Fibonacci

If you think baseball fans are freakish over numbers you haven't been locked in a room with an investment analyst. We've all seen the stock charts with colored lines tracing up, down and sideways patterns and an investment analyst is a person who deciphers what this means to an investor and whether or not they should buy or sell a particular stock or index. Charting involves using a significant history of past patterns and making sense of that history to project forward where the analyst thinks the individual stock or the markets will go next. Chartists go as far back in a stock's or index's history to trace a pattern as they are able. There are many books detailing basic charting that the novice can read and learn the basics, but there are so many complex derivatives of charting that only the most experienced chartists is given credibility and that's because he or she also has had a history of being right more times than not.

Getting it right is what it is all about when charting. Making even one small mistake and a chartists can cost a firm millions. if not billions of dollars.

One of the mathematical formulas used by today's investment specialists is something discovered almost 1000 years ago by Leonardo Pisano or Leonardo of Pisa, an Italian mathematician that brought the Arabic disovery of the decimal system to Europeans. He also wrote a book entitles, 'Libar Abaci', and in that title he used filus Bonacci, translated to mean, son of Bonaccio and over time students of his simply morphed his name into Fibonacci.

The basic Fibonacci numbers are a series where the next number is the sum of the previous two: 1,1,2,3,5,8,13 and so on. From this series scientist and mathematicians have derived what they call the Fibonacci Sequence and the amazing quotient of proportions which is known as the Golden Ratio or 1.618. This ratio of 1.618 is natures building block. For example if you divide the number of female honey bees in a hive by the male bees you get 1.618, if you measure your arm from shoulder to finger tips and then divide by the length from your elbow to fingertips you get 1.618. Need more, measure your height and divide by the number from belly button to the floor. If you examine sea shells you'll see the 1.618 relationship between swirls. But more importantly Fibonacci brought to modern technical analysis the golden ration translated into three percentages: 38.2%, 50% and 61.8%. There are other numbers in the sequence but for this discussion we are only interested in the above as they are the significant numbers in an investment market retracement.

And here is why today some chartists are alarmed that the markets are indeed readying themselves for a retracement. The chartists proclaim that historically the markets will retrace down to the next level of support.

This is how it works, if you take any chart of an index or stock and apply the following numbers to it you can see what worries the technicians. The high value is marked at 100, the low at zero and in-between lines of support are drawn illustrating 61.8%, 50% and 48.2%. Fibonacci decrees that retracement is at the next lower level unless that level should fail to hold and then the markets will continue to retrace to the following level. The stock price or index will continue its descent until it finds a level of support for its price or value. The economic tailspin of 08-09 followed the Fibonacci formula exactly, from high to low the numbers and ratios were spot on.

Before you start liquidating all your holdings the analysts are not saying that the markets will falter if they should reach a certain significant number. On the contrary the technicians are not close to calling a Bear market, but when and if it happens, chart from where we are at that moment to the next point on the Golden Ratio and you will see that nature works even in investment markets.

The Dollar Bubble

A lot has been written and said about our weak dollar. Advocates state that a weak dollar is good for our export business and rotten if you happen to be a retiree planning a vacation overseas.

That said, I say, 'Phooey on both.' I'll explore what I mean in a later blog. The big thing with the beaten up dollar, that Treasury Secretary Geitner is attempting to shore up or at least stabilize, is the carry trade. Carry Trade, you say? It sounds like something from a 1920s movie. No, that was carriage trade. Carry trade is when investors, usually banks and sovereign funds, borrow cheap dollars and buy higher yielding assets somewhere else. With interest rates at or close to zero our government is basically giving away money, and it doesn't look like they'll change their philosophy any time soon.

Investors use the difference between what they pay to borrow and what they buy to make billions of dollars in profits, almost a no-brainer. It is a form of arbitrage with virtually no risk.

The last time investors enjoyed such a run was when the Japanese yen was kept at artificially cheap rates and ran for a period of 12 years. The dollar may do the same, according to Richard Franulovich, a senior currency trader in a November 11th Forbes interview. In fact, Franulovich doesn't think that even if the United States hikes rates it will take years to get competitive with other countries. The carry trade may continue all the while.

Unwinding such complicated currency trades would be a global event and if circumstances changed quickly it could have serious implications. That is the real risk for everyone who is unmindful of global investment reality.

