Even playing field?

If you read as much financial "stuff" as we do here at SMI, you quickly learn that writers in certain quarters are convinced the financial markets are rigged. Either the government is running the show, or some group of elites, or well, somebody is clearly up to something. While occasionally some good points are raised, the argument tends to get tired (and generally speaking, as a result, we don't continue to do much reading from those conspiracy-minded sources).

While it's hard for me to believe the whole system is rigged, I don't doubt for a minute there are isolated cases of misconduct. There's simply too much money involved, and greed too hardwired into the human DNA, for there not to be. This is an area where government has a perfectly legitimate and appropriate role to play as regulator and enforcer of the laws on the books.

The question is, are they fulfilling that role? Evidence like this suggests they are not. Huge purchases of index futures in advance of the public release of government information (that is likely to move markets) needs to be met with a swift and brutal slap from the enforcement arm that oversees these types of securities transactions. Hopefully that action is coming.

It's crucial that the players in the system be held to account when they break the rules. When individuals feel like the game is unfairly stacked against them, the whole system crumbles.

Posted by Mark at 2:26 PM | Comments (0)
Category(s): Current Market Events

Email this post

401(k) / group annuity plans

Forbes has a disturbing article on certain 401(k) plans set up as "group annuities" by insurance companies. By their account, "Among 401(k) plans with assets of less than $250 million, group annuity-style menus account for 55% of the market and are sold by axa Equitable, Lincoln Financial and other insurers." These group annuity plans charge ridiculous fees and often lock participants into those fees for years.

Not all 401(k) plans with annuities are necessarily bad. But some sure are. If you're in a plan with annuity investment choices (or one that is run by an insurance company), you should read the article and ask appropriate questions to make sure you're not in a plan like the ones they describe.

Posted by Mark at 3:13 PM | Comments (0)
Category(s): Retirement

Email this post

Savings rate jumps to highest level in 15 years

In the June editorial, I wrote that consumers were sharply adjusting their spending/borrowing/saving habits.

Here's the proof, from this report on May incomes: "With the boost to incomes, the savings rate rose to 6.9%., the highest in 15 years."

Unfortunately, the "boost to incomes" referred to was primarily due to one-time stimulus checks sent to roughly 50 million Social Security recipients in May. It would be easy here to spin off-topic on the idea that this "income boost" basically amounted to working taxpayers paying off debts for (mostly) retired folks — probably not a great strategy for getting the economy humming again.

Instead, we'll keep the focus on what the recipients did with that extra "income" — they mostly saved it or used it to pay off debt (those two activities look the same in this particular statistical measurement). That's good on the personal level; it's what they almost certainly should be doing with that extra money.

But it also shows why one-time stimulus payments are typically ineffective at stimulating the economy. The people receiving the money don't spend it, and it's basically just a transfer from one group of citizens to another (normally from those who pay income taxes to those who don't, or at least from those who pay a lot of income tax to those who pay relatively little).

More importantly, it shows the headwinds the economy is going to have to fight as it eventually returns to health. The "New Normal" idea is based, in part, on the prediction that people aren't going to simply return to the irresponsible spending habits of the past few years. Rather, they're likely to take any increases in income to pay down debt and increase savings, as is evident in this May data. To what extent people continue to do so, and for how long, once the recession ends, will determine to some degree how quickly the economy returns to health. Ironically, what's good for individual financial health (debt reduction and savings increases) is bad for the short-term health of the economy. But that's the price we pay for past excesses.

Posted by Mark at 10:14 AM | Comments (0)
Category(s): Economy

Email this post

July issue now available

The July 2009 issue of the newsletter has just been posted to the website.

Readers following our Fund Upgrading strategy are advised that five funds are being replaced this month. SMI web members can read the write-ups of the new funds we're adding here.

Want to see which funds SMI is currently recommending? Become a Web Member today to instantly gain access to all of the new July content!

