Bottom Fishing

Ulli Uncategorized Contact

Ever since the markets made new lows in October many investors, as well as the folks on Wall Street in general, were on a quest to declare a bottom which, I guess, was supposed to be followed by an imminent and profitable turnaround.

I received my share of emails from readers curious about the subject of bottom fishing. The WSJ had this to say a few days ago on that topic:

Investors in equities remain on a quest for clarity, the knowledge that stocks have indeed reached that fabled bottoming-out point that suggests a return to more bullish days — or least, something less volatile and bearish.

Mary Ann Bartels, technical research analyst at Merrill Lynch, notes in commentary Monday that the market has seen its classic selling climax — evidenced by 90% up days reached in October that “signaled the beginning of a base-building process.” She warns again, however, that the period of “testing” the lows can be long and arduous, and involve indexes falling to new lows.

Referring to Thursday’s action, which saw the Dow swing in a 900-point range in one day, she argues that this was likely the third test of the lows reached October 10. Still, she says that the market still has “its work cut out for it,” pointing to resistance levels of 960 to 1000 on the Standard & Poor’s 500-stock index and 9300 to 9405 for the Dow.

Ryan Detrick, analyst at Schaeffer’s Investment Research, is looking for a worsening of the current trend, pointing to the 21-day moving average of the International Securities Exchange’s put-to-call ratio. The current average is 1.35, far from the 2002 market low of 0.95.

“I think there is still too much optimism for an ultimate bottom to have formed,” he writes. “For the time being, the short-term trend could be poised to turn higher, but the long-term trend persists lower. I still think commodities will lead the market lower, as hedge funds continue to unwind their positions.”

Attempting to pick a bottom is nothing but a crap shoot. You might as well go to Las Vegas and try your luck at the tables.

“What comes down goes down further,” has been the theme of the past few months and those ignoring the fact that we are just in the beginning stages of a (potentially lengthy) bear market, most likely learned another costly lesson.

While buying on dips is a favorite hobby for many, it ignores two facts:

1. It works only sometimes in well defined bull markets.

2. It’s a killer in bear markets, unless you keep believing your clueless broker when he utters the famous and very costly words that “the market can’t go any lower,” and “prices are a great value.” Yeah right.

This alleged market bottom is made of quicksand. Stay away until a clear turnaround is evident. Those who have moved back in are probably having the same thoughts as the trader who was overheard saying on the floor that “I don’t want the cheese anymore… I just want out of the trap.”

No Load Fund/ETF Tracker updated through 11/20/2008

Ulli Uncategorized Contact

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

A repeat of last week as the bears had fun feasting on a bullish carcass.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -17.17% thereby confirming the current bear market trend.



The international index now remains -32.27% below its own trend line, keeping us on the sidelines.

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Begging For Money

Ulli Uncategorized Contact

It’s been all over the news that the CEOs of the 3 automakers traveled to Washington again, hubcap in one hand while looking for a handout with the other.

Minyanville had this story:

If you’re planning to beg Uncle Sam for $25 billion, it might be smart to brush up on your poor-boy act first.

The CEOs of General Motors (GM), Ford (F) and Chrysler overlooked this basic fact when they flew to Washington in private jets to testify before Congress.

“We want to continue the vital role we’ve played for Americans for the past 100 years, but we can’t do it alone,” GM’s CEO Rick Wagoner told the Senate Banking Committee.

Tom Schatz, president of a watchdog group called Citizens Against Government Waste, huffed: “This is a slap in the face of taxpayers. To come to Washington on a corporate jet and asking for a handout is outrageous.”

You’d think that insight would rate a “Well, duh” – but apparently not from the auto industry’s top dogs.

Wagoner’s trip to Washington in a G4 private jet cost his struggling company an estimated $20,000 roundtrip. A commercial flight booked online would have cost about $576 for coach and $1,674 first class round trip.

Sure, sure – a CEO’s time is more valuable than gold, but there are cell phones and e-mail to keep in touch with the galley slaves back in Detroit – and electronic gizmos work on commercial flights and even in airport terminals or taxis.

