A Fear Hedge

Ulli Uncategorized Contact


I have received a number of emails from readers wondering why gold is rallying as inflation has dropped into negative territory. In the past, gold has been mostly associated with being an inflation hedge, but it can be a hedge during times of great turmoil as well, as this article from 24/7 Wall Street examines (hat tip to reader Richard for this link):

There is no real inflation today. Even if the Obama stimulus package ends up reaching $2 Trillion in theoretical printed dollars from what the TARP of 2008 started out with and what the new package will ultimately cost with bank and industry bailouts over the next two years, the CIA world fact book estimates the US 2008 GDP at $14.3 trillion. Smooth out the $2 trillion over 2008 to 2010 and you do have a lot of funny money, but spread over 3 years or more and you don’t have hyper-inflation.

Industry is on its backside. The jewelry business is on its backside. The consumer is so far on its backside that yoga poses are in order. Every industry that uses gold is on its backside. And almost none of the major central banks have gold as the basis of their currencies.

So you have no actual hard demand for the shiny yellow stuff. Not today any how. The demand for gold is for gold coins, a massive flurry of bullion buying by ETFs (and investors), and the institutions and traders buying the hell out of it. The reason is simple… pure fear.

Gold may be a perfect hedge against inflation. But what you are witnessing today is that gold is also a pure hedge against fear.

There is fear of nationalizing some of the major banks. There is a fear that the DJIA could go to 6,000 and the S&P; 500 could go to under 700.00. There is a fear that unemployment will hit double-digit levels. And there is a fear that our massive and nasty recession is going to be the modern day version of the 1930’s. These are currently all real fears, and this has not yet happened. A year ago the DJIA was north of 12,000 and the S&P; 500 was north of 1,300.00. The closing levels yesterday were 7,365.67 on the DJIA and the S&P; 500 closed at 770.05.

[Emphasis added]

All these fears are justified as the world watches with anticipation as to which shoe will drop next.

I must admit that I missed the entry point as gold crossed its long-term trend line to the upside and simply rallied on. We have no gold holdings at this time, but I ‘m looking to make a small commitment in that sector once I see a pullback. My preference is to enter this area via the ETFs GLD or IAU. As of last Thursday, IAU was positioned 13.85% above its long-term trend line.

Sunday Musings: The Value Of Feedback

Ulli Uncategorized Contact

Last Sunday, I talked about the impossibility of being able to please all the people all of the time with my blogging efforts. I received a lot of commentary and emails, some of which you can review here.

Feedback is a valuable component of any business or any writer whether he gets paid for his efforts or makes a voluntary contribution. If you work for a company, the feedback you receive consists of an annual job review, along with raises, pay cuts or even termination.

A business receives feedback from its customers although many organizations seem to have forgotten that fact and don’t show too much interest in how their customers feel about them. I’m sure you have come across this annoying fact many times.

Then there are others who try to take feedback to the ultimate level. Some of the better known fast food chains insist that their top ivory tower executives spend at least one week a year behind the service counter, so that they never forget who generates the revenues.

And who can forget the wonderings of Lee Iacocca, who walked the assembly lines of Chrysler talking to the mechanics as to how things could be improved. There is no better way to solicit feedback than from the man who actually does the work.

Then there is the other extreme that comes to light when you have too much money and you are surrounded only by brown-nosing “yes-men” so that the only reality you are exposed to is phony compliments telling you how great you are. Entertainer Michael Jackson comes to mind.

The bottom line is that we’re all better off if we get some kind of feedback regarding our efforts. Usually that requires that you check your ego at the door first, before wading into the unknown. I for one appreciated your comments, which where all constructive and some contained valuable suggestions, however, most opinions were evenly divided, which supports my theme that you can’t please everybody.

Many readers liked my references to other articles, some didn’t. I will keep continuing on the same path, but try to condense and reduce wherever I can, which I already attempted this past week.

Everybody has an opinion on this subject, even former President Bush had to chime in as the following video clip shows.

http://www.youtube.com/get_player

Don’t kill the messenger; I thought this was very funny.

The Value Of Selling

Ulli Uncategorized Contact


In regards to my recent post “7 Years Of Wealth Wiped Out,” reader VR had this comment:

It’s almost funny when I try to talk people out of buy-and-hold strategy and point them to your blog for market-timing.

Everyone is afraid of missing out on a big rally. They don’t really mind losing more than 50% of their investment to a bear.

The worst is that no one believes that the market could go further down from this level.

