The Fed released it March 18 FOMC minutes, and it was revealed that many Fed officials were of the opinion that an economic contraction was “likely.” This is not earthshaking news especially in view of the fact that Fed Chairman Bernanke has since uttered the “R-Word.”

The Fed is usually behind the curve with its facts and announcements as Calculated Risk recently reported when reviewing historical statements:

For the recession that started in April 1960:

“By and large, however, the economy seems quite solid.”
Federal Open Market Committee, May 1960

“[Chairman Martin] was by no means convinced that the situation was serious.”
Federal Open Market Committee, July 1960

“The Chairman reiterated his views … There was a declining picture, … but the economy was not going over a precipice by any means.”
Federal Open Market Committee, October 1960

For the recession that began in July 1990:

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].”
Chairman Greenspan, July 1990

“…those who argue that we are already in a recession I think are reasonably certain to be wrong.”
Greenspan, August 1990

“… the economy has not yet slipped into recession.”
Greenspan, October 1990

There you have it. It pays to make up your own mind and not to listen to at times undecipherable Fed speak, which seems to be in no way related to reality.

Bill Fleckenstein had some interesting thoughts in his piece titled “Our housing-bubble hangover.” Here are some highlights:

The market has been bouncing around on misplaced hopes that the Federal Reserve will somehow save the day. Beyond the din, it’s important to focus on one overarching fact: The fundamental problem in our country is the aftermath of the housing bubble.

We don’t need more regulation to solve the financial system’s problems. What we need is enforcement of the rules and laws already on the books. Had that occurred and had the Fed not pursued its practice of setting interest rates too low, this debacle could never have reached the mammoth size it did. But we are where we are: staring down a recession that intervention will not silence.

While this is a good analysis, we can’t ignore that fact that the market has a mind of its own and rarely acts in a way that is expected or pleases most investors. Given all the negative economic news of last week, including UBS’s $19 billion write-down, the market averages ‘should be’ down, but they’re not, and we find ourselves within shouting distance of a domestic buy signal.

This is why continue to advocate getting away from trying to analyze facts and opine about them as opposed to simply following price trends.

With that in mind, we got stopped out of our gold position last week. Other asset classes have rallied strongly above their respective trend lines issuing a buy of their own. Today, we added a small holding in Latin America and in an Intermediate-term bond ETF.

If the market holds at these levels, I suspect that we will get more buy signals in other areas as well, probably before our domestic buy is generated. We will ease our way carefully into those areas with upward momentum by using only a small exposure and adding to it once the trend has been confirmed.

As of yesterday, our Trend Tracking Indexes (TTIs) retreated slightly and are positioned as follows:

Domestic TTI: +1.13%
International TTI: -3.07%

Income investors looking for a higher yield are having a tough time since high yield equals high risk. Bloomberg reports that “Junk Bond Losses Top $35 Billion.” Here are some highlights:

High-yield, high-risk bonds are off to their worst start ever, and the biggest investors say there’s no recovery in sight.

The Cary, North Carolina-based company’s bonds plunged 24 percent in February, more than all but one other top-50 issuer in the high-yield market, according to Merrill index data.
…
The $3.4 billion Fidelity Advisor High Income Advantage Fund, which invests in high-yield bonds, preferred shares and convertible securities rated below investment grade, lost 7.52 percent this year. The $2.1 billion Oppenheimer Champion Income Fund, which mainly buys high-yield debt, has tumbled 13.1 percent.

The lesson here is that junk is junk. In today’s environment, it simply does not pay to take chances on getting a high yield and then seeing your principal drop precipitously. As I said before, if you need income, use a combination approach of selecting no load mutual funds/ETFs with acceptable dividends, but make sure that they are trending up.

How can you do that? Look at my weekly updated StatSheet, section 10 on Bond and Dividend paying ETFs, and examine those with a positive %M/A, which means closing prices are above their long-term trend lines. Click here to view the latest issue. Then use your favorite financial site to see what the current dividend payout is.

