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Thursday, December 29, 2011

End of year stock levels prove so-called experts completely unrealistic

I made several posts about so-called experts from Goldman Sachs and people like David Kotoc (August 2, 2011) who made lofty predictions about the level of the stock market, explaining how they were going to be wrong.  Here we are at the end of the year, with only 2 trading days remaining, and with the S&P 500 at 1,258.  We are exactly flat for the year - we started at 1,260.  Kotoc, Goldman, and others, had predicted we would be at 1,450 at this time.  Goldman maintained their 1,450 prediction even after Abbey Joseph Cohen, also with Goldman, reduced her expectations for GOD growth for 2011.  I had hoped to see 1,300, or perhaps 1,350, but am not surprised at all that we are flat for the year.

Looking ahead, I am much more optimistic about 2012.  I believe we will see much stronger stock performance this year, with as much as 20% gains on stocks for the year.  This would put us around 1,500 on the S&P 500.  I would not be surprised to see that level on the S&P 500 this year at some point.  I see 2012 as a transition year for the U.S. economy, with 2013 a more consistently positive year for economic growth.  Stocks should anticipate this however, and should trade well during 2012, and especially during the second half of the year, anticipating better economic times in 2013 and beyond.  Higher growth sectors of the economy should perform best, including technology, consumer discretionary, industrials, and yes, even financials - you cannot have a sustained recovery int eh economy without the banks financing it.  We are a financial system of credit and without access to credit, our economy will not grow.

Holiday spending, as expected, looks solid.  We will get the final reading around January 12th, but preliminary reports already show strong growth is sales, especially online sales, which are up around 15% to 16% over last year.  Consumer spending accounts for 70% of the U.S. economy, and is vital to a sustained recovery.  Strong consumer spending translates to strong earnings growth for stocks as well.

All in all I am pleased with how 2011 has unfolded from an investment standpoint.  I will have my final investment performance numbers shortly, but I have outperformed the market dramatically this year.  I am very pleased for my clients.  This has been a challenging time for everyone, so it is nice to have some very attractive gains for the year indeed!

Thursday, December 15, 2011

Foreclosures down 14% in November - don't be fooled!

Although foreclosures overall in the U.S. were down 14% in November, versus November of 2010, we actually saw increases in many of the markets that have the largest issues, especially in California, Las Vegas, Arizona overall, etc.  In fact, Vegas has been number 1 for 59 months straight - that's almost 5 years!  And, 9 of the 10 worst cities for foreclosures are in California, with the only city in the top 10 that is outside of California being Vegas.  Foreclosures in California were actually up 11% in November, and we also saw Utah and Massachusetts post increases for November.

A big issue with these data is that banks have been constrained by a combination of political interference, logistical challenges, including paperwork problems, bottlenecks, staffing, etc., and negative public sentiment.  These issues have in large part been resolved, or the banks just don't care anymore, and they are now aggressively pushing forward with foreclosures.  Now that the infrastructure and logistical support is in place, and banks are committed to the foreclosure process, we should see a marked and sustained increase in foreclosures moving forward.  There are approximately 4 million properties already at some stage of default/foreclosure, so the impact on inventories will be significant, sustained and very negative.

Dramatically higher inventories means lower prices and even more difficulty getting properties sold.  Every market is unique, but in general, prices will continue to fall, especially in those markets that experienced the highest percentage and dollar increases during the boom, and we will not see a bottom form until the foreclosure inventories are moved through the process and inventories overall are stabilized.  Only at that point can we start to bottom and then have a chance for any kind of rebound in real estate.

The rebound process will be slow.  Anyone sitting on a property thinking that prices are going to rebound significantly will be waiting a very, very long time.

My biggest concern with the foreclosure issue is that there are many people out there that cannot afford their homes.  Those people will lose their home, period.  It is just a question of timing.  However, there are many others out there - literally millions of homeowners - who can afford their mortgage payment, but who are upside down (they owe more than the property is worth).  At some point, once they come to terms with the fact that they are, in all likelihood, never going to get back to even, or anywhere close to it, many of them will simply walk away from the property.  This means that we will see even more houses coming onto the market, swelling inventories even further over the coming few years.

When we consider the 4 million properties already in the default/foreclosure process, and add to that several million more that will very likely come onto the market from those who are able to afford their payment, but are upside down, it is easy to understand why real estate prices will not rebound for many, many years.

Thursday, December 1, 2011

Fast Money Fools

I love watching these fast money idiots, such as those on CNBC and including Jim Kramer, squirm when they make these short-term predictions/recommendations on air, and then they are swiftly proven to be completely wrong.  My best advice - take whatever they say and do the exact opposite.  You are much more likely to make a profit!

Tuesday, November 22, 2011

U.S. Economic Data Gap Widening Versus Europe

Despite today's revised GDP growth for the third quarter (revised down from 2.5% annualized growth to 2% annualized growth), the U.S. economy is beginning to show signs of improvement.  We have seen retail sales improving, corporate profits overall looking solid, and even some minor improvement in employment (from 9.2% to 9%).  In fact, initial jobless claims last week fell to 388,000, which was the lowest level in seven months, the Philly Fed manufacturing index, which translates to 53 on an ISM basis, shows a very strong employment component.  Earlier in the week, the index of industrial production beat estimates with an especially strong reading on business equipment. This translates to strong capital-goods investment, which is also a job creation engine.  Retail sales in October also beat estimates, and rose over 7 percent versus October of 2010. Both producer and consumer price inflation dropped slightly in October.  Well-respected economists like John Ryding and Conrad DeQuadros are predicting 3 percent real GDP growth for Q4. Joe LaVorgna even thinks GDP could be 4 percent in the fourth quarter.

Our problem is that we are completely focused on the problems in Europe, which are overshadowing the improvements we are seeing at home.  Stock markets here in the U.S. are being whipsawed day-to-day, week-by-week, as news from Europe roils global markets.  But the reality is that we are (finally) starting to see real progress here, and that will translate to better financial market performance at some point.  It's that "at some point" that is the 800-pound gorilla in the room.

I believe the key change in perceptions for U.S. investors (and by extension U.S. markets) will come when we see fourth quarter consumer spending results for the holiday shopping season.  As we move into January and begin to get the final results from retailers, I believe we are going to see that, for the first time since the Lehman Brothers failure in late 2008, consumers are gaining real confidence in the future of our economy and are spending money again.  I still feel that they will be looking for bargains, but when they find them, they will pull the trigger.

If the divergence between U.S. (positive) economic improvement and negative news from Europe continues, I believe that U.S. investors and consumers will eventually begin to focus on what is happening here with our economy and will therefore start to look ahead to 2013 and beyond with optimism.  I further believe that this optimism about the future will translate to positive stock market performance, improving employment, and a much stronger economy, notwithstanding the rapidly growing national debt, which is now above $15.3 trillion and rising very quickly ($122,000+ per taxpayer, and $49,000+ for even man woman and child (citizen) of the United States).

Sunday, November 20, 2011

What is the government thinking??

It's official, the U.S. government is now the largest holder of our own national debt, surpassing China and now holding more than $1.6 trillion in U.S. treasuries.  How are they buying these bonds?  They are printing currency - U.S. dollars, devaluing our currency to push long-term interest rates down by 20 or 30 basis points. Why are they doing this?  Because they think (wrongly) that if rates are lower, somehow banks will lend more money and it will help the economy.  The 10-year treasury was already well below 3% and is now below 2%, yet banks are not lending any more money today than they were before the government started buying these bonds.

Here's a novel idea: instead of printing money to buy our own debt, why don't we spend the same $1.6 trillion on infrastructure?  We have an estimated $2 trillion in needed rebuilding, repairing and replacement that is needed.  We could have not only paid for the vast majority of this (80%), but could have also made a nice dent in the unemployment rate at the same time.  Every $1 billion in infrastructure spending is estimated to create 30,000 new jobs.  More notable still is that, if that much money was spent in the economy, it would have a massive multiplier effect, which would create more economic activity and more jobs.

I am not in favor of printing money, but if we are going to do it, wouldn't it make more sense to spend that money on something beneficial to the economy and that would create jobs, instead of simply buying our own debt?

Kramer is a complete moron

Jim Kramer of CNBC is a complete moron.  This guy tried to run money and completely failed.  To reward him, CNBC puts him on air, not only giving him his own show, but also puts him on in the morning after the death of Mark Haynes.  He takes credit for being right when he says to buy a stock the day before the company reports positive earnings, or sell a stock before negative earnings, when, in either case, the stock moves a few percentage points.  No wonder he never made anyone any money.  The guy is a joke.  I can't believe anyone ever listens to this bonehead.

