Subprime Toxicity: A Worldwide Effect

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Since I have been writing frequently about the Subprime debacle for most of this year, you might be getting tired of reading about it.

However, its incredible negative impact and consequences are here to stay for some time to come and will affect adversely not only the U.S. economy but many countries worldwide.

It’s interesting how the Subprime pig, as I called it, made its way around the world rattling countries when and where you least expected it. How did this crisis spread from being a bunch of Subprime loans, originated by greedy, irresponsible mortgage brokers, become such a powerful tool that brought down hedge funds and so far has caused losses in the neighborhood of $50 billion dollars—with no end in sight?

MarketWatch recently featured a story called “Toxic Export,” which explores how America’s risky Subprime mortgages fouled the world markets. It’s an interesting read and will enlighten you as to how, among other things, U.S. Subprime loans caused havoc for a British bank that never lent a penny across the Atlantic.

Sunday Musings: Balance Migration

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When I wrote last Sunday’s piece on the newly created term “Market Dislocations” and the possibility that we might be introduced to more BS terminology relating to the Subprime fallout, I did not realize how quickly new terminology might appear.

MarketWatch had a blurb titled “Bear CFO: some prime brokerage clients moved money to rivals,” in which he explained that “we did see some balance migration going to other prime brokers.”

Hmm, balance migration? I wonder who thinks up that terminology. If you haven’t read the article, you may be trying to figure out what he is talking about. While all businesses, at one time or another, “lose” clients, customers or patients, that would be too ordinary of a statement for a Wall Street firm. They don’t ‘lose’ customers, they simply experience ‘balance migration.’

The CFO went on to say that “what we really saw were clients trying to be more defensive and moving balances in many cases into the hands of the banks where they felt there was a stronger hand, if you will.”

Ouch; does someone actually get paid to write this garbage?

The company has lost billions of dollars of clients’ money and still can’t get off their high horse. Wouldn’t this be the time to eat some humble pie and use a different tone to re-connect with lost customers?

On the other hand, BS (not Bear Stearns) terminology permeates every part of American business in good times and bad. If you’re in sales and have recently lost some customers, you might consider going to your boss (or write an e-mail) and explain that there is nothing to worry about; you simply have experienced some balance migration to your competitor. See what he says; maybe that will qualify you to move up in the company food chain.

ETF Investing: Market Agony

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No matter which investment methodology you use, you are bound to be frustrated and disgusted from time to time. Recent market behavior seems to have brought these feelings to the front burner, as reader Chris writes:

I value your input and am grateful for the service you provide.

How do you deal with the volatility of the market such that when you sell funds that have reached their sell stop one day, and the next day the market goes up a lot (like today) and erases the losses you took for the day before?

All of my funds are in either 401K’s or IRA’s and I still have 20+ years before I have to start taking disbursements. However, I get so upset when the market falls so much (I lost 50% during the bear market of 2000).

How do you distance yourself from what you do and not take it personally?

I am sure that Chris is not alone with this assessment, so here’s how I answered her:

“I have found that the only way to deal with the irrationalities of the market place is to detach myself emotionally by using a systematic approach to investing such as I advocate.

As you know, we have a clearly defined entry and exit strategy; still, you have to accept the fact that sometimes markets will go against you, by stopping you out of your positions and thereby either triggering a small loss or forcing you to take profits.

There is no perfect investment approach. While there are many, every one of them has its drawbacks at one point or another. Since you still have some 20 years to retirement, you need to look at the big picture. While there are never any guarantees about investing, one thing is for sure: There will be another bear market, which has the potential to shave the value of your portfolio down considerably.

Unfortunately, many experienced that disaster during the 2000 to 20003 period, as you did, by seeing their portfolios deteriorate some 50% or worse. That’s what you need to guard against, everything else is secondary.

Having said that, the day-to-day pull backs and rallies (and occasional whipsaws) that have frustrated you, are merely an inconvenience, a price you pay for being astute and aware of the fact that bear markets need to be avoided at all costs.

I don’t like the day-to-day changes any more than you do, but I keep my nose away from hyped up news stories and focus on the big picture as outlined. That helps me keep my emotions in check.”

No Load Fund/ETF Tracker updated through 11/15/2007

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

High volatility marked this week as the major indexes managed to come out ahead.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +4.44% above its long-term trend line (red) as the chart below shows:

The international index slipped -0.63% below its own trend line, keeping us in a sell mode for that arena.

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

Is The Dow Theory Favoring The Bears?

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The Dow Theory, a market trend forecasting system developed in the late 19th century by WSJ editor Charles Dow, is close to signaling that the primary trend of the market, which has been up for five years, is down, or bearish, USA Today reported.

Chuck Carlson, contributing editor of Dow Theory Forecasts newsletter said that “the market is at a big inflection point.” According to Dow Theory, if the Dow industrial average (made up of companies that make goods) and the Dow transportation average (made up of companies that ship goods) both breach significant market levels, it confirms a trend change.

The transports are trading below their August low, when the credit scare first hit stocks. What is worrisome is that the industrials, after plunging 4.5% the past three sessions, are hovering less than 197 points, or 1.5%, above their August low. If the industrials close below their Aug. 16 low of 12,845.78, it would confirm that the market trend has turned bearish.

“Dow Theory looks at significant points on the downside and upside,” Carlson says. “If stocks breach those points, such as the dark period in August, it means something significant is going on. If both the industrials and transports are moving lower in tandem, it’s not good for the economy, profits or stocks.”

While I agree with this assessment, it also seems to go along with our Trend Tracking Indexes (TTIs) coming off their highs and subsequently triggering sell stops for a variety of our holdings. Again, just because a trend turns down, it does not mean that a return to bear market territory is imminent, although many fundamentals point in that direction.

As always, my preference is not to guess, but the let the actual numbers (and not the media) dictate my next move. If it turns out that this downturn was temporary’ and the main trend heads due north again, we will pick our entry points at that time. While this means that we will have to give up a little on the upside, we were well protected on the downside had it played out that way. That’s what let’s me sleep at night.

Dead Cat Bounce Or Trend Reversal?

Ulli Uncategorized 1 Comment

Euphoria returned to Wall Street as yesterday’s sharp rebound rally lifted the major indexes out of the doldrums after relentless selling for most of November. The question now is whether this marks the beginning of a trend reversal or is simply a dead cat bounce with more downside activity to come.

While obviously no one has that answer, I believe it pays to be a bit more conservative for the time being. If you like charts and technical analysis, this article in MarketWatch makes a case that the healthy pullback from the highs has accelerated into a more technically threatening downturn. Translation: The near to intermediate-term outlook has turned lower.

Singing a similar tune was chief economist Dr. Irwin Kellner in his article “Goodbye, expansion; hello, recession,” which focuses on the plight of the consumer. He makes the case that the value of people’s two biggest assets, their homes and their investments, are falling.

Many have little or no savings to fall back on, having spent more than they have earned for the past two years. Adding insult to injury, the credit squeeze has made borrowing no longer an unchallenged privilege for the masses; if you can’t prove you don’t need the money, lenders will be very hesitant.

More interest rate cuts by the Fed would confirm that the economy is indeed sliding, which will affect stock market direction. Right now, it’s too early to tell if this market will climb a wall of worry or if this rebound was a one day event. I am playing it conservatively, until momentum numbers show that the uptrend is alive and well.

Our domestic Trend Tracking Index (TTI) has climbed to +4.89% above its long term trend line while the international TTI has rebounded from negative territory, two days ago, back to +1.33%. I will hold off with making new commitments to the international arena until I can see a more consistent upward trend.