As you know from my writings, there aren’t too many investment professionals, authors, articles and market philosophies I can agree with. My guess is that there are less than a handful of people in this country whose investment approaches I admire.

So, it’s really refreshing to occasionally come across an article that represents my view 100%. Al Thomas’ piece on “Tracking a Hot Market,” while written years ago, still applies nowadays. It’s timeless wisdom. He correctly states that most investors have no clue as to how to determine market direction. So they go out and hire a financial planner or broker who also does not know.

As a reader of my weekly StatSheet, you are familiar with my Trend Tracking Indexes (TTIs) which determine whether the major market direction is up or down. If you are so inclined, you could cut the umbilical cord and become independent of my data by creating your own directional indicator as Al outlines in his article.

I am currently reading his book “If it doesn’t go up, don’t buy it,” which reflects my beliefs exactly about the market place. Al pulls no punches about what’s wrong with the financial services industry (he’s been involved in the investment community since 1965). If you are a financial professional, you may want to read this book only if you are open minded as it exposes the many shortcomings of the industry, and there is a good chance that you will feel offended.

In the near future, I will further review this book. I am only saddened by the fact that Al Thomas (who is also a reader of my newsletter) already said all of the things about Wall Street, and the inept financial services industry, that have been on my mind for a long time.

With my ETF Master List now containing 497 ETFs, the investment choices are becoming definitely overwhelming to some. Using momentum figures, as displayed in my weekly StatSheet, makes it easy to sort out those performers that are worthy your attention and discard those which are heading in the wrong direction.

Here are the top five ETFs, which I have sorted based on YTD performance and grouped by reference to the famous Clint Eastwood movie bearing the same title:

The Good:
SLX +51.39%
EWZ +31.40%
EWY +37.25%
PXJ +35.92%
TF +35.33%

The Bad:
STH -0.04%
IXG -0.18%
KCE -0.39%
FXM -0.46%
FVD -0.48%

The Ugly:
KRE -14.86%
DCR -21.82%
TBH -25.32%
XHB -25.35%
ITB -33.37%

Keep in mind that this is just a snapshot in time. Look at this as a ‘big picture’ overview of YTD performance. It will tell you which areas to consider and, more importantly, which ones to avoid.

In a recent post I talked about the dangers of using leverage when investing and how it has helped this market to continue its run toward record highs.

Front page news at MarketWatch tells us some more details about the subprime debacle and its effect on two of Bear Stearns hedge funds, one of them which is down an amazing 91% for this year.

Minus 91%?

Hmm, I guess using sell stops to protect investor capital would be out of the question. Makes you feel kind of glad that you and the size of your portfolio aren’t qualified to participate in these kinds of ventures, doesn’t it?

To make their investors feel better, the company stated that “in light of these returns, we will seek an orderly wind-down of the funds over time.” Oh yeah, that sounds great. Be sure to hurry up, the investors could use the left over money to gas up their cars.

The High-Grade fund had $1 billion in assets while the Enhanced Leverage fund had about $600 million and via leverage they controlled more than $10 billion in mortgage related securities and other derivatives.

I can see why they would name one of their funds the “Enhanced Leverage” fund. What I don’t understand is how the other one can be called “High-Grade Structured Credit,” because of the involvement of subprime mortgages, which are anything but high-grade. The article further states that “the losses partly reflect unprecedented losses in the valuations of several securities with top AAA and AA credit ratings.”

I don’t get that. Either they did not really own AAA rated securities or the ratings were incorrect. On the other hand, maybe they simply misread the label “subprime” loans to mean “supreme” loans? We may never find out but the smart guy in this transaction has to be the hedge fund manager on the other side of these trades who made a killing for his clients.

I am sure the investors will get the obligatory “thank you and come again letter.” After some passage of time, Bear Stearns will come out with a “new and improved” hedge fund and solicit the same investors with promises of great fortunes. It’s business as usual.

CNBC recently reported that Bear Stearns has told investors in two hedge funds that speculated in subprime mortgages that the funds are now essentially worthless.

Hmm, while the final numbers still have to be compiled, essentially that means that the investors have lost their entire investments. Gone! 100% loss! Out the window! Down the drain!

This reminded me of an informal research project I did a few years ago among some of my 50 something friends and acquaintances. My goal was to find out about their biggest blunders when it came to investing—investing in any kind of asset.