It’s hard for me to believe that anyone would be more concerned about missing out on a rally than protecting himself from downside losses. I suppose that old habits die hard because the buy and hold proponents have done a great job of brainwashing the public for a long time.

However, numerical facts, which most don’t bother to look at, show a different picture. You most certainly remember the last bear market of 2000, the brunt of which we avoided by selling on 10/13/2000. On that date, the S&P; 500 stood at 1,374. Two days ago, it closed at 779, which is a loss of about 43% over some 8-1/2 years.

Since most investors and professionals alike are desperately trying to beat the S&P; 500 performance, and most fail to do so, many portfolios have done worse. Looking at it another way, year over year, this century has not been kind to the buy-and-hold investor as the following chart shows:

This means a portfolio with a starting value of $100,000 would now be worth $68,000. 8 years of investing via buying and holding and nothing but losses to show for.

If the markets don’t provide us with a significant rally over the next couple of years, many investors will become acquainted with our own version of the “lost decade.”

Since bear markets are a fact of life, and can strike at anytime, a smart investor needs to recognize that fact by using some sort of an exit strategy. This century has shown that selling at the right time is far more important than when and what you buy.

Not selling can have a devastating effect on your portfolio, as we’ve seen, while missing out on the initial stages of a bull market will merely reduce your potential profits.

No Load Fund/ETF Tracker updated through 2/19/2009

Ulli Uncategorized Contact

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

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

Continued worry about the survival of the banking system pulled the major indexes deeper into bear territory.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -10.40% thereby confirming the current bear market trend.



The international index now remains -20.43% 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.

Another Fraudulent Scheme

Ulli Uncategorized Contact

MSN Money reported that another alleged fraud has taken place (sorry, no link):

The Securities and Exchange Commission accused Robert Allen Stanford, chief of the Stanford Financial Group, a large Houston money-management firm, today of conducting “a massive ongoing fraud” in the sale of about $8 billion of high-yielding certificates of deposit held in the firm’s bank in Antigua.

The complaint, filed in federal court in Dallas, alleges that Stanford and two associates — James M. Davis, a director and chief financial officer of Stanford Group and the Antigua-based bank affiliate, and Laura Pendergest-Holt, the chief investment officer of both organizations — misrepresented the safety and liquidity of the CDs, which do not come with any federal deposit insurance.

The CDs were sold by Stanford International Bank through the firm’s brokerage business, which is based in Houston. Both the bank, which claims $8.5 billion in assets and 30,000 clients in 131 countries, and the brokerage unit, which operates about 30 offices in the United States, were named in the SEC suit. Stanford Financial asserts that it advises about $50 billion in assets.

While this is relatively minor in scale when compared to the Madoff affair, if allegations hold, many people may have been defrauded of some of their assets. By the mere fact that CDs were involved, I conclude that a lot of elderly investors or those with a need for income have been affected.

As an investor how can you prevent being taken? There are 2 simple steps you can take, which will avoid you being the next victim making headlines.

First, if an investment promises an above average return and it sounds too good to be true, it usually is. Don’t fall for it. This may sound obvious, but in times of low interest rates, greed can cloud judgment.

Second, all fraudulent schemes require you to send the money to a company where the assets allegedly will be invested. That’s a no-no, because you’re giving up control.

Even when working with an advisor, be sure that your account is housed at a reputable custodian in your name with the advisor merely having a limited power of attorney (LPOA) to implement his investment strategy.

If you only follow these two simple steps, you will have all but guaranteed that fraudulent schemes won’t become a part of your life.

Honing In On Last Year’s Lows

Ulli Uncategorized Contact

The markets took it on the chin yesterday with all major indexes heading sharply south and honing in on last November’s lows. Actually, the Dow came within 31 hundredth of a point of taking out the November 20th level.

The November low of 752 of the S&P; 500 held up so far, but we have moved within striking distance. Causing this ruckus was the fear and worry that the stimulus package most likely won’t eliminate any recession pains.

In addition, Wall Street traders may have finally woken up to the fact that there is a recession going on around the world that seems to be increasing in speed as well as in magnitude and that other stimulus packages may not work either.

To readers of this blog, this should come as no surprise as I have questioned the wisdom of any stimulus or bailout program from the very beginning. It now remains to be seen if there is more follow through to the downside. If the 752 level on the S&P; is violated, you could see some indiscriminate selling, since this bottom has been hailed as the real thing.

To be clear, a break below it could bring the widely forecast 600 to 650 level into play, which would be absolutely devastating to the buy-and-hold crowd. Being safely on the sidelines is the only appropriate position during these times of madness.