Sunday, November 13, 2011

Asia and Europe moving higher on Italian hopes

Both Asian and European markets are looking higher after Berlusconi stepped down and the lower house in Italy passed austerity measures designed to bring their $2.6 trillion debt under control.  Mario Monti has been selected as the new Italian president, heading up a technocratic government tasked with attempting to turn around Italy's failing economy and out of control government spending.  The Technocratic movement first appeared in 1919 after World War I when scientists and engineers were thought to be better-able to run governments.  This movement gained strength as a result of the Great Depression, but lost favor when FDR's New Deal, seen as a more democratic solution, was implemented.  With the apparent failure of socialist governments across Europe to rein in spending and deficit, this movement appears to be once again gaining a following.  Monti will be the first to test the validity of this resurgent movement.  In the short-term at least, it appears that financial markets welcome this change.  We should see US markets also open higher reflecting global optimism that Europe may finally be getting their financial house in order.

Wednesday, November 9, 2011

Italian bond yields spike, pummeling world financial markets

The yield on the 10-year Italian bond has spiked well above 7%, which was seen as the tipping point for Greece and Portugal forcing the EU to bail them out.  The key difference is that Italy, Europe's third largest economy, is simply too large to bail-out.  The ECB (European Central Bank) has been furiously buying Italian bonds, but this has not stopped prices from plummeting.

Financial markets across the globe have been hit hard, with most major exchanges down well over 2%.  We are going to open down well over 200 points on the Dow.  This will be a key test of the support levels on the market.  If we can hold today at or above support, it should give technical traders some confidence to buy the market higher, hopefully pushing us closer to the 200-day moving average.

Tuesday, November 8, 2011

Major indexes show improving technicals

All three of the major indexes are showing strong technical improvement, with the Dow forming a nice "W" pattern with a break-out above the top of that "W."  The S&P 500 i forming a "W" pattern right now, and looks to possibly break-out shortly.  The chart below shows that "W" for the S&P 500 (far right side of the chart), with tops right around the 1,260 level.  The 200-day moving average is at about 1,273.  If we break-out of this "W" we could certainly see a test of that 200-day and if we can get back above that level, it would be a huge positive for the markets.

Typically markets will stay above or below a 200-day moving average for long periods of time.  We broke down through the 200-day for the S&P 500 around the beginning of August and except for a recent, brief penetration, about a week ago, we have been stuck below it.  It can take a few tries before successfully surpassing the 200-day on the upside, but it appears that we are close to trading up into a higher range.  This would be welcome progress on the technical front, especially in light of all of the negativity in the markets we have endured of late.

Thursday, November 3, 2011

Slower traffic keep right

If you believe that the slower traffic keep right laws should be enforced and expanded, please follow this link and sign the petition:

Wednesday, October 26, 2011

EU Agrees on deal; bondholders get screwed

Leaders of the EU countries plan to leverage the region's 440 billion euro ($609 billion) bailout fund to 1 trillion euros. The fund is known as the European Financial Stability Facility, (EFSF) and currently has between 250 billion to 275 billion euros left-over after bailouts for Greece, Ireland and Portugal. The plan is to leverage the fund by around four times through a special investment vehicle and a debt-insurance plan.  Excuse me?  Isn't this how we got into trouble in the first place?  


Okay, I just had to get that out of my system.  What are these people thinking??

The other key announcement out of the Euro-zone summit was that private holders of Greek bonds will take (be forced to take) a 50% write-down on the value of their Greek bonds, which will save Greece 100 billion euros - great for Greece, not so great if you are a bank or individual holding these bonds.  

This outcome was baked in the cake - we knew it had to happen, but the result is a structural default on the part of Greece.  We can only hope that these measures, as ill-conceived as they may be, will be enough to deflect attention away from Greece, at least int eh short-run, so we can get back to focusing on our own, very significant problems here at home.

I don't see how Greece will ever be able to pay-back the money they have borrowed, either from private investors or from the EU bailout.  Even the most optimistic estimates don't show them balancing their budget for many, many years.  I serious doubt they will ever get there, much less have the money left-over after paying their regular operating expenses to pay-back hundreds of billions of euros in debt.  The only positive I can draw from this situation is that I was unlucky enough or foolish enough to loan them any money.

Friday, October 21, 2011

Continuing Occupy Wall Street Article Saga

My latest posts to my Noozhawk article encapsulates the stupidity of the OWS movement participants:

For those who believe the OWS protesters are well-informed, consider this:
Wells Faro, the bank they were protesting in front of, chanting; “Banks got bailed out people got sold out,” was forced by Hank Paulson to take $25 billion in TARP money on October 28, 2008.  in December of 2009, they paid it back, along with roughly $132 million in dividends.  Pacific Capital, AKA Santa Barbara Bank & Trust, took approximately $181 million in TARP money.  Shortly thereafter they stopped making their dividend payments and the Treasury was forced to accept about $195 million in common stock.  To-date, SBB&T has not repurchased any of that stock owned by the Treasury.
If the OWS people are so well-informed, why were they protesting outside of Wells Fargo on Anacapa, when literally right across the street stands a bank that took taxpayer money and never paid it back?

Thursday, October 20, 2011

Noozhawk article draws fire

Wow, if you are interested in reading a lot of back and forth on the issue of the Occupy Wall Street protesters, revisit my article at:  I have drawn a lot of hate on this one!  I am really pleased to see so many people so passionate about an issue come down firmly on both sides.  Unfortunately many don't seem to have a clue as to what they are commenting on, but at least they are passionate about something.  It would be nice if they would do their homework and actually understand the issues and the facts surrounding those issues, but again, at least they are writing a post instead of playing video games, although some are probably playing video games while they are writing their posts.

Monday, October 10, 2011

Volatility in stocks results in tight window of opportunity

Stocks hit a high of 1356 on the S&P 500 back on July 7th and then dropped precipitously over the following two months, to an intraday low of 1074 on October 4th (last Tuesday).  This decline represented a 21% fall from that July 7th high.  I was buying heavily on Monday and Tuesday of last week, and was able to put a lot of cash to work at that time.  Since last Tuesday, the S&P 500 has rebounded roughly 10.5%, to a current level of 1188, gaining back fully half of what was lost over the prior 8 week period.  This quick rally from the low underscores the fact that buying opportunities in stocks do not last long in today's highly volatile environment.  Investors must be prepared with an actionable strategy in place, and must be ready to pull the trigger when the opportunity comes along, because that opportunity will not be around for long.

Stocks close the worst quarter since the depths of the recession; where do we go from here? Published in Noozhawk on Monday, October 10, 2011

Thursday, September 29, 2011

Powerful rebound in stocks may signal short-term bottom, or not

We are up over 250 points right off the open this morning, after a very volatile week to-date, with stocks gaining about 420 points on the Dow Monday and Tuesday, and then giving back 180 yesterday.  What does this mean?  Well, if we look at the apparent progress of the EU with regard to increasing the scope and size of the European bailout, it would appear that we could be turning the corner with the crisis.  If a viable plan is set in motion and the financial markets gain confidence that the various EU member countries providing the funding will pay, and those in trouble will stick to their austerity measures, this could be a short-term bottom for stocks, both here and abroad.  I would like to believe that we can put the crisis behind us and get back to focusing on domestic issues, like unemployment and U.S. economic growth, which are still major concerns.  However, I have heard estimates as high as $2 trillion to fix what is broken across Europe, and candidly, they don't have the money.  My sense of this is that they are all posturing and stalling, hoping we will feel enough pain that we will find is less expensive to step in and pay the bill.  The problem is that we don't have the money!  We can't even pay for our own problems, much less bailout all of Europe.

We already are the largest contributor to the IMF, which is a key contributor to the EU bailout already, so indirectly we are already sending Europe a ton of cash.  We are also providing swaps for euros to dollars, to help provide liquidity, which costs us money also.

To me, this is a game of musical chairs, or hot potato... the music has stopped, and there are not enough chairs.  The potato has been passed from Greece, Ireland, Spain, and Portugal, to Germany and France, to the IMF (us) and back to Europe.  At some point we have to accept that there is not enough money to go around.

