Upside Break-Out

Ulli Uncategorized Contact

Despite a sharp drop after the market opening on Tuesday (see chart), the major indexes recovered and closed higher with solid gains. In the face of $123 crude oil, and predictions of prices moving into the $150 to $200 area in the next 6 to 12 months, the markets resisted any sell off attempts.

Our domestic Trend Tracking Index (TTI) broke out of the upper band of the neutral zone (+1.50%) again and sits now +1.64% above its long-term trend line. If we can stay above the +1.50% level for a couple of trading days, that will constitute a new domestic Buy signal.

In the meantime, our holdings in the Latin American markets as well as the Transportation Index have moved up nicely, and I will add a second increment. Some domestic no load funds have now crossed their own individual trend lines as well, which will bode well for this uptrend if a Buy signal is in fact generated.

The International TTI improved as well, but still remains below its trend line by -1.29%. I will keep you posted via this blog as to day-to-day changes.

Stupid Quote Of The Year

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Leave it up to bankers, the main contributors to the mortgage crisis, to come up with the stupid and ignorant quote of the year (or possibly of the century). Reuters reports in “Bank of America-Countrywide to curb risky mortgages:”

Bank of America Corp said on Tuesday it plans to stop offering some riskier mortgage loans after it finishes buying Countrywide Financial Corp., the largest U.S. mortgage lender.

The second-largest U.S. bank said the combined businesses will not offer “option” adjustable-rate mortgages, which let borrowers pay less than the interest due.

It also plans to “significantly curtail” other non-traditional mortgages, including some loans that don’t require borrowers to fully document income or assets.

The Charlotte, North Carolina-based bank also said it will limit prepayment penalties and offer enhanced protections on interest-only and “hybrid” adjustable-rate mortgages. The latter carry fixed interest rates for a period of time, typically five years, and then adjust.

Bank of America will continue to offer loans eligible for purchase by mortgage financiers such as Fannie Mae and Freddie Mac, as well as adjustable-rate mortgages, and mortgages with a 10-year minimum interest-only period.

“We recognize this tightening, by definition, restricts the availability of credit to some borrowers,” said Bruce Hammonds, Bank of America’s global consumer credit executive. “However, this will help ensure that those who get loans can afford to repay them.”

[emphasis added]

Duh? As opposed to doing what? Extending credit to anybody who can fog up a mirror? Hello Mr. banker; a fact that you may have been missing is that some people are simply not credit worthy, should not have credit extended to and should not own a home. Has this realization now finally set in, where it should have been part of responsible loan underwriting all along?

Ok, so ignorant, selfish and greedy bankers are a pet peeve of mine. If you are one, tough! This blog is not about political correctness but saying it as it is. Ah, I feel better; I had to get this off my chest.

Where’s The Bottom?

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MarketWatch featured an article titled “Five signs the stock market has bottomed.” Here are some highlights:

Are we there yet? That’s what investors want to know as they search for a bottom after six punishing months for stocks. People are understandably eager to be done with this downturn and see markets move forward.

It’s a tough wish at a time when the U.S. economy is clearly contracting and likely in recession. The good news is that stocks typically recover several months ahead of the economy. The bad news is that we’re probably closer to the beginning of this slump than the end.

Remember that the stock market will show signs of bottoming well before every bit of bad economic news is wrung from the headlines. These milestones won’t be obvious or appear at once, and keep in mind that just because stocks stop going down doesn’t mean prices will roar to new records. The damage to the economy is done, and will take time to repair.

The story goes on to acquaint the reader with five key leading indicators to watch for so that you will be the first to know when that elusive bottom actually occurs.

There are faulty assumptions with some of the reasoning in this article.

First, despite Wall Street employing more fortune tellers than any other industry, no one can with any amount of certainty forecast or determine a market bottom. Many have tried and failed, and those who succeeded had a temporary stroke of luck, which went out the window with the next forecast.

Second, the assumption is that everybody is looking to buy at the very bottom. Since that point can’t be determined as it is happening, this will be at best a 50/50 chance of the market rebounding or further sinking into oblivion.

Third, my experience tells me that a bottom can only be determined after it has occurred. In other words, we need to see a sustained rally off a bottom formation and only then can we reasonably assume that the trend has reversed from down to up. The opposite occurs at top formations.

Fourth, trying to determine ahead of time whether a bottom has been formed is an exercise in futility and a wild guess at best. For your long-term investment success, it is not necessary to try to engage in risky bottom fishing. Following trends and investing in mutual funds/ETFs as they break out above their long-term trend lines will not only keep you on the right side of the market, but also let you live a much more worry-free investment life.

Sunday Musings: A Moment Of Truth

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There have been few business leaders in the past as outspoken as Lee Iacocca. I’ve enjoyed his books in the past and ordered his latest “Where Have All the Leaders Gone?” In the meantime, reader Kenny sent me an excerpt of that book, which probably resembles how a lot of people feel these days. Take a look and see if you’re one of them:

‘Am I the only guy in this country who’s fed up with what’s happening? Where the hell is our outrage? We should be screaming bloody murder. We’ve got a gang of clueless bozos steering our ship of state right over a cliff, we’ve got corporate gangsters stealing us blind, and we can’t even clean up after a hurricane much less build a hybrid car. But instead of getting mad, everyone sits around and nods their heads when the politicians say, ‘Stay the course.’