Posted by Mark at 10:07 AM | Comments (0)
Category(s): SMI General Announcements

Email this post

Good advice

From Bill O'Neill, via Chuck Jaffe's latest column:

Bill O'Neil, the founder of Investor's Business Daily and author of "How to Make Money in Stocks," told me this week that the idea for most investors is to find a system that works for them and to then stick with it, knowing that they will never be right all of the time but that if they win more often than they lose, they'll make money in the market.

"Most people would be better off if they found a system they could live with," O'Neil said. "You will always have times where you say 'I could have made some money in there,' but if it's against your rules and your rules work over time, you can live with the mistakes."

Posted by Mark at 11:10 AM | Comments (0)
Category(s): Investing Principles

Email this post

Past performance is no guarantee of...

We've said it before and we'll say it again: just because an investment performed well in the past doesn't necessarily mean much for the present or the future.

Fortune magazine senior editor Allan Sloan makes the point in the Washington Post, with a focus on Treasury bonds:

If you put $1,000 into the S&P 500, 10-year Treasurys and 30-year Treasurys at the start of last year, you ended up with about $630, $1,230 and $1,450, respectively. The advantage: a stunning 60 percentage points over stocks for 10-year Treasurys, an even more stunning 82 points for the 30s.

But if you didn't adjust your portfolio at the beginning of this year, you've given a batch of that gain back.... 10-year Treasurys have given back 30 percent of their gains from last year relative to the S&P stocks and 30-year Treasurys have given back about 45 percent....

What makes a lot of money one year can lose a lot the following year. Within the past decade, we've seen various red-hot investments turn ice cold almost overnight: tech stocks, telecom stocks, commodities and, of course, houses. Now, long-term Treasurys.

How to protect yourself? Diversification and selling discipline.

Posted by Joseph at 1:19 PM | Comments (0)
Category(s): Investing Principles

Email this post

Maximizing income from CD's

James Stewart of SmartMoney has a counterintuitive strategy for investing in CD's (certificates of deposit, not the musical variety). Instead of buying longer maturities in order to get slightly better yields, he thinks savers should currently be shortening their maturities.

In this environment, I have a suggestion that bucks the conventional wisdom: Instead of lengthening maturities, shorten them. You don’t have to give up all that much income; you don’t have to worry about rising interest rates eroding your principal; and the short maturities guarantee that, in the event CD rates do rise, you’ll be in a position to take advantage of them when your CDs mature.

Given the modest improvements in yield from a one-year CD to a two-year (his article quotes national averages of 2.1% for one-year and just 2.3% for two-years), I think he's right. You might give up a tiny bit of income, but chances seem good that sometime within two years you'll make that up by being able to roll-over into higher yielding CDs.

Posted by Mark at 4:32 PM | Comments (0)
Category(s): Current Market Events, Retirement

Email this post

The 'mountain of cash' on the sidelines

The Los Angeles Times' Money & Co. blog examines whether money sitting on the sidelines in money market funds will flow back into stock funds, helping to fuel an extended bull run.

The conventional wisdom, backed by historical research, says it will.

In a research report on Monday, Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said that whenever money market assets have exceeded 25% of the capitalization of the Standard & Poor’s 500 index, stocks have rallied over the following two years. That number currently is 43% after having peaked at 58% in mid-December.

But the conventional wisdom isn't altogether correct, argues MMF guru Peter Crane.

[M]uch of the cash flow into money funds over the past two years had little to do with the collapsing stock market, said Peter Crane, chief executive of research firm Crane Data.

Corporations, which account for two-thirds of money-fund assets, have built up funds for purposes ranging from emergency reserves to bankrolling mergers, and are unlikely to put that cash into stocks, Crane said.

That’s a big reason why overall money-fund assets are down only 4% from their mid-January peak despite the torrid market rally since early March....

So-called retail money funds — those used by individual investors as opposed to institutional investors — have been losing assets at a faster clip this year. Retail fund assets are down 8.2% from their January peak.