If Greece ultimately defaults, I feel there is a strong likelihood that the EU will fall apart and the euro as a currency will be dead.  German is really the key - they have to decide if they are willing to take the bad with the good.  Germany can't simply generate a reported 60% of total GDP from the EU countries, but then when there are problems, not contribute significantly to the solution.  So far they appear to be (reluctantly) participating in the bailout.  But, in the long-run, they are the key to Europe's recovery, and if they are unwilling to stick it out, like dominoes, the EU countries with financial problems will default, one by one, and the euro and EU will fall apart.  We have our own serious problem, so it is up to Germany to do whatever it takes.

Thursday, September 22, 2011

Global sell-off crushing U.S. markets

Everything is down hard today after Asia and Europe suffered heavy losses overnight.  The Dow is down 428, the S&P 500 40, and the NASDAQ 80 so far.  Gold is off $80 an ounce.  Copper, silver, oil and just about everything else is getting hit, except for treasuries.  The Fed announced yesterday that the U.S. economy and the global economy, face significant risks, and they announced that they will swap short-term treasuries for long-term, basically trying to buy-down long rates with $400 billion they will get from selling short-maturity paper.  Bad idea.  Rates are already at historic lows.  People and businesses are not constrained from borrowing because rates are too high, they are not borrowing because they have no confidence in the economy and their jobs, and banks are simply not lending.

We have returned basically to the recent lows, and I would suspect that we will once again bounce from here.  I would again recommend long-term investors step in here and buy quality names.  We rallied about 8% from here after the recent correction to get back above 1,200 on the S&P 500, and I expect the same rebound this time as well.  Longer-term, I feel that valuations are very attractive here, even with consideration given to the fact that earnings estimates need to come down somewhat.

Monday, September 19, 2011

The facts on taxes in the U.S.

Obama's argument that the "wealthy" should pay "their fair share" is grossly flawed.  His focus is on the rate that the wealthy pay versus the middle class, while the reality is that the wealthy pay, in real dollar terms (which is what matters) far, far more than any other class of people in the U.S.  Here are the facts:

  • The wealthiest 1 percent of the population earn 19 per­cent of the income but pay 37 percent of income taxes
  • The top 5 percent pay more than 50% of the taxes 
  • The top 10 percent pay 68 percent of the tab
  • The bottom 50 percent—those below the median income level—now earn 13 percent of the income but pay just 3 percent of the taxes
These are proportions of the income tax alone and don’t include payroll taxes for Social Security and Medicare.

Obama's "Plan" for getting us out of this economic slump is to tax the only people who can hire

Obama's latest plan is to cut $3 trillion out of our deficit with a combination of cuts in spending and tax increases.  He basically wants to raise taxes on "the wealthy" and "large corporations."  These are the people and businesses that he also expects to do the hiring, which is the only way unemployment will decline, and the only way the economy will ever recover.  Most importantly, the Republicans will never, ever agree to these tax increases, so all he is doing is making a political speech aimed at setting his talking points for the coming election.  It is a sad day with the President of the United States is solely focused on playing politics when the country is teetering on a double-dip recession and so many are out of work and suffering.

The First Step to Getting Out of Credit-Card Debt Is Creating Your Budget - Published in Noozhawk Monday, September 19, 2011

Netflix blooper costs shareholders big time

Netflix made a classic and foolish error when they decided to raise prices in a terrible economic environment, and now they are paying for it.  Their real problem is that they, for some reason I still cannot understand, do not offer their entire catalog in streaming format.  I canceled my subscription when they raise their prices because I couldn't get the DVD and streaming service together without paying close to twice what I had been paying for the same service before the price increase.  Obviously I was not alone.  They have lost an estimated 1 million customers since the price increase.

Worse yet, their exit survey did not allow me to explain why I was canceling, forcing my responses to fit within their preformatted questionnaire, which neglects to offer a response about pricing.  I think they have gotten the message now.  The real question is, will they reverse the price increase, make their entire catalog available for download, and most importantly, can they regain their lost customers if they do so?  Possible, if they act quickly, as Coke did when they stopped making real (Classic) Coke, and changed to "New Coke," which cause a worldwide negative reaction.  Coke admitted it screwed up, and immediately offered Classic Coke again.  Because of that quick response, some questioned whether it was a mistake at all, and a few to this day think Coke execs did it on purpose in what could have been the most brilliant marketing stunt ever.

I certainly wouldn't compare Netflix to Coke, an iconic product with a very powerful brand identity and generations of ferociously loyal customers.  But, I do believe that streaming entertainment content is what people want, and Netflix already has about 25 million customers.  If they act now, reduce prices, and get all of their content converted to immediate download format, I believe they can recapture their momentum, and their valuation.

Friday, September 16, 2011

Keeping the streak alive

If we close higher today, we will have been up for the past five trading sessions in a row.  We started the week at 1,154, and are currently hovering around 1,213, up just a few points so far for the session.  This represents a 5.1% gain for the week (if we were to close here).  Not bad considering all of the negativity we have experienced this week, including the continuing bad news out of Europe and especially Greece!

Wednesday, September 14, 2011

Perception becomes reality

We have been bouncing between roughly 1,150 and 1,200 on the S&P 500, and are right back up to 1,200 today, despite so much negative news out of Europe and elsewhere.  The reason, I believe, is very simple - valuations.  When the S&P 500 was around 1,350, even with good news, stocks were selling-off.  Now, after a 20% correction, valuations are more attractive, and therefore, investors are buying, even in the face of seemingly dire news.  Go figure.

Monday, September 12, 2011

Nice finish!

Stocks were pretty much down all day, but rallied in he final minutes to end up 69 points for the Dow, The S&P 500  up 8 points, and the NASDAQ adding an impressive 27.  This is a really powerful result given the negativity out there and the hammering that foreign markets took today.

The Ins and Outs of Buying Foreclosed Properties - Published in Noozhawk, Monday, September 12, 2011

Stocks set to start the week with heavy losses

Dow futures are pointing to a 200 point plus decline this morning after renewed fears have surfaced over Greek and European debts.  French banks will likely receive downgrades as Greek debt exposure continues to pressure their balance sheets and erode confidence in them.  The S&P 500 lost about 2% on Friday, and is set to drop about the same percentage off the open this morning.  Foreign markets are down across the globe.  I continue to believe that current valuations or stocks are attractive and would recommend  buying quality names.

Friday, September 9, 2011

El Erian a bigger joke than Obama's jobs plan

One again El Erian is clueless.  Hand-picked to succeed Bill Gross at PIMCO, one of the worlds largest bond houses, El Erian recently wrote an op/ed piece supporting Obama's $447 billion jobs plan.  Not only is this plan far too small to make any meaningful impact, but it would have to pass Congress, which is a non-starter.  There is no way Congress, especially Republicans are going to "coalesce around the President."  Has El Erian forgotten the debacle that caused S&P to downgrade the U.S. debt rating a few weeks back?  Further, how are we going to fund another $450 billion in spending, which is exactly what the President proposes?  We will have to borrow it, and we have already borrowed so much that we are teetering on oblivion.  El Erian is a sham.  He flies around the country making speeches while Bill Gross does all the work.  Look at the investments El Erian made for Harvard and how they have performed.  Unfortunately, the only thing that is more of a joke than Obama's jobs plan is El Erian.

Craig D. Allen
Montecito Private Asset Management, LLC

Wednesday, September 7, 2011

Stocks snap back

After an ugly start to the month and this week, we had a 276 point gain on the Dow today.  Gold dropped dramatically as well, as money flowed out of the safe haven trade and back into stocks.  Gold's recent activity appears to be signalling a top for the commodity.  Obama's $300 billion stimulus package announcement certainly helped, although we will need to borrow any money to be spent on any stimulus package - money we certainly can't afford to borrow.  The argument has always been that by stimulating the economy, and especially by adding jobs, economic activity will generate more tax revenues for the government.  I agree, but the problem is that there is always a time-lag between the time you spend the money and the time the economy picks up steam.  Further, we have already had a stimulus, the TARP program, and two rounds of Quantitative Easing (QE), and we haven't seen the positive results expected or needed to justify the massive borrowing it took to fund these initiatives.  Will this package be THE ONE?  In the big picture, $300 billion, unfortunately, is peanuts, so I doubt it will have a lasting impact, much like the Cash for Clunkers program, which stimulated car sales for a few months, but in the long-run, probably hurt the automakers by compressing future sales into a shorter period of time, without driving any real sales increases.  I have yet to see the details of this proposed stimulus, but regardless of those details, any stimulus package will require borrowing, since we have no money.  Sooner or later, and likely sooner, this massive bill is going to come due.

