JOBS REPORT

August 8, 2009

The July jobs report was just released and it was not as bad as was expected.  We only lost 247,000 jobs in July.  Only!  We are still losing jobs each month.  In fact, that is 19 straight months that we have lost jobs.  However, the number is now declining each month, which means that we are on a pace to get to where we are adding jobs eventually.  The stock market reacted positively to this news and the bond market reacted negatively (which means interest rates went up).  Both those reactions mean that investors feel we are on pace for a recovery.  Things are less bad, and that is viewed as good. 

The stock market has had a powerful run off the March 9^th low and continued that run in July.  The stock market is now extremely “overbought”.  That means it has run too far too fast, and should pull back some or at least take a breather and not go up much until earnings catch up.  However, there are still a lot of investors who have money that is not invested that are buying in every time the market drops some.  That is probably what has kept this market going.  We have reached another “resistance” level, which means the market can break through on the upside or fail to break through and go down.  These resistance levels make money management really tough!

There is little doubt that many people are still struggling financially.  I was in the Dallas area this past weekend, and we had no trouble walking into a restaurant and getting a table.  There are no waiting lines.  We ate a Friday’s for lunch on Tuesday and there were only a handful of tables filled during the lunch hour.  People are still cutting back on their spending and are saving more.  Many people have lost jobs, and many have had their hours and/or pay cut.  All this is to say that our recovery is going to be slow.  It is going to take a while for all the wounds to heal.  The unknown is how the stock market will react through this recovery.

I believe that the stock market will continue to rebound as long as earnings start to grow.  Companies have been reporting substantial drop in revenues, but have been reporting higher earnings per share than was expected.  They have done this by reducing costs, primarily payroll.  Hopefully, companies have reduced their payrolls as much as they need to, and now we need to see their earnings grow.  Generally, a company’s stock price should rise proportionately with their earnings.  There is much more involved, but this is a general principal.  I believe that companies have cut costs a ton and have allowed their inventories to dwindle to the point where there is going to be a supply issue.  We will see production ramp up big when demand returns.  This will cause a huge spike in earnings.  I am focusing on sectors of the market that will benefit from that ramp up.  I also believe that there will be significant spending on infrastructure, so I am investing in those sectors. 

I do not believe we are returning to the lows of March.  We will have pull backs and we probably will have one sometime soon, but I do not think they will be severe.  Pullbacks happen in the market all the time.  I will use those pull backs to continue buying back into the market.

ASSET ALLOCATION

July 8, 2009

I just had a client ask a great question.  “Should I keep putting money in my 401K?”  The answer is somewhat involved.  First, everyone should have some savings outside of retirement plans. Some call this an “emergency fund”.  I believe you should divert some of the money you are contributing to a 401K plan to an emergency fund IF you do not have an adequate fund built up.  Others, like me, have been paying for college and weddings.  Sometimes events like these may necessitate that your retirement savings be put on hold while you save for those expenses.  Ideally, you have enough money to do both.

Once you decide how much you have available to contribute to a 401K, you should answer the question of how it should be invested.  Many people are stopping their contributions to their 401K plan because they are losing money in the stock market.  Don’t stop contributing to the plan. Instead consider changing how it is invested.  Look at all your investments together (including the 401K and investments outside of the 401K).  Develop an investment strategy for all the money.   For example, I asked this client how much his 401K balance is to his total investments.  He answered that it was about 5%.  The only stock market investment he has is in his 401K plan.  Therefore, he only has 5% of his investments in the stock market.

I believe that it is important to have a diversity of investments.  By this I mean different asset classes like your business, real estate, stocks, bonds, CD’s, life settlements, etc.  There are many ways to your invest your money.  No one asset class will be the best asset class all the time.  Diversification among different asset classes will provide you an opportunity to make money in at least part of your investments most of the time.  Occasionally, there will be periods where many asset classes will go up or down at the same time.  Many asset classes went down in this current economic crisis. 

Many people are tired of the stock market.  They are trying to decide whether to throw in the towel.  No one can guarantee that the stock market will go up from here.  History says it always has, but that does NOT mean it will.  Everyone should do an assessment of their investments and financial goals, then develop a strategy for their investments to meet their goals.  The stock market is just ONE asset class.

STOCK MARKET STALLED? INTEREST RATES GOING UP?   

May 28, 2009

The stock market rise may have stalled and interest rates are going up.

The stock market has had a huge run off the bottom on March 9^th, but it seems to have run out of steam.  It has been running up because signs have been appearing that things are “less bad”.  But, now investors want to see improvement.  They want to see signs that things have bottomed and are now improving.  That is most likely going to take awhile.  How long, no one seems to be able to agree on.  Many are still expecting a pull back as that is totally normal after a strong run in a short time.  Most believe we are NOT going to go back to the March 9^th lows, but it is common to retrace 50% of a run up.  I have not heard many think we will pull back that much.  The main reason for this is there are many professional money managers who still are sitting on a lot of cash, and want to be back in the stock market.  We are in that camp.

We have held a high percentage of cash mainly to protect the downside during these uncertain and volatile markets.  However, now the threat of another Depression seems to be off the table.  The problems have not totally disappeared though.  Commercial real estate, credit card defaults, unemployment, and further home foreclosures are still looming problems.  Any significant bad news will send the market down.  The stock market has stalled between 930 and 880 on the S&P 500.  The low on March 9^th was 666.  800 would be a 50% retracement.  Many believe it will go back to 850.  All this is to say the downside risk is expected to be 5-10% and the upside potential is unknown. 

Switching to the bond market, 30 year government bond yields have gone from a low of 2.5% in mid-December to 4.6% today.  Most believe inflation is inevitable due to all the government borrowing.  I agree with this and that is why I am not rushing to lock in long term bonds right now.  The panic is subsiding and investors are willing to take more risk.  This means they are demanding higher yields on bonds.  Right now, if you want to be totally safe, CD’s are providing the highest interest rates.  However, those rates are really low.  We are buying mostly secondary CD’s (ie. ones people are selling) and have gotten some reasonably high rates.  Unfortunately, we cannot buy as much as we want. 

We are finding some relatively high yields on lower grade corporate bonds.  We are only buying ones of well known companies and bonds with very short maturities (typically less than one year but no more than three years),  Interest rates could get very high like they were in the late 70’s and early 80’s.  We want to be able to lock in those high yields, so that is why we are keeping maturities very short now. 

I think our country still faces lots