rally started when Citigroup and Bank of America reported profits for the first two months of 2009, with XLF rising 39% since March 6. It is important to remember that the rapid resurgence in financial sector stocks also stems from their extremely oversold condition last year. Citigroup and Bank of America each absorbed more than a 90% drop in share price in the last 52 weeks. Yesterday, Citigroup jumped 9.5% and Bank of America zoomed 13.1%.
Although I am trying to stay positive this year, I still see challenges for the financial sector. There still will be billions of dollars worth of toxic assets that will have to be written off, making year-end results for financials hard to forecast.
Personally, I am not sure about the longevity of the latest rally. While Citigroup and Bank of America notched unexpected profits for the first two months this year, I am not convinced both companies will be profitable at the end of the year. If you believe that we are simply in the midst of a bear market rally and that the financial sector is going to be rocked further by the credit crunch, shorting the index might be profitable. On the other hand, if you believe that this is the beginning of the rebound for the beaten-down financial sector, going long may let you pick up shares at very cheap prices.
If you want further guidance about which ETFs to trade and when, check out my ETF Trader service by clicking here. As always, I am pleased to answer any questions that you have about ETFs. To send your questions to me, simply click here. I will try to follow up in a future ETF Talk.
ETFs: Please Drink Responsibly 2
I've read a lot of bad press lately regarding ETFs, and particularly levered ETFs. There seems to be a backlash on the use of volatile, levered ETFs as a way to build long-term wealth.
Well, to this sentiment I say, duh!
Some ETFs and, in particular, those that are levered two and three times, are not intended to be used as long-term wealth builders. These ETFs are trading vehicles, pure and simple. They should be used with a restricted time frame of anywhere from a few weeks to a few months tops.
These volatile, levered ETFs are not buy-and-hold investment vehicles, nor are they to be used for the average risk-averse investor seeking long-term gains. Rather, they only should be used by the highly risk tolerant, and by those willing to employ strict stop losses, as well as those unafraid to take a loss if things go south.
So please, you people in the financial media, don't continue scaring investors into thinking that levered ETFs are inherently intoxicating. If you drink them responsibly, you'll reap the pleasures and avoid the hangover.
Churchillian Wisdom
"The inherent vice of capitalism is the unequal sharing of blessings; the inherent virtue of socialism is the equal sharing of miseries."
-- Winston Churchill
In his oh-so-British, statesmen-like way, Churchill nailed it when it comes to the differences between capitalism and socialism. I hope for the sake of the free world that we have more unequal sharing of blessings than equal sharing of miseries.
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.