Higher oil prices and interest rates, along with GM nearing bankruptcy, pulled the markets down, and pretty much all of Tuesday’s gains were surrendered.

Our domestic Trend Tracking Index (TTI) moved again further away from breaking its trend line to the upside (-1.84%), which means that, barring any extreme upside recovery, a domestic buy appears unlikely this week.

Economic news seems to be interpreted in different ways, of course, depending on who you ask, but no one seems to have a clear cut idea as to what’s next on the horizon. Hopes of recovery by the end of this year are on the front burner, but we can’t be sure.

Given this constant barrage of bad news vs. encouraging news, let’s look at how bad the economy really is from a humorous point of view as submitted by reader Tom. I hope this will put a smile on your face:

The Economy Is So Bad…

Congress says they are looking into this Bernard Madoff scandal. Hey, great idea…. the guy who made $50 billion disappear is being investigated by the people who made $750 billion disappear.

Rising oil prices and interest rates, a falling dollar and a record decline in home prices couldn’t keep the market down yesterday.

The upward bias came in form of a surprisingly strong consumer confidence report that helped the bulls forget quickly that the past 4 trading days were losers.

Since our International Buy signal on May 11, 2009, our fund selections have now gained 3.30% and our hedge positions improved today as well.

Our Trend Tracking Indexes (TTIs) are now positioned as follows:

Domestic TTI: -0.59%
International TTI: +5.94%
Hedge TTI: +0.73%

Our domestic TTI has now again moved to close proximity of breaking its long-term trend line to the upside. As I said before, to minimize any whipsaw signals, I want to see a clear break above the line after it has been recalculated, which happens every Friday.

We’ve been close over the past few weeks, but the markets backed off every time we put our hands on the trigger. Stay tuned to any changes; I will keep you informed via an update blog post.

The ultimate investment goal for the majority of investors is to find some no load funds/ETFs that have the ability to zag when the markets zig.

This is a daunting task indeed and many, who thought they had such portfolio diversification last year, learned the hard way that this proverbial needle in the haystack had not been found yet.

The WSJ had some thoughts on the topic in “When The Market Zigs, These Funds Zag:”

Last fall, many investors found out that they weren’t as diversified as they had thought. Mid-cap blend, large-cap growth, international value: Their mutual funds had fancy names and labels, but when the crunch came, all those funds were caught doing the same thing, betting shares would rise.

Investors, of course, know there that there is no free lunch. Absolute return funds will outperform others in a bear market, but they will underperform when shares boom. They tend to have high expenses. Federated Market Opportunity’s A shares have a 5.5% sales load and a total expense ratio of 1.56 %. Plus, such funds are only as good as their managers.

Obviously, those investors who had FMAAX as part of their holdings did fare better than the rest of the asset allocation crowd. While I don’t own FMAAX, or any of the funds discussed in this article, I have used it in the past since it is available to me as a load waived fund.

With a Beta value of 0.43, it will hold up better than most in bear markets but lag in rip-roaring bull markets. Still, it’s not a fund for all seasons that can be blindly held. Applying a trend tracking strategy including stop loss points would have improved results considerably.

Buying and holding this fund still exposed you to a 24% drop last year, however, it has recovered nicely closing last week at 11.73, which is only a little over 7% off the price it had when our Sell signal was generated on 6/23/2008.

The bottom line is that there is no such one fund/ETF for all seasons, so the search for the needle in the haystack goes on.

One reader emailed me with the following question:

Could you explain the difference between smart money and dumb money? I know the traders lure us unsuspecting people into the market like they have over the last 2 months or so then sell their holdings and then go short and wait till the bag holders start selling again and then cover their shorts and start buying again apparently from the Dumb money people.

Is this close to reality?

Nobody is luring you into the market. It’s a decision you make and no one else. It sounds to me that you have a trader’s mentality (short-term), which puts you automatically in the loser’s column most of the time. There are very few short-term traders who consistently make money year after year. Many try but most fail.

Your comment makes me believe that you have lost money over the past couple of months; otherwise this question would be moot. Nobody is out to get you, but chances are that you work with pre-set stop losses, which get filled at the most inopportune time giving you the impression that you are being shafted.

To me, once sell stops are placed ahead of time, they become public knowledge to those executing the orders. This is why I never recommend placing stops in that fashion. If you base them on closing prices only, and they get triggered, then enter the order the next day.