With almost daily news about banks having taken, or are about to, tens of billions of dollars in write-downs due to the real estate/credit bubble, you may be wondering how this whole mess got started.

Sure, you’ve been catching news pieces here and there, but what caused this dilemma in the first place? How can Subprime mortgage investments have spread like a virus with such force and intensity that institutions around the world have become infected?

While I have been posting on that subject for about a year, 24/7 Wall Street featured an article titled “Quants gone wild – The Subprime crisis.” It’s a bit lengthy but a worthwhile read if you need a refresher in what has happened and who messed up.

Here is the conclusion:

So where are we today? Well, regulatory accounting requirements mandate that publicly owned investment banks write down assets of questionable valuable. CMOs/CDOs/SIVs do come to mind. Massive write-downs have wiped out huge chunks of capital and crippled investment banks’ ability to act as financing institutions—and there is more carnage to come. This is important as there is real risk that if the flow of credit from the impacted financial houses tightens further—those that supply vital credit to both consumers and companies—the downturn we’re moving into will be deep and long.

A couple closing thoughts: don’t run with the lemmings; don’t be overly impressed with things you don’t understand; drink some green tea and take time to write a Haiku as we witness a staggering capital meltdown from the consequences of uncontrolled financial engineering in derivatives currently estimated at US$500 trillion globally.

The big unknown time bomb remains the derivative problem, since there is no way to ascertain who is involved to what extend. Just the mere fact that this is a $500 trillion global entanglement has turned this investment arena into a casino with no limit.

Finally, I found a few paragraphs in the media that made some sense. MarketWatch featured a piece titled “Avoidable trillion-dollar tragedies.” While the story addresses several important issues, I want to focus on the portion about the misguided mutual fund management mess. Here is an excerpt along with my comments:

If the next few years are as devastating as the 2000-2002 bear market, traditional mutual funds families risk losing as much as $10.6 trillion of retirement savings balances, including $2.4 trillion of deferred income taxes. In the last bear market investors lost $7.8 trillion simply by “staying the course.”

My comment: The markets have currently moved back into the upper trading range, so investors are in a bullish mood. While it’s too early to tell which way a possible breakout will occur, you not only need to be aware that a bear market can return at anytime, you also must have a plan in place to avoid going down with the crowd.

If fund managers are so smart, why won’t they protect shareholders’ money from bear markets? Read your prospectus; they promised they wouldn’t sell short or “go to cash” in bear markets. When markets decline, you lose money.

My comment: Because the only protection against a bear market is to be in cash on the sidelines or actually invested in bear market funds. And don’t let any of these index proponents tell you any different—when the markets head south, index funds with will join the crowd.

As for tax-deferred programs, they have made their managers more money from inflated balances. Yet so far in this decade, the benchmark Standard & Poor’s 500 Index adjusted for inflation, has lost 23%. The wonder of compounding has been working against you. Many 401(k) plans are employee benefits that have not benefited employees.

Either find an experienced independent adviser who uses low-cost exchange-traded funds, or demand that regulators allow actively managed clones of the buy-and-hold-only funds. Let the investors decide; it’s their money and their choice. In bear markets, shareholders are paying for management that’s likely to lose them money.

My comment: Low cost index funds are fine during bull markets just like mutual funds. In a bear market, however, your portfolio will head down the same, but you may save a few pennies due to lower annual cost. That’s a small consolation when, at the end of a bear market, you’re index portfolio may “only” be down -40% vs. -45% in mutual funds. My point is that a bear market does not discriminate, because any kind of bull market asset will be devoured.

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

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

A strong move to the upside supported the bullish cause and brought us closer to a Buy signal for domestic equities.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved now +1.34% above its long-term trend line (red), which means we are honing in on the +1.50% buy level.



The international index improved to -3.21% below its own trend line, keeping us in a sell mode for that arena as well.