Stay the course? You’ve got to be kidding. This is America, not the damned Titanic’. I’ll give you a sound bite: ‘Throw all the bums out!’

You might think I’m getting senile, that I’ve gone off my rocker, and maybe I have. But someone has to speak up. I hardly recognize this country anymore.

The most famous business leaders are not the innovators but the guys in handcuffs. While we’re fiddling in Iraq, the Middle East is burning and nobody seems to know what to do. And the press is waving ‘pom-poms’ instead of asking hard questions. That’s not the promise of the ‘America’ my parents and yours traveled across the ocean for. I’ve had enough. How about you?

I’ll go a step further. You can’t call yourself a patriot if you’re not outraged. This is a fight I’m ready and willing to have. The Biggest ‘C’ is Crisis!
Leaders are made, not born. Leadership is forged in times of crisis. It’s easy to sit there with your feet up on the desk and talk theory. Or send someone else’s kids off to war when you’ve never seen a battlefield yourself. It’s another thing to lead when your world comes tumbling down.

On September 11, 2001, we needed a strong leader more than any other time in our history. We needed a steady hand to guide us out of the ashes. A Hell of a Mess. So here’s where we stand.

We’re immersed in a bloody war with no plan for winning and no plan for leaving. We’re running the biggest deficit in the history of the country. We’re losing the manufacturing edge to Asia, while our once-great companies are getting slaughtered by health care costs. Gas prices are skyrocketing, and nobody in power has a coherent energy policy. Our schools are in trouble. Our borders are like sieves. The middle class is being squeezed every which way. These are times that cry out for leadership. But when you look around, you’ve got to ask: ‘Where have all the leaders gone?’ Where are the curious, creative communicators? Where are the people of character, courage, conviction, omnipotence, and common sense? I may be a sucker for alliteration, but I think you get the point.

Name me a leader who has a better idea for homeland security than making us take off our shoes in airports and throw away our shampoo? We’ve spent billions of dollars building a huge new bureaucracy, and all we know how to do is react to things that have already happened.

Name me one leader who emerged from the crisis of Hurricane Katrina. Congress has yet to spend a single day evaluating the response to the hurricane, or demanding accountability for the decisions that were made in the crucial hours after the storm. Everyone’s hunkering down, fingers crossed, hoping it doesn’t happen again. Now, that’s just crazy. Storms happen. Deal with it. Make a plan. Figure out what you’re going to do the next time.

Name me an industry leader who is thinking creatively about how we can restore our competitive edge in manufacturing. Who would have believed that there could ever be a time when ‘The Big Three’ referred to Japanese car companies? How did this happen, and more important, what are we going to do about it?

Name me a government leader who can articulate a plan for paying down the debt, or solving the energy crisis, or managing the health care problem the silence is deafening. But these are the crises that are eating away at our country and milking the middle class dry.

I have news for the gang in Congress. We didn’t elect you to sit on your asses and do nothing and remain silent while our democracy is being hijacked and our greatness is being replaced with mediocrity. What is everybody so afraid of? That some bonehead on the news will call them a name? Give me a break. Why don’t you guys show some spine for a change?

Had Enough? Hey, I’m not trying to be the voice of gloom and doom here. I’m trying to light a fire. I’m speaking out because I have hope; I believe in America. In my lifetime I’ve had the privilege of living through some of America’s greatest moments. I’ve also experienced some of our worst crises: the ‘Great Depression’, ‘World War II’, the ‘Korean War’, the ‘Kennedy Assassination’, the ‘Vietnam War’, the 1970s oil crisis, and the struggles of recent years culminating with 9/11. If I’ve learned one thing, it’s this:

‘You don’t get anywhere by standing on the sidelines waiting for somebody else to take action. Whether it’s building a better car or building a better future for our children, we all have a role to play. That’s the challenge I’m raising in this book. It’s a call to ‘Action’ for people who, like me, believe in America. It’s not too late, but it’s getting pretty close. So let’s shake off the crap and go to work. Let’s tell ’em all we’ve had ‘enough.’

From my viewpoint, this is Iacocca at its finest. I have always liked authors who could care less about political correctness and call a spade a spade. This article has nothing to do with investing but everything with having the right attitude, and I sure hope that you enjoyed it as much as I did.

One Man’s View

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Mish at Global Economic Trend Analysis reviewed the demographics of jobless claims and in his article he referred to the credit binge as follows:

The structural problems created by a 25 year credit binge simply are not going to be cured by a two quarter recession that Paulson and other economic cheerleaders will not even admit has started. Peter Bernstein a financial manager, consultant and financial historian agrees. Inquiring minds may wish to take a look at a Wall Street Journal Interview with Peter Bernstein.