The sudden strengthening of the dollar would have carry trade investors scrambling to liquidate holdings. They would have to sell what they own to pay back the dollars they borrowed. The fallout from such a massive liquidation would have the same repercussions investors experienced in the 2008-2009 market sell off. Unwary investors would see their holding plummet in value, and for them it would be for no explicable reason. This added, unseen and unmindful risk is something investors with short-term goals need to be aware of. The problem is most investors, broker and 'so-called' planners are clueless to global economics. And, just in case you still don't get it- this is a new global economy.

Wall Street Shares Blame

• Time Magazine had a recent cover piece on why Main Street hates Wall Street. This certainly didn't take too much research since more than a few brokers are not too thrilled with the past and current shenanigans of certain banks, brokerage firms and government officials. Let's face it, writing about the poor relationship between Wall Street and the rest of the world is as easy as explaining why California hates Detroit. But it's wrong. The scribblers paint with a wide brush and not everyone in the business is culpable.

  This is like assuming every broker, planner or advisor is a Bernie Madoff. While its easy to blame someone else a lot of times people need to be responsible for their own investment actions. They lose money because they don't know what they're doing or place their trust with people that have no business investing other people's money.

  Let me share some of my experiences with you. One of my current best clients came to me because his neighbor moved. I am not making this up.

  When I first met Tom and his wife it was the mid0-90s and they had a tech-Internet heavy portfolio that when I met them they wouldn't let loose of until someone pried it from their cold...well, you know the phrase and then one day I got the phone call because as Tom explained, their next door neighbor moved and the neighbor had been giving Tom tips on what dot com junk to buy and sell. The neighbor sold aluminum siding or something for a living and was simply following the herd in his dot com recommendations and sharing his world of knowledge with Tom. What did the neighbor care what he told poor Tom what to buy and sell, it wasn't like it was his money to lose after all. When Tom and his wife discovered exactly what they owned and the risk they were taking with all their retirement money it was easy to convince them to move to safer more stable investments.

  Or, how about this one -Years ago I held a seminar and after the meeting a woman approached me with a huge welcome home, sailor, smile on her face, and told me she was planning on getting into the business (the investment business, dear reader) and she was going to do it as soon as she retired and offer her services to her friends and neighbors. I am really very good at picking solid investments, she boasted, showing me some top notch dental work. 'Really," I said, "who do you follow?' She gave me a blank look and finally after what must have been a full minute turned a lovely pink and said, 'I read Money Magazine.'

  And a few weeks back a senior client who has been with me for 15 years fired me because their 40-year old son had suddenly morphed into a financial genius, graduating from tightening bolts on stuff for a living, and was taking over their retirement plan investments. He helped pick our Medicare insurance,' the wife almost in tears told me as they were leaving. (That's a qualifier, huh?) Can anyone spell future disaster?

  Then there was, many years ago, a woman I was referred to who showed me some fancy annuity brochures and paperwork on several limited partnerships she had invested in. It was all the money she had in the world. I asked who was her broker and she told me it was a Detroit fireman who moonlighted as a broker. Ah ha! Which wasn't as bad as the school teacher who gave $100,000 to a fast food manager to invest for her. He too was moonlighting in the investment business.

  Finally there was the lady I had coffee with the other day who wanted me to be aggressive with her portfolio and buy Exchange Traded Funds. Why, I asked. 'People are getting rich buying ETFs,' she said. She had been an aggressive investor her entire financial life, she said, but lost big when the dot com bubble burst and again in 2008. But this time she knew it was different. When I asked he what she knew about ETFs she was stumped and didn't know the first thing except buy and hold was dead. The sad fact is someone will find her and take whatever is left of her retirement fund.

  So there are just a few examples of poor judgement and people who could blame Wall Street but Wall Street had as much to do with their losing money as I have qualifying for the next Olympics. Here's a few tips for finding someone qualified to help you:

  Make sure they work full time in the investment business and have a series 7 license to sell all products not just insurance and mutual funds.

  They carry Errors and Omission insurance and make them show you the certificate. Lots of people lie, unfortunately.

  You never write checks payable to the broker no matter what they say.

  Never simply buy a product, invest for the long term with a plan. Preferably it's a plan that you articulate not what they say you should buy.

  Finally, don't do business with someone that obviously makes less money then you do. Let the new brokers practice losing money on someone else.

Mutual Funds, The Supremes & Fees

By the time you read this the Supreme Court may have already decided on reducing the fees that the mutual fund industry charges its customers for managing their money.

