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

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

Despite a sharp sell off on Monday, the major averages recovered and closed higher for the 4th week in a row.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -4.08% thereby confirming the current bear market trend.



The international index now remains -8.14% below its own trend line, keeping us on the sidelines.

Stimulating the economy at all costs has been the mantra of the past few months. Even the current G-20 meeting London will have its main focus on how to improve economic conditions worldwide.

Personally, I don’t expect anything in terms of a tangible action plan since some participants are not convinced that reckless stimulation will bring the desired results.

Reader Tom sent in this humorous description of not only how a stimulus bill works but also what the likely result will be:

Shortly after class, an economics student approaches his economics professor and says,
“I don’t understand this stimulus bill. Can you explain it to me?”

The professor put down his bucket and replied with a smile, “Congratulations. You now understand the stimulus bill.”

Some readers have asked how a private/public partnership to remove toxic assets from banks’ balance sheets would actually work. Much has been written about it, although not always in understandable terms.

Hat tip goes to Mish at Global Economics for pointing to the following video, which attempts to clarify the details of its implementation. You will probably be as surprised as I was to find out who would potentially invest in such a scheme.
Take a look. The video is about 12 minutes long, but well worth the time to better understand the concept:

To me, it seemed like the government finally took charge of the auto industry by putting the pedal to the metal and in no uncertain terms announced as to what action is acceptable and what is not.

GM received a 60-day grace period from the government task force and Chrysler is looking to get engaged to Fiat in a hurry.

If those two auto makers don’t redo their business plan quickly, they may be facing possible bankruptcy. I think that public outcry over the propping up of AIG and senseless dumping of taxpayer’s funds into basically insolvent enterprises was finally heard loud and clear in Washington, hence this action along with the request of CEO Wagoner to step aside.

Apparently, the task force also confirmed what many had been suspecting for a while that GM is burning more cash than it earns, which does not bode well for those holding stocks or bonds.

Since the rally of the past 3 weeks was not based on sound fundamentals or an improving economy, but represented merely a rebound in a bear market, the auto news was all I took to put the bears back in charge.

This was only day 1 in a week that could serve up many more surprises in terms of economic reports. Consumer confidence, the Home Price Index and the all important and widely anticipated jobs report on Friday can all contribute to make this five explosive trading days.

Forbes featured an article titled “Mutual Fund or ETF: Which Is Right For You?” While most of the information posted is well known, I want to hone in on one segment addressing the liquidity of ETFs. Here are some highlights:

Liquidity is usually measured by the daily trade volume, which is generally expressed as the number of shares traded per day. Thinly traded securities are illiquid and have higher spreads and volatility. When there is little interest and low trading volume, the spread increases, causing the buyer to pay a price premium and forcing the seller into a price discount in order to get the security sold. ETFs, for the most part, are immune to this. ETF liquidity is not related to its daily trading volume, but rather to the liquidity of the stocks included in the index.

Broad-based index ETFs with significant assets and trading volume have liquidity. Narrow ETF categories and even country-specific products have relatively small amounts of assets and are thinly traded. ETF liquidity could dry up in severe market conditions, so you may wish to steer clear of ETFs that track thinly traded markets or have very few underlying securities or small market caps in the respective index.

ETFs have exploded onto the investment arena over the past few years with now over 700 of them being available, of which 447 are currently featured in my weekly StatSheet. I have recently removed some and will continue to do so while adding others.

Just because a huge variety of ETFs specializing in many sectors is offered does not mean that they are suitable for investment. Some have trading volume of only a few hundred shares per day, which makes me wonder if they can even survive.

Remember, one of the reasons many investors select an ETF over a mutual fund is that it can be traded during the day allowing faster portfolio adjustments due to market conditions. This also means that you want to be able to get in or out quickly, which only works if liquidity is not an issue.

When choosing an ETF, be sure to make liquidity one of your selection criteria so that you don’t get stuck giving back too much in profits or unnecessarily increasing losses due to low volume not being able to accommodate your order efficiently.

For me personally it means that I want to see at least 3 times the average trading volume of the order I am planning to place.

For example, using SH for our hedge strategy, I was able to fill a $2 million limit order in about 20 seconds. Of course, SH trades on average 2 million shares a day, which amounts to trading volume of some $150 million; that made my order insignificant and helped me to get a speedy execution.

Hat tip to reader Richard for pointing to “New Mark-To-Market Rules Coming.” Here are some highlights:

The House Financial Services Committee, led by Rep. Paul Kanjorski (D-PA), yesterday (Thursday) successfully browbeat the Financial Accounting Standards Board (FASB) into coming up with modifications of the mark-to-market rules for valuing bank assets. Wall Street, which over the last 10 years has invested over $5 billion in lobbying and campaign contributions, is seeing a nice payoff on their investment. Investors, not so much.

There is a term for knowingly publishing financial statements with incorrect values in them, and that term is “securities fraud.” The very foundation of capitalism is that the “real value” for something is that which a willing buyer and a willing seller can mutually agree upon. That, folks, is the market price. That is the price at which these securities should be valued.

Supposedly, suspending mark-to-market rules is going to restore confidence in the banking system. This is nonsense. Why would you buy a bank, when it clearly says: “This book value belongs on the fiction shelf”! If a bank is insolvent, it should be taken into receivership. We do it all the time with small banks – 25 times it happened last year, and so far it has happened 19 times this year.
…
Taking over the big banks, cleaning them up and then selling them off as quickly as possible has worked in the past, most notably in Sweden. We should go that route, rather than legitimizing securities fraud.

[Emphasis added]

As the author pointed out, changing mark-to-market accounting will be the equivalent of fraud. We all have to live with mark-to-market rules whether we realize it or not. If you sell anything in the open market place, be it via a garage sale, an ad in the paper to get rid of your old car or a vacant lot, a final price is established by an agreement between a willing buyer and a willing seller.

So why should banks be exempt? For the simple reason that, as many bloggers have posted before, mark to market accounting would render them insolvent. What arrogance. You make bad business decisions and instead of being punished, you simply change the law in your favor and come up with fancy models supporting your view point.

To demonstrate, I am thinking of selling one of my assets, which is a 3-year old Jeep Laredo, for $20,000. The problem I am having is that most buyers think the car is worth only $12,000. Adopting banking terminology, I insist that my pricing model is correct, and I firmly believe that they simply don’t understand this asset.

How is that for arrogance?