Holding Forever?

Ulli Uncategorized Contact

After Monday’s drubbing, the markets roared back on Tuesday with the major indexes more than cutting their losses in half. The only fly in the ointment was that the rebound occurred on weak volume suggesting that not everyone was convinced that this would be more than a dead cat bounce.

Of course, the big factors behind the comeback were hopes that Congress will approve a rescue package of some sort to bail out the ailing banking system. Only time will tell how this is going play out.

On a different subject, I received an email from reader Jean, who had this question:

Fidelity Advisor VII Technology Fund – T (FATEX) and Franklin Small Mid Cap Growth Fd Class A (FRSGX) are two funds I’ve held for almost 10 years. I keep waiting for them to reach the cost for which I purchased them.

What do you think I can expect from these two funds?

Hmm; she’s held these funds for almost 10 years waiting for a comeback to reach a break even point. Let’s take a look at a long-term chart of FATEX:

I don’t know at what price point Jean bought this fund, but it seems to me that were several opportunities to sell for a profit when the long-term trend lines were crossed to the downside during early 2000.

The problem with this scenario is not Jean’s fund selection but the investment method she employed in the first place, which is Buy and Hold. It’s a fallacy in that there is no clear plan as to when to enter or exit a position. Let’s say you bought in at $20/share, when will you sell? When the price hits $40? Or $60? How about $500? It’s simply ridiculous to expose yourself to the vagaries of the market place in that fashion.

The inevitable result is that even almost 10 years later, her investment is still negative and she’s looking to break even. Both funds are in downtrends right now and should not be held at all.

I suggest to reader Jean to re-evaluate her investment approach and come to terms with the fact that, long-term, buy and hold is nothing but a loser’s game.

Rejected

Ulli Uncategorized Contact

The bailout package was rejected yesterday and, with Dow being down some 300 points as the announcement was made, it dropped another 300 points within seconds thereafter.

Rebound attempts failed and all major indexes suffered steep losses not seen since the last bear market of 2001. The S&P; lost some $700 billion in market value and, I hate to say it, the portfolios of the Buy & Hope community got hammered big time.

The S&P; 500 is now down almost 14%, just for this month, and anyone holding on to long positions should have learned this lesson: When in bear market territory, the wisest move is to stay on the sidelines in cash until the trend reverses and turns bullish again.

I’ve been harping on this for the past 20 years and many readers have followed this advice and have written me that they now have a hard time hiding that smug look on their faces. No, I am not gloating here but merely pointing out that many investors continue to be mislead by Wall Street’s self serving investment approach that promotes the senseless “you always have to be in the market” attitude.

Bear markets have a way of bringing back some reality that seems to get swept under the table during bullish party times. I am repeating myself: There are times to be in the market and there are times to be out of it. The latter has applied for the past few months, since our last domestic sell signal was issued on 6/23/08.

Our Trend Tracking Indexes (TTIs) have followed the markets lower and are now positioned relative to their trend lines as follows:

Domestic TTI: -6.66%
International TTI: -16.37%

Sure, bear markets, as we’ve seen over the past few weeks, have tremendous power to bounce higher, but so far, the attempts have all been head fakes.

I have no idea if we will see a rebound rally in the near future, but nothing would surprise me. Right now, I am watching this carnage from the sidelines with my assets, and those of my clients, safely tucked away in a US Treasury only fund waiting for better opportunities.

Will Gold Be The Savior?

Ulli Uncategorized Contact

With Washington’s circus performance in full swing, reader Tony had this to say:

The Fed is printing all this money to create the cash needed to fund whatever form this bailout takes, right?

And if, ultimately, a plan will earn a profit for US, how do we know the money will be applied to reduce the ridiculous dept they are creating?

Would you invest in gold given the inevitable inflation that printing all this new money is creating?

Sure, the devil is in the details. We won’t know yet what checks and balances will be applied to be sure the debt recreated will eventually be reduced. My concern there is too that if any profit actually comes to back that it will be spent in the usual fashion and not applied to strict debt reduction. This is how government works, but I can’t be 100% sure of that this time given the outrage of the citizens about the bailout in the first place.

Under normal circumstances, I would agree with you that such an sizable extension and expansion of credit would have inflationary consequences. However, the enormous destruction of assets (now up to some $500 billion), which we witnessed over the past year, is definitely a deflationary force to be reckoned with. I think we have entered unchartered territory and, not being an economist, I would guess that these two forces, at least temporarily, would cancel each other out. Long-term, however, one or the other may prevail.

While in times of uncertainty gold has been a great hedge, it has recently displayed tremendous volatility. If you prefer holding physical gold (coins, etc.) that’s one thing, but investing in an ETF like IAU, is another.

