One Man’s View

Ulli Uncategorized Contact

Mish at Global Economic Trend Analysis reviewed the demographics of jobless claims and in his article he referred to the credit binge as follows:

The structural problems created by a 25 year credit binge simply are not going to be cured by a two quarter recession that Paulson and other economic cheerleaders will not even admit has started. Peter Bernstein a financial manager, consultant and financial historian agrees. Inquiring minds may wish to take a look at a Wall Street Journal Interview with Peter Bernstein.

I read the interview with the 89-year old Bernstein and found it worthwhile to share with you. Here are some excerpts:

WSJ: Aside from securitization, what were the main causes of the problem?

Mr. Bernstein: You don’t get into a mess without too much borrowing. It was sparked primarily by the hedge funds, which were both unregulated by government and in many ways unregulated by their owners, who gave their managers a very broad set of marching orders. It was a real delusion. It was like [former New York Gov. Eliot] Spitzer: “I am doing something dangerous, but because of who I am, and how smart I am, it is not going to come back to haunt me.”

When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That’s part of the problem going forward. You don’t have a high-growth exit from this, as you’ve had from other kinds of crises. We won’t have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn’t turn up. Or like a U, a flat U. The reason for that is that people aren’t going to get caught in this bind again. They will tell themselves, “I’m too smart to do that again.” And everyone else is going to be saying the same thing. It is, in fact, going to be a wonderful environment in which to take risk, because there aren’t going to be any excesses.

I’m a child of the Depression, and I am thinking about what the early years were like after World War II. It took a very long time to get the memory of the Depression out of business decisions, and certainly banking decisions. I think this is going to be the same. The Fed, too, is going to be less decisive and is going to feel that what it should do is less clear. One of the things that gave people a sense that they could afford to take risks was the sense that the central bankers more or less know what they are doing. But I don’t think we are going to feel that way going forward.

WSJ: You said that it could turn out that the smart thing to do is to take more risk, because everyone will be so risk-averse. What kinds of investments do you see as the big winners coming out of this?

Mr. Bernstein: You could say: the things that have been beaten down the most, which would be real estate. But I think real estate is going to be under a cloud for so long, and you can’t buy real estate with cash, it is too much money. I think you should go with the stock market. If things are better, the stock market will go up, and if things are awful, the stock market is going to be way down. But it is a place where, if you want to take risks, you’ve got a wide range of choices. This is why I own stocks [in addition to other investments], because I don’t know where the bottom is going to come, and I want to be exposed to every kind of possibility I can think of. And, at least, if you pick the stock market and you are wrong, you can change your mind. There is some liquidity there. Stocks never became cheap, but they didn’t become crazy, the way other assets were.

WSJ: How long do you think this whole process will take, before we get back to normal?

Mr. Bernstein: Longer than people think. The people who think we will have turned in 2009 are wrong. There has to be a respite along the way. Nothing goes in one direction forever. But it will take longer than people think. If that weren’t the case, I would be talking entirely differently. I would be saying, “What an opportunity we have got.” And I just can’t believe that the opportunity is here yet. There is too much to unwind.

WSJ: Can you explain the reason you think it will take a long time?

Mr. Bernstein: We have to go back to a moment when people have the courage to borrow and lenders have the courage to lend. Until credit is going up instead of down, you can’t have growth. Housing has got to be a very important part of that; it always has been. You have to reach a point where somebody says, “This house is cheap, I am going to buy it,” or where some businessman says, “This is a great opportunity for us to expand our business. Everything is available to us.”

If China goes into a recession, God knows. The Iraq war and the whole situation with terrorism, we really don’t know where that is going to come out. There are so many things that have got to get buttoned down before you say that the future looks good enough to take a risk.

WSJ: What kind of indications are you looking for as signs that the economy is about to get better and that the stock market and the investment world are about to turn the corner?

