September 16, 2008

The office is humming these days with the recent launch of the Children’s 100 Index®, getting our new mutual fund ready to go public, and a lot of paperwork associated with our change to 100% fee based work.

If you are interested, the Index can be seen at Childrens100Index.com.  It is meant for institutional use, so it may seem light on the introductory side for those used to “retail” websites.  But you can get a flavor of what we are doing by looking at the Index.  The core holdings for The Kid’s Fund will come from this Index.

We are also taking extra time to make sure we have the paperwork to effect a seamless changeover.  We have about 250 clients, so it is a lot of work to assemble it all.  Look for a packet in your mail in the next week or two.

In this issue of the newsletter we have a warning about banks, some comments on the economy, a mention of another great technology find, along with my usual update on the stock market and some comments about your accounts

This Is One Unhealthy Market 

The weak trading of volume that I discussed in my last newsletter has come back up in the past couple of weeks.  But the market has been sliding backwards during that time, too.  Not an encouraging sign.

Inflation is waning, which means the government can inject more money to stimulate the economy without worrying about runaway inflation.  I still believe deflation may be the bigger problem in the long run.  In deflation, cash is king.  Assets that can be readily converted to cash without resorting to fire sale prices are the only things you should be considering these days.  Avoid hard assets like real estate (down 20% or so), gold (down 20% or so), energy (down 20% or so), and non-liquid investments like annuities.

Hold only high quality investments that can be converted to cash and moved on short notice as defaults from banks could bleed over into insurance companies and businesses with weak credit.  This is the way we run managed accounts for our clients, and we do it for a reason.

We can’t look overseas for any relief, either.  Global economies are slowing down even more than the U.S. has been, proving that the old adage “When the US sneezes the world catches cold” still holds true.  There are no safe places to invest overseas since Europe is down 30% India down 45% and China off a full 50% from last year’s highs.

Earlier this year the Federal Reserve Bank, lived up to Chairman Ben Bernanke’s assurances that the Fed would drop money from helicopters if needed to revive our economy.  When the credit crisis raised its ugly head a year ago, the proverbial helicopters worked overtime and last winter the money supply in our country was expanded at rates not seen since 9/11.  For some reason, the money supply has been shrinking for the past couple of months. 

I’m not sure if this is by design, or perhaps just a lot of cash getting sucked into the black hole of debt servicing.  As analyst Tom McClellan said, “It’s like the Fed is trying to scoop up all the money it dropped from helicopters like the street sweepers after a ticker tape parade, lest that money lay about causing inflation.”  Except the market is saying don’t worry about inflation right now.  Strange.

It sure doesn’t surprise me to see the stock market in a tailspin when money is being withdraw from the economy.  It takes money to buy stocks, and there isn’t any to spare.

I don’t know why this is happening.  I just react to what I observe, which is why I have our growth accounts in capital preservation mode.

I have seen good markets to invest in, and this isn’t one of them.

The good thing is that bad markets always end, and we are in great shape to take advantage of the great buying opportunity that always follows lousy markets like this.  I used to keep this saying by William Hamilton taped to my computer,  “The graveyards of Wall Street are filled with the bodies of men who were right too soon”.  Time to be patient while we wait, safely out of the stock market.

For those of you who allow me to manage your money, you are in excellent shape.  We have done a good job of preserving principal so we can buy low when the market does find its next bottom.  Relax and enjoy the ride.

If you have friends who are having a difficult time in this market, please send them my way.

  Banking Update

It is no secret that banks are under a lot of pressure from all the bad real estate loans.  Eleven banks have failed so far this year (three in the past month alone). My friend Bill Donoghue who writes a column for the Wall Street Journal’s Market Watch reports that analysts suggest that two or more Georgia banks might not be far behind.  This compares to no bank failures in 2005 and 2006.  Tough times.

Bank failures are like lightning strikes.  We all know to take precautions in an electrical storm, and the banks are in one now.  We can’t predict the next lightning strike, and depositors get no real warning of a bank failure.  Pasadena based IndyMac, the largest bank to fail in this go-around went on the FDIC watch-list in June and failed July 11. 

The FDIC limit is $100,000 per depositor – higher for IRAs.  More than 10,000  depositors were over the FDIC insurance limit by an average of $100,000 each.  My understanding is that those 10,000 depositors lost 50 cents of each dollar in IndyMac that was over the FDIC limits.

That’s a shame because this kind of loss is easily avoidable.

What can you do to protect yourself?   Vote with your feet.  Remove any amount over the FDIC insurance amount from that bank.   You can simply deposit it in another bank.  A good alternative is to use the Treasury-only money market funds in our brokerage accounts.  Treasury bills are the only thing safer than FDIC deposits.  Our brokerage accounts are also covered by SIPC, my industry’s version of FDIC.  Pretty darned safe stuff.  It is where I keep my cash.

Check your bank statements now.  When banks fail and some of your money is uninsured by FDIC there are no guarantees, no time limit for reimbursement and no sympathy for the money in your account.  But they will let you keep the toaster they gave you to open the account.