But the build-up of cash in those funds in 2008 was due in part to dissatisfaction with fixed-income investments that went awry, such as exploding auction-rate securities and some surprisingly risky short-term bond funds, Crane said. So some of that money now may be heading back into other income-oriented investments — including corporate-bond funds, which have seen hefty inflows this year, and bank accounts — rather than into stocks

This is likely a case in which both side are correct. Quoting SEC info, Forbes notes that $4 trillion is sitting in money market funds. Surely, some of that money will flow into stock funds and some won't (and, as Peter Crane points out, not just because investors are skittish).

The market is made up of millions of players, each making decisions based on unique circumstances and available information. Speculating about what all those other people might do is less helpful than knowing what you're doing and why.

Posted by Joseph at 3:15 PM | Comments (0)
Category(s): Current Market Events

Email this post

What the credit markets are telling stock investors

Over the past week we've been discussing the fact that SMI's All-Clear Indicator is getting set to trigger. Re-entering the market based on this signal has been a very astute move every time it has occurred in the past 50 years or so. But many readers are understandably having a very difficult time reconciling the stock market's recent rise — much less the prospects of a continued bull market — with the continuing economic difficulties (and longer-term systemic problems).

We've looked at this from multiple angles, but one that we haven't considered at all is fleshed out by Jon Markman in this very interesting article. The basic summary is this: the credit markets led us into this mess, and the credit markets are now signalling that it's over. It's worth a quick read.

Posted by Mark at 10:43 AM | Comments (0)
Category(s): Current Market Events

Email this post

Finding value in the current market

If you're having trouble reconciling the idea of short-term opportunity in the stock market with the many big-picture issues still facing the economy, you're not the only one.

I'm a fan of author Jason Zweig (who wrote the book we excerpted our Feb 2008 — The High Cost of Fear — cover article from). He's usually pretty insightful. His recent article titled Wall Street's Clearance Sale Leaves Few Bargains details how so far in this market rally, the junky stocks are the ones that have risen the most, while the high-quality stocks haven't done as well. The tone is pretty pessimistic, wondering "But after this big and fast a bounce, how much upside can be left?"

Interestingly, he then turns to Jeremy Grantham to answer that question. (You'll recall that we've talked a fair amount about Grantham's views on the market recently.) Again, the context is basically this: the market has rallied a huge amount, the stocks that have rallied the most aren't really very good companies, and any good values that did exist seem to be pretty much gone now.

So where can a value-conscious investor turn?

Mr. Grantham regards "high-quality blue chips" as the only bastion of value in today's market. He cites companies like Coca-Cola, Johnson & Johnson, Procter & Gamble, Wal-Mart Stores and Microsoft as offering "high, stable returns with very little debt."

Dividends average better than 3% for this group; if "everything merely returns to normal" over the next few years, Mr. Grantham expects these blue chips to be able to return 11% to 12% annually after inflation.

That's the punchline of this relatively pessimistic article?

Think about this with me for a second. Here's another way to rephrase that calculation: If everything "merely returns to normal", these bluest of blue chips would be expected to gain roughly 50% over the next three years. (Assuming a modest 3% annual inflation.)

Hello? Anybody out there NOT interested in an additional 50% gain over the next three years or so? Anyone think that isn't a big enough prize to be worth playing for?

Now granted, Grantham may be all wet and the exact opposite could happen. The point really isn't to debate his view of how this is going to play out. I was just struck by the dissonance between the article's tone and the example cited. I think it's an illustration that the author, like most of the rest of us, probably feels torn about this market. Conditions obviously aren't that great, yet there still seems to be opportunity in stocks.

It's hard to reconcile. But then again, it always is during/after bear markets.

Posted by Mark at 2:55 PM | Comments (0)
Category(s): Current Market Events

Email this post

Best online finance tools

Well, SMI's 401k Fund Tracker didn't make this Wall Street Journal list of the best online tools for personal finance, but I guess I won't hold it against them.