Thursday, August 25, 2011

Gold continues its slide

Gold is down another $50 or so an ounce, or about 2.8%, after the CME raised its margin requirements for the second time this month.  Gold lost $104 an ounce yesterday (Wednesday, August 24th), and has fallen almost $200 per ounce from its all-time high around $1,900, which it hit on Monday of this week, August 22nd.  As I have been writing, I believe gold to be in a massive bubble.  Some may be tempted to buy gold since it has pulled-back somewhat.  Don't do it!  It is still grossly overvalued at $1,700!

Steve Jobs steps down as CEO of Apple

Jobs has been battling a rare form of pancreatic cancer and already had a liver transplant.  He has been out on medical leave since January, but late yesterday announced he would be stepping down as CEO of Apple.  In his letter to the board, he strongly endorsed Tim Cook, who has served as acting CEO in Jobs' absence.  The board quickly voted Cook in as CEO.  Most recently Cook was COO of Apple, and has been the architect of the company's intricate supply chain that has been responsible for high-quality materials and production capabilities.  A detailed succession plan which included Cook has been in place since Jobs first began experiencing serious medical problems back in 2004, which Cook stepped in as interim CEO for Jobs for the first time.

Although Cook is the clear choice of Jobs and the board, and is highly skilled, it will be difficult for anyone to fill the shoes of Jobs - a visionary leader and creative genius behind the stunning success of the iPod and iPad.  Apple shares are down 5% in after-hours trading. I own Apple shares for clients and will hold what I own.

Monday, August 22, 2011

S&P Sacks Its President

Just a few weeks after S&P downgraded the U.S. sovereign debt rating, the company decided to replace its president.  McGraw Hill owns S&P, and they are claiming that this was planned from last year.  Right.  S&P is also under investigation by a Justice Department probe for its activities surrounding the mortgage crisis.  Basically the U.S. government has declared all out war on S&P since the downgrade, at this is unlikely to relent, even if they dump Deven Sharma, their current president.  We reap what we sew.

A flat tax may be our only option - Noozhawk article; 8-22-2011

Sunday, August 21, 2011

Two compelling reasons to buy stocks now

In this post, I will present one technical indicator and one fundamental factor that provide compelling support for buying stocks now.  The first is a technical indicator - the percentage of stocks trading on the New York Stock Exchange that are currently below their 200-day moving average.  This indicator takes the previous 200 trading days and looks at their closing prices for each.  By adding these 200 prices together and then dividing by 200, we arrive at a 200-day moving average for the stock.  The 200-day moving average is a very strong indicator, since the average is taken over such a long period of time (200 trading days).  When more than 80% of the stocks that trade on the NYSE have broken below their 200-day moving averages, historically speaking, the stock market has rallied, both in the following 15 days, and in the following 3 months, both by healthy percentages.  We currently have only 15.22% of all stocks on the NYSE trading above their 200-day moving averages, which means that almost 85% are below their 200-day moving averages.  This is a very strong indicator that the market is about to reverse to the upside in the near future.

On the fundamental side, the S&P 500 is trading at only 11 times its next 12 months of earnings.  We take the earnings estimates for all 500 stocks and add them together using the correct proportion that each stock holds in the index, and then divide the current level of the S&P 500 by the earnings estimate.  Th long-term historical average for the S&P 500 is 15 times earnings.  At just 11 times, we are trading at a deep discount to that average.  However, the rub here is that these are, in fact, only estimates from analysts for what they think companies will earn over the next 12 months.  To the extent that these analysts could be wrong, and they are wrong a lot, we can't trust this indicator all that much.  However, even if they are overly optimistic, which is likely the case, we are still very likely trading at a discount to next year's earnings.

Fear is dictating the direction and trading in the market.  We will need some kind of major reassuring event or announcement to allay those fears, and to get investors to come back to the table on the buy side.  For those willing to take the risk, and who are long-term investors, as opposed to speculators and traders, I feel that there are attractive bargains in high-quality stocks.  There can be no reward without risk!

Monday, August 15, 2011

Stocks erase entire point loss from last week

The S&P 500 closed at 1,204 today, or 4 points above the close of Friday August 5th.  This means that despite all of the volatility that we experienced last week and all of the panic selling that took place, we are actually up from August 5th's close.  You have to feel sorry for those who panicked and sold at the lows last week.  Hopefully stocks will continue to rebound.  We have more news coming on the earnings front this week, as well as some economic data.  It's only Monday!

A Little Perspective: What should matter to investors - Noozhawk article

Friday, August 12, 2011

Stock rally back towards break-even for the week

After a whole lot of volatility this week and today, stocks are attempting to rally back to break-even or perhaps a positive finish to the week.  We are trading at 1,188 on the S&P 500 right now, and with a close last week of 1,200, we are down about 1% for the week at the moment.  In other words, we only need 12 more points to get back to break-even for the week.  This result shows first that there are buyers, and second that long-term investors need to look at the big picture and remain calm during times of uncertainty.  More importantly, they need to have a well thought-out strategy in place so that they can take advantage of drops in the market to add to positions, and to buy quality names at good prices.  This is exactly what I did over the last week for my clients.

Wednesday, August 10, 2011

Dow off over 500

We gave back everything we gained yesterday, plus about 100 points.  This puts us down about 700 points so far for the Dow this week.  Gold spike to above $1,800.  I am sort gold through the GLL (short gold ETF).  I believe gold is grossly over-bought and will get killed as soon as the uncertainty subsides.  It's ugly out there, but there is no reason to panic and no reason for this overreaction.  It is clear that small investors are driving the direction of the markets day to day.  I am not a trader.  I am an investor, and I see value here.  Corporate profits have been very strong for several quarters, and most importantly, top-line revenues for the first quarter since the recession ended were strong.  People and companies are buying stuff, which is good for companies and good for the economy.  We will get past this!

Tuesday, August 9, 2011

New Noozhawk Column!

I am very pleased to announce that starting this coming Monday, I will be writing a weekly column for Noozhawk (  Please go to the Noozhawk site and subscribe to their free email service.  You will receive daily emails of all of the top story headlines of the day, including my column each Monday!  The Internet has forever altered the delivery of information and electronic formats like Noozhawk are the future of information.  I hope you will all enjoy reading my articles!

Stocks rebound sharply; Dow up 430 points

Fantastic rebound in stocks today!  The S&P 500 gained 53 points and the NASDAQ added 125.  Today's bounce underscores the fact that the world is at least not perceived to be ending anytime soon, and investors are willing to risk their capital when prices are attractive.  A great day!  Tomorrow is a new day!

Dump Your Debt System launch!

I have just launched a new website for my Dump Your Debt! System - a simple, easy to use, effective debt elimination strategy that works!  The site is (not .com).  I have developed this System on many years of teaching financial planning courses and have helped literally thousands of people get out of debt and more importantly stay out of debt.  If you or someone you know has debt problems, this System will help them.  Take a look!

Stocks rebound sharply

Stocks are rebounding nicely so far this morning, up over 2%, with the Dow up well over 200 points.  It is still early, and we could see more selling, but this does show that investors are willing to step in and risk cash.  Stocks should be bought and gold should be sold here.

Monday, August 8, 2011

Stocks close at lows

The Dow lost 635, the S&P 500 lost 80, and the NASDAQ lost 175 today.  That's nearly a 7% drop in the NASDAQ today alone.  Wow.  Investors are freaking out.  There is definitely a buyer's strike.  I think today's activity underscores one of the fundamental flaws in the investment industry, which is that the current way in which investment management services are sold--through an asset allocation strategy approach-requires that managers stay fully invested at all times.  This means that, unlike me, they have no flexibility to step in when markets drop as they did today, and buy quality names.  This characteristic of the markets leads to higher levels of volatility, but also to good opportunities for those of us who do hold cash balances, and who do have the flexibility to buy when markets are down hard.

We are seeing market drops similar to where we were at the end of 2008, just after the financial market implosion, the Lehman Brothers failure, and the mortgage and derivatives meltdown.  I would submit to you that things are significantly more positive today.  There is no new news.  I have been talking about the possibility of a double-dip recession and slow GDP growth for months and months.  Today's move as well as that of last week in general, also shows that the small investor-those who really don't understand what is going on, are driving the bus.  Small investors are almost always wrong in the longer-run, and I believe they will be proven wrong this time.

