June 30, 2009

Decisions, Decisions

This weekend I had the privilege of helping out the Shriners on Prescott's Courthouse Plaza during the Bluegrass Festival.  The crowd was large, perhaps 1,000 strong, sitting on blankets in the grass, lawn chairs, the courthouse steps or just strolling in the shade of the old elms.  Gorgeous weather, of course, and a great day all around.  I always feel grateful when I see the great slice of Americana we have here in Prescott.Act on reality avoid fortune telling

While hanging out downtown, I had some time to reflect on the markets.   Sometimes making correct investment decisions is easy.  This is not one of those times.

To the casual observer, the market has moved sideways for about 45 days now, but remains well above the March lows.

A closer look reveals the S&P 500 Index** is currently near its lows for the month of June, and a couple more down days could establish a clear downtrend.  And, the first of my key momentum indicators has become negative.

Complicating the decision making is the fact that there is a flood of government money entering the economy, and until jobs are created, plants built for new industry, and inventory again built up this money needs to go someplace, and it often finds its way first to the financial markets.

As the old saying goes, a rising tide lifts all boats, and the tide of new money ought to continue rising for another few months at least.  Is this just a pause in a dramatic bull run?  Or is this the beginning of another stomach churning decline?  We are in unique times and no one knows for sure.

Even though many reports now say the economy is on the mend there is so much confusion in the economic data that many investors have failed to take advantage of the stock market's advances, and may not notice when the trend turns down.

Remember, we invest in the financial markets, not the economy.  They are not the same.  The market leads the economy, so I watch the trends in the market and spend very little time watching the economic numbers.

Since I prefer to act on what my eyes tell me actually is happening rather than relying on the fortune telling you can see on the financial news stations, I'm not going to just guess and mask it with a lot of smooth talk.  I am waiting for the market to tell me by breaking out either to the upside or the downside. Then I will know what the next move will be.

Account update

When the market is trending up we invest, when it is trending down we sell or hedge to control risk.  The transition between the uptrend and downtrend is a "top" and the most difficult environment for me to invest in.  I will almost always lose some money during that transition since it takes time to recognize the shift and react to it.  This dynamic has affected our Careful Growth model* which is showing a small loss in June but holding on to gains for the year due to the big months in April and May.

What we try to do is be invested and gain enough in the uptrend so that we have net gains after reacting to a transition.   So far we have done that this year.  Due to the possible market "top" forming, we have sold some of our holdings to bank those gains and reduce risk going forward.

Right now our growth accounts* are only about half invested, holding international, technology and high yield bond funds, along with a big chunk of cash.  I need to get a clearer picture of market direction before investing more of that cash.

Successful investors are patient investors.  It's clearly time to be patient.  However since 1957, the S&P 500** has averaged +35.8% in the first year following the end of bear markets and +11.9% in the second year (Source: BTN Research).  So we must remain mindful that our patience does not turn into timidity.  There is opportunity out there.

Our Flexible Income* model, remains fully invested in high yield bond funds, but has cooled off, also, after two torrid months in April and May.  Its 1.76% gain for the month of June, through Friday's close, doesn't seem that impressive in this era of double digit swings in prices until you realize that this 4-week return is an annualized rate of 21% - after cooling off.  I can be happy with that in a lower risk investment.  I hope you can, too.

If you have friends who are struggling with investment decisions, please tell them about my work and the systematic way I go about things.

The Riddle of the Week

How do doctors measure the degree of laryngitis?

(See answer below)

Gold Disappoints......Again.

Radio ads for gold dealers imply a lot of sure fire results, but you need to take them with a grain of salt.  Gold dealers are completely unregulated and so their claims can be very . . .um . . . one-sided.

Sure there are lots of reasons gold should be going up.  But the facts show that gold is not going up.

In early June, gold made its 4th run in 14 months toward the magic $1,000 mark, only to fail and collapse in price just like it has each earlier time.

Will it finally break out in response to the government spending?  Possibly. But the facts are that gold has gone nowhere over the past year despite wide public knowledge of the incredible amount of government spending.  One thing I've learned in this business is that when the vast majority of investors all think one thing, like gold rising in price as the government deficits mount, something else is likely to happen.

Keep in mind that gold did nothing but go down as deficit spending took off in the 1980s. The linkage between gold prices and government spending is not all that direct.

The fact that gold is stalled, in the face of so much rationale that it should go up, tells me that there may be something greater going on that we cannot yet see.

Gold may still become a good investment, but I would not bet the farm on gold right now.

Riddle Answer

In hoarsepower.

How Much?

The US government is projected to spend $4.0 trillion during the current 2009 fiscal year, equal to $1 billion of government spending every 2.2 hours throughout the year.  That breaks down into more than $7.5 million per minute.   I know that money can go fast, but holy cow!  (Source: Treasury Department).

*    The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed.   Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account.  Not all trades are profitable.  Use of inverse investments for hedging introduces the risk of loss in both up or down markets. It should not be assumed that current or future holdings will be profitable.   A list of all trades in these accounts for the past 12 months will be provided upon written request.

**  The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market.  Investors cannot invest directly in the S&P 500 Index.

Information in this newsletter is derived from sources deemed to be reliable, however we cannot guarantee its accuracy.  Please discuss any legal or tax matters with your advisors in those areas.  Neither the information presented nor any opinions expressed herein constitutes a solicitation for the purchase or sale of any security.