Now What?

The market had a big up day. What’s next? This ties into what I have been talking about for a while as negative sentiment has been building. There is clear visibility for bad things to happen to the market. Visibility does not mean inevitability which is why I have taken no defensive action ahead of what might happen. I am not that bright, just ask any of my family members and they will tell you. Trying to out maneuver a big turn in the market is not something that is likely to go well. If you invest in the stock market you have to be prepared for down a little. You should be able to tolerate down a little. I have written too many times about utilizing a very simple exit strategy where stocks are concerned and that I do not try to be too nimble. The market strength today is a surprise. Fortunately for my clients there is no financial consequence to my being surprised. There have been many comments in the last few days from people describing why they are bearish and the action they have taken. The whys center around a laundry list of very scary things. But none of the commenters left an objective market related catalyst for why they took their action. The yield curve is going to invert but it hasn’t yet and may not. The economy is going to have a recession but GDP came in today at 3.3%. There is a housing bubble but what if it is just a mania? If you study market history you will see that the...

Panic AND Mayhem

Katrina looks like it may end up having far reaching consequences. I have begun to map out what action I will take in client accounts if the market breaches its 200 DMA and/or if the yield curve inverts. I may be wrong but I don’t think of the action today in the two year and the three year as being a true inversion. The problem created by an inverted yield curve is that lending becomes un profitable. Most banks are not looking to borrow for two years so they can lend for three. I do think there is more chance of an inversion now than there was a week ago, but it has not happened yet. As a matter of philosophy I do not want to take defensive action against something that might happen. It usually takes months for an inverted curve to be felt in equities. I feel so sense of urgency on this topic. I mentioned the other day, long term money can handle down a little. The SPX is 20 or 25 points away from its 200 DMA. A drop from here down to there is only down a little. I am not worried about down a little. The fact that there may be a touch of panic out there is probably a call to NOT get very defensive. Another thing with all of this is that capital markets have had some sort of knee jerk reaction to Katrina and the waves (obscure music reference from my youth). Some of that reaction will be unwound as things get back to normal. I do not know how...

Counter Strategy

One aspect of my style of money management is the ongoing use of a counter strategy. I should probably devote more writing to this idea. I like to have limited exposure to investment products that will go up when everything else goes down. There are all sorts of inverse funds, gold, currency funds and so on available to pursue the idea. There is not a lot of content out there that addresses this but here is one article that creates awareness from Marketwatch. The author asserts his belief that things like falling dollar funds and inverse bond funds will likely be winners in the coming months. I don’t know anything about the author. I don’t really care if he ends up being correct or not. What makes the article so useful is that it creates awareness of what I think is a very important...

You Know, Adjusted for Inflation…

I heard Bob Froelich go down this road earlier today talking about oil at $70 versus where it would need to be to compare to 25 years ago. We have been hearing about this point for many months now. I am not fond of this line of thought or, depending on how its used, justification. I don’t want the worst period in our country’s history for energy prices to be the benchmark. If the inflation adjusted number is $100, how relieved will you be if it only goes to $92? Does it ease your mind to know if it costs you $52 to fill your SUV now, you only have $13 to go before your 1980 station wagon equivalent? I find the whole thing to be silly. If a year ago is cost you $32 to fill your car and now it costs you $44, you either have a hardship or you don’t regardless of what was going on 25 years...

Casting Too Wide Of A Net

I enjoy reading articles from Morningstar because I tend to disagree with almost every conclusion they draw and their articles make for useful posts on this blog. The latest article is about single country funds. You can read the article here. The conclusion of the article is “We’re concerned about all the interest in single-country funds, though. For starters, it’s always dangerous to chase after hot performers. Moreover, these funds come with all sorts of geographic, sector, and other risks, and they’re difficult to use effectively.” The author later says this about China funds “All told, China funds are way too explosive for conservative to moderate investors and those with shorter time horizons. They’re also far too daring and focused for individuals who want only a supplemental international offering with lots of upside potential.” Wow. To be clear, single country funds are more volatile than broad foreign funds. For some folks single country funds are clearly not appropriate. But I disagree with the way in which the author so broadly advised two out three types of investors ( I am making an assumption, when he says conservative and moderate that the only other one is aggressive) to avoid them. Single country funds are a tool to be used or mis-used by investors. Some investors will be more informed than others and some will have more success than others. As a first step, it does not take much work to figure out that there are some interesting things going on in China, as an example. Perhaps a little more work may lead to an investment in one of the China...