Marc Faber, publisher of the Gloom, Doom and Boom report has some interesting thoughts on the next market correction, the Dollar, the Euro as well as stocks and bonds in the long run. Take a look at this video:
[youtube=http://www.youtube.com/watch?v=mnSZkcPicEA]Sunday Musings: The American Greek Crisis
The Greek debt crisis has been on and off the front pages for months. With just about all western civilizations being deeply indebted to varying degrees, the question in my mind is whether a similar situation could develop here in the U.S. and if so how do we deal with it as investors?
To some, we’re already on our way and there is nothing anyone can do to stop it.
For more analysis, here are some highlights from “Greece’s crisis could presage America’s:”
Greece is a financial basket case, begging for international help. Is America heading down that same road?
Many of the same risky financial practices that now imperil the Greeks were at the center of the all-too-recent U.S. meltdown.
As with Greece, America’s national debt has been growing by leaps and bounds over the past decade, to the point where it threatens to swamp overall economic output. And in the U.S., as in Greece, a large portion of that debt is owed to foreign investors.
Not good, if these debt holders begin to wonder if they’ll be paid back. A foreign flight from U.S. Treasury securities could sow financial chaos in the United States, as happened when many investors lost faith in Greek bonds.
It’s something that could affect all Americans. The U.S. has never defaulted on a debt, and even the hint of such a possibility could send interest rates soaring and choke off a fragile recovery.
How long can the United States remain the world’s largest economy as well as the world’s largest debtor?
“Not indefinitely,” suggests former Federal Reserve Chairman Alan Greenspan. “History tells us that great powers when they’ve gotten into very significant fiscal problems have ceased to be great powers.”
After all, Spain dominated the 16th century world, France the 17th century and Great Britain much of the 18th and 19th before the United States rose to supremacy in the 20th century.
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The Greek government has taken stiff austerity steps in an effort to get a lifeline from the European Union, sparking strikes and violent demonstrations. Greek unions say a second nationwide strike in a week — planned for Thursday — will shut down government services, close schools and halt public transport and ground flights for 24 hours.
Some of the same risky strategies used by U.S. hedge funds and other professional investors in a failed effort to profit from subprime mortgages in this country — and which led to the 2008 financial near-collapse — are now being employed by those betting that Greece will default on its debt.
Greek Prime Minister George Papandreou, who met with President Barack Obama at the White House on Tuesday, is calling for “decisive and collective action” here and in Europe to crack down on such rampant speculation and unregulated bets. He is also seeking more favorable European interest rates for loans.
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Many economists say it’s a stretch to compare the U.S. economy, by far the world’s largest, to Greece and other distressed small economies of southern Europe. They say many of Greece’s problems are unique to that nation and aggravated by a monetary system that rigidly binds 16 nations to the same currency, the euro.
But others argue it may only be a matter of time before the U.S. faces a similar, and potentially graver, crisis.
“Someday it will happen if we don’t get our act together on spending, our debt under control and our economy to grow faster,” said Allen Sinai, chief global economist for New York-based Decision Economics Inc., which provides financial advice to corporations and governments.
With signs pointing to a weaker recovery than after other post-World War II recessions, U.S. consumer spending is likely to remain unimpressive and the jobless rate high for some time. Sinai said that suggests there won’t be enough growth to push down federal deficits by much. “It’s a political keg of dynamite,” he said.
Greece’s national debt now equals more than 100 percent of its gross domestic product, the broadest measure of economic activity. U.S. debt — now $12.5 trillion — is fast closing in on the same dubious milestone.
Nearly all of Greek’s debt is held by foreign governments and investors. In the United States, roughly half is owned by global investors, with China holding the largest stake.
By contrast, Japan’s debt is proportionately even bigger — about twice its GDP — but the impact is cushioned by the fact that most is held by Japanese households.
“The more open you are to the rest of the world, the more likely you’re going to have a problem if you start running large deficits and large debt loads,” said Mark Zandi, founder of Moody’s Economy.com, and a frequent adviser to lawmakers of both parties.
Zandi does not see any major fallout from the Greek fiscal crisis in the United States for now, other than a possible temporary hit on potential European export markets.
However, he said, “global investors at some point are going to start demanding a higher interest rate. And that’s our moment of truth. If we don’t address it by cutting spending and raising taxes, some combination of the two, then we’re going to have a problem.”
Tough choices are indeed ahead, and no one has a definitive answer as to how this will all play out.
So, what’s an investor to do?
In the bigger scheme of things, this is a fairly easy solution compared to the complex issues addressed in the article. No matter what the economic circumstances will be, there will always be an asset class that will benefit from it.
However, since it is impossible to anticipate which asset class will be the winning combination because of us not knowing exactly how the economic circumstances will develop and at what point it time, you need to be patient and watch the trends develop in the market place.
With ETFs now covering just about any sector you can imagine, you simply watch the trend changes in my weekly StatSheet, especially in the ETF Master list. Track the changes in the %M/A column, as discussed in “Protection Against Rising Interest Rates.”
To my way of thinking, there simply is no other worthwhile alternative to spotting changes in the market place than via the identification of major trend changes. While this does not guarantee you a successful investment every time, you will simply have to accept the fact that you will be wrong occasionally.
That’s where the use of a trailing sell stop is absolutely necessary, since it limits your losses and lets you stick around for the day when one, or more, of your investment choices turn into a winner rewarding you for being disciplined and staying the path.
Breaking Away
In “Glass Ceiling Still Intact” I talked about the closing of the exhaustion gaps on the domestic TTI (Trend Tracking Index), and that the 1,100 level on the S&P; 500 was the resistance level at the time.
While the market seems to have broken out above the 1,100 level, it had not done so in convincing fashion.