Let’s take a look at a 1-year chart:

As you can see, IAU is currently bouncing around its long-term trend line and could break either way. From July to September, a huge correction occurred and a subsequent rebound retraced most of those losses.

If you are an aggressive investor, you can take a position here, but you need to use a trailing sell stop. Since gold appears to be news driven right now, a $100/oz drop or gain can happen at anytime. Personally, I have no positions and prefer to wait for better confirmation of an upside breakout.

Sunday Musings: My Personal Bailout Plan

Ulli Uncategorized Contact

OK, I have to admit it, the following is not my idea, but it was sent to me by reader John, and I believe it’s currently circulating on the internet.

It is is one man’s great alternative to a different bailout approach. It’s simple, funny, on the spot, certainly beats the alternative and is a worthwhile read:

I’m against the $85,000,000,000.00 bailout of AIG.

Instead, I’m in favor of giving $85,000,000,000 to America in a “We Deserve It” Dividend.

To make the math simple, let’s assume there are 200,000,000 bonafide U.S. Citizens 18+.

Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up..

So divide 200 million adults 18+ into $85 billion that equals $425,000.00.

My plan is to give $425,000 to every person 18+ as a “We Deserve It” Dividend.

Of course, it would NOT be tax free.

So let’s assume a tax rate of 30%.

Every individual 18+ has to pay $127,500.00 in taxes.

That sends $25,500,000,000 right back to Uncle Sam.

But it means that every adult 18+ has $297,500.00 in their pocket.

A husband and wife have $595,000.00.

What would you do with $297,500.00 to $595,000.00 in your family?

Pay off your mortgage – housing crisis solved.

Repay college loans – what a great boost to new grads

Put away money for college – it’ll be there

Save in a bank – create money to loan to entrepreneurs.

Buy a new car – create jobs

Invest in the market – capital drives growth

Pay for your parent’s medical insurance – health care improves

Enable Deadbeat Dads to come clean – or else

Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.

If we’re going to re-distribute wealth let’s really do it…instead of trickling out a puny $1000.00 (‘vote buy’) economic incentive that is being proposed by one of our candidates for President.

If we’re going to do an $85 billion bailout, let’s bail out every adult U S Citizen 18+!

As for AIG – liquidate it.

Sell off its parts.

Let American General go back to being American General.

Sell off the real estate.

Let the private sector bargain hunters cut it up and clean it up.

Here’s my rationale. We deserve it and AIG doesn’t.

Sure it’s a crazy idea that can ‘never work.’

But can you imagine the Coast-To-Coast Block Party!

How do you spell Economic Boom?

I trust my fellow adult Americans to know how to use the $85 Billion “We Deserve It” Dividend more than I do the geniuses at AIG or in Washington DC.

And remember, this plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.

Ahhh…I feel so much better getting that off my chest.

There you have it. Does this idea invoke pleasant feelings or do you feel better knowing that AIG is being bailed out?

Just for fun, I have asked some clients and friends as to what they would do if they received a tax-free windfall of some $300k. If I take their ideas, and assume that others have similar needs and wants, and multiply those by 200 million recipients, I’ve come to the conclusion that the current recession would be over in no time and an economic boom of enormous proportions would result.

Yes, it’s simple and an economist could shoot holes in that idea. But what the heck, I have to admit that thinking about the implementation of such a positive action plan makes me wonder if it could actually work.

(Correction: My wife, who is an accountant, informed me that in the above example, taxpayers would be taxed closer to a rate of 45%, rather than the stated 30%).

Spreading The Fear

Ulli Uncategorized Contact

The hype and angst surrounding the bailout proposal has been enormous, and I have to wonder if much of it was by design in order to shove this idea down peoples’ throats before much analyzing could be done.

Dr. Housing Bubble featured an excellent article on the subject. Here are some highlights:

As I eagerly await the bread and circus theatre to resume tomorrow, has anyone seen any details on the $700 billion plan? The plan ushered over the weekend by Henry Paulson was an absolute joke and mockery to our economic system. He back peddled and stated that he wanted to keep it as “simple” as possible so discussion in Congress would move much smoother. What in the world is simple about asking that any actions taken by the U.S. Treasury are not reviewable by a court of law? There was a quick firestorm from economist, bloggers, and anyone with an ounce of commonsense how absurd the 3 pages bailout was. Even with the additional modifications to the plan of CEO compensation, equity sharing, and oversight no one is asking the most important question. Why in the hell do you need $700 billion? The mainstream media seems to be neutral about the bailout.

