OK, I was wrong, but ain’t it great?

A couple of months ago I became concerned about the potential for a soft market in September.  Historically, September has been the worst month to be in the stock market, and Tom McClellan who writes a newsletter I enjoy, pointed out an echo-like pattern in the money supply that contributed to the stock market crash in 1987 and again to big declines in 2000 and 2001.  Earlier this year, the Fed created the set-up for another similar drop in September.

So, although I had good reason to be cautious, the stock market took only a brief two week pause, dipping only 4.5%, and then started what might be the beginning of another uptrend.  

I’m OK that I fell for the market’s head-fake, because this 4.5% decline began just like many other, much bigger declines, and we never know whether we are dealing with a big one or a small one until it is over.   We made a little money anyway, just not as much as if we had taken the full risk of staying invested.  Better to be safe than sorry in this business.

What happened?  Money happened!

As I mentioned a few months back, there are only two things that matter in the investing business.  How much money is there and how willing are people to invest it?  Right now there is a lot of money in circulation, enough to buoy up the markets even in times when, economically, things look a little shaky.  
One way to gage the money supply is to watch the small company stocks.  

Let me use Tom McClellan’s metaphor of markets being like a brood sow, with many little piglets all scrambling to get some milk.  The biggest, strongest piggies always get plenty, and only after they have drunk their fill do the runts get a turn to eat.  

You can’t really tell if there is enough milk to go around by looking at the biggest piggies, you have to watch the small ones. When they thrive you know there is plenty of milk.

It is the same way with liquidity in the financial markets.  If there is enough money, after the institutions have bought all of the big company stocks they want, they will buy the small company stocks.

And in September, the stocks in the Russell 2000 Index of smaller companies dropped over 6%, one third more than the large company indexes fell.  This tells me that the event my research pointed to, a liquidity shrinkage, was real, just not a big shocker.

Does this mean the stock market is now out of the woods?  I wouldn’t exactly say that, since the stock market is never really out of the woods. Some market risk is a constant.

My work still points toward some big problems in the market toward the end of next year, but right now a lot of indicators are positive.  Barring any explosions from terrorists or implosions in critical industries there could be money to be made before we get to the end of next year. Enough money to make investing a good idea.

If you have been reading my newsletter long enough, you may be able to tell that I am now more optimistic about the market’s future than at any time in the past several years.  For sure there will be dips in the market as it zigs and zags on its course, but I don’t think we have any crashes in our immediate future.  And when is the last time you heard me say that?

And remember, the stock market is the single best leading indicator for the entire economy, and that is certainly good news for everyone.

Jersey Boys Report

Annual IRA Fees

This is the time of year that our primary custodian, National Financial Services (NFS) sends out notices of IRA Annual Maintenance Fees.  The fee is $35, and you do not need to send any money.  It will be deducted from your account on December 14, 2009 so there is nothing for you to do when you get your notice.

What is Really Behind This Year’s Flu Frenzy?

I see many similarities in the public reactions and media frenzy over the N1H1 “Swine” flu and the ups and downs of the financial markets.  Both generate an undue amount of fear.

I frequently counsel clients who are worrying too much about their money in hopes that they can direct some of that energy toward more practical endeavors.  I think I need to do the same, now, regarding the flu.

First, all the data I see about N1H1 leads me to believe that it is no worse than ordinary flu, and may actually be below average in its severity.

To put this in perspective, we have had a few handfuls of deaths from N1H1, but annually over 100,000 Americans die from the regular flu.

So what is the big deal about N1H1?

I think part of it may well be a grab for resources by the agencies involved in the public health business. Most are local agencies and hospitals. In a tight economic environment like we have, many budgets are being cut. The public health agencies threatened with budget cuts are merely trying to make themselves seem indispensible in light of such a “threat” so the rhetoric gets ramped up.

And of course bad news sells better than good news, so the media is eating it up, too.

