Bloomberg had an article titled “Soft-Dollar, Trading Costs Devour Fund Returns,” which describes the effect of various expenses and trading costs on overall mutual fund returns.

The story goes on to look at a fund manager’s turnover rate, which is the amount of trading expressed as an annual percentage of fund assets. For example, a turnover rate of 100% tells you that the value of the entire portfolio was traded in a year. Yes, this does happen; in some fund orientations more than in others.

That in itself is an irony, because the fund manager obviously feels that, in order to increase performance he needs to discard losing stocks and add more on the winning side. While this makes good business sense to me, there is a double standard here. Why are you, as a fund investor, not supposed to (or only with a penalty) to do the same thing by dumping underperforming funds and replacing them with better ones?

Makes it pretty clear whose interests are priority and whose are not.

The gist of the story is that all fund expenses decrease the shareholder’s return. However, keep in mind that this is only an issue for Buy & Hold investor, who will not only be paying these expenses in good times, he will also be paying them as his portfolio suffers in a bear market.

Following trends, I never concern myself with a fund’s expense ratio. I want to be invested in a good performer and will only stay in it long enough until my sell stops, or a major trend reversal, takes me out of the market. While the entire mutual fund community hates this selfish profit motivated approach, it allows you to stick to the basis of investing, which is to make your money grow and not be loyal to a fund company that has absolutely no loyalty towards you.

Speaking of selfish and profit motivated, always remember, a mutual fund company’s main goal is the same as the one for any corporation, including the one you work for: To make money for the company; nothing else. If you happen to grow your portfolio along the way, that’s great, but not necessary for the fund company to survive.

Here’s a more humorous way to look at it: “Fall in love with your wife,” but “fall out of love with your mutual fund,” and focus only on those that can help you grow your portfolio.

Everybody has one or more pet peeves they feel strongly about. I am no exception. Here’s one that no doubt you are encountering as well on a daily basis, which is the downright obnoxious, funny and sometimes dangerous use of cell phones.

To me, cell pones are one of those inventions that can make your personal and business life easier by being able to follow up on important issues on the spot. However, cheap phones and endless talking plans seem to have reversed the benefits for many by turning them into addicted phone slaves.

The obsessive use of cell phones is ever present especially with the younger generation (I hate it when I sound like my dad). What is so important about answering a phone during the middle of a meal while having lunch or dinner with a friend?

Because of the total disregard for privacy by most cell phone users, I have been forced into having to listen to many conversations, and I can assure you that 99% of them are not worth the free cell phone time.

Not too long ago, I was driving out of a housing tract and was stuck behind a sports car. In it I noticed a young lady with her left arm hanging out the window holding a cigarette while being on the cell phone using her right hand while, at the same time, attempting to make an illegal left turn onto a highway. Since it was late model 3-series BMW, there is a good chance that it had a stick shift, but I can’t be sure. What a talent.

Why is it that most people have the incredible urge to place a phone call the very moment they get into their car and have to back out of a tight parking spot? What is so important to discuss on the phone for a mother, attending to her 2 young children who are strapped into the back of her high end 2-ton SUV while barreling down the freeway at 70 miles per hour?

Or, enter the twilight zone as I did a few months ago at my Huntington Beach office when I went to the restroom. I was speechless when I heard a guy sitting in the stall talking on the cell phone. It might have made sense to me if he had a sudden brain storm as to how to solve global warming or a host of other issues that ail the world. But since his conversation started with “hey man, how you doin?” this was obviously not the case.

It seems that no matter where I go, people constantly eye their cell phones in nervous haste almost out of fear that they might have missed a message. At the gym, at the beach, in a sports bar, in a fine restaurant, or any other event, phone phobia is ever present.

Why?

My personal opinion is that this addiction stems from a need to be constantly entertained, which has reached ridiculous proportions. I believe that the younger generation has a downright fear of silence. They don’t know, or have not learned, the simple pleasure of sitting at a beautiful spot, like the beach or the mountains, reading a good book and enjoying the sounds of nature.

