Recently, a reader asked for clarification about the differences between Closed End Funds (CEFs) and Exchange Traded Funds (ETFs). The WSJ describes the features as follows:

“Both exchange-traded funds and closed-end funds are baskets of stocks, bonds or other investments that typically trade throughout the day on an exchange. Traditional mutual funds, in contrast, are typically priced just once a day at net asset value, which is the value of all fund assets minus liabilities, divided by the number of shares outstanding.

Since a closed-end fund sells a fixed number of shares that then change hands on an exchange, its market price is affected by demand for its shares and can drift far away from its NAV. So an investor who buys a closed-end fund at a price close to its NAV may ultimately sell at a price well above — or below — the value of the fund’s holdings.

But in an ETF, large investors can assemble a basket of securities that mimics the ETF’s portfolio and use this basket to buy big blocks of ETF shares. Likewise, they can sell a block of the ETF’s shares back to the fund in exchange for that basket of securities. Since big investors can easily swap ETF shares for the underlying securities, the ETF’s market price tends to stay close to its NAV.”

I have to add that when trading either, you always need to look at volume to make sure that your orders can get filled quickly whether you enter a trade or want to exit one. I have found that especially with lower volume municipal CEFs, liquidation can be very slow at times, and you may have to chase the market price, especially on down days.

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

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

The assassination of the former Pakistani prime minister, along with weak housing data, pulled the major indexes slightly lower.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +4.67% above its long-term trend line (red) as the chart below shows:



The international index dropped to -1.62% 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.

With 2007 fast coming to a close, you will find the media gearing up for a variety of market forecasts and predictions ranging from the plausible to the downright outrageous. Be prepared to be fed this information on an almost daily basis for the next few weeks. Most of this “advice” is useless as I have written about before.

Nevertheless, I think it pays to look at other view points and opinions, even if you happen to disagree.

A different view about 2008 was featured in a brief interview on MarketWatch with William Knapp, chief investment strategist for MainStay Investments, who said that “investors should expect the economy to sidestep a recession in 2008 but, even if one occurs, consumers will barely know it happened.”

Wow; that’s about as optimistic of a view as I have heard. Given the variety of issues I have posted about for the past 8 months starting with the Subprime debacle, followed by the credit crises, the housing disaster and more recently the huge number of credit card defaults many banks are facing, I sure can’t agree with the above assessment. With none of these above issues even being close to being resolved, my personal view is far less optimistic.

However, whichever direction the markets will turn, there are bound to be opportunities we can take advantage of. Right now, certain sectors and countries appear to be on the upswing, and we are easing ourselves into those markets.

By only paying attention to trends, I don’t blindside myself to a certain viewpoint of what may or may not happen. If it ends up that Mr. Knapp is right, then the market trends will lead us in the direction of those areas that will move up given his outlook. If the markets adopt a more pessimistic attitude, then we will adjust accordingly and follow those trends that are supported by that scenario.

Bond guru Bill Gross of Pimco has made his share of forecasts, which usually do not sit well with investors. The one that caused a bit of an uproar was when he forecast the Dow to be falling to the 6,000 level, or thereabouts. I think that one was made sometime last year.

A few days ago, he said the recession had begun in December and that he’s been begging the Fed to cut interest rates, at least according to 24/7 Wall Street. I am not sure in what form that begging took place, but let’s not forget that Mr. Gross is somewhat biased in that lower interest rates will help his bond investments. Muni bond funds have had their worst year in seven, and Pimco’s own PML is down about -9.7% for the year. So yes, a recession and much lower interest rates will bode well for his stable of funds.

My point is the same that I have made before: Forecasting can’t be done with any accuracy at all. While I have written about the prospect of a recession as a result of the Subprime/credit fall out, we can’t make investment decisions simply based on that possibility alone. I will continue to watch the actual market trends and make my picks based on those ETFs/no load fund areas that are showing the strongest momentum figures.

With all the talk about the Subprime crisis and the resulting credit debacle, you may have been wondering as to what exactly the definition of a “credit crunch” is.

Minyanville’s Kevin Depew defines is as follows:

“The simple answer is that a “credit crunch” is a general decline in the supply of, and demand for, credit.