We've highlighted a few of these for you in the past (particularly a number of the budgeting sites). But there are more unfamiliar names on this list than familiar. Might be worth a minute to peruse their list of tools for creating financial plans, tracking investments, checking for fraud, keeping track of credit, and (hopefully not) managing loans.

If any of you have used any of the mentioned tools and have feedback, either positive or negative, add it for the community in the comments below.

Posted by Mark at 3:23 PM | Comments (0)
Category(s): Family Finances

Email this post

Coppock curve turns positive

I saw several references this week to the fact that the Coppock curve turned positive last Monday (or the prior Friday, depending who was reporting it). I don't ever remember mentioning this old technical indicator before in SMI, but thought some of you might have seen/heard similar reports this week, so I thought I'd touch on it briefly here.

First, here's an explanation of what the Coppock curve is and why it might matter from Don Hays:

It was developed almost 60 years ago, and when I got started in this business about 40 years ago I subscribed to Edwin Coppock’s market letter. It is most definitely a lagging indicator, and long-term in nature. It theoretically only uses month-end data, and uses a combination of two long-term momentum calculations for the "market." If you have followed it, you know that virtually every major bull market of the past 90 years has been identified by the Coppock momentum gauge turning upward and moving through the zero line. There have been a few false signals, in 1938, 1941, 1947 and 2001. The latest failure in 2001 came in that rally after the 9/11 disaster, but was the first false signal in the last 50 years. The last signal given in April of 2003 proved to be another good example of its typical "correct" call. As noted in the summary, as of yesterday — or in fact Friday's action, the Coppock Momentum formula has once again given its confirmation that this is a new bull market.

So, in a nutshell, it's another slow indicator that tries to signal when the trend has definitively changed. In that sense, it's similar to SMI's All-Clear indicator.

A lot of people got excited about seeing this indicator flip, mainly because it has a pretty spectacular record over the past 50 years or so. (Hays had a chart in their report today showing each of the signals plotted on an S&P 500 chart. I wish I could reproduce that here, but suffice it to say, after virtually every significant downturn since 1965, there was a Coppock buy signal sitting almost exactly where you would have wanted to buy.)

But not everyone is convinced. Mark Hulbert looked at the signal's record over a much longer time period and found it unconvincing. One big reason for that — it flashed two very early buy signals in 1931, well before the 1932 lows. The losses from those incorrect signals undo a lot of the later positive calls it has made (when you average out the gains and losses, as he did in his article).

Then there's Jay Kaeppel (who I've never heard of before today), who says the Coppock Guide is useful, but not the way most people use it. Instead, he shows how using a different application of the system would have made a lot more money over the decades, and says that application is still at least a month away from issuing a signal.

The main point: simply to alert you that some other "long-term" trend indicators are lining up on the bullish side. As with the posts earlier in the week, I want to jumpstart the process of thinking about getting back into the market (or getting to your fully invested posture) in preparation for what looks like could be an all-clear signal as soon as a week from today.

It's always extremely hard to invest again after a big bear market. It would be twice as hard to do so "out of the blue" without any warning. So I'm providing some warnings to get you thinking about your plan and, potentially, provoke a gradual change in mindset.

Posted by Mark at 11:26 AM | Comments (0)
Category(s): Current Market Events

Email this post

More bullish fodder

As a follow-up to my post Tuesday, which likely left some readers shocked at the rapidly emerging bullish case, here are a couple other bullish points of view to consider.

Note that I'm not trying to turn everyone bullish all of a sudden — I just recognize this is a pretty sharp jolt for some, so I figured it might be helpful to look at a couple more examples from other sources seeing it similarly. We'll definitely be talking about the potential risks and how to respond to all this appropriately in the coming days/weeks, particularly if the all-clear indicator appears likely to trigger. What follows below is merely food for thought, not something to run out and take action on.