The case is all about how much is too much. The entire magilla began when three shareholders of a certain mutual fund family filed suit stating that the average retail fund customer paid twice as much for the fund's management services as did the same fund's pension and institutional clients.

The mutual fund management responded that they did more work for the retail customer and therefore the higher fees. And, when you think about it if you manage a one million dollar pool of money versus a ten thousand dollar account it does make some sens that the larger account is the same amount of work, earns substantially more in fees even at the smaller percentage of assets.

Not so, pipes Jack Bogle, founder of Vanguard Funds, and a consumer advocate for low fees and index fund management. Fund fees have taken the wrong road and have gotten totally out of hand.The higher the fees the less the client is able to retain. Even the smallest increase becomes substantial over a period of 10, 20 or 30 years. This coming from a man who earned millions and millions selling the American investor on indexing; or what I call charging a fee for no active management. To me this is no different then Michael Moore poking fun at rich people while banking hundreds of millions from his books and movies.

Now before you get all giddy that the load mutual fund industry is getting their comeuppance I should mention that the mutual fund in question is a no-load. The lead manager of the fund took home $12 million dollars in 2002 as compared to the average fund manager who earned some $800,000. The year in question was a rotten year for investors who lost 22% if they had invested in the S&P 500 but lost 14% if they had invested with the fund in question. So was the fund manager worth all that money? Probably not, but that's a question for investors and the Board of Directors to deal with and not the Supreme Court.

Giving a win to the shareholders is going to open a Pandora's Box of misery for the entire fund industry. Lawyers will declare open season on all funds before you can say Jiminy Cricket. And Harvard law professor Jesse Fried agreed by saying the Supreme Court victory would keep costs down by having plaintiff attorneys monitor fund company compensation structure. That's a nice way of saying it'll be feeding time at the shark pool.

This could be more about clamping down on income earned by money managers then it is about mutual fund's expense rations. If that is indeed the case the money management talent will move to where they will be fairly compensated.

In the end you have to wonder why these fund shareholders picked this fight when there are thousands of fund choices out there where they could invest their money, many offering identical services at less cost? Make no mistake if the activists win the average fund investor will lose with higher fees going to lawyers to protect the fund's interest.

Navigating Inflation

If you didn't study history you would think that inflation would have been the fallout during the Great Depression of the 20s and 30s. Inflation was actually non-existent from 1920 through 1939. In fact the average annual inflation rate for the 1920s was a measly 0.08% and a negative 1.94% for the 1930s.

Inflation, defined as an increase in the price of goods and services, wasn't a problem through WWII, the Korean conflict, the decade of the hippie(Puff the Magic Dragon) until the decade of the 1970s when it soared in excess of 7% per year and continued through 1982. It coincided with the Nixon decision to remove the dollar from the gold standard.

The primary benefit of the Gold Standard was that it guaranteed long-term price stability. In other words real monetary policy could not be manipulated by central banks as long as they were on the Gold Standard. Unemployment was an issue under the Gold Standard but inflation wasn't.

Consumer Price Index is not the same as inflation even though people quote and even confuse the CPI number as the rate of inflation. The CPI math calculation uses sleight of hand in crunching the numbers. The government uses an arbitrary year as a base year to set the base number 100. Everything is then calculated off that base year. Currently it is 1984 but a few years back it was 1967. The CPI is calculated every month based on a basket of products but does not include food and energy which gives a false reading as both are items used by all of us including those living on fixed incomes.

Government like a little bit of inflation. It shows the economy is growing. Wages almost always lag all other inflation indicators which is the biggest reason that people never feel like their making headway or living any better today then they did yesterday even though they have bigger cars, homes and toys then they did a decade or two back.

Contrary to wide spread belief inflation will not drastically impact every lifestyle when it does arrive. Those most affected will be those that need to buy goods and services such as the young and middle-aged adult with children. College education, health care, new mortgage interest, energy, utilities and food will increase in cost. But if you are retired and do not need to buy new appliances, cars and furniture while not sending kids to college, inflation will impact you modestly.

Retirees can prepare themselves for an almost certain inflationary period by eliminating all variable debt in exchange for fixed (including home mortgages), purchasing needed major appliances, cars and furniture now and making sure they do not lock in long-term fixed interest savings.

Energy and food expenses will certainly be problems for many retirees. However with some adjustments to current savings and investments those increases can be nullified. The biggest challenge will be for retirees to recognize and accept changes in their investments and savings. Something probably more difficult then anything peace negotiators in the Middle East have encountered.