December 23, 2008

My Christmas Gift To You

Bad news attracts attention more than good news, and this year has  certainly had  no shortage of bad news.  However, the worst of the economic decline appears to already be behind us and it is time to begin planning for the inevitable recovery, so I am going to focus on what is going on that is good and pointing to brighter times. 

Besides it's Christmas.  Let's get in the holiday mood with some good tidings.  Let's focus on some of the positive aspects and opportunities in the investment markets.

Insider Buying

Insiders are the folks  who are in the best position to know what is really happening in a company - executives, boards of directors, those sorts of people.  To avoid collusion, insiders must report to the government what they are buying and selling so all can see.   And these days the reports are telling a surprising story.

Keep in mind that insiders are people, too.  And they have as many reasons to sell company stock as you or I might.  Houses to build, kids to put through college, or simple diversification of a portfolio can all lead to sales of company stock.  For this reason, even in good times, insider sales are normally 3 times higher than insider buys. 

But there is only one reason an insider buys company stock.  They think the company's future looks bright and the stock price will be moving up as a result.  When insiders buy in large numbers, savvy investors pay attention.

Money Manager Jon Markman reported on December 5, 2008 that SEC filings show insider buying at their highest levels in over 10 years and that for the past 8 weeks insider buys have skyrocketed and outnumber insider sales by more than 2:1. 

This is a powerful endorsement that insiders see economic life after "The Fall of 2008". In fact they are putting their money where their mouths are.  This strongly suggests that better times lie ahead for investors.

Rocket Fuel for the Markets

markets have been rising for a month now

If you have been reading this newsletter for a while you might remember that I first mentioned a recession in our future on July 22, 2006 in my Messages From The Bond Market article.  I again warned about a recession on October 12, 2006 in Hard or Soft Landing?, and yet again on December 6, 2006 in This Time It's Different and I used the "r" word many times in early 2007.  

This shows that there is a bit of validity to the research I do.  Looking forward, I see equally powerful forces that ought to give investors many reasons to smile.

Although the bear market and recession seem like recent phenomena, both began more than a year ago.  The stock market began topping in July of 2007, 17 months ago.  The recession, according to recent government reports actually began in the 4th quarter of last year. In other words, the recession is old news. 

Good investment decisions are made by looking forward, not backward.  What happened last year or last month won't make you any money.  The recession is what investors should have been thinking about last year, but doing that now may not make any money next year and could cost you a bundle.  So, let's look forward to what might happen.

It has been a couple of months since the last of the big bank failures.  The Government's efforts to stabilize the financial system are working.  This means the likelihood of us sliding into another great depression is fairly remote.  This also means the bulk of the market's declines are behind us  rather than in front of us.  Getting out of the economic doldrums might be a long slog, because many layoffs will still occur over the next year.  But the stock and bond markets are already priced for that occurrence, so any declines over the next year or so should be quite modest compared to what we have seen.  Risk is much lower now, not higher.

The biggest factor I am seeing right now that will affect the markets going forward is a lot of rocket fuel being loaded into our economy in the form of money being created by governments around the world.   $700 billion here, a trillion there.  One recent news article said Congress had over $7 trillion of spending proposals on the table. 

These are staggering amounts of money, and once in circulation, every dollar will have to go somewhere.  If only a small portion of that money finds its way to the stock market, that is enough to drive prices dramatically higher.

It takes 9-12 months for government stimulus money to actually begin working in the economy and show up in the stock markets.  But the government began injecting billions into the banking system more than a year ago, so the time is ripe for a good market rally to begin.  The 15% gain in the S&P 500 stock index** since November 20th says it may already have. 

That's right.  If you look closely you will see that the markets have been rising for a month now, and the incredibly wild swings in stock prices are becoming less wild.  It is looking more and more like the crash, or "the Fall of 2008" as I call it, is behind us.

For this reason 2009 looks as bright as 2008 looked dim.   So stay tuned, I think 2009 is going to be a great year to be invested.

Good News for Consumers

Rising prices?  As you know I predicted $2 gasoline last summer when prices were still $4.  What I am seeing now points to even more relief for consumers.

The government's Bureau of Labor Statistics announced that the November Consumer Price Index fell 1.7 percent, the fourth monthly decline in a row   After being up over 4.1% on an annualized basis last summer, the CPI now stands at only 1.1% higher than in November 2007. 

Declining inflation is a symptom of deflation, and is a reflection of tough times for business as they lower prices to compete for your business, but as a consumer you should be applauding.   Gasoline prices, housing prices, car prices, and retail prices of all sorts are all coming down. 

Inflation may yet be in our future the way the government is printing money, and when it arrives the investments that have done well at preserving principal in 2008 (annuities, government bonds and CDs) will become terrible investments to hold as the purchasing power of those fixed dollar investments gets eroded by inflation.  But that time is not here right now.  

I will do my best to warn you about inflation, just as I have warned you about impending recession and other things.  Your part is to not buy anything that can't be quickly liquidated and moved to an inflation resistant investment when the time is right.

When inflation arrives, it normally spikes up so quick action may be necessary when you read about it here.  For managed account clients, I take care of these things for you.  For the rest of you, stay liquid - or call me to have me manage your accounts, too.

Account updates

For much of the past month, our Growth models* were hedged to protect against loss if the stock market kept going down.  The market now appears to have bottomed on November 20th.  As the rally off of the November 20th lows began the hedges started working against us, creating small losses as the market advanced.  Over time as this trend became more evident, I reduced the amount of the hedges, selling the final one last week.  My research shows that risk is much lower now than at any time since summer.

The small losses this past month on top of the small earlier losses we took during the crash brought our year to date Careful Growth model* performance to -14% at its low point.  For perspective, the stock market was down over 50% from it's highs at one point this year.  We had gains this past week, so I am hoping we have turned the corner.   The stated objective of the Careful Growth model* is to outperform the stock market while taking less than ½ the risk. 

Our performance for all growth models* since their inception in 1999 is 6.12% higher than the S&P 500 Index**, and our maximum period of loss has been only 1/3 of the stock market's loss.  I will apologize for not being perfect, but I am pleased that we are achieving our objective with the Careful Growth*  accounts.

Currently, growth accounts* are 2/3 invested and 1/3 in cash.  Holdings include telecom (a stronger than average sector since the crash), construction (this sector is rebounding as the government plans infrastructure projects), financials (which normally lead the market during economic recoveries, and are doing so right now) and emerging markets (which are rallying in response to prospects for economic recovery around the world).

Flexible Income models* have experienced a maximum loss for the year to date of 5.14%.  This is in comparison to the Lehmann Aggregate Bond Index, which at one point had lost 12.83% of its value this year.

Currently Flexible income* is 30% in cash 70% invested with a mix of high quality corporate bonds (45% of the portfolio) and emerging market bonds (25% of the portfolio) with top holdings being government bonds from around the world.

Of course our Balanced accounts*  which have a 50/50 blend of Careful Growth* and Flexible Income*  are halfway between their performances, down about 9.5% for the year.

Most importantly, we are partially invested to take advantage of what looks like a budding market advance that may turn out to be a really strong one.

Mutual Funds involve risk including the possible loss of principal. Investors should carefully consider the investment objectives, risks, charges and expenses of The Kids Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained by calling 888-549-7879. The prospectus should be read carefully before investing. The Kids Fund is distributed by Northern Lights Distributors, LLC member FINRA/SIPC.

*    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.  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.