You might want to consider using a different approach.

I have some clients who have divided their pile of investment money into two parts, named “play” money and “serious” money. Since they are interested in the market, they use their play money to satisfy what I call the need to gamble and take risks. I handle the serious money, which is to be invested with discipline and for the longer term.

To me, smart money is represented by those investors/advisors who work with an investment discipline, which supports clearly defined entry and exit points. At the same time, they are in control of their ego by seeing the need to take small losses from time to time in order to avoid the big ones.

Dumb money is the just opposite in that those investors are relying more on hope than anything else by not having a clear buy/sell strategy or any idea when to get out of a position. That, unfortunately, is the mode of operation by the majority of the investing public.

Ever since I left Germany in 1973 and immigrated to the United States, I was of the opinion that this country’s prosperity was based on survival of the fittest.

I was reminded of that when I read “That’s Not the American Way: Chrysler’s Bailout and the Road to Ruin:”

Chrysler’s plan to close about 25% of its dealers is the natural outcome of a series of very unnatural events surrounding its bankruptcy, says Howard Davidowitz, chairman of Davidowitz & Associates.

“That’s a big problem for the financial stability of the U.S.,” says Davidowitz, who had a hard time envisioning an alternative to a very grim scenario for America: “With big government, mad borrowing, and not letting things fail, there’s no way we can have [rising] living standards,” he says.

[Emphasis added]

Sad but true. The United States has now taken a path that is about as un-American as I have ever seen one. By implementing policies that no longer let only the fittest companies survive, we are now having the fittest compete with the sickest because they are being propped up for dubious reasons.

I have no idea at this point whether we will be following Japan’s path to a lost decade (or two), or if we can manage to come to our senses and change course before it’s too late.

Nobody has that answer, but I am sure that, no matter which road we will be forced to travel, investment opportunities will present themselves to those who are not only prepared to take them but also disciplined enough in their approach to survive even treacherous market conditions.

A reader pointed to the quarterly letter (PDF file) by Jeremy Grantham titled “The Last Hurrah and Seven Lean Years.”

While the entire report is simply superb, I want to focus on two sections, namely “Seven Lean Years” and “The VL Recovery.” Let’s look at some highlights of the former first:

Probably the single biggest drag on the economy over the next several years will be the massive write-down in perceived wealth that I described briefly last quarter.

Collectively, we will save more, spend less, and waste less. It may not even be a less pleasant world when we get used to it, but for several years it will cause a lot of readjustment problems. Not the least of these will be downward pressure on profit margins that for 20 years had benefited from rising asset prices sneaking through into margins.

Besides the loss of wealth being a life-altering shock for many, it will also postpone any inflationary effects. I am not an economist but, to my way of thinking, the Fed would need to first “replace” this lost wealth of some $20 trillion via the creation of new money before any inflationary effect can work itself through the economy.

The change of lifestyle along with saving more and spending less will also contribute to the current deflationary environment staying with us for some time to come. I believe that those betting on a fast return to growth and inflationary times lurking right around the corner will be sadly mistaken.

Here are some interesting highlights from “The VL Recovery:”

So we’re used to the idea of a preferred V recovery and the dreaded L-shaped recovery that we associate with Japan.

We’re also familiar with a U-shaped recovery, and even a double-dip like 1980 and 1982, the W recovery. Well, what I’m proposing could be known as a VL recovery (or
very long), in which the stimulus causes a fairly quick but superficial recovery, followed by a second decline, followed in turn by a long, drawn-out period of sub-normal growth as the basic underlying economic and financial problems are corrected.

I must admit that I have never heard of a VL type of recovery, but I find myself agreeing with its concept wholeheartedly.

As far as the market is concerned, we may be already in the rising part of the “V” (the superficial recovery), which then should be followed by a second decline. I have in the past referred to the recovery portion as a bear market rally but only time will tell if and when this VL concept comes to pass and if the next down-leg is upon us.

I believe things will play out like this to some degree. Since we are following trends, the type of recovery, nor the length of it, has really no bearing on our investment decisions. When a trend comes to an end, for whatever reason, we get out of our positions, head for the sidelines and wait for the next opportunity.

Unfortunately, those investors simply buying and holding, with no plan to ever exit the markets, will be paying a steep price for ignorance by watching their portfolios get annihilated again.