MarketWatch had an interesting write-up in “Stupid investment of the week,” which featured the latest and greatest new thing called 130/30 funds. Sure, with ETFs steeling a lot of the mutual fund business, it was time for a new invention no matter whether it made sense or not.

In case you never heard of 130/30 funds, here’s the definition:

The 130/30 moniker reflects what these funds do. Typically, a 130/30 fund invests 130% of its assets in “long positions” — stocks on which the manager is betting that the price is going up — and 30% in short positions, where the expectation is that the price will go down.

It’s a different twist on long-short funds and market-neutral funds, both of which brought certain qualities of hedge funds — notably a purported ability to make money in all market conditions — to ordinary mutual funds. Alas, the vast majority of those fund types have failed to deliver on their potential; most market-neutral funds have been unable to make decent money in all market conditions.

The article goes on to refer to two funds namely MAMSX and RUSAX, which have been on the market for less than a year. A picture is worth a thousand words, so let’s take a look at the chart:




The obvious goal of 130/30 funds, or long/short funds for that matter, is to make money no matter which way the markets trend. Both funds have failed miserably so far and pretty much followed the S&P; 500 into bear market territory.

While the intent of designing a strategy that works in bull and bear environments is a noble one, 130/30 funds seemed to have missed that mark by a mile.

MarketWatch featured an article titled “Is the whole world slowing?” Here are some highlights:

Europe’s economy contracted in the second quarter, burdened by higher prices and weak export markets, the statistical agencies reported Thursday.

So much for the theory that the global economy has “decoupled” from the United States. It’s still true that when America catches a cold, the rest of the world sneezes.

[Emphasis added]

My viewpoint is exactly the same, and I have many times commented that we are living in such an intertwined global environment that there is no place to hide. What I mean by that is that no country is exempt from a major economic downturn. While some countries or regions may be affected on a delayed basis, ultimately everyone will end up sneezing as well.

It appears that my international Trend Tracking Index (TTI) has been the leading indicator for the past 9 months, when it signaled a “Sell” on 11/13/07. Its composite consists of widely diversified international funds, which are a good representation of the world as a whole. While some countries have temporarily been able to buck the downtrend, everyone has now joined the crowd with most momentum numbers for country ETFs now having moved solidly into the red.

Based on the International TTI being in bear market territory by -7.08%, and the domestic TTI having recovered to -0.56%, it would appear that the U.S. market is poised to take the lead if and when the current bear scenario reverses itself.

Based on recent emails, I can tell you that while a lot of readers are following my recommended Buy/Sell discipline, some of them are not. It would be interesting to know, how many of the current 18,000 readership is in tune with my approach and how many simply view it as another form of entertainment.

With the recent market turmoil, it pays to have a plan in place which will serve as a guide to your actions and allow you to make better investment decisions, while at the same time preventing a serious portfolio haircut should the bear market continue.

This point was brought home when I read MarketWatch’s “Keep the faith,” which focused on investors having trouble maintaining their confidence in the stock market and the economy:

Between the housing bubble, credit crisis, inflation worries, concerns over the weak dollar, the potential for the economy to drop into a recession, a stock market that seems more anxious in falling than rebounding, and more, it’s hard to believe an investor could have any faith and confidence left.

While having confidence is a good thing, it does nothing for you when it comes to your investments, unless you have a specific plan in place to deal with the uncertainties thrown at you by the economic upheaval. Unless you don’t mind becoming a repeat victim of the 2000 – 2002 bear market, you better replace blind confidence with realistic thinking about where the market is at and where it might be going.

The story goes on to suggest six reasons why you should be confident in today’s environment. While I don’t agree with most of what’s written, you may want to read them anyway. However, the bottom line refers to the same old numbers of what the stock market has returned over the past 5 years or over a lifetime.

Nowhere will you find the most important data, which is the negative effect the last bear had on more recent returns during this century. If you have accumulated substantial assets over your lifetime, and you are now somewhere in your 50s or older, don’t believe the baloney about diversification and long-term stock market returns. If a bear market has the potential to cut your portfolio value by 50% or so, that’s what you should be directing your attention to by making plans accordingly.

While no one knows whether the bear will turn out that ugly or not, you better be prepared other than simply keeping faith in the fact that over the very long term 9% returns have been accomplished. When you’re in your 50s, your time frame has been shortened considerably, and a 50% portfolio loss will have far more of an impact on your financial life than when you were in your 30s.

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

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

Continued volatility moved the major indexes with not much to show for.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -0.56% thereby confirming the current bear market trend.



The international index now remains -7.08% below its own trend line, keeping us on the sidelines.

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

I found this interesting video clip on YouTube featuring Lawrence Hrebiniak, Professor of Management at The Wharton School. It’s a bit lengthy but well worth it. His book with the same title has just been published.

With the dollar having turned the corner and headed higher, at least for the time being, we got stopped out of our Swiss Franc positions last week. Gold went from sideways to south, and our stop loss point was triggered there as well.

Reader Steve had this to say:

I am confused, what caused the dollar to strengthen and what caused Oil to weaken? In fact why have commodities weakened, has demand changed so much?

Can you help me understand the dynamics of the dollar and the commodities in general?

Thank You.

From my vantage point, a dollar reversal was coming; it’s just not clear yet whether this is just a short-term phenomenon or a long-term directional turn around. The Euro zone finally realized that their economies were weaker than anticipated and may even be worse off than the domestic one here in the U.S.

With the “Euro’s” constant concern about inflation supported by a trigger happy (in terms of raising interest rates) ECB (European Central Bank), interest rates may have hit a brick wall. Slowing economies may force lower rates in the future and that has put a floor under the dollar and contributed to the recent reversal.

Slowing economies around the world causing less demand for a variety of materials (including oil and commodities) may cause that bubble to burst as well. After all, demand, or lack thereof, is what makes prices move.