This is a huge buying opportunity and those who do not step up and step in will be kicking themselves in a month or two.  I promise you that investors will not even remember why the market was down in a few weeks (not that they understand why right now!)  The S&P 500 is at 1,119.  Remember that level.  I am not saying we can't go lower - we probably will go lower in the short-run.  But down the road, that level is going to look very, very attractive indeed!

Stocks off 5%

We are close to the lows for the day, as investors panic-sell on the S&P downgrade.  Again, this is not new news!  We have known since April that S&P would downgrade the US if Congress did not reduce spending and/or increase revenues by at least $4 trillion over the next 5 years.  Treasuries are actually up in price today, which shows that the U.S. has not lost its place as the most secure place on the planet to invest.  This is a panic blow-out sell-off, which is a very attractive opportunity to buy.  I assure you the world is not coming to an end.  If you have been following my blog or my other commentaries, or have listened to be on the radio or read my articles in the News Press, you know I have been extremely reluctant to buy anything up until now.  I have been sitting in cash for months and months, waiting for this to happen.  Investors have been completely ignoring the problems both here in the U.S. and across the globe, with regard to the mounting debt issues and slow GDP growth.  Finally investors have recognized the reality of the situation, and are overreacting to it.  This is the opportunity of this year and possibly the next few years, to buy high quality companies at great value.  Yes things could go lower.  The chart shows we could go to 1,040 on the S&P 500.  That's ok!  We are not going to get the exact low.  I can't say for sure when investors will feel that prices are so low that they need to start buying, but it will happen, and when it does, stock prices will bounce very quickly - far too quickly for you or I to make our purchases before prices rally.  Don't miss this opportunity!  They just don't come along all that often.  If you are concerned, buy half of what you want to own and wait to put the other half to work in case things go lower.

Downgrade pressuring stocks

Stocks will open down about 2% this morning after the S&P downgrade.  Ironically treasuries are actually higher, with the 10-year yield down to 2.48%.  I would not be surprised to see stocks open down but rebound during the session.  We are now AA+ rated according to S&P, but still AAA from Fitch and Moody's. at least at the moment.  Keep in mind that China, Israel, Spain, Belgium and Taiwan are all AA rated.  Spain and Belgium??  They are two of the countries begging for bailout money from the EU and from the IMF (us).  We might have a similar debt to GDP ratio, but we are a lot stronger economically, more diverse, and certainly much more able to service our debt.  Again, our 10-year treasury is yielding less than 2.5%.  These other countries are paying much, much higher rates for their sovereign debt because their perceived risk is much higher.  I believe the stock markets will bounce, if not today,very soon, and therefore think this is an exceptional buying opportunity.  To get good prices, investors must buy when there is uncertainly, doubt, and fear.

Sunday, August 7, 2011

Charts telling an ugly story

The technicals have been signaling a downturn in stocks for some time, with several confirmations of break-downs recently.  If we believe the charts (and I do), we could see the S&P 500 fall to 1,140, or perhaps even 1,040 in the short-term.  I think we will have a bounce before that, but ultimately, at least according to the chart, we should see lower levels.  However, I am comfortable with the purchases I made at the end of last week (Thursday and Friday) - I bought high-quality companies with encouraging fundamentals.  While I want to get the lowest prices possible, I have found over my 20+ years in the business that you can never get the absolute low, and if you do, it's blind luck.  I have seen too many times where the charts are saying that the market should go one way and it does the opposite.  Here is the chart for the S&P 500 (from Investorplace.ocm):


Saturday, August 6, 2011

S&P downgrade not a surprise

S&P back in April stated that unless the U.S. put in place cuts that amounted to at least $4 trillion, they would downgrade.  They followed-through after the government only put in place $2.1 trillion in cuts over 10 years, most of which will not come within the next 5 years.  We can certainly argue with their reasoning and their timing, but the reality is that $2.1 trillion over 10 years is a drop in the bucket, and is far short of what is needed to contain the ever-expanding national debt.  We need to balance the budget so we can generate a surplus to pay down the national debt to a more reasonable level, far below 100% of GDP.  My concern is that, unless we do something more significant now, we are going to be forced to do something drastic in the near future, that could crush the economy.  With this said, I feel that the downgrade was already baked in the cake, so we shouldn't see too much of a reaction this coming week.  Fitch and Moody's still have us at AAA, although they are both still evaluating us.  We lost 7% on stocks this past week, and globally, $2.5 trillion in stock value was erased.  I think it's time for a rebound, but longer-term, we will have an overhang from the debt problems we face.

Friday, August 5, 2011


I don't know what else to say.

117,000 jobs

Not a bad report for July employment, adding 117,000 jobs.  Stock futures are rallying big-time, up over 150 on the Dow already on this report.

Thursday, August 4, 2011

Biggest drop in 2 1/2 years: great buying opportunity!

The Dow dropped 512 today, or 4.31%, The NASDAQ lost more than 5%, down 136, and the S&P 500 fell 60 to 1,200. Only once or twice a year do we get these kinds of opportunities to buy quality stocks at attractive valuations.  It takes a lot of fear and uncertainty to cause the opportunity to materialize, and that's exactly what we are seeing today.  People are freaking, and that's what I love to see!  This is the best buying opportunity we have seen in a long, long time, and I am taking full advantage of it.  I was buying throughout today's trading session and will buy more tomorrow, unless we rebound right off of the open.

The unemployment number will be reported tomorrow, and that's what most people are waiting to see.  I feel that even if it is ugly, stocks may still rally because we are down about 12% from the recent high already.  That is a huge dip in little more than a week, so I feel that many investors will start to buy regardless of the bad news.  We shall see!

This is it!!!

I am buying like crazy right now!  This is the time.  If you have been holding cash, put it to work now!

Wednesday, August 3, 2011

Going straight to 1,200

Watch 1,249 on the S&P 500.  That is the March low, and we are only a few points above that level right now. If we break through that level, there is no support all the way down to 1,200.  I think that's where we are going. The ADP report showed 114,000 jobs added.  That is a good number, but stocks don't care.  Stocks are bouncing around the flat line as we await the ISM Services sector report due any minute now.  If that number is ugly, we are going down further.  The other reports this week - ISM Manufacturing, and the consumer income and spending report, were both negative.  I would expect the services sector report to be equally negative.  We have also had a 60% increase in companies reporting job cuts to come, so we will have to push through that in the coming months, even if Friday's employment report isn't so bad.  The ADP report has not lined up well with the Commerce Department report in the past few months, so I can't really say that the ADP report makes me feel any better about Friday's report.I think, even if the Friday unemployment report is positive, stocks will still probably sell-off.

Tuesday, August 2, 2011

Another bonehead makes another overly optimistic prediction

David Kotok, Chairman & Chief Investment Officer of Cumberland Advisors told CNBC on Wednesday that he expects the S&P 500 to end the year at 1450.  His flawed reasoning is that he believes now that we have a deal on raising the debt ceiling, that somehow this translates to a peak in the national debt, and that the focus will now turn to other things, such as corporate profits.  Wrong!  Even the rosy expectations of the architects of the debt ceiling deal in Congress are only predicting a reduction in the budget deficit of about $2 trillion or so over the coming ten years.  This means that every year of that ten years, and very likely well beyond that time-frame, we will be adding hundreds of billions if not trillions of dollars to the national debt.  This is in addition to all of the interest expense we incur each year to service the debt, which we have to issue additional bonds to cover, since we don't have the money to pay a penny of the principal or a penny of the interest.  Why on earth would Kotok believe that the national debt has peaked??  Far from it.  

I will admit that the investing public has a very short attention span, so after we get past this period of uncertainty surrounding the debt ceiling, they will likely forget about that one problem.  However, the real issue we are struggling with now, and the real reason the market got ht today, has nothing to do with debt, and everything to do with the economy and specifically unemployment.  The ADP report and more importantly the Commerce Department report on Friday on unemployment are the key points of uncertainty which are weighing on the markets.  

Don't be fooled by these so-called experts that don't seem to be able to comprehend the bigger picture issues that appear glaring, serious, and difficult to deal with under our current economy conditions.  We saw the spending report today that showed that consumers are not spending and are saving more already.  The more concerned they become with their job and with the state of the economy, the less they will spend.  This is the risk of a double-dip recession, and it is real, pressing, and comes with a lot of baggage.