I read the interview with the 89-year old Bernstein and found it worthwhile to share with you. Here are some excerpts:

WSJ: Aside from securitization, what were the main causes of the problem?

Mr. Bernstein: You don’t get into a mess without too much borrowing. It was sparked primarily by the hedge funds, which were both unregulated by government and in many ways unregulated by their owners, who gave their managers a very broad set of marching orders. It was a real delusion. It was like [former New York Gov. Eliot] Spitzer: “I am doing something dangerous, but because of who I am, and how smart I am, it is not going to come back to haunt me.”

When you think about how all of this will work out in the long run, we are going to have an extremely risk-averse economy for a long time. The lesson has painfully been learned. That’s part of the problem going forward. You don’t have a high-growth exit from this, as you’ve had from other kinds of crises. We won’t have a powerful start, where the business cycle looks like a V. Here, the shape of the business cycle is like an L, where it goes down and doesn’t turn up. Or like a U, a flat U. The reason for that is that people aren’t going to get caught in this bind again. They will tell themselves, “I’m too smart to do that again.” And everyone else is going to be saying the same thing. It is, in fact, going to be a wonderful environment in which to take risk, because there aren’t going to be any excesses.

I’m a child of the Depression, and I am thinking about what the early years were like after World War II. It took a very long time to get the memory of the Depression out of business decisions, and certainly banking decisions. I think this is going to be the same. The Fed, too, is going to be less decisive and is going to feel that what it should do is less clear. One of the things that gave people a sense that they could afford to take risks was the sense that the central bankers more or less know what they are doing. But I don’t think we are going to feel that way going forward.

WSJ: You said that it could turn out that the smart thing to do is to take more risk, because everyone will be so risk-averse. What kinds of investments do you see as the big winners coming out of this?

Mr. Bernstein: You could say: the things that have been beaten down the most, which would be real estate. But I think real estate is going to be under a cloud for so long, and you can’t buy real estate with cash, it is too much money. I think you should go with the stock market. If things are better, the stock market will go up, and if things are awful, the stock market is going to be way down. But it is a place where, if you want to take risks, you’ve got a wide range of choices. This is why I own stocks [in addition to other investments], because I don’t know where the bottom is going to come, and I want to be exposed to every kind of possibility I can think of. And, at least, if you pick the stock market and you are wrong, you can change your mind. There is some liquidity there. Stocks never became cheap, but they didn’t become crazy, the way other assets were.

WSJ: How long do you think this whole process will take, before we get back to normal?

Mr. Bernstein: Longer than people think. The people who think we will have turned in 2009 are wrong. There has to be a respite along the way. Nothing goes in one direction forever. But it will take longer than people think. If that weren’t the case, I would be talking entirely differently. I would be saying, “What an opportunity we have got.” And I just can’t believe that the opportunity is here yet. There is too much to unwind.

WSJ: Can you explain the reason you think it will take a long time?

Mr. Bernstein: We have to go back to a moment when people have the courage to borrow and lenders have the courage to lend. Until credit is going up instead of down, you can’t have growth. Housing has got to be a very important part of that; it always has been. You have to reach a point where somebody says, “This house is cheap, I am going to buy it,” or where some businessman says, “This is a great opportunity for us to expand our business. Everything is available to us.”

If China goes into a recession, God knows. The Iraq war and the whole situation with terrorism, we really don’t know where that is going to come out. There are so many things that have got to get buttoned down before you say that the future looks good enough to take a risk.

WSJ: What kind of indications are you looking for as signs that the economy is about to get better and that the stock market and the investment world are about to turn the corner?

Mr. Bernstein: Somehow, the housing trouble has to at least flatten out. As long as that is going on, I think the pressure on the credit system is going to persist. It is kind of the leading indicator. It is where the trouble started. We have to underpin the consumer. That is why this is different. That is why this is like nothing we have had before.

Before, it was investment that made the V at the bottom of the business cycle. I don’t see real investment turning enough without some sign from the consumer side. Maybe the foreign countries will do it for us. That is a substitute for consumption here. Maybe. But I think that they won’t do enough for us, and maybe will be too infected by us to do it. But maybe growth in Asia will help us. The Asian thing is tremendously exciting.

To me, the gist of the story is that uncertainty is bound to stay with us for quite some time.

While we currently may have a disconnect from the market place to economic realities, the key to surviving this period with your portfolios intact is to take selective picks in those areas that are showing upward momentum and are trending higher—at least for the time being.

And that’s the key. Trends will start and may end quicker than we like, so be aware of reversals and use your trailing sell stops. Don’t be afraid to take a small loss, but stay away from the big ones.

No Load Fund/ETF Tracker updated through 5/1/2008

Ulli Uncategorized Contact

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

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

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved now +1.34% above its long-term trend line (red), which means we remain close to breaking out to the upside of the neutral zone (+1.50%).



The international index dropped to -1.17% below its own trend line, keeping us in a sell mode.



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