Sunday Musings: Investment Scandals Du Jour

Ulli Uncategorized Contact

It was quite challenging this week to keep up with all the potential scandals brewing in the Wall Street community. There is no need for you to go out this weekend and spend money to rent an action movie when all you need to do is follow the business pages of your local newspaper. It’s free!

Looks like Merrill Lynch’s bull (no pun intended) is being morphed into a bunny, if you follow their story lines. There is the departure of CEO Stan O’Neil, who is now the fall guy for Merrill’s involvement in the mortgage market meltdown. Well, having to write off some $8.4 billion for the quarter is a little too much in order to ask for forgiveness to keep a job. Adding to that annoyance was Stan’s behind the back (without board approval) contacting of Wachovia to discuss a possible merger.

But don’t feel too bad for Stan, he’s the man when it comes to cutting personal deals. According to the Wall Street Journal, he won’t get a severance or a bonus (Really? I wonder why?), but he’ll take the proud walk with $161 million earned from various pension plans and stock grants. Should that not suffice, he’s eligible for a pension worth $24.5 million that could provide annual payments of up to $2 million. There’s also a little pocket change left in that deferred compensation plan of some $4.8 million.

If I were him, I would have left on my own some time ago, especially since the SEC is now alleging that Merrill tried to do some deals with hedge funds to delay having to report huge write-downs on mortgage backed securities. Translation: Hiding investment losses. Again, this is only an allegation, but I can’t help but catch the faint smell of Enron…

Then there was the story of WaMu (Washington Mutual) finding itself on the receiving end of a lawsuit filed by New York Attorney General Andrew Cuomo charging that eAppraisalIT colluded with WaMu to inflate values of homes nationwide. If this holds true, you will see an entire different side of the Subprime pig making its presence known. Depending on how far reaching this allegation is, it could add a whole new dimension to the mortgage and real estate debacle.

Not to be outdone, the stock of the mother of all banks, Citigroup, has been downgraded on the possibility of a dividend suspension or possible sale of some assets due to write-downs from, you guessed it, the Subprime crisis. Citigroup’s board has called for an emergency session this weekend to discuss whatever it is that they’re not sure about.

In my view, it is one thing to lose money with an investment, that is part of investing; but it’s quiet another not knowing what exposure your various investment vehicles have or what they might be worth. Even if they have become worthless, not knowing and not going public with it, is inexcusable.

ETF/No Load Fund Investing: Do You Need Investment Insurance?

Ulli Uncategorized Contact

You very likely have insurance for your most prized possessions such as life, health, car, property and a host of others. While you may not like paying the ever increasing premiums, you realize that you couldn’t do without it nor would you take that chance.

I was reminded of that, when I reviewed a portfolio with a client, a physician who is busy running his medical practice and not all that interested in day to day investment details. As we went over the sell stop discipline along with the trend tracking method, he said: “All we’re really doing is insuring ourselves against catastrophic loss in our portfolios.

He is right, although I never thought of it in those terms. In essence, when you have a methodical plan to get in and out of your investments, you simply try to insure yourself against too much risk to the downside. Those who did not do that, paid dearly during the last bear market.

We pay our premium from time to time in form of a whip-saw signal that may get us out of the market unscathed and soon thereafter back in as the downside risk has been reduced. Such was the case back in August (8/16/07) when a Sell signal moved us out of our international positions. Three weeks later (9/5/07), the trend reversed, and we moved back in.

These types of whip-saw signals can provide us with an opportunity to re-evaluate the various available fund/ETF choices and make adjustments by moving to a better performer. That was definitely the case in September when our then primary fund choice (WASYX) provided us with a superior return.

Whip-saws are a part of investing when following trends. If you look at them as insurance against portfolio disaster to the downside, you may be able to better accept them as a necessary evil.

No Load Fund/ETF Tracker updated through 11/1/2007

Ulli Uncategorized Contact

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

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

Despite Thursday’s sharp drop in the markets, the major indexes managed to keep the weekly losses manageable.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +6.35% above its long-term trend line (red) as the chart below shows:



The international index slipped but still remains +3.29% above its own trend line, keeping us on the buy side.

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

ETF Investing: October’s Winners and Losers

Ulli Uncategorized Contact

Despite its ups and downs, October turned out to be a good month for those invested in the right sectors. The top 10, as well as the worst 5 crowding the bottom of the totem pole, from the 500 ETFs I track, are listed below. Please note that the figures shown cover the past 4 week period:

Here are the top ten along with their gains and current M-Index ranking:

1. FXI (+22.65%, 57)
2. IFN (+21.92%, 35)
3. GXC (+21.80%, 31)
4. EEB (+20.90%%, 47)
5. USO (+19.76%, 31)
6. DBO (+17.98%, 18)
7. EWZ (+17.02%, 43)
8. PGJ (+16.49%, 48)
9. IIF (+15.83%, 26)
10. GDX (+15.65%, 25)

And here’s the bottom of the barrel:

1. RYF (-12.28%, -12)
2. UYG (-9.42%, -4)
3. SMH (-9.28%, -6)
4. IAT (-7.11%%, -9)
5. KRE (-7.07%, -8)

It’s obvious that there is a huge difference between these two extremes. If you have missed the upswing, then you should look into using trends to identify those ETFs with strong upward momentum along with our M-Index ranking. It goes along with one of the basic laws of physics: “A body in motion tends to stay in motion.”

While this is not a guarantee that an up trend will never end, it allows you to ride upward momentum as long as possible. When used in conjunction with a trailing stop loss strategy, you’ll never have to guess when to sell; simply let the market tell you when it’s time to get out.

ETF Master List – Mid-Week Update As Of 10/30/2007

Ulli Uncategorized Contact

Uncertainty ahead of the Fed meeting had the markets move sideways. Today’s announcement could be a trick or treat with many hoping for another interest rate cut of at least ¼ point.

Below please find the link to the most recent ETF Master list, which has been updated with yesterday’s closing prices. This will enable you to work with more recent data. You can download the file at:

http://www.successful-investment.com/SSTables/ETFMaster103007.pdf

Our Trend Tracking Indexes (TTIs) moved higher from last Friday’s close and remain in bullish territory with the domestic and international TTI having moved above their long term trend lines by +6.56% and +4.79% respectively.

ETF Investing: When Bearish Can Be Bullish

Ulli Uncategorized Contact

Seeking Alpha had a short blurb on the interpretation of investor sentiment. The story cites a recent sentiment survey showing that the sharp drop on the 20th anniversary of the ’87 crash caused bearish sentiment to rise to its highest levels since May of this year.

Their 5-year chart supports the view that, after extreme high sentiment readings that, more often than not, the markets performed well—at least for some amount of time.

It’s a contrarian indicator that is interesting to note, but I would not hold my breath but rather rely on my sell stop discipline to get me out of the market should it turn out that the bears are right this time.