Ford CEO Alan Mulally’s $28 million pay package includes the use of a private jet. He lives in Seattle and the company jet zips him home on weekends, ABC News reports.

You’d think avoiding the “let ’em eat cake” trap would be Public Relations 101. But maybe the auto industry CEOs are so accustomed to their perk-filled nether world that they simply don’t understand how a little thing like flying on a private jet to ask for a handout looks to the working stiffs of America.

Anyone being (or pretending to be) in dire straits financially should know to put on a complete act to support that view before looking for a handout; especially in Washington. Oh well; not having your priorities in order seems to be a sign of our times…

Reader Questions

Ulli Uncategorized Contact

Reader John had these questions and comments:

Given the fact this market is something we’ve never experienced is your re-entry strategy the same as in the past?

Yes it is; nothing has changed with our re-entry strategy. As the bear market goes on, the trend line will move lower, while prices eventually move higher generating a new buy at the crossing point. You don’t want to move back in too early due to heavy bear market volatility.

Bottom picking is not the way to go. Bear markets have to play themselves out, and this one is just starting. Those hoping for a “V” type recovery will be sorely disappointed.

GM was described as having more obligations than assets along with a product that has become hard to sell therefore the bailout for them will not change nor fix the problem. It was suggested to let them move into chapter 11.

Kinda makes sense to me. Your opinion if you have one?

GM burns through money at a rate of $2.5 billion per month. Throwing them a lifeline of $25 billion will only postpone the inevitable. In 10 months, they’ll be in the same position building cars nobody wants or needs given the same economic circumstances.

I read a comment by a MarketWatch reader, who put it this way in regards to government stimulation packages:

“The US will use stimulus to keep people in houses they cannot afford and to prop up auto companies which make cars no one wants to buy. This will assure a continued glut of unaffordable houses and crummy automobiles while the country literally falls down around our heads. Not to mention the fact that poor slobs who didn’t buy houses they couldn’t afford will be subsidizing those who did, and those who work for companies with minimal benefits will subsidize GM workers who have gold plated benefits packages.”

Personally I struggle with any corporation receiving bailout money and still handing out a bonus….perhaps the correct spelling is “bone-us”…

From the beginning, I have been against bailing out (financial) companies that failed due to ill placed and reckless bets in the stock market or any others where the business model has become outdated. As we’ve now seen, once the bailout programs are on the table, everyone wants a piece of “free” money; even if it is only to postpone the inevitable demise. Where is this going to stop?

Lastly, I commend you for your strategy of moving into “cash”….. I can’t imagine any other position yet I hear otherwise and cannot fathom why.

Yes, I can’t see any other position than money market or CDs right now. Once the trends change, we will be ready to act; whenever that will be. Unfortunately, most investors won’t have the patience to wait for the right moment to jump aboard.

Still Bailing

Ulli Uncategorized Contact

While I don’t always agree with Bill Fleckenstein’s view, he wrote an interesting article yesterday titled “Trillions down and still bailing.” Take a look:

Unfortunately, despite some 12 financing facilities created by the Treasury and the Fed, massive interest rate cuts and various bailouts, the government has little to show for its attempts to dictate where markets should trade.

The Fed’s own balance sheet has exploded from roughly $900 billion worth of debt in August to around $2 trillion as of last week. Knowledgeable sources expect that to reach $3 trillion by the end of the year.

That means that it will have grown from approximately 6% of gross domestic product to more than 20% in the space of four months. (For perspective, Japan’s balance sheet grew from roughly 9% of GDP to 29% over the 10-year period from 1994 to 2004, as it pursued “quantitative easing,” which basically involves the central bank making more cash available to banks to ease lending.)

These numbers and rates of growth are so enormous (and unprecedented) as to be utterly incomprehensible. Does anybody actually think the government has any idea what it’s doing?

I think it’s certainly dawning on folks that when the government “does something,” it often creates more problems than it solves. In this case, as it props up poorly managed companies, it may only be allowing them to rain further havoc on the better ones in their industry. American International Group is an example of this, and I’m sure many other financial entities will turn out to be as well. (As an aside, notice all the idiotic executives, across a wide range of industries, who have bought back hundreds of billions of dollars’ worth of shares at stupid prices — a classic example of blowing up their businesses in an attempt to manage the stock price.)