This risk aversion on the part of lenders makes it more difficult for even the most credit-worthy borrowers to obtain money at reasonable terms. In effect, interest rates – the cost of money – can become infinitely high for many borrowers. As a result, it becomes difficult to fund projects and investments, which can slow economic growth, which can make lenders even more unwilling to lend.”

OK, now we know what it is, how do we get out of it? Kevin explains:

“The Fed can make even more credit available; a monetary response. This may temporarily relieve tight credit conditions among financial institutions.

Being a non-economist, I like his explanation; short, sweet and to the point. As the credit bubble continues to unwind with potentially far reaching effects, it’s important that you know how it was created in the first place and what can be done to get out of it.”

While it does not have a direct effect on the decision making part of our trend tracking methodology, it will help you understand where we are when looking at the big picture. If a major trend, such as we’ve been having in domestic equities for 14 months, comes to an end all of a sudden, there is a good chance nowadays, that the Subprime/credit/housing debacle is one of the main culprits.

Minyanville had a hilarious piece in Kevin Depew’s “Five Things You Need to Know.” This one was number five and it dealt with General Mills’ move back in June to raise the price of its cereal while decreasing the box size so that customers would hopefully be fooled by the cost increase.

Some applauded the move, upgrading the stock from “Earnest” to “Sneaky,” while other Wall Street analysts found the whole thing confusing.

Minyanville obtained a transcript from a portion of that previous analyst call (not to be taken too seriously):

Analyst: So let me see if I understand this. The price of your cereal is going up?

General Mills Spokesperson: That’s correct.

Analyst: But the price per box is actually going down?

General Mills Spokesperson: Correct.

Analyst: So then how is the price going up?

General Mills Spokesperson: Because we’re making the box smaller.

Analyst: Ok, but you just said the price of each box is going to be less.

General Mills Spokesperson: Yes, that’s true.

Analyst: So then you’re actually lowering prices.

General Mills Spokesperson: No, we’re raising prices.

Analyst: How?

General Mills Spokesperson: Look, you’re an analyst, you work with numbers.

Analyst: Right. Ok. I got it.

General Mills Spokesperson: Next question.

Analyst: Uh, actually, I don’t get it. How can you raise the price by lowering the price?

General Mills Spokesperson: Because we’re decreasing the size of the box.

Analyst: Ok, but you’re charging less for each box.

General Mills Spokesperson: Yes. Because we’re decreasing the size.

Analyst: Ah, I get it. So then the price is really the same, you’re just making the box smaller which makes the price look lower.

General Mills Spokesperson: No, no, no! Listen. We’re raising the price of our cereal.

Analyst: But –

General Mills Spokesperson: Shut up! Now listen, we’re raising the price of our cereal.

Analyst: (Silence).

General Mills Spokesperson: Say it.

Analyst: We’re raising the price of our cereal.

General Mills Spokesperson: Good. We’re raising the price of our cereal… while simultaneously making the box smaller. Go on, say it.

Analyst: While simultaneously making the box smaller…

General Mills Spokesperson: But… and this is the important part… but we’re raising the price more than we’re decreasing the size of the box… go on…

Analyst: But we’re raising the price more than we’re decreasing the size of the box.

General Mills Spokesperson: So…

Analyst: So…

General Mills Spokesperson: That…

Analyst: That…

General Mills Spokesperson: Come on…

Analyst: Come –

General Mills Spokesperson: No, I mean, come on and follow the thought. So that…

Analyst: Oh. So that…

General Mills Spokesperson: The…

Analyst: The… price is lower?

General Mills Spokesperson: No! So that the customer…

Analyst: So that the customer…

General Mills Spokesperson: Will.

Analyst: Will.

General Mills Spokesperson: Oh good Lord. So that the customer will think the price has gone down when it’s really gone up!

Analyst: Oh.

General Mills Spokesperson: See? Price increase. Smaller box. Larger price increase than smaller box.

Analyst: Right. I still don’t get it.

General Mills Spokesperson: You know what? Just forget it.

Analyst: I’m going to have to downgrade your stock, you know.

General Mills Spokesperson: Good. Good. You do that.

Analyst: I will.

General Mills Spokesperson: I don’t even want you to rate our stock positive.

Analyst: Good, because I won’t.

General Mills Spokesperson: It would be an insult to the company for you to rate it positive.

Analyst: I’m downgrading your stock to “Mean.”