Wednesday’s good news in form of a better than expected durable goods report was overshadowed by a rebound in oil prices causing continued worries about the impact on consumers.

Nevertheless, the major indexes managed a decent afternoon rebound, despite the financials being a big drag. This was caused by an analyst’s opinion that AIG’s recent $20 billion raise in capital may not be sufficient and that the insurer’s financial position could worsen.

That’s not surprising to me, since I believe that the fallout from the real estate/credit bubble, and the fact that many investment banks are still stuck with worthless, leveraged holdings, has not fully played out yet.

Be that as it may, yesterday’s activity affected our Trend Tracking Indexes (TTIs) positively, and they improved slightly:

Domestic TTI: +1.20%
International TTI: -3.01%

A fact is that prices tend to decline faster than they rise. If the markets decide to resume the previous upward trend, chances are that it will take a lot longer than the 5-day drubbing the major indexes took last week.

However, since we don’t control those factors, we will focus only on what we can control, which are our sell stop points. Yesterday’s activity had no effect, and we will hold all positions.

Uncertainty was the word of the day on Tuesday as the markets see-sawed (see chart from Marketwatch.com). However, after the drubbing of last week, momentum picked up late in the session supported by a drop in oil prices and an unexpected gain in new home sales.

On the other hand, continued lower consumer confidence figures kept a lid on advances. I suspect that some further sideways action will dictate trading in the near future until some catalyst can propel the major indexes higher again. In the absence of such a catalyst, we may be treading water for a while longer. Here’s how our Trend Tracking Indexes (TTIs) fared yesterday:

Domestic TTI: +1.09%
International TTI: -3.20%

Domestically, we’ve slipped back into the neutral zone and will hold our positions subject to our trailing sell stop points.

With energy prices being on the front burner, despite today’s pullback, I have added a position in that area last week, along with gold, which broke out to the upside but retreated today.

Recently, I had a discussion with a client who marveled at the ability of Wall Street firms to make money. He assumed, like many other investors do, that many high powered firms have superior stock picking abilities or staff with the foresight to properly assess the next hot investment trend so that the firm can get in on the bottom.

Generally speaking, that’s not how the money is being made. Sure, being in on worthwhile IPOs will always generate large sums of money, but even more is being made (and lost) in the derivatives business.

While I will elaborate on that further with a special post within the next couple of weeks, I was reminded of it when I read the latest fraud investigation on Mish’s Global Economic blog titled “Fraud, Antitrust Investigation Involving JPMorgan, Jefferson County.”

It’s a stark reminder that all is well and good on Wall Street, and the events of the Orange County bankruptcy in the 90s (due to derivative investments) have been long forgotten.

Here’s an excerpt of the latest derivatives debacle:

The Largest U.S. Municipal Bankruptcy Looms in Alabama. What caused this mess is an interest rate swap Jefferson County officials entered into when they financed a $3.2 billion sewer cleanup. The strategy backfired, demonstrating the speculative, risky nature of swaps.

Meanwhile, the U.S. Securities and Exchange Commission and the Justice Department are now investigating bankers and officials involved in Jefferson County’s swap agreements.

[emphasis added]

It pays for you to read the entire story, but suffice it to say, that’s the way big money is being made—not by trying to pick the next hot stock. The eventual outcome of this debacle will be the same as always: A few heads will roll, some fines will be paid but, afterwards, it’s business as usual.

As for the rest of us, we have to take the hard road by investing responsibly and conservatively especially when other people’s money is involved. The markets don’t make this always easy, especially when we’re trending sideways; we have to tough it out and stick to our plan in order to succeed long-term.

While this route may not make my clients hundreds of millions of dollars, it let’s me sleep at night knowing that we work with integrity by never having to worry that we were part of a scheme that brought down an entire county.

Reader Tom pointed to an article by Bill Gross of PIMCO titled “Hmmmm?” It addresses the current investment outlook with a main focus on U.S. inflation and the way it’s calculated. It’s an interesting read, but his last two paragraphs sum it up best:

What are the investment ramifications? With global headline inflation now at 7% there is a need for new global investment solutions, a role that PIMCO is more than willing (and able) to provide. In this role we would suggest: 1) Treasury bonds are obviously not to be favored because of their negative (unreal) real yields. 2) U.S. TIPS, while affording headline CPI protection, risk the delusion of an artificially low inflation number as well. 3) On the other hand, commodity-based assets as well as foreign equities whose P/Es are better grounded with local CPI and nominal bond yield comparisons should be excellent candidates. 4) These assets should in turn be denominated in currencies that demonstrate authentic real growth and inflation rates, that while high, at least are credible. 5) Developing, BRIC-like economies are obvious choices for investment dollars.