As I have written, I do not believe we will see 1,450 by year end.  Keep in mind we are in a down trend right now and it is already August.  I see the markets headed lower in the short-run, but believe we will get a bounce of some magnitude.  I will be buying this week, especially if the market goes lower.  I feel comfortable putting cash to work at current levels or below.  A rally back to 1,350 would be an 8% run from here, and maybe 10% from where I think we are headed. Certain sectors within the overall market will do much better than that, if we get that move to 1,350.  I will be more than satisfied with that!

Layoffs could signal a double-dip, or a fundamental shift

Recently we have seen multiple companies in multiple industries laying-off workers at an alarming pace, including HSBC, a major global banking firm, that just announced this week that they were dumping 30,000 workers.  On Friday Merck announced that they were kicking 13,000 to the curb, while Borders, which is bankrupt, is sending 10,700 to the unemployment lines.

We saw GDP come in last week at an anemic 1.3%, far, far below what most economists and analysts had previously expected, including the mighty Goldman Sachs, which recently cried uncle and dropped their 2011 GDP estimate from 3% to 2% (they are still too high).  Goldman still maintains a 1,405 target for the S&P 500 by the end of 2011, which wasn't looking so unachievable a few weeks back when the S&P 500 was above 1,350, but at 1,250 looks like wishful thinking.  That target would represent a 16% advance from where we are today, and we are not at the bottom, unfortunately for them.

The layoffs could signal a growing risk of a double-dip recession, which I have written about extensively.  While I still think a double-dip is entirely possible, I am not convinced that these layoffs should be interpreted to mean that companies, even the ones doing the layoffs, are performing poorly.  On the contrary, all evidence points to companies doing better, not worse.  We have seen strong earnings reports for several quarters, going all the way back to the third Q last year.  More impressive is the fact that in the most recent quarter, we have seen the majority of companies reporting top-line revenue gains that strongly indicate that people are spending money in the economy.

This leads me to the conclusion that companies are not laying people off because they think the economy is bad today, or more importantly because they think the economy will be bad in the future.  These layoffs tell me that companies are facing increasing competition, made even worse by the weak dollar, which is drawing more and more companies from outside the U.S. into our markets, and this increasing competition is forcing companies to cut costs anywhere they can.  Add to that advancing technology which allows companies to do what they do with fewer humans, and you have a recipe for higher unemployment.

This trend, unfortunately for those looking for work, is not going to necessarily improve with our GDP growth rate.  Unemployment will only improve if and when new companies are being formed at a brisk pace, driving demand for workers.  New companies will not be able to get off the ground though, unless the tax code and healthcare costs are reined-in to incentivise people to take risks with their capital, time, and efforts.  The current climate, economic, financial and political, is not conducive to entrepreneurship.  Without new businesses, I do not believe we will see unemployment coming down; at least not until or unless GDP growth rises well above 3%, which I do not expect to see before 2013 at the earliest.

And then panic set in

Panic selling has pounded stocks today, driving the Dow below 12,000 with a decline of 265 points today.  The S&P 500 closed down 33 at 1,254, right above that magic 1,250 I have been waiting so patiently for!  Many investors are selling just because the market is declining.  While this is foolish, it is also providing an opportunity for those with cash (like my clients).  We have the ADP employment report coming tomorrow, and the government employment number on Friday.  That is what everyone is worried about, and could push stocks down a lot lower.

You will hear all kinds of explanations (excuses) for why the market is going down including the debt situation here and in Europe, the possibility of a double-dip recession, inflation, commodity prices, blah, blah, blah.  The reality is that if stocks were fairly priced, they would not get hammered.  Stock prices are inflated (or at least have been before this 100 point drop on the S&P 500), and that's why people are selling.

I will be putting some cash to work this week, unless we rebound sharply.  Investors with long-term time horizons should have a well-defined strategy and should be looking to add to positions at these more attractive prices.  If they don't, they will be kicking themselves when we rally back up.

Last hurrah for gold

I have already written about gold being in a bubble, as are all commodities, but this issue bears repeating - gold is grossly overpriced and will crash.  At $1,640 or so this morning, we are seeing the last push of the shinny metal before the realities of inflation taming actions by the Fed, slow growth, and a deal on the debt ceiling signal the start of spending cuts and higher taxes.  Gold benefits from uncertainty and inflationary fears, two drivers we have experienced in spades.  When the music stops, make sure you have a seat!

Friday, July 29, 2011

Slower Traffic Keep Right - Published in the Santa Barbara News Press in June of 2011

In Texas, there are a lot of highways that have just two lanes of traffic in each direction, just like the 101 traveling through Montecito.  It is very common to see signs along these highways that read; “Slower Traffic Keep Right.”  These signs alert drivers of the need to stay in the right lane unless they are passing someone.  This helps speed the flow of traffic and avoid traffic jams that occur when drivers sit in the left-hand lane blocking faster traffic.  (By the way, this is a huge pet peeve of mine, and I wish California would use the same signs.)  While this message is intended for commuters, I think it applied equally well to investors, especially these days, with such extreme market volatility.

Recently 60 Minutes aired a show on high-frequency trading.  High-frequency trading, in simple terms, involves computer programs that look for certain indicators or inaccuracies in securities trading markets, and, when they find one, blast-off orders for a huge number of shares, getting in and out in seconds, trying to profit only by pennies per share traded.  These pennies add-up when we are talking about millions of shares traded, and can be highly lucrative.  However, the trades also increase volatility dramatically, both for the individual security traded, and for the market overall, especially if you have many high-frequency traders all trading at the same time, based on the same or similar indicators.

The problem of high-frequency trading, and the reason it is so controversial, is that, when we have periods of trading where the market moves down significantly over a short period of time, high-frequency traders identify opportunities to participate in that downside by throwing a massive amount of volume at the market, essentially kicking it while it is down.  Often this accelerates the downward move in the market (or an individual security), which can cause wide spread panic, resulting in even more selling pressure.

There have been some who have called for eliminating high-frequency trading, and all program-based trading for that matter.  We saw a similar reaction to the 1987 stock market crash, which initially was blamed on program trading, although this particular type of program trading was insurance-based and not speculative—programs had been developed that were supposed to protect large institutional portfolios from downside risk beyond certain parameters by automatically selling securities if the market fell by a certain percentage or by a certain amount, or by buying put options on indexes, such as the S&P 500, to provide a hedge against further losses.  When the stock market crashed, these programs were triggered, resulting in even more selling and greater losses overall for the stock market. 

My feeling is that markets should be allowed to trade freely, regardless of volatility.  Since I consider myself to be an investor, as opposed to a speculator or trader, I am not so concerned with daily fluctuations, other than when they present opportunities for me to purchase securities at attractive prices.  Volatility is not a bad thing, per se, although it can serve to confuse some investors, and can create a lot of “white noise” meaning that the longer-term trend can sometime be obscured by the day-to-day action of the markets. 

A true long-term investor should not be swayed by daily volatility.  Instead, each investor should have a well thought-out investment strategy based on their true, long-term objectives and risk tolerance, which should not change, based on short-term fluctuations in the market.  If followed, this long-term strategy should keep the investor focused on their long-term goals, and should prevent them from making rash decisions or panicking, based on any short-term declines that may be caused by speculators, high-frequency traders, et al.  Easier said than done!

I realize that, in the heat of battle, sometimes it is difficult to understand whether the volatility we are experiencing day-to-day is a consequence of short-term speculation, or is an indicator of a more significant economic or financial market trend that will have long-term, negative implications for portfolios.  Herein lies the rub.  How can we accurately determine whether a short-term downward move in the markets is just that, a short-term event, or if it is the beginning of a significant market correction or bear market? 

This is a complex question with no right or wrong answer and no single right answer.  I can only comment on what I do to address this challenge, although there are many experts out there that have varying ways of doing so.  I rely on my analysis of the current and future trends I see developing within the U.S. and world economies, and the U.S. and world financial markets.  That is a really broad and general answer to a very specific problem, I know!

More specifically, I conduct a lot of research on what is happening within the U.S. economy and financial markets primarily, and additional research on how foreign economies and markets will affect the U.S. economy and financial markets.  What I attempt to determine is where we are now, in terms of the economic cycle, and then, based on my analysis of the current and future situation, and adding to that what typically happened during similar economic times in the past, where the economy is heading over the next 3 to 5 years.  From that general overview, I then try to identify those sectors of the economy that I feel will perform best, given my analysis and forecast for the economy.  I also look at each sector to see how it has performed historically, at similar times in the economic cycle, with similar commodity prices, similar interest rates, similar political environments, etc., etc.  This is, of course, not always possible, since there may not be a comparable situation for each of these variables.