I heard an ad today describing N1H1 as the cause of the “first ever declaration of a Phase 6 pandemic”.  That sounded ominous, but I did not know exactly what those terms meant, so I did a little research.

The term pandemic, just means widespread.  No surprise that flu could be widespread, that happens every year.  

The “Phase 6” part of that term relates to a category that includes outbreaks in multiple communities in at least 3 countries of the world.  That sounds like it could also include the regular flu, colds, allergies and heatburn if you want it to.

So, why is N1H1 the first disease to ever be raised to a “Phase 6 pandemic?”  Because these are brand terms coined by the World Health Organization in a 2009 revision of their procedures.   It used to be called something else that you never heard of.

I would suggest that anyone who uses the “first ever” term to scare you a little might be someone whom you should avoid doing business with.

The real problem is that the normal flu vaccines, which are planned a year ahead of time, are a product of a lot of guess work about which strains of flu will be prevalent so they can be included in the next year’s flu vaccine.

This year, the federal Center for Disease Control or whoever makes those judgments, guessed wrong.  When N1H1 emerged last spring, it had not been included in the “regular” vaccine.  Oops.

So, the full court press by the government and the media is really to make up for a major blunder at the top, not because N1H1 is a particularly nasty bug.

I do not mean to simply pooh-pooh the flu, because any form of it can be a serious illness.

But I would suggest that you not allow yourself to get caught up in the hysteria surrounding N1H1 flu, but deal with it like you have dealt with the flu every other year.

If you are disposed to get flu shots, go ahead and get them this year too – two sets of shots are needed now, regular and N1H1.  If you have shrugged it off in other years, shrug it off this year, too.

In reality, flu is easier on older folks who have built up some immunity to flu over many exposures.  The exceptions are folks who have other health issues (such as COPD, diabetes, etc.) which weaken defenses and make it harder for the body to fight the flu.

At the other end of the spectrum are children who have not yet built up immunity to flu and can get it easier than adults.

Whether it is N1H1 or any other strain of flu these things hold true.

If you want to stay healthy, wash your hands a lot.  The only way flu gets into your body is through your nostrils or throat.  And most germs are transmitted by our own hands to our nose or mouth.  If you can keep flu off of your hands with frequent washings and keep your hands off of your face you will have a much better chance of avoiding the flu this winter.

As Spock would say, “Go forth and Prosper”.  And I would add “in good health”.

Riddle of The Week

Throw me off the highest building, and I’ll not break. But put me in the ocean, and I    will. What am I?

A wave.

What’s Going On In Your Portfolio?

Our Flexible Income* program continues to show growth, but at a much slower rate than in the past six months or so.  This is good.  The current rate of growth is capable of continuing for a while, while the rate of growth this summer was so high as to clearly be unsustainable.

Flexible Income* remains fully invested in high yield bonds which continue to enjoy their very low volatility uptrend.

HCM’s Careful Growth Strategies* carries the plural in its name because I use go back and forth between several different strategies depending upon what kind of market we appear to be in.  

Due to the staying power of this year’s uptrend in the market, many of my long term indicators are turning positive, indicating it is time for a different style of growth strategy.

As a result, I have begun the transition of Careful Growth* from the very defensive, quick-to-trade strategy that served us so well during last winter’s market crash, to a strategy that will (hopefully) produce many fewer trades than we saw over the past two years while still pursuing growth in account values.

Going forward, we will also be using more broad market indexes, rather than industry or country specific investments, and due to the greater diversification in the broad indexes, we will hold fewer investments at one time.

When our current investments begin to trend and trigger sell signals, that money will be moved into the leading indexes.  The changeover wont’ happen right away, but is a process that may take a few months.

That is if the market continues to cooperate.

Currently Careful Growth* is currently fully invested in funds of Latin America, India, Australia, and International Value stocks from mid-sized companies, as well as gold mining, and Internet, plus we continue to hold a big chunk of high yield bonds because they are growing.

Please consider forwarding this newsletter to friends who might benefit from strategies that Adapt to Changing Markets®.