February 22, 2011
If You Are Not Invested Now, When Would You Be?
The Investment View from Prescott, Arizona
I confess to regularly reading 64 different newsletters, blogs, newspapers and magazines to stay on top of the economy and the markets.
Diverging viewpoints in the various publications often point out something I am overlooking. In fact, one of the newsletters has been mostly wrong for 15 years but has a track record of getting the really big trends right. And they provide such thought-provoking analysis that it is still good background reading.
Another newsletter, which has garnered over 20 awards in the 17 years I have been subscribing, can also get on the wrong side of the market, and is doing so again as of this writing on February 21st. This fellow has exceptional skills as a chart reader, and led me to create my “consensus of 150 indicators” analysis. But he likes to rationalize about the effects of events like the recent upheavals in Egypt, political wranglings, and occasional news items and then use the rationale to project what the market might do, sometimes acting on opinions, not facts.
With so many possible outcomes to scenarios like what unfolded in Egypt, no one, not even national intelligence services with all the resources they command, gets it right very often.
When I can’t see the underlying causes of a certain market action, rather than try to rationalize them away, I find it more profitable to accept the market action as a fact, invest accordingly and worry about “why it is so” later on. In fact, if you must wait to know why something is going up or down before acting, it is often too late to be a good investment.
The facts of the stock market trend the past few months are that it appears to be defying gravity. Often that means that the market is ripe for a decline, but no one really knows when or how deep it might be. What history suggested would be a sharp decline in January turned out to be a real yawner.
A month ago I accepted that traditional market indicators were not working very well and decided to do less analysis and just go with the fact that we were in a strong uptrend.
As a result, the changes I mentioned in the past few newsletters and implemented last month are working very well and I think you will be pleased when you open your February statements.
It is easy to glibly predict an imminent top in markets like this. Eventually those who do will be correct. After all, even a broken clock is right twice a day. But the fact is, no one really knows, and predictions based upon opinions are much more error-prone than those based upon facts. Plus, they can be very expensive to investors who cling stubbornly to wrong opinions.
Only now is it becoming clear that the driving force behind the uptrend in US stocks is money coming out of bonds and international markets, both of which have declined a lot recently.
The ability of the market to absorb bad news and keep on climbing is a sign of underlying strength – due in part to the easy money conditions created by the Fed and a slowly recovering economy.
Regardless of the many things one could worry about right now, the facts show that the US stock market is trending up strongly. To those who are still on the sidelines, I would ask, if you are not going to invest now, when would you?
A Dinosaur? Not me!!
I’m just back from three days in Dallas, where I attended a conference for money mangers where several of the topics were uses of social media for business – things like Facebook, LinkedIn, Twitter and such.
Beyond staking my claim to appropriate account names, I don’t do much on these new services partly due to difficult compliance requirements when talking business on them, but primarily because I see them as a potential black hole for my time.
However, I had an eye-opening talk with my son Matt, 20, when I said “I emailed you something a few days ago, have you seen it?” His reply was “Oh, I guess I ought to check that every once in a while.”
The “ah-ha” moment in that was when I realized that kids today think of email as soooo last century. They don’t use it. Instead, they prefer to communicate with Facebook, text messages, and other new formats that are surpassing email and many other things that I consider comfortable.
At that moment, I realized that I needed to get up to speed on social media or risk becoming a dinosaur who has a difficult time communicating with the younger generation of investors coming up.
So off to Dallas I went . . .
This newsletter is a very effective mechanism to keep you abreast of what is happening in the markets and your accounts, but there is no substitute for getting eyeball to eyeball when talking about your money.
I am not a stickler for frequent account reviews like many commissioned brokers who have to meet with you to get you to buy their next great investment. I won’t call and bug you, I just take care of things as best I can so you don’t have to worry about where your money is when you are trying to sleep.
However, it is important that we meet occasionally to make sure you understand as much as you want to about what I am doing on your behalf, and discuss any changes in your financial circumstances, goals, needs, or comfort (or lack of it) with risk.
Please feel free to call 778-4000 anytime to schedule an account review at your convenience.
What We Were Saying Back Then
An Added Dimension of Diversification
From my February 24, 2009 Newsletter:
“The great lesson of [the bear market of 2007-09] is that ordinary methods of diversification – just owning different kinds of stocks and bonds, etc. – are ineffective in the markets of the 21st Century. Diversifying among strategies takes the concept of diversification one level deeper, and this is what most investors, and sadly many advisers, have overlooked in their planning.”
What’s Going On In Your Portfolio?
As I mentioned elsewhere in this newsletter, the changes implemented in January have gotten traction and have shown explosive growth. Our Careful Growth portfolios are fully invested in stocks and stock funds. Current holdings include 45% hard assets that should do well in an inflationary environment, made up of 20% gold and precious metals, and 25% oil and industrial materials stocks.
Thirty-five percent of our holdings are in technology, construction and heavy equipment stocks, and we hold one foreign stock and a Japanese stock fund which continues to do well for us despite the let down in international stocks in general.
Our Socially Screened portfolios, which use the same decision making methodology as Careful Growth Strategies but with a smaller universe of investments to select from, are also fully invested and performing well.
Flexible Income portfolios, which have struggled the past few quarters as interest rates began to rise, are having a strong month through February 18th and are showing modest year-to-date gains.
Municipal portfolios are currently invested in an intermediate term municipal fund as I seek to manage the risk of rising interest rates which can hurt principal values.
And of course, if you are using a Balanced Strategy which is a 50/50 blend of Careful Growth and Flexible Income, you can rest easy knowing that you are currently showing gains on both the income and growth sides.
The regulators in my industry have issued an alert to the public regarding “phishing” scams due to the increasing number and sophistication of these come-ons.
Phishing scammers send fraudulent emails purporting to be from a financial institution that has acquired the recipient’s bank, credit card or mortgage accounts. Another variation is a shipping instruction that needs to be verified or a photo a friend wants you to see at some website.
The emails direct the target to update or verify their account information by clicking on a link to a website that mimics a legitimate site. You don’t even need to enter any data; just opening the offending link can create problems for unwitting people.
Victims who are drawn to those sites have their computers infected with “crime-ware” that gives crooks access to personal information, passwords, online transaction information and even your entire address book so they can phish your friends.
A simple way to protect yourself is to never click on a link provided to you in an email. Access the firm’s website like you usually do.
And when in doubt, don’t. You can always call the friend or firm on the telephone to confirm the legitimacy of any link you are unsure about.
Q: My life can be measured in hours. I serve by being devoured.
What am I?
A: A candle.
Our Spotlight Strategy
Municipal Income Strategy
The Municipal Income Strategy moves from high-yield to high-quality municipal bond mutual funds and ETFs to produce greater income than “buy and hold”, with lower risk as measured by fluctuation in principal values. HCM’s Adaptive Market Strategies® direct investments into parts of the municipal markets showing the greatest strength. If the price weakens, they are replaced with new investments that are going up or hedged until the market stabilizes. Repeat as needed.
(Please see chart below)
* 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.
Balanced Strategy Description and Performance Information
Careful Growth Strategy Description and Performance Information
Flexible Income Strategy Description and Performance Information
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be 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 constitute a solicitation for the purchase or sale of any security.