Once I have completed all analyses and comparisons, I develop my strategy by deciding what percentage of a portfolio, based on the investor’s objectives and ability to assume risk, should be invested in the various asset classes—their appropriate asset allocation.  Once this has been determined, I then decide how I want to divide-up the assets into sub-categories, based on my expectations for the future performance of the U.S. economy and the various sectors within the economy.  Those sectors I believe will outperform in the coming environment will be over-weighted as compared to their historical averages, while those economic sectors that I believe will not perform well will be underweighted or not weighted at all.

Once the overall strategy has been defined and the initial investments have been made according to my determinations for the economy, etc., I then monitor the performance of portfolios against my expectations and the changing investing environment.  When changes are required, I update portfolios to accurately reflect those changes, always maintaining proper alignment with the investor’s stated objectives and risk tolerance.

There are many strategies available to investors, and what I have described above is a simplified explanation of what I do on a daily basis for my clients.  The important point is that each investor needs to identify the most appropriate strategy for their portfolio that not only makes sense to them, but also has at least the potential to generate the kind of returns that are commensurate with the risks taken.  Most importantly, a well-conceived and executed investment strategy can be the one thing that keeps the investor focused during short-term declines, and prevents he or she from panicking at the worst possible time.  My best advice to true investors is “Slower Traffic Keep Right”—let those who wish to speculate have the fast lane and pass you by.  We will see most of them stranded on the side of the road after they run out of gas.

Thursday, July 28, 2011

Armageddon or Opportunity?

The Dow gave up another 62 point today, after yesterday's 199 point plunge.  Uncertainty surrounding the debt ceiling vote, or lack there of, is driving investors and speculators to sell stocks.  I would hope that lawmakers will do the right thing to avoid default and at least pass some kind of short-term measure, but they are already posturing for the 2012 election, so it would not surprise me if they let good sense and prudence take a back seat to politics (again).

If they do pass something, I would expect stocks to rally smartly, which is why I am looking to put some of my cash to work.  We closed right at 1,300 on the S&P 500 today, so we have dropped roughly 50 points over the past few sessions.  If I can get the S&P 500 down below 1,275, I will probably invest some cash with the expectation that Congress will take action to avoid a default.  If they stall, and we default, stocks will likely get hit hard.  If that happens, I will look to put a lot more cash into stocks, once we crash.

Monday, July 25, 2011

Playing Chicken with the World Economy

Stock futures have actually rebounded a bit, as European markets react to the possibility of U.S. default.  It appears that traders are fairly confident that there will be an eleventh hour deal to avoid a U.S. default, with John Boehner and Harry Reid both working on separate short-term debt ceiling solutions.  August 2nd is the deadline, so we still have some time, but time is running out.

The other economic news on the international front is the Moody's downgrade of Greece to Ca.  S&P and Fitch already have dropped their ratings on Greek debt, and with the recent EU bailout, Greece is basically in default, with Moody's now saying their is virtually 100% certainty that they will default on their sovereign debt.  They also stated that this sets a bad precedent for the other troubled countries - namely Portugal and Ireland, showing these countries that they can access capital even when they exhibit horrendous fiscal irresponsibility.

U.S. Stock futures have rebounded from their lows, and are not down about 90 to 100 points for the S&P 500.  We will have to watch the first hour or so of trading to see how traders and investors react to the news of the failure of Congress to reach an agreement on the debt ceiling and on Greece.  So far we are not seeing wide spread panic, but many probably have not heard this news as of yet, so we may be in for a roller coaster ride today and this week.

Sunday, July 24, 2011

Failure to reach agreement threatens global markets

Congress has failed to reach any agreement of raising the debt ceiling, forcing a powerful sell-off in the futures markets.  We will open down hard in the morning, unless an agreement is reached overnight, which is unlikely.  The President has called an emergency meeting with Congressional leaders to try to find a short-term solution to raise the debt ceiling by a small amount, to avoid default.  I think we will get the band-aid solution, but the bigger issue will be whether or not Congress can agree on a real solution that includes a balanced budget requirement, which Republicans are demanding.

Muni Madness: What’s next for municipal bonds? - Published in the Santa Barbara News Press in June of 2011

Not too long ago I wrote about municipal bonds and my feeling that specific revenue bonds were more risky in the current environment than GO’s, or general obligation bonds.  Revenue bonds are only supported by the revenues generated by the stated source of that revenue.  For example, a water district bond will be supported by the income the municipality receives from consumers paying their water bill.  By contrast, a GO is a state obligation that is supported collectively by all revenues received by that state.  This means that if one state revenue source falls short, the state will not necessarily need to default on the GO bond, whereas if the revenue bond’s source falls short, the municipality will need to restructure at a minimum, which typically will have a devastating impact on the value of the bond. 

Of significant concern is the fact that the total amount of investor money held in revenue bonds ($2.7 trillion) completely dwarfs the amount in GO’s ($1.4 trillion).  Some states are at even greater risk.  In Florida for example, which was pounded economically by the real estate bubble collapsing, about 90% of all its municipal bonds outstanding are revenue bonds. 

Meredith Whitney, who is best known as a top banking analyst who predicted much of the bank and real estate market problems that we experienced in 2008 up to the present, made a highly controversial call on the municipal bond market last year.  Her report was extremely bearish on municipal bonds and on the municipalities that issue them, citing the glaring realities of the massive budget deficits many states are running, and their very limited number of viable options to address these deficits.  In the report, she predicted between 50 and 100 municipalities would default in 2011, resulting in hundreds of billions of dollars in municipal bond defaults over the coming five years.

Whitney stated in an interview with Fortune Magazine; "I never intended on framing the scale of defaults as a precise estimate, but I continue to believe that degree of municipal defaults will be borne out over the cycle. I meant to point out that the state debt problem is a massive headwind for the U.S. economy, second in importance only to housing."

Just this week, Whitney released a fresh report that is, if this is even possible, even more negative on municipalities and muni bonds.  In this report, she concludes that the future state budget deficits that need to be closed, either by new taxes or massive cuts in social services, are far bigger than the official numbers show, and that debt levels, when all liabilities are counted, vastly exceed the official estimates.  States have generally relied on federal aid, rainy day funds and general obligation bonds to balance their budgets. However, they suffer from the same issues as the federal government in that they have massive future liabilities such as unfunded pensions that generally do not appear on their books.

In her latest report, Whitney examines 25 of the largest states, adding ten new ones to the list as compared with her previous report, including Arizona, Nevada, Connecticut, and Wisconsin. Her data shows that since 2003, state governments have raised annual outlays from $1.5 trillion to almost $2.2 trillion, or $700 billion, but tax receipts have risen only $400 billion ($300 billion less), to $1.4 trillion. In fact, spending continued to grow throughout the recession, while income from sales, income taxes and corporate taxes flattened out in 2007, and in most cases have declined since.

In her report, Whitney cites three major problems, none of which have a viable solution.  First, 46 of the 50 states are obligated to balance their budgets each year. Even with tax increases on many income sources, tax revenues are still falling in most states because of high unemployment and lower overall spending by consumers.  To bridge the gap, she states are getting that extra money from three sources:

·       The federal government has increased aid to the states dramatically through the stimulus - the American Recovery and Reinvestment Act.  Since 2009, the ARRA has sent $480 billion in grants and contracts to states, which has offset over one-third of states’ combined deficits. Unfortunately, the last stimulus dollars will go out this month.
·       States have increased their issuance of GO’s to fund operating expenses, essentially matching long-term debt with short-term cash needs. Those securities are backed exclusively by state tax revenue.  The issuance of GO’s has grown from $67 billion in 2000 to $148 billion in 2010.  Although interest rates are historically very low, this massive increase in outstanding GO’s means that states will be spending more and more servicing this debt, which leaves less money for services.  Today, debt service absorbs half of Nevada's budget, and 40% of Michigan's. In Arizona, California, Connecticut, Ohio and Illinois, the share now exceeds 20%.
·       The third and by far most significant problem is pension costs.  Pension liabilities are referred to as “off-balance sheet debt” because, unlike GO’s, states do not report these obligations on their balance sheets.  Pension liabilities are far larger than GO’s, amounting to roughly $2 trillion today.  The unfunded portion of these liabilities has increase by 50% over just this past year.  Pension funding costs are rising far faster than states’ abilities to fund them.  This means that, at some point, taxes will have to be raised significantly to meet this funding liability (or the stats will be forced to default on their pension liabilities).  This situation is not stable, it is getting worse, and the longer states wait to address pension liabilities, the more severe the consequences.  Worst of all, states are not fully disclosing the extent of their pension liabilities, either current or future—either they don’t want us to know, or they don’t know themselves.  Which is worse?  States are systematically underfunding their pensions as well. Today, states are only covering, on average, 77% of their future liabilities versus 103% in 2000. To fully fund their annual pension costs, states would need to increase spending by over $700 billion a year, or over 40% of their current level of spending.