Investment success depends on an ability to anticipate the herd, ride with it for a substantial period of time, and then begin to reorient portfolios for a changing world. Today’s world, including its inflation rate, is changing. Being fooled some of the time is no sin, but being fooled all of the time is intolerable. Join me in lobbying for change in U.S. leadership, the attitude of its citizenry, and (to the point of this Outlook) the market’s assumption of low relative U.S. inflation in comparison to our global competitors.

[emphasis added]

I would not call it anticipating the herd, but looking for a trend in place that can be followed and tracked until it ends. When it does, it’s time to jump ship and look for other opportunities. In this changing world, nothing lasts forever and only those who are able to go with flow, are flexible and make portfolio adjustments to reflect the current market place will be the long-term winners.

Recently, I had an interesting conversation with a college graduate who was my doubles partner in a tennis match. He elaborated on how he’s been staying in touch with many of his fellow students and friends despite many having moved to far away places. Using email and social sites such as facebook.com make it a snap to keep personal connections going over indefinite periods of time.

This made me reflect back on my own graduation in 1973 (University of Kiel, Germany), when I was the only one to move out of the local area and on to the United States. Sure, for a while I kept in touch via snail mail (the only option) and infrequent visits during trips to Europe. Of course, over time these contact attempts faded so that after some 35 years of absence, I am pretty much out of touch and out of the picture.

I marvel at the fact how easy it is nowadays to stay connected which, if you are consistent, may pay some handsome dividends.

Al Thomas, author of the best selling book, “If It Doesn’t Go Up, Don’t Buy It!” had this story in last week’s newsletter, which makes some good points, that not only college graduates should be aware of and apply:

Every week I write something about the stock market – how to, when to and where to put your money and how to protect it from loss if you do. This week I want to say something very important
to the young folks about success. And you parents take note if your kids are still young.

People are assets. This kind of investment can really pay off.

Throughout anybody’s working life of some 40 years, there are bound to be many job changes and maybe even moves into totally different careers.

To keep in touch, as Al Thomas points out in his above article, is the smart thing to do since that type of networking should be a lifelong endeavor; not just for the potential business opportunities but also for the personal, meaningful friendships that may develop, which are always an asset that can’t be counted in dollars and cents.

As you know from previous posts, I am not one to put any credibility into forecasting, which is why I like to poke fun at those who, with serious faces, are trying to predict presidential outcomes or worse the closing price of the Dow on the last trading day of the year.

Joining this ever growing list of Wall Street fortune tellers can put you (temporarily) into the lime light because your forecast was close (lucky guess). This can present a real problem because if you then keep reading about your successful forecast, you may actually believe that you have special abilities; that is until reality strikes with your next guess being so far off that you are quickly removed from the “have to know” list.

I was reminded of that when I read Paul Farrell’s latest piece “Megabubble waiting for new president in 2009.” While I actually agree with some of his assessments, he goes way out on a limb by saying:

Flash forward: Real life, Washington, new leaders, a new Congress, old wizardry. Be forewarned: No matter who’s elected president, America will soon see a massive statistical curtain pulled back, exposing a con game of historic proportions. And when that happens, you and I will suffer another ear-splitting global meltdown, bigger than today’s housing-credit crisis, dragging us deep into a recession and bear market for years.

Ok, that’s a wild guess, although I can see that we may be facing a bear market far worse than the last one. To the casual reader, his entire story may sound pretty frightening, so remember, it’s just one man’s opinion. If he really believes in that forecast, however, I have to wonder what he might do with his “lazy portfolios” (Buy and Hold, of course), which are being promoted as the equivalent of motherhood and apple pie?

A “deep recession and a bear market for years” will not bode well for any portfolio that holds bullish assets. If his forecast comes to pass, I will report about the various consequences.

I have to admit that in my advisor practice, I always try to cover my back (investment wise) to expect unexpected events. As history has shown, those “black swans” have the ability to give your portfolio such a serious haircut that years of accumulated profits can vanish in a hurry along with a good portion of your principal.

This view may be based on my overly cautious nature but, given the economic environment we’re likely to be in for years, being prepared and ready to make a quick exit to the sidelines may prove to be the soundest of all investment decisions. What’s the alternative? Play ostrich and go down with the sinking ship?

I think not and lucky for me, even Oscar Wilde seemed to agree when he said:

“To expect the unexpected shows a thoroughly modern intellect.”