First up is a technical analysis expert. First, here's a disclaimer that we aren't huge on technical analysis, except as a confirming indicator. So I definitely wouldn't put a ton of weight on what you read here. But I found a couple things interesting in his article. One is how he points out that the near-term, intermediate-term, and now with the market blasting through the 200-day moving average, long-term (what he calls the "primary trend") indicators are all pointing higher.

A quick sidenote relevant to the 200-day moving average emphasis in his article — the S&P 500 dropped down briefly yesterday to touch that moving average and bounced immediately back up. That's potentially significant (or at least will be if it happens a few more times). Often, significant levels like a moving average will act as a "ceiling" until they're broken through, then switch and act like a "floor" after that point. What was resistance (knocking the market lower) can quickly become support (keeping it up).

A second confirmation of sorts comes from a totally different perspective, via Mark Hulbert. He reports on Jeremy Grantham's latest quarterly letter (PDF), explaining that Grantham has become quite bullish for the rest of the year. That's quite a surprise, for as we've pointed out a number of times here over the past 18 months, Grantham has been steadfastly bearish the past several years, and in fact called the recent downturn pretty well. For him to now be looking for a rally to S&P 500 levels of 1000-1100 (roughly another 7%-18% on top of the huge rally we've already had) by the end of 2009 is a bit of a surprise.

His reasoning though, is consistent with much of what you've been reading here at SMI. The article indicates that he expects a continued strong rally primarily as a result of the surge of stimulus money coursing through the economy (coupled with the liquidity being furnished by the Fed). Importantly, he's not nearly so optimistic about the longer-term, expecting the rally to fizzle at those higher levels rather than turn into a multi-year bull market. In other words, he expects a short-term rally based on the extraordinary government measures being taken, but ultimately expects that we'll have to take our medicine eventually in the form of slower growth and what he terms "disappointing" stock returns for some time after that. That idea basically echoes the last paragraph of my editorial this month.

What to make of all this? There are lots of conclusions we could draw. I'm not going to tease them all out here, but one take-away that's particularly relevant for SMI readers is the market can rally — perhaps significantly — despite the presence of looming long-term problems. There are always two aspects to market moves. There's the "what should be happening based on business conditions" element, which factors in all the stuff we've been concerned about lately (goverment policies, inflation, interest rates, business profits, etc.). But there's also a "valuation" element. If stocks overshoot to the downside during a market panic, the outlook may still not look that great, but stocks can rally considerably from those low levels.

One final point to consider. The last two bull markets have been extremly long. The last one was a full five years (Oct 2002 - Oct 2007). The one before that was almost 10 years (Oct 1990 - March 2000). It's very unusual for bull markets to last that long. The average bull market lasts less than 3.5 years, and it's returns are typically very front-loaded. This U.S. News & World Report article quotes Standard & Poor's as saying "the average bull market going back to 1942 has produced gains of 38 percent in Year 1, 12 percent in Year 2, and only 3 percent in Year 3."

My point is simply that some readers seem to be tripping over the idea that we could have a bull market with so many problems looming on the horizon. It's hard to get past the looming problems if you're thinking a bull market means several years of uninterrupted gains. It's easier to reconcile stocks moving up with the looming problems if you recognize most bull markets are much shorter than the ones we've most recently experienced.

Understand that we've already been in a bull market for several weeks if you use the classic definition of a gain of 20% from the prior lows. The question, of course, is whether this bull market will be short-lived — the classic "cyclical bull market within a secular bear market." We may have to wait a while for the answer to that question.

Posted by Mark at 9:27 AM | Comments (0)
Category(s): Current Market Events

Email this post

Market update

Over the past several months, we've written about a lot of trends in the economy and government that concern us. Some readers have expressed frustration with us for reporting on so many "negative" news stories and trends.