Ben Bernanke, Paulson, and Bush went on their financial fear mongering tour basically saying that if you don’t pass this bailout, the world as you know it will implode on itself. Little do they know that in many cities people are already struggling and have very little to lose if they haven’t lost everything already. This is what the President had to say:

“I’m a strong believer in free enterprise. So my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances. The market is not functioning properly. There’s been a widespread loss of confidence. And major sectors of America’s financial system are at risk of shutting down.

The government’s top economic experts warn that without immediate action by Congress, America could slip into a financial panic, and a distressing scenario would unfold:

More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.”

Holy crap! If you put it that way, why don’t we raise the amount and give Paulson $10 trillion? God forbid you take my credit cards away. You mean we are going to lose additional jobs on top of the 605,000 that have already been lost this year?

So this is something that is already happening. Now we get the ultimate fear mongering of seeing your stocks decline. Some Americans are living paycheck to paycheck let alone investing. Let us see the raw numbers here. How many Americans own stocks?

57 million households own stocks directly or through mutual funds. Given that there are 105,480,101 or so households, that means 54% of people will be impacted by a decline in stock values directly in their portfolio. What this also means is that 46% of Americans do not own any stocks. But how much money do American’s really have saved in retirement accounts? Given that the median household income for U.S. households is $46,326, let us run these quick numbers:

401(k) Median Amount

20 year olds

(Salary Range)$40,000 – $60,000 = 401(k) Median Amount $16,393

30 year olds

$40,000 – $60,000 = $38,693

40 year olds

$40,000 – $60,000 = $78,834

50 year olds

$40,000 – $60,000 = $99,932

60 year olds

$40,000 – $60,000 = $97,588

Sources: Employee Benefit Research Institute, Investment Company Institute

So let us assume that the market goes bonkers and it declines by 30 percent. How much do 20 to 29 year olds lose? $4,917. What about those in their 30s? $11,607. How about the hypothetical 40s family? $23,650. A 50s or 60s family looks to lose approximately $29,900. Is there any wonder why there is a big generational gap going on here? That is why the next big issue which in fact is bigger than this bailout is the entitlement programs that will be coming down the pipeline for the baby boomers. The median 20 – 39 year old household has probably lost more simply by inflation and stagnant wages. Certainly the amount of money being thrown toward Paulson and Bernanke is nothing to justify even a horrific 30% drop. The numbers simply do not pan out. In addition, if you retire say at 62 with $97,000 and live until 75, divided over 13 years we are talking about living on $7,461 a year plus Social Security. Try managing that one.

Again, those that stand to benefit the most are in the top 5% of this country. Why do you think there has been wide opposition to this bailout? Take a look at this L.A. Times and Bloomberg poll:

“(L.A. Times) Americans oppose government rescues of ailing financial companies by a decisive margin, and blame Wall Street and President George. W. Bush for the credit crisis.

By a margin of 55 percent to 31 percent, Americans say it’s not the government’s responsibility to bail out private companies with taxpayer dollars, even if their collapse could damage the economy, according to the latest Bloomberg/Los Angeles Times poll.”

As it turns out, a large number of Americans actually have the guts to stand up for what is right. Plus, they realize that the economic plan will do very little to benefit them. Take a look at the above numbers. Approximately 30% of Americans own their homes free and clear. Many of these people do not want to bail out banks that made absurd idiotic loans while they were being prudent. In addition, many other Americans are making their mortgage payments on a timely manner. Do you think they are going to appreciate dolling out assistance to lenders that gambled their future away? Of course not.

The problem with the $700 billion price tag is no one is bothering to explain why they need $700 billion. Why not $200 billion like the Fannie Mae and Freddie Mac bailout? The only reason we get is “it needs to be sizable enough to impact the markets.” Bull. After all, if this program as I read it is setup to continually recycle loans in a garbage in garbage out model, having a $200 billion pool should be enough to take in enough crap mortgages at a major discount, throw them back on the market, and repeat the process over and over until the crisis is over. Wouldn’t that make the most sense?

But of course Ben Benanke keeps using the Roto Rooter argument that the credit markets are clogged. Good! That is the damn reason we got into this mess to begin with. The fact that the President tried to instill fear about having our credit cards taken away is a blessing in disguise. People shouldn’t be spending money they don’t have. People shouldn’t have bought homes they could never afford. Forget the auto loan. Time to clean up the balance sheet of your house. And the banks and Wall Street? If the buyers were the drug users Wall Street and the lenders were the drug pushers. Let them implode. This “I’m for the free enterprise except for the largest bailout known to mankind” is absurd.

