Looking Forward

It's that time of year when every economist, pundit and college bowl junkie starts making predictions for the new year, or at the very least figuring the over and under. I spent the week swirling saucers of soggy tea leaves so I could get a glimpse into the future and report back to you what's in store for investors next year. After the decade we've had everyone is anxious about what to expect. Should we pull the bed cover over our head when the clock strikes midnight or jump up and greet the new year like an old friend from the 90s we've sorely missed?

First let's look at employment. Everyone is making a big deal about how the government counts people that are out of work and accuses the politicians of making numbers look better than they really are. The government gives us one number and talking heads another. The NY Times reported that unemployment is not a tad over 10% as officially reported but more in line with 17%.

Employment is the last thing that recovers in any depression. The worst is over. If you have a job today you'll probably have a job next December too. If you don't have a job but are looking you may get a job by the end of 2010. This depression like half the marriages in America is not going to last forever and neither is the double digit unemployment numbers. Better numbers in 10 but nothing to get truly excited about.

Manufacturing - this sector had already swept out most of the excesses. A lot of people didn't think the government should have bailed out the auto industry but since approximately one out of every ten jobs is somewhat related to making cars they really had to. Things are and will be different. In the Detroit area I don't think anyone believes the car companies are dumb enough to go back to the old ways of doing business and building cars simply to keep plants open and people working. Those days are gone. Manufacturers should see the beginning of profitability starting late in 2010. One car company has already brought back some economic benefits for it white collar workers such as a 401k match. More and more rust-belters will be smiling in 2010.

Hyper inflation. The way the wonks talk on cable you'd think we were on the brink of becoming the twin of post WW ll Germany trundling wheelbarrows of Deautsche marks to buy a loaf of bread. Hyper inflation is defined as prices increasing at 10-50% per month. We are a far cry from hyper inflation. In fact in 2010 we may not experience a huge run-up in prices at all. After a decade of very little inflation you can expect a slight increase in 2010 starting in the second half, but more coming in 2011.

Unfortunately government spending will continue. Nothing stops our elected officials from standing at the urinal of public waste. It's not their money, they don't care, get used to it.

Real estate - new home building should see a very modest increase, which is good news and existing home values may have a slight pop before the summer break when folks start serious shopping. At worst we're looking at stabilization. Some areas of the country have already experienced increases for their markets. More residential real estate will be bought as consumers will finally figure out that prices are as good as they will get. Commercial real estate, on the other hand, has lots of excesses and there are serious issues in this sector.

Interest rates, according to the new Time Magazine Man of The Year, will hold firm for an extended period of time. I say until midway 2010 and then rates will start their systematic increases. When rates start moving up hang on because it will be a bumpy ride. Lock in your fixed rates now and eliminate all your variable rate credit cards asap.

The dollar could strengthen or just muddle along until a firm economic policy on dealing with how much money we've printed and shoveled in the world's economies is handled. The one thing to remember is that in a global crisis everyone loves the dollar. A weak dollar is still good for most of the S&P 500 companies as they do business here, there and everywhere. It's not so good for retirees shuffling for one last hurrah around the Piazza San Marco and slurping pasta e faioli, washing it down with Kaopectate shooters while on a fixed income.

The biggest thing that will happen in 2010 is the one thing that no one has yet thought about or prepared for. Most everything we do think, worry to death and prepare for never happens. The markets should do well into mid-year and then take a break, consolidate and resume for a decent 2010. If you're out of the market you should start to move back in. This depression was a global event seen only once every hundred years. We should not retrace to previous market lows, if that gives you some comfort. If you're invested you should review and bring your portfolio up to date. Too many investors stick with an allocation that they established when they were in their 40s and 5os and conveniently forget that they need to upgrade to reflect their current age and risk level.

Hopefully my insights will help you sleep a bit better. Nothing ever is as bad as it seems unless it happens to you. Wishing you all, dear readers, a wonderful New Year.

Racing To Win

Some money management firms view investing the same way they would a horse race. You read and hear their advertisements and they brag that their mutual funds outperformed their indexed averages over one, three and ten years, as if it were something that would make their product more attractive to investors. Yet, those same ads contain the warning that past history is no guarantee of future results. Confused? Me, too.