To plug these ever-widening gaps, states are tapping their “rainy day” funds—money accumulated over the years for emergencies.  While I think we can all agree that, from a financial perspective, it is definitely raining, once these funds are spent, there is no source to replace them.  In 2010, states used about $9 billion from their rainy day funds. 

To add even more uncertainly to the municipal bond picture, the federal government is once again looking for ways to remove the tax advantage municipalities now enjoy on the interest they pay on their bonds.  At present, Munis are not taxable at the federal or state level, making them highly attractive to investors in high tax brackets.  Since 1918, there have been 125 attempts to either diminish or completely do away with this tax advantage. 

The President recently put together a bipartisan commission (The National Commission on Fiscal Responsibility and Reform (NCFRR)), tasked with “bringing the federal budget into primary balance by 2015 and to meaningfully improve the long run fiscal outlook.”  After eight months of deliberations, the Commission released a six-part plan in December 2010.  The key element of the recommendations of the Commission that could impact muni bonds is there recommendation to tax interest on state and local municipal bonds as income for newly issued bonds.  This could actually benefit current bond prices because these bonds that are “grandfathered”—not subject to taxation, would be highly valued in the marketplace.  It would make it really difficult for states to sell new bonds, however, and those new bonds that they sell would need to pay a much higher rate of interest to entice investors to buy them, since they would not have the same attractive tax status.  These new bonds would (theoretically) only be taxed at the federal level (would still be state tax-free), but would still be less desirable.
The NCFRR report is just one of several initiatives that are currently circulating in Washington, but it is clear that the federal government is actively seeking to take away the federal tax exemption for municipal bonds. 

Given the current political and economic environment, municipal bond investors need to actively review each bond position held, and make some tough decisions about the true risks in their bond portfolios. 

Monday, July 18, 2011

Credentials Matter - Published in the Santa Barbara News Press in June of 2011

In any business, acquiring the knowledge, experience and expertise necessary to perform well for clients or customers is critical to success.  In the investment arena, this is especially true because the financial markets are highly complex, and because so much is at stake.  With your life savings on the line, understanding the background of the advisor you are working with could make all the difference.

Early in my career, I realized that to do a good job for my clients, I would need to do everything possible to understand the markets and the multitude of investment vehicles available to investors.  I started in the business in 1990 with Lehman Brothers after completing a degree in Finance and passed the series 7 and 63 licensing tests, after about 4 months with the firm.  Soon after I also passed my commodities licensing test—the series 3.  I worked for Lehman in Houston for about 3 years before taking a position with Sutro & Company in La Jolla.  I immediately began studying for the CFA, or Chartered Financial Analyst designation, and secured my CFA in 1997.  I went on to get my CFP and CIMA designations, along with my series 24, 8, and 65, as well as my insurance license (all of my licenses except for the 65 are now inactive—I just don’t need them anymore).

I have always believed in educating myself.  From a purely business perspective, the financial world is highly competitive, so having the right credentials is critical to success.  On a much more important level, doing all one can to be the best they can be at their job, to do the best job possible for their clients, is paramount.

While I would not go so far as to say that professionals in the investment arena cannot do their jobs without having credentials, I will say that, at least in my opinion, those who do not put forth the effort to educate themselves to the best of their ability, do not exhibit the level of passion, responsibility, and initiative that I would demand as a client.  With that said, there is no substitute for experience. Those advisors who have been in the business for twenty, thirty, forty years and more, certainly have a lot to offer.  However, gaining those key credentials can only add value to that experience.

It is important to understand the requirements of the most recognized credentials in the investment business, to get a sense of what it takes to obtain them, and how they help the advisor do a better job for their clients.  For investment management, the CFA is the top designation, period.  There are certainly many others, but nothing even comes close.  Anyone calling themselves a “Portfolio Manager” or “Investment Manager” should have a CFA, and if they don’t, as a client, I would want to know why they do not have it.  To complete the CFA program and receive a CFA Charter, the applicant must first meet the minimum initial requirements.

To sit for the CFA exams, the applicant must:
  • Have a Bachelor's (or equivalent) degree

Ø  or be in the final year of their bachelor's degree program at the time of registration
Ø  or have four years of qualified, professional work experience
Ø  or have a combination of work and college experience that totals at least four years (Note: Summer, part-time, and internship positions do not qualify)
  • Understand the professional conduct requirements (they will be asked to sign the Professional Conduct Statement and Candidate Responsibility Statement)

Once the initial requirements have been met, the candidate can then sit for the exams.  There are three levels of the CFA exam—Level I, II, and III.  Level I is given in June and December each year.  Levels II and III are only given once per year, in June.  This means that it takes a minimum of 2 ½ years to complete the program, assuming the candidate passes each Level the first time, and that they take Level I in December, and then immediately take Level II the following June.  (I have never personally known anyone to do this.)
The CFA exams cover the following topics:

  • Ethical and Professional Standards
  • Quantitative Methods
  • Economics
  • Financial Reporting and Analysis
  • Corporate Finance
  •  Equity Investments
  • Fixed Income
  • Derivatives
  • Alternative Investments
  • Portfolio Management and Wealth Planning

The CFA exam process is by far the toughest series of tests I have ever taken.  Nothing else comes close.  Anyone who has successfully completed the CFA program and has been awarded their CFA Charter has demonstrated a significant commitment to their career as an investment professional, as well as a strong commitment to ethical conduct in all that they do.

The CFP (Certified Financial Planner) is the top credential for financial planning professionals.  As with the CFA, I would say that anyone offering financial planning services absolutely must have the CFP certification.  The CFP also has stringent requirements for candidates:

  • Completing the Education Requirement
  • Pass the test—The CFP® Certification Examination tests the candidate’s ability to apply financial planning knowledge to client situations. The 10-hour exam is divided into three separate sessions. Because of the integrated nature of financial planning, however, each session may cover all topic areas. All questions are multiple choice, including those questions related to case problems.  The exam is administered three times a year - generally on the third Friday and Saturday of March, July and November - at about 50 domestic locations.
  • Experience Requirement—At least three years of qualifying full-time work experience are required for certification. Qualifying experience includes work that can be categorized into one of the six primary elements of the personal financial planning process. Experience can be gained in a number of ways including:
    •  The delivery of all, or of any portion, of the personal financial planning process to a client.
    • The direct support or supervision of individuals who deliver all, or any portion, of the personal financial planning process to a client.
    • Teaching all, or any portion, of the personal financial planning process   
  • Applicants must also pass the Fitness Standards for Candidates and Registrants and a Background Check and pay their certification fees. 
The CIMA (Certified Investment Management Analyst) designation is the top credential for investment management consulting.  The CIMA professional integrates a complex body of investment knowledge to provide objective investment advice and guidance to individuals and institutions. That knowledge is applied systematically and ethically to assist clients in making prudent investment decisions. The CIMA certification program requires that candidates meet all eligibility requirements, including experience, education, examination, and ethics.

There are many other high-quality credentials available to investment professionals.  I have written about those that I have because I know them well and because I believe them to be the best.  What is more important, however, is the level of commitment it takes for professionals to invest their time, energy, and money into the process of acquiring these and other credentials.  As a client, I would want and expect to see this level of commitment from my financial professional, and if I did not see it, I would be concerned.  There are far too many inexperienced “advisors” hired by banks and investment firms, who do not possess either the commitment or capabilities to manage the hard-earned assets of their clients.  I believe most clients assume that these firms require their financial professionals to obtain education and credentials.  

Unfortunately, this is not the case.  Many “advisors” do not have college degrees, much less advanced degrees, certifications, or designations.  The responsibility ultimately lies with the client to ensure that their financial professional is qualified.