Mr. Bernstein: Somehow, the housing trouble has to at least flatten out. As long as that is going on, I think the pressure on the credit system is going to persist. It is kind of the leading indicator. It is where the trouble started. We have to underpin the consumer. That is why this is different. That is why this is like nothing we have had before.

Before, it was investment that made the V at the bottom of the business cycle. I don’t see real investment turning enough without some sign from the consumer side. Maybe the foreign countries will do it for us. That is a substitute for consumption here. Maybe. But I think that they won’t do enough for us, and maybe will be too infected by us to do it. But maybe growth in Asia will help us. The Asian thing is tremendously exciting.

To me, the gist of the story is that uncertainty is bound to stay with us for quite some time.

While we currently may have a disconnect from the market place to economic realities, the key to surviving this period with your portfolios intact is to take selective picks in those areas that are showing upward momentum and are trending higher—at least for the time being.

And that’s the key. Trends will start and may end quicker than we like, so be aware of reversals and use your trailing sell stops. Don’t be afraid to take a small loss, but stay away from the big ones.

No Load Fund/ETF Tracker updated through 5/1/2008

Ulli Uncategorized Contact

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

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

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved now +1.34% above its long-term trend line (red), which means we remain close to breaking out to the upside of the neutral zone (+1.50%).



The international index dropped to -1.17% below its own trend line, keeping us in a sell mode.



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

Breaking Out To The Upside

Ulli Uncategorized Contact

In a reversal from yesterday, the markets opened higher and never looked back with the S&P; 500 closing above 1,400 for the first time since January.

Financials provided leadership, as energy was knocked lower by a drop in oil prices. The dollar rose and the Commodity Index was pushed to its lowest level in 4 weeks. Gold dropped as well and has now come off its high in March by some 18%.

Our Trend Tracking Indexes (TTIs) improved and are hugging their long-term trend lines as follows:

Domestic TTI: +1.69%
International TTI: -1.69%

Today’s strong up move in the market pushed our domestic TTI now above the upper range of the neutral zone (+1.50%). If this level holds for a couple of trading days, that will then constitute a new Buy signal. Stay tuned as tomorrows payroll report will certainly have an effect on market direction.

If a Buy signal materializes over the next few days, I will provide more details in a special blog post.

Rally Evaporates

Ulli Uncategorized Contact

As expected, the Fed cut the fed funds rate and the discount rate by 0.25% each. The accompanying statement regarding inflation concerns was largely unchanged from last month. The Fed further elaborated that readings on core inflation have improved somewhat and that trend should moderate in the coming quarters.

Apparently, that was not good enough for the Wall Street crowd, and the markets reversed course with the Dow, at one point being up 178 points, closing down 12 points.

Our Trend Tracking Indexes (TTIs) fared as follows:

Domestic TTI: +1.23%
International TTI: -2.85%

That means, domestically, we’re back to watching further trend developments to see if the upper band of the neutral range (+1.50%) will be broken, which would then generate a new Buy signal.

Right now, we need to continue to be patient; I will focus on those areas that already have started their own individual trends regardless of the positions of the domestic and international TTIs.

All Eyes On The Fed

Ulli Uncategorized Contact

Market activity has been sloppy over the past couple of days with anxiety rising as to whether the Fed will cut rates again tomorrow. The decision will be announced around 2:15 PM EST.

Our Trend Tracking Indexes (TTIs) pulled back and are situated as follows:

Domestic TTI: +1.11%
International TTI: -2.72%

We are holding on to some our small positions in emerging countries, Latin America and the Transportation Index along with our Swiss Francs. Our sell stop points are set and will be executed if the markets head south.

My guess is that the Fed will cut 0.25%, but the accompanying statement will be just as crucial. Any unanticipated wording, which might be interpreted as a negative, will most likely result in a sell off, which will send our TTIs back to the lower range of the neutral zone.

I will post an update after the market close on Wednesday.

