In view of the government take-over of Fannie and Freddie, Nouriel Roubini wrote a timeless piece a couple of days ago titled “Comrades Bush, Paulson and Bernanke Welcome You to the USSRA (United Socialist State Republic of America)”.

Here are some highlights:

The now inevitable nationalization of Fannie and Freddie is the most radical regime change in global economic and financial affairs in decades. For the last twenty years after the collapse of the USSR, the fall of the Iron Curtain and the economic reforms in China and other emerging market economies the world economy has moved away from state ownership of the economy and towards privatization of previously stated owned enterprises. This trend was aggressively supported the United States that preached right and left the benefits of free markets and free private enterprise.

So Comrades Bush and Paulson and Bernanke will rightly pass to the history books as a troika of Bolsheviks who turned the USA into the USSRA. Fanatic zealots of any religion are always pests that cause havoc and destruction with their inflexible fanaticism; but they usually don’t run the biggest economy in the world. But these laissez faire voodoo-economics zealots in charge of the USA have now caused the biggest financial crisis since the Great Depression and the nastiest economic crisis in decades. So let them be shamed in public for their hypocrisy and zealotry that has caused so much financial and economic damage.

There isn’t anything worthwhile I feel I can add to this story, other than that time will eventually tell us how bad of a move this take-over really was. With a new line up of candidates preparing for death row (Lehman, WaMu, Merrill and others), I have to wonder how long this propping up of failed institutions will continue.

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

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

Wild swings in the market led to only minor gains.

Our Trend Tracking Index (TTI) for domestic funds/ETFs remains below its trend line (red) by -2.15% thereby confirming the current bear market trend.



The international index now remains -9.07% 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.

Lately, I have been receiving a lot of subscriber email wondering what to do with their invested positions. I personally find it hard to believe how some people subscribe to my free newsletter, which spells out exactly when to buy and sell, and then proceed to do the exact opposite.

Even my constant nagging of using sell stops seems to simply fall on deaf ears.

Consider the latest email from an anonymous reader:

My entire portfolio is invested in the following mutual funds……….would you continue to hold or bail out…….I have emerging Markets……..gold …..energy ……natural resources……..oil and gas…energy services…..oil and gas services, and precious metals and precious minerals………. ………….China ……..India………that is 10 areas. I think that covers it…………..I am getting clobbered ……but I know and feel that these are all areas that are going to rebound…….as soon as the i***t is out of office………

Of course, you are getting clobbered when you’re hanging on to investments that are in severe downtrends. None of these should be held during a bear market. Take a look at a chart:




Had you used my recommended sell stop discipline for sectors and country funds of 10% from the high since you bought them, you’d be 100% in cash right now. You’re playing the game without a plan, based on your wild hope that a new president in office will make all the difference and that your holdings are going to rebound.

While that possibility exists, it’s not a basis for making intelligent investment decisions. This is the exact type of wishful thinking that has killed portfolios during the last bear market of 2000 to 20002. I suggest you re-revisit your ideas and become acquainted with the fact that whatever you do, you should always use a sell stop; it will save your bacon many times.

Your investing style is based on a bullish scenario, which will get clobbered in a bear market environment as you have witnessed. I believe that the bear has a long ways to go, but if I’m wrong, then trend reversals, as shown via my Trend Tracking Indexes (TTIs), will give you the opportunity to re-enter the market at a time when the odds are stacked in your favor.

As I suspected, the market did the old pop and drop over the past 2 days, and gave back all, and then some yesterday, of what was gained the day before. So much for the euphoria surrounding the Fannie/Freddie bailout announcement.

Contributing greatly to the weakness in the financial sector was Lehman’s drop of 45% in share price value after it become known that their capital hunting efforts around the world to shore up their balance sheet may have come to an end as a Korean bank backed away from a deal.

The question in my mind is now whether Lehman is big enough to be bailed out and then WaMu, followed by who knows. When will it end? Companies that are no longer a viable businesses entity should be allowed to fail as is customary and healthy in any capitalistic society.

Yesterday’s sharp retreat was a disappointment for many investors who had hoped that a turn-around maybe close at hand. On the contrary, we actually slipped deeper into bear territory with our Domestic Trend Tracking Index (TTI) now having dropped -3.44% below its long term trend line while the International TTI has dropped -10.73% below its own divider between the bullish and bearish zone.

Being on the sidelines remains the best course of action.

Euphoria reigned on Wall Street yesterday as a sharp opening rally gave way to a drop and a subsequent recovery, all caused by the government bailout plan of Fannie Mae and Freddie Mac.

Over the next few days, when more details become known, the markets may react to the reality of what really happened. The government bailed out an institution that should have been allowed to fail. This artificial prop-up will do nothing for homeowners, foreclosures, the credit crisis or the recovery of real estate in general. It was simply designed to throw a lifeline to an institution in order to protect the financial system. Nothing more, nothing less.

Of course, the total expense of this venture is the dark horse here, but what’s a few hundred billion dollars among friends? Eventually, we all get to participate in paying for this newly created monster.

The old adage “watch what they do, not what they say,” certainly rang true over the past few weeks leading up to this takeover event. Mish at Global Economics posted a great analogy in case you are not sure what politicians really mean based on what they’re saying. You can read it at “Paulson And Others Translated.”

Be sure to watch the music video referenced at the end of the post with the appropriate title “Take a load of Fannie.” It hits the nail on the head with a classic song, which is funny, sad and true.

In case you’re wondering, this rebound did nothing to change the direction of our Trend Tracking Indexes (TTIs), which are still under water and in bear territory:

Domestic TTI: -2.00%
International TTI: -8.23%

New reader Lloyd had this experience to share:

I invest in mutual funds and ETFs. I was using Fidelity funds and using the 1 mo, 3 months, and 1-year returns to pick the best performing funds.

This seemed to work okay, but recently it had me in all oil and oil related funds and when oil dropped I lost all my profits. I was wondering if your method would do the same or would it get me out with some profit. Also, what do you use for a sell signal for the sector ETFs and sector mutual funds?

I was looking at your M-Index and wondering why you use YTD in your calculations rather than 1 year. It seems to me that if you use YTD, you’re not always using the same number of months to make your calculations. The last month of the year the YTD is 12 months of data whereas the first of the month of the year the YTD is only one month. Does this affect the ranking?

First, using longer term momentum figures as Lloyd suggests can work as well. However, you still need to pay attention to the direction of the trends and follow a strict sell stop discipline. Just because momentum figures are still in positive territory does not mean holding a fund/ETF is advisable.

Once you have established your invested position, you need to set up your trailing stop loss point. For sector and country funds, I use 10% and for domestic and broadly diversified international funds I use 7%. Without it, you are exposing yourself to tremendous risk no matter which investment approach you use.

Second, you are correct in your observation that the value of the M-Index is reduced to a smaller number every January due to the new YTD returns. Since all M-Indexes for all ETFs/Mutual Funds are adjusted at the same time, it really does not really matter since the figure by itself has no meaning. It is only important when compared to others and shows increasing and decreasing momentum.

Again, when working with momentum figures or trends in general, the implementation of a sell stop discipline will save your portfolio from major damage. Unfortunately, many Buy & Hold investors have not figured that out yet and will have to learn the hard way (by losing serious money) that a bear market is not to be taken lightly.