Recently, strong buying emerged causing a gap opening (actually two) on the weekly domestic TTI chart as shown above (right red arrow).
Gap openings occur when strong buying pushes the opening price above the closing price of the prior week creating a gap in the chart.
As previously discussed, while this shows strong upward momentum, it also means that prices will retreat at some point to “close the gap.” The timing of it, however, is the big unknown.
Take a look at the above chart again and note the left arrow, which shows the breakaway gap established during the last quarter of 2009. It was finally closed when prices retreated during the 1st quarter of 2010 before resuming their upward trend.
When the closing of a gap occurs, the market is at a crossroads. It could turn around and head higher again as it did in the above example or, further weakness could set in resulting in a long-term trend change.
If you decide to use the closing of a gap as an entry point to “buy on a dip,” be sure to have your sell stops in place in case the dip does not hold, and you end up in a bearish downdraft.
No Load Fund/ETF Tracker updated through 3/11/2010
My latest No Load Fund/ETF Tracker has been posted at:
http://www.successful-investment.com/newsletter-archive.php
Slow and steady was the mantra of the week, and the S&P; 500 gained another 1%.
Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +5.01% keeping the current buy signal intact. The effective date was June 3, 2009.
The international index has now broken above its long-term trend line by +6.71%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss. 
[Click on charts to enlarge]
For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.
ETFs vs. Index Funds
There are differences between ETFs and Index funds you should be aware of as explained in “ETFs vs. Mutual Funds: Which Is Right For You?” Here are some highlights:
Much has been made of the differences and similarities between index mutual funds and exchange traded funds (ETFs), but less has been written on which makes the most sense for investors, cost-wise.
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Passive institutional investors use ETFs because of their flexibility, active traders invest in ETFs for their convenience and hedge funds utilize ETFs for their simplicity. ETFs may be easily purchased in small amounts like stocks and don’t require special documentation, special accounts, rollover costs or margin. Additionally, ETFs are exempt from the short sale uptick rule, which prevents short sellers from shorting a regular stock unless the last trade provided a price increase.
It already sounds like a compelling argument in favor of ETFs.
Costs in tracking an index.
* Rebalancing. Rebalancing in index mutual funds because of net redemptions generate explicit costs from commissions and implicit costs from bid-ask spreads on the underlying fund trades. ETFs are made with an innate creation/redemption design that avoids these transaction costs.
* “Cash drag.” Index funds also incur costs when holding cash to deal with potential daily net redemptions. ETFs don’t incur this cost due to their creation/redemption process.
* Dividends. Index funds have an advantage over ETFs in their dividend policy. Index funds will invest dividends immediately while ETFs would accumulate the cash and distribute it to shareholders at the end of the quarter.
Non-tracking costs.
* Management fees. ETF costs are lower because the funds are not responsible for the funds’ accounting – the brokerage will take in these costs for the ETF holder.
* Shareholder transaction costs. ETF shareholder transaction costs come from commissions and bid-ask spreads, which is determined by the ETF’s liquidity. Shareholder transaction costs are usually zero for index mutual funds.
* Taxes. The creation/redemption process eliminates the need to sell securities in ETFs. Index mutual funds need to sell securities; this triggers taxable events. ETFs may also reduce capital gains by transferring out securities with the largest unrealized gains as part of the redemption process. The tax process favors ETFs, but consult your tax advisor for advice.
Again, from my point of view this is not meant to pit one against the other, but merely to demonstrate the differences.
It’s all about choice. If you have only index funds in your 401k, then you may want to use those. If you have the choice of using either, you might want to consider ETFs due to their intraday trading ability and lack of trading restrictions in addition to the points mentioned above.
No matter what your preference, be sure no always plan for an exit strategy the moment you establish new positions. Consider that the most important lesson learned from the two bear markets of the past decade.
ETFs And 401(k)s
In a welcome development, “ETFs Slowly Displace Mutual Funds in 401(k)s:”
BlackRock(BLK), the largest seller of exchange traded funds, is helping to push more Americans toward ETFs instead of mutual funds in their 401(k) plans.
Americans held $3.9 trillion in employer-based defined-contribution retirement plans, of which $2.7 trillion was held in 401(k) plans as of Sept. 30, according to the Profit Sharing/401k Council of America. Mutual funds had $2 trillion of those assets, but ETFs are starting to chip away, as they have with everyday trading among institutional and individual investors.
BlackRock estimates that as much as $2 billion of its iShares funds are now held in 401(k) plans, accounting for half that market. “Within the 401(k) space in the next five years, it is conceivable that flows to ETFs could reach several billion dollars,” says Darek Wojnar, head of product research and strategy at BlackRock’s iShares, its ETF unit.
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The main selling points are low and transparent fees. According to BlackRock, the average expense ratio of an iShares ETF is 0.41% versus the average mutual fund’s 1.50%, a difference that can result in tens of thousands of dollars over 30 to 40 years.
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In 2007, WisdomTree Investments(WSDT) created a business unit designed to deliver ETFs to the 401(k) marketplace. In all, the company sells 52 funds.
Small businesses have been early adopters of ETFs in their retirement plans because of lower costs. That trend may continue until larger companies join the fray. When that happens, mutual funds’ dominance may slip quickly.
Sure, while low and transparent fees are an attraction, more important for any investor is the removal of trading restrictions. This will make it easier to implement a strategy, such as trend tracking, along with the use of sell stop points.
The current rigid model that blacklists investors not only for frequent but also infrequent trading is clearly designed to benefit the provider and not the individual. If mutual funds do not ease up on one-sided rigid policies, they will be the losers in the long run, because the development of ETFs simply can’t be stopped.