The answer was surprising. It turned out that the biggest losses were not obtained by picking a bad stock and holding it too long, or selecting the wrong kind of mutual fund. On the contrary; the biggest losses came from investing in newly formed companies with the promise of an imminent IPO and the subsequent riches to be derived from that. Others invested in companies with a hot new product in the developing stages, which never materialized.

In other words, had these people invested in listed financial products on the stock exchanges, and not given up control of their money, they would have been in better financial shape at this time and most likely would have avoided losing 100% of their investments.

So, how much did they lose? Based on my computations, the average 50 something lost $125k on various ventures! While most of them were not hurt by these poor choices, it’s still a large amount to part with. If you had this money available and compounded it conservatively for 20 years, you’d have in access of $500k.

The lesson learned is that, if you’re on your way to investing for your retirement, and don’t have outright risk capital available, stick to the financial markets. Even making a mistake here and there may not nearly be as devastating as a 100% potential loss in an illiquid venture, where greed can easily overwrite common sense.

I am about 70% through reading Thomas Friedman’s book “The Word Is Flat.” It’s a fascinating research project about how the world has become a totally interconnected place where every businessman can utilize the resources and services of anyone else.

He specifically hones in to the special relationship the U.S. enjoys with India. I was astonished to learn how many businesses outsource services and tasks to Indian companies. That includes major banks, Wall Street firms, tax preparers, computer manufacturers and many others.

There are several reasons for this affinity. Bangalore, India has developed a massive infra structure of domestic Indian companies that are all set up to service U.S. based businesses. For example, if a Wall Street firm needs to have a presentation project done, they can simply upload the details at day end Eastern Time to a service in India specializing in that sort of thing and have it back in their e-mail inbox by the next morning.

Because of the time difference to India, they work while we sleep. Of course, there are many service firms that work 24-hour shifts to allow for simultaneous work interaction with the U.S.

The only reason this is possible is because India has an extremely well educated, bright and English speaking work force that is eager to work. The pool of resources, Friedman says, is absolutely enormous. Indians get paid a very good wage to work for an outsourcing company, and it is a well respected position.

For an American firm, it’s a no-brainer. You get an equivalent of an MBA or in some cases even a PhD, who will work for an hourly wage that is considerably less than what they would be paid here in the U.S.

To verify that information, I contacted some of the outsourcing firms Friedman mentions in his book. I found that administrative/marketing assistants will work from $8 to $15 per hour, while the services of a computer programmer range from $10 to $30 per hour.

When I grew up back in the former East Germany, I remember my parents always harping on me to “finish my dinner because there are starving people in India.” You may have heard that too, but recently I heard this quote being changed to parents telling their kids “finish your homework, because there is somebody in India who wants your job.”

It’s a fascinating book that describes the enormous impact of a continuously flattening world. It’s a must read for everybody because Friedman also explains the upcoming “Chinese revolution” in terms of what happens when their massive educated workforce, and soon to be English speaking, gets unleashed and involved in world markets. Among many other topics, he further elaborates what you must do to protect your job from being outsourced.

If you haven’t read it, I recommend it; it will do more for your understanding of how the world operates nowadays than the daily hyped up news barrage.

A few days ago, MarketWatch had a story featuring the editor of the Mutual Fund Strategist Newsletter, Holly Hooper-Fournier, saying that 16 of the firms 17 timing models are “currently issuing a buy signal.”

She further noted that, unlike some timing models, the ones used by her firm remain bullish on international and emerging markets investments.

Hmm; I find it hard to believe that any model would issue a buy signal at this juncture in the market given the run up we’ve had over the past 10 months. While I don’t speculate on future market direction, I think that, looking at the big picture, we are closer to a market top then a market bottom.

The danger is that the investing public (who reads stories like this) looking for a point to enter the market, might be tempted to throw caution to the wind and put all available investment dollars to work at once.

A smarter way would be to use my incremental buying process and only expose one third of the total portfolio at first and, upon a 5% gain, commit another one third increment and so on. This will help avoid to possibly buying in at the top of the market and, when used together with my recommended sell stops, will reduce the risk tremendously.

Just because a newsletter you follow issues a buy signal does not mean you have to jump in 100%. Commit a portion you are comfortable with and, if things go your way, add more. You’ll definitely sleep better at night.