Market as of 11-9-10

I am holding to what I stated last week. Gradually putting money into safer assets ie cash, short term fixed since this market has gone up so much. Focusing on large cap stocks and stock funds. Favorite sectors right now are Financials and Energy. I am still waiting and will continue to wait for the eventual opportunity to short long term fixed income.

Market Euphoria as of 11-4-10

This has been a wild week in the markets, first the elections, then Ben Bernanke's QE2 announcement. If you are a longer term investor and you have your portfolio diversified in good quality stocks, and shorter term bonds,  some commodities, maybe some real estate - you had a very rewarding week. I am writing this just before the employment figures get released tomorrow at 8:30 so things could of course change.
If you are a fairly active trader, you may have had a fairly confusing and frustrating week. The markets moved drastically, especially on Wednesday after the Fed announcement. Today, all you had to do was throw darts at the wall and you made money.

So now what?
There is market momentum that is hard to short right now. This could go on for a while with stocks and commodities moving higher.  However, as noted in previous remarks, the average investor is now stepping back into the market, a move which usually signals we are nearing a Top.

Short Term players - I  would consider taking some money off the table, tightening stops ( I do hope everyone uses Stop Loss transactions just in case), and starting to hedge positions. The market has had a terrific run these past 2 months and now is not the time to be greedy. Putting some money in safer investments does not mean we think the market is going to go down. It is a safety move because nasty events have a habit of appearing suddenly and causing drastic moves in the market. No such moves are expected right now, investors are turning euphoric meaning they think the markets will go straight up into next year. That always makes me cautious.  What I suggest doing in markets such as this is Dollar Cost Average Out  ie start withdrawing money from stocks into safer investments on a schedule, and putting in tighter Stop Loss orders. Bonds - keep them short duration.

Long Term investors and 401k participants - I would review investment allocations to ensure equity investments are in Large Cap funds that hold a lot of dividend paying stocks. Bonds should be in shorter duration fund options. Money Market holdings should be increased to "take some profits off the table". New contributions should be going into safer investments rather than being invested in Stock funds at these high valuations - wait for a pull back before allocating these contributions into stock funds.

Bond Market 11-3-10

It will be interesting to see what happens to bonds this afternoon when the Fed announces its QE2 plans. I have seen rationale for both rising and falling bond prices. However, once we get past this news, there is little disagreement about the future of the bond market - there is little upside potential and a lot of downside risk.
Bonds can only keep  going up if interest rates keep falling. Problem is there is not much room left for interest rates to fall. If these record low interest rates stay steady for the next year, then bond prices should remain relatively steady for the next year. But inflation is coming - it has to given all the government spending and now QE2 which is just printing more dollars. The only question in the investment community is When - this month, by year end, by next summer.
In the classes I teach, I consistently hear people talk about putting most of their money in bonds funds thinking they are safe vs. the stock market which they view as a casino. This is not the way to view these two markets and bond fund holders are going to be sorry over the next several years.
Here is an article by Bill Gross at Pacific Investment Management (PIMCO),  one of the country's most respected Bond Managers. Please take heed.

http://www.thestreet.com/story/10902225/bill-gross-qe2-signals-end-of-bond-rally.html

Annual expenses lower in ETFs vs. Mutual Funds

 Question asked during Adult Ed Investment class tonight.

Question was why are ETF annual expenses lower than mutual fund expenses, even indexed funds.

"Lower costs
Expenses can have a significant impact on returns for investors. ETFs, in general, have significantly lower annual expense ratios than other investment products. ETFs are less likely to experience high management fees because they are index-based, not “actively” managed. And, since they trade on an exchange, ETFs are insulated from the costs of having to buy and sell securities to accommodate shareholder purchases and redemptions".

I took the above excerpt from the articles on my website. You might want to read all the articles since they are fairly comprehensive.

here is the page which has 4 articles on it so scroll down:

     http://www.trendlinefinancialsolutions.com/category/investing/

Bull, Bear or Neutral

OK, so what am I normally - Bull, Bear or neutral?
Normally I am bullish and have been so for the past 2 years. Starting 1 month ago I changed to mild Bear.
Why? I think the upcoming move by the Fed, which is already baked into the markets, will not achieve anything but artificial bubbles in the equity, bond and  commodity markets. Below is a very good article recently on what the Fed is doing and why it is ludicrous. This does not mean that I am out of the market, but I am not "all in". I have also started hedging equities. Concerning Fixed markets, I think the future best investment will be to short bonds, mainly in the 20 year maturity area. However I do not think it is time yet to start the shorting - maybe  by year end depending upone the effect of the Fed QE2.

-- Dr. John Hussman, "Bernanke Leaps Into a Liquidity Trap"

The Down 50%, Up 100% Conundrum

Average people think in terms of dollars, not percentages.
When comparing investments, the use of percentages allow one to compare investment returns without having to know the amount of money invested, only the time period needs to be the same. This is the Time Weighted Rate of Return. If one compared dollar increase or decrease, one would need to know the amount invested to compare the investments. This would be quite tedious and futile. All performance returns you see on TV and in the papers are stated in terms of Percentage gain or loss.

The problem is average people have a hard time thinking in Percentages. We tend to ignore the Base Number upon which the percentage is based.

For example, assume you have a $1,000 portfolio that loses 50% of its value or $500. What percentage increase would be needed to return the portfolio to its original $1,000. Consistently, in Adult Ed classes I teach, the asnwer comes back 50%.  NO, the answer is 100%.

People answering 50% forget that the Base Number has changed. Their mind tells them that if I lose 50% of $1,000, then  I have to gain 50% of 1,000 to get back to $1,000. That is actually a true statement, but after losing 50% of  $1,000, you only have $500. This $500 is now how much you have in your portfolio after the loss and becomes the new Base Number. Now to increase your $500 portfolio so that it  becomes $1,000, you would have to earn another $500 or a 100% gain in your $500 portfolio.

In short, if your investment loses 50%, it takes a 100% gain to return to even - the Down 50%, Up 100% scenario.

I should note that the above is a mathematical calculation that would need to be done if you plug in other percentage scenarios.  So, if  your investment loses only 10%, it does not mean that you have to earn 20% to get back to even. If your $1,000 investment lost 10% or $100, you would have to earn 11%  ($100 / $900) to get back to even. The Down 50%, Up 100% example is normally used in explanations since the answer is so dramatically different that what our minds expect the answer to be.

Welcome to Trendline Financial Investing Thoughts

My name is Peter Owen and I am president of Trendline Financial Solutions, a personal Financial Planning practice on Long Island. There are several reasons I started this blog  to voice periodic musings on Investment topics and the Markets:
- people have been asking me in my Practice to give my opinion on many investing topics.
- I do not want to overload my exisitng website with a lot of  short commentary. Longer articles  are posted on my Website -  http://www.trendlinefinancialsolutions.com/
-Many of the comments will address issues raised during the Adult Education financial classes I teach each week. Since average Long Island people attend those classes, some to learn and some to socialize, I find that the questions raised during those classes are applicable to most average investors.

I hope you find the future posts useful and informative.

Peter B. Owen, ChFC, CLU, FLMI, CRSP, CISP
President and Chief Financial Planner
Trendline Financial Solutions
1675 Cedar Beach Road, Southold, NY 11971
223 Parker Avenue, West Hempstead, NY 11552

Phone: (516)317-2860

Email: info@TrendlineFinancialSolutions.com
Website : TrendlineFinancialSolutions.