The Annuity Game

Ulli Uncategorized Contact

While I don’t always agree with Paul Farrell’s viewpoints, he did write a nice piece about annuities called “Clip Job.” If you own an annuity, or are consider investing in one, you owe it to yourself to read the entire article. Here are some highlights:

Although I rarely write about annuities anymore, over the years I’ve built a huge file of “colorful” articles on annuities. “Colorful” is my metaphor for some juicy and brutal titles that sound more like they’re ripped from tabloids. The message is painfully clear: The press loves trashing annuities, year after year after year.

But what’s really striking is how the critics are still hammering away at the same old problems, suggesting that all the bad press, criticisms, lawsuits and piñata whackings have had little effect on changing the annuity industry’s bad behavior.

Indeed, sales have roughly doubled in a decade. And as InvestmentNews put it in a special report on insurance products last fall: “Acceptance of annuities seen to be on the rise.”

Don’t get me wrong, there really are honest annuity companies and brokers out there. And annuities do work for many investors: “We’re not condemning the product,” one senior executive at the Financial Industry Regulatory Authority, the securities industry’s “self-policing” agency, was quoted as saying in BusinessWeek. But “we have concerns about the way they are sold.”

Along with FINRA, however, there’s a vast patchwork of state agencies and insurance industry regulators that make effective policing tough.

In fact annuities have countless, hidden flaws that all too often remain undisclosed until it’s too late: excessive commissions, lower returns, payout delays, surrender fees and long lock-ins. Still annuity sales climb.

As BusinessWeek puts it: “Potential buyers can ignore the sales fluff and dig into the fine print to figure out if an annuity is right for them. But that can be a real slog.” Some prospectuses can run “over 500 pages, so you know why most buyers wind up relying on a sales spiel.”

The big reason annuities sell so well is simple: Sales commissions are lucrative for annuity sales agents, some as high as 14%. As a result, the industry attracts aggressive hustlers with questionable ethics preying on vulnerable customers, especially the elderly, a pattern that gives the rest of the industry a bad name.
…

Bashing annuities has been major league sport among independent experts who’ve analyzed them. Here’s a montage from my files over the years, about how bad things have been for a long time:

Smart Money: ‘Can’t get a bigger commission’

In “Ten Things Your Variable-Annuity Seller Won’t Tell You” you’ll hear that “legions of brokers, insurance salesmen and independent financial advisers are clamoring to sell them. Why’s that? ‘You can’t get a bigger commission for anything else these days’ … about twice what your broker usually gets for peddling a mutual fund.”

Bloomberg: ‘Good for one lady in Iowa’

“When I was in the insurance industry,” said finance professor and annuity expert Moshe Milevesky, “we used to joke that there probably was one lady in Iowa for whom the product was good.”

Wall Street Journal: ‘Treat them like blind 12-year olds’

In a critique of the “Annuity University,” one of their trainers tells salesmen the best way to sell to potential senior-citizen customers: “Treat them like they’re blind 12-year-olds.”

InvestmentNews: ‘Sellers are burning consumers’

“Too many sellers are burning consumers … buyers of variable annuities have no idea what they’re actually buying, and many have been lured into an inappropriate investment vehicle. … Many, if not most, elderly will see little or no benefit from a tax-savings strategy that can take 10 to 15 years to pay off.”

The story goes on featuring other ‘sales techniques.’ Over the years, I have been asked by many readers and clients about my view of annuities. Here are two facts I have found based on personal experience:

1. I have never met a client/reader who told me that he was happy with the annuity he or she owned. Au contraire; most asked for my assistance in getting out from under it.

2. All annuity owners I have come in contact with did not go out to buy an annuity. It was sold to them.

And that has been the rub. They were sold an annuity; they did not do the research and selected one based on their criteria and needs. My view is that, especially today, with instant access to the internet and just about all the information you could ever want, it has never been easier to spend a little time and do some annuity research to educate yourself. Whether you then choose to work with an agent, or contact an insurance company directly, is up to you.

Since I believe that there is never a reason to buy a “load” mutual fund, there is also no reason to ever pay a ridiculous “up front commission” to buy an annuity product.