Matching fund to index is not an apples to apples comparison even though some would have you believe. Results are slightly different when comparing the S&P 500 index against mutual funds that invest in the same stocks for that index. A few of the indices have performed so poorly over the past one, three and ten years that a grade school investment club could beat them so let's not get giddy about beating indices.

Then there is the 'star' rating. Ever since independent analytical investment firm Morningstar emerged with its star rating system for mutual funds, stocks and now exchange traded funds investors buy only those four and five star rated investments. Morningstar has consistently written that the star rating is not something that an investor should base their entire due diligence on. Management, risk, history, total return and expenses are the other basics that investors should concentrate on.

Still fund companies advertise that many of their mutual funds have achieved star quality, much like a well-earned Michelin award. The problem is that the star is fleeting like the Michelin, and can be downgraded or upgraded by Morningstar at any time. But, many investors believe it is a star etched in stone like a Hollywood Walk of Fame hand print.

Do your fund company managers eat their own cooking? Nothing is more disconcerting to sit down at your local family restaurant, look out the window and see your chef enjoying his lunch at a competitor across the street. The same is true with investments. It has been proven that money managers who have their own savings and retirement assets invested in the funds they manage have a better investment track record than those that don't.

So maybe the fund companies would be better off advertising that more of their money managers have more of their money invested in their funds than any other fund company. Now that would impress me.

Buy & Hold Dead?

You've heard this and probably wondered if it was true since a lot of so-called financial experts have been saying it, buy and hold is no longer a valid investment strategy.

Buying and holding any investment for an exceptional length of time is certainly not a wise strategy except in certain instances such as art, rare coins, stamps, vintage autos, rare books and those painted 'collectible' dinner plates of dead Presidents advertised on late night cable. Okay, I'm kidding about those china dinner plates; but buy and hold being dead for mutual funds, stocks and exchange traded funds, which is what the new age market soothsayers are talking about, is something of a misdirection.

The hidden issue is not that buy and hold is dead it is that the so-called experts want you to sell your mutual funds, move all your assets to their side of the fence and buy ETF and index funds while they charge you a fee for this service.

In order to do that they need to convince and scare people to move money around. If this wasn't so sad it would be funny. They are telling investors to cash out active managed mutual funds to buy index funds. The fact is that the plain vanilla mutual fund that the self-crowned experts are telling you to sell is an active managed investment vehicle while the majority of ETFs and all index funds that they are telling you to buy are static. How can you confirm this? Simply check a Morningstar report by either going on-line, visit your local library or calling your fund company for a report and check the 'turnover' percentage. You'll be stunned to discover that some active mutual funds have a 100% turnover, meaning the total assets of the fund are bought and sold over the course of a year's time. You have to ask yourself how anyone of reason label active managed mutual funds with a turnover like that a buy and hold investment? The answer is to scare the uneducated.

The index and ETF funds change holding very little over the course of a year or two. These are the true buy and hold vehicles. They will only vary as some stocks are added and others deleted by definition of the index or sector but these are small modifications and do not make these active managed funds.

Buying and holding individual stocks for 10-20 years or a lifetime can be a smart move or financial suicide depending on what you bought, what you paid and why you bought it. Let's say you bought an automotive company stock and over the years the stock rewarded you with dividends and splits and you made a very tidy paper profit. At some point the stock either starts to stagnate or drops in value, perhaps the company even stops paying a dividend. Holding this stock and watching your gains go swirling down the drain is not a smart option. Why lose all your gains? Depending on where you hold the stock (price paid) and what account either retirement or individual, the time may be ripe to take some if not all of your profits, Buy and hold for some individual stocks for a lifetime may never make sense.

Let's put things in perspective. There is nothing wrong owning ETFs, index funds and mutual funds along with individual stocks. There is no rule that says you shouldn't. You'll get active management on one side plus indexing in specific sectors to round off your portfolio. Not taking advantage of all the tools to grow and keep your savings is just silly.

The next time someone in the investment business tells you that buy and hold is dead ask to see their portfolio and what they own. You may be surprised that what they own is exactly what they're telling you to sell.

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.