Though the government hasn’t admitted it yet, we are in a recession, and in this particular instance, it seems to me that creating jobs will be an unusually severe problem. That’s because the economic expansion we saw from 2002 to 2007 was essentially just a function of speculation (as I have stated often — and I explain in my book “Greenspan’s Bubbles”). I just cannot stop worrying about where the jobs are going to come from prospectively.

When I wrote that book, I pretty much exorcised my own demons regarding my revulsion and anger at the policies of former chief Alan Greenspan and his Federal Reserve. Recently, though, I couldn’t help but think how much better off everyone would be had the United States used the time after the equity bubble and the 9/11 attacks to pursue sound policies, as well as encourage folks to save money and prepare themselves for the demographic challenge of Social Security and rising health care costs.

Instead, Greenspan created a multiple-GDP-sized housing bubble, during which folks took on huge amounts of debt instead of actually saving money. It was only ridiculous financing (which has since imploded the banking system) that allowed so many folks to pay absurd prices for houses — and take money out of them at the same time via home-equity loans.

Of course, one of the most misguided government ideas was trying to prop up home prices. (Secretary Hank Paulson essentially conceded as much last Wednesday when he announced that the Treasury Department was abandoning its plan to purchase troubled mortgage assets.)

House prices need to come down to where folks can afford them. And prices may have to fall even further than we might have thought in the first place, because there’s going to be high level unemployment and probably not a lot of wage growth.

This is going to be a very unpleasant period, I’m sorry to say. The outcome we are witnessing is exactly why, during both the stock mania and the housing mania, I was so vociferous in my criticism of Greenspan. He is the one man who continually meddled with the market and continually advocated that folks behave in an irresponsible way.

I find it outrageous that this buffoon is still making speeches (and commanding huge fees) when the entire country, and perhaps the world, is paying for his crimes against finance.

This pretty much mirrors my view, since I have maintained from the beginning of this crisis that government intervention will not work and propping up failed companies will do nothing but cost taxpayer money and put future generations on the proverbial financial hook.

In the meantime, with the markets heading further south, portfolios of buy-and-holders are being destroyed at an alarming rate. With the S&P; 500 now being down over 42% YTD, many portfolios have done worse and are reaching or exceeding the 50% loss level.

It saddens me to see that, since lives will be changed forever because of it, even though most of the damage could have been avoided via the simple methodology of trend tracking.

Keeping The Powder Dry

Ulli Uncategorized Contact

As you can imagine, with the markets having devastated many portfolios, I have received a lot of client and reader mail expressing how this crisis has affected them, and how trend tracking has made a difference to those who followed its signals.

Reader Steve had this to say:

Many thanks from a very satisfied client. It is with a sense of relief that I can pull up my account balance and find most of it still intact. My heart is heavy when I hear stories from friends, family, and co-workers tell of their unimaginable losses.

You are truly a voice crying out from the wilderness with a message that has been MORE than validated through this current financial fiasco. I know that recovery will begin someday. But, in the meantime, I will be more at peace knowing that when it does I will be in a much better place to take advantage of it.

You are helping us “keep our powder dry” while we await that time.

I am not sharing this with you to pat myself on the back, but to make a point. The every day question has been when will this downturn end and where is the bottom?

While I don’t have those forecasting abilities, some people, whose opinion I value, have pegged a potential bottom, as measured by the S&P; 500, at 600 – 650. If this holds true, it would cap the additional downside at another -20%.

This means that buy-and-holders could potentially see their portfolios reduced by some 60%. It does not take a genius to figure out that once you have lost 60% of your holdings, you need to make some 250% on the balance just to get back to even. That’s truly a frightening number to accomplish.

If you are forced to go that route, you have will lost most of your ammunition to participate in a recovery, and the road will be long and painful.

That is what reader Steve meant when he said that we are “keeping our powder dry” to be ready to participate with a maximum of our assets when the upswing eventually occurs.