If that is the case, I would feel more comfortable pushing through healthcare for all and investing in our crumbling infrastructure. At least we’ll get something for the price tag there. Instead we are going to use the money to bailout banks? Talk about massive hypocrisy. Let us run through the doomsday scenario since many don’t have the desire to look at this.

(a) No bailout. People and financial markets initially panic. Weak institutions will no longer be able to hide the sausage and will be exposed and will collapse. In fact, a few people have estimated that nearly half of the 8,429 commercial will fail.

(b) Systematic failure of these toxic institutions. They fail and their poor risk management brings them down. They knew the risk. Making $500,000 loans on 500 square foot boxes and pocketing beacoup money is gambling. Hope you enjoyed your reckless spending.

(c) Banks that do remain, will lend but to those that meet certain standards. What is so bad about that? What we are basically being told right now is that we have to continue believing that the Great Wizard of Oz really isn’t some shady banker behind the cape. In fact, they want us to continue this model of giving money to people that don’t qualify. That is simply unsustainable. But guess what? The United States itself is now becoming the debt addicted borrower on the world stage.

(d) Standards get better and we move our economy away from this model of flipping houses to one another and obsessing with remodeling our homes as a method of economic stability. Are we a world power because we watch HGTV and have an obsession with granite countertops? Of course not. The jobs of the future are in biotech, engineering, and IT and we are going to drop $700 billion in propping up a system that rewards flipping and rehabbing homes? You know what that will do for our future economy? It is going to saddle us with so much debt, we’ll be unable to focus on anything else. Please refer to Japan to see how well it works when you zombify your banking industry after a housing bubble.

(e) The correction happens and we move on. New industries develop and new careers will come forward in time. This happens in any business cycle. When will this happen? It is hard to say but once we get back to more prudent standards we can get our country back on the right course.

So essentially that is how things will play out if there is no bailout. But say there is a bailout. What changes from above? My prediction is this is what will happen:

(a) Bailout passes. Initial euphoria on the markets which will give way to reality since Main Street has horrific balance sheets. The party will wear off quickly. We are still at record high foreclosures and nothing will stop this. Why? Because much of our economy was dependent on an incestuous relationship of, “I sell you home. I get commission check. I buy home with check. I sell other home. Use check to remodel and pay construction workers…etc etc.” It all depended on people buying and selling homes at a hyper accelerated pace. That will not continue.

(b) Once Main Street realizes that they were shafted, there will be an uproar but what will they do? Will they protest? Will they take to the streets? Who really knows. The deal at that point will turn into buyers remorse. After all, the government buying the loan doesn’t remove the fact that the loan is still bad. Let us run a scenario:

-The government buys a loan from X bank. X bank claims the mortgage is worth $400,000. The government offers a minor discount of 10% and takes the loan. They now have a $370,000 loan. The borrower has received zero savings. The government can try passing the savings to the borrower but most likely they will still not be able to make the payment. What if they can only make the payment on a note of say $200,000. Will the government modify the loan to that level? If that is the case and the root cause is helping home owners, why not let judges use cram downs and force lenders to modify loans as such with equity kick backs to lenders. That is, if the folks sell the home in a few years for a profit that cash goes back to X bank. Why don’t they go for this? Because it exposes the drug dealer (Wall Street and banks) and drug abusers (home borrowers who want a free lunch). This would make the most sense.

-The government will most likely have a foreclosure on their hand. So now what? Are they going to try to sell the home in this current market with already tons of inventory? They are going to get screwed 2 times here. First, they’ll get shafted from lenders since I doubt they’ll be offering 30 to 40 cents on the dollar which they should. So they’ll over pay once here. Many of these borrowers will default. So now, you have a home and you need to place the home on the market. Guess what, the market sucks. So now, you have to drop your price (another price hit) and accept what the market will offer you.

There is a silver lining. The majority of Americans are seeing through this sham. Keep calling and writing your representatives since at least it stalled it long enough to keep comrade Paulson from turning this country into a crony capitalistic mortgage swap meet.

I could not have said it any better. Based on feedback from my readership of 18,000, I can attest to the fact that many are calling their representatives and asking for this bailout to be voted against.

These unique current times may very well go down in history as a fight against the power grab by a few and will be examined from all perspectives for years to come.

If you want to make a difference and contact your representatives, I suggest you read Mish’s article “Take Back America” at Global Economic Analysis, where he has listed fax and phone numbers as well as reference links of senators/congressmen to contact.

No Load Fund/ETF Tracker updated through 9/25/2008

Ulli Uncategorized Contact

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

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



All eyes are on the negotiations about the bailout plan. The major indexes lost for the week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -4.23% thereby confirming the current bear market trend.



The international index now remains -10.28% 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.