Or, what about simply silently sitting in this type of environment and thinking? Yes, sitting and thinking about things that matter without TV, iPod or cell phone.

Has that become a lost art?

The Subprime pig strapped on his wings this week and feasted at different troughs in a variety of countries. While the countryside varied, much to the pig’s delight, the food was identical: Same old leftover slop from irresponsible subprime lending procedures primarily designed to feed somebody’s corporate bottom line no matter what the long-term outcome might be.

Affected countries, besides the U.S., included Australia, Germany and France. Yes, even the French saw their culture invaded by having to interrupt their wine and cheese desert to come to grips with the fact that some of their own U.S. exposed hedge funds stopped redemptions. The European Central Bank injected some $130 billion into the financial system to provide liquidity, a step which was followed by the Fed a day later.

Once the subprime pig is on the move, there is no way of knowing where it might stop and feast next. And that is a big problem because there is no transparency as to which financial institution has how much exposure.

There is a good chance that far more companies have invested in these loans through a variety of schemes, and fear of redemptions may keep them from disclosing their true risk exposure until the heat is really on.

If this trend continues, it will be an absolute certainty that the stock market rally of the last 10 months will come to an end. And don’t kid yourself into believing that there are asset classes that will resist the subsequent downdraft.

The only safe position will be in money market—until the subprime pig has found its last meal.

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

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

Tremendous market swings to the upside and downside left the bulls coming out ahead by a small margin. For more details, please see the above link.

Our Trend Tracking Index (TTI) for domestic funds/ETFs rose and still remains +2.00% above its long-term trend line (red) as the chart below shows:

The international index has now moved to +1.67% above its own trend line, as you can see below:

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

Today’s steep sell off (based on the continued spread of the subprime virus) did not affect any of our sell stops. Since I had liquidated some of our more volatile holdings in some country and sector funds last week, we are left with positions that have been fairly stable.

Most of them have come off their highs by 4%-5%, which means there is still a little “play room” until the 7% sell level gets triggered.

Our Trend Tracking Indexes (TTIs) rallied early in the week and are, as of today, positioned in regards to their long-term trend lines as follows:

Domestic TTI: +2.54%
International TTI: +3.07%

We will hold all positions subject to our sell rules.

Last week, reader Craig pointed towards my previous observation that gapped upside openings will always be closed, which translates into a market pullback.

The odds of this happening are extremely high, although I have not read any study confirming that this is a 100% occurrence. Let’s take a look again at an enlarged portion of the Domestic Trend Tracking Index (TTI):




As you can see, the lower arrow shows a gap that was formed during the first quarter of 07. While the markets retreated a few weeks later, the gap was never completely closed. This is in contrast with a more recent gap (upper arrow) which was closed during the sharp pull back 2 weeks ago.

I have seen thousands of charts where these types of break-away gaps have been closed, the timing, however, has always been uncertain. Sometimes it happens quickly, as in the case with the upper arrow, sometimes it may take months.

How can this be of value to you? Recent gaps allow you to look at market behavior in a different light. When a correction occurs, such as we’ve seen over the past few weeks, you can look at the TTI chart and hold off making any sell decisions until the gap has closed. In many cases, this will also coincide with our sell stop discipline. Many times, after a gap has been closed, the markets will resume their previous trend, which was to the upside.

If the original gap in the above chart gets closed, that will put us at a very critical juncture in that most likely the trend line (red) will be pierced to the downside. However, there again is the chance of a rebound. That is why I evaluate the breaking of the trend line to the downside for a few days to be sure the break holds before issuing an all-out Sell signal.

Again, you need to be humble and accept the fact that there is no investment method which will get you in and out of the market correctly 100% of the time. However, having a plan that attempts to keep you away from the devastating impact of another bear market (whenever it occurs) sure beats the buying, holding and hoping approach that has proven to be a portfolio killer.