At the same time, we've consistently maintained that the market would turn around before the news got better. While we've conceded that some readers clearly needed to examine their risk tolerance and perhaps make adjustments in light of the steep bear market, for the most part we've encouraged SMI readers to stick with their plan and ride this thing out.

Many readers haven't liked this advice (to put it mildly). Some have left, in search of systems or seers that will move them in and out of the market in an effort to avoid the next bear market whenever it arrives. Market-timing never looks better than at the end of a bear market. On the flip-side, buy-and-hold investing never looks worse.

Then the market goes and rallies 40% in three months.

As difficult as it is to still be down as far as we are from the highs of 18 months ago, I can't even begin to imagine how it would feel to have sold at the March lows. And yet, logic tells us there are many people in exactly that boat, given the huge volume of selling around that market low.

Timing the market is an incredibly difficult thing to do. Which brings me as close to the topic as SMI ever gets.

As many of you know, SMI offers two very basic, very "big-picture" technical indicators for those inclined to add a dose of timing to their long-term investment plans. Our bear alert indicator gave a sell signal way back in January of 2008. (I think all of us wish we could go back and give that signal a much higher weight in our investment plans than we did then!)

The other signal that SMI offers is our "All Clear" indicator. This is a very-slow moving indicator. It isn't designed to catch the market bottom. It was purposely designed to be slow, because we were perfectly willing to give up the early part of a new bull market to try to make extra sure it didn't signal too early, before a bear market was actually over.

Guess what is getting close to triggering?

It's not there yet. But with yesterday's huge rally taking the S&P 500 index above its 200-day moving average, one significant obstacle to it sounding has been removed. The all-clear indicator relies on weekly closes (meaning the price at the end of the day each Friday). It would take a monster rally in the next few days for the moving averages to trigger the all-clear this week.

But all it would take for it to trigger next Friday is for the market to stay at or above the level where it currently sits right now.

Given that fact, it isn't particularly surprising to read that the top market-timing newsletter of the past 30 years (you knew I'd circle back to tie that in, didn't you?) switched to an aggressively bullish stance at the end of the day yesterday. Here's a brief rationale from the author's May 21 issue:

"During the early stages of bull markets, many investors will remain on the sidelines. They have a preconceived idea of where the market will go and will cite any number of economic concerns, as well as the warnings of CNBC pundits, to support their bearish case. Don't get us wrong; they might be right, but if history is any guide, the great majority of investors who were badly mauled during the bear market will not commit even a portion of their capital until it is much too late."

The economy is far from out of the woods. The news from Washington is troubling. The long-term outlook for inflation, interest rates, and our national debt all seem negative. But we've warned you for many months all that would still likely be the case when the market bottomed and the next bull market began.

Granted, we have no assurances the bottom is in. There are no guarantees when you invest in the stock market. We don't even have our all-clear signal yet. But the landscape has been shifting for several weeks now. Each level of gains has boosted the probability that the worst is over.

I thought it would be good to let everyone know the all-clear is getting closer than most probably would have guessed. Not that it's infallible. But for many readers, that's the signal they've waited for to re-engage with this market, and I'm guessing that most of those readers probably thought they'd have a little more time to get comfortable with the idea. It's never easy to recommit to the market after it's caused you so much pain. And, as the quote above alludes to, that's exactly why markets can bottom and run so far, so fast while the news is still bad.

It's time to start thinking through what your response will be if we do, in fact, get an all-clear signal 10 days from now.

Posted by Mark at 3:57 PM | Comments (0)
Category(s): Current Market Events, SMI Advanced Strategies

Email this post

Sector Rotation update

Mark is exercising his civic duty in court today — jury duty that is. But a quick word to let you know that we're making no changes in the Sector Rotation strategy. Both recommendations made last month are holding strong in the top quartile this month, so no changes are needed. Mark will post the file when he's back in the office later this week.

Posted by Matthew at 2:35 PM | Comments (0)
Category(s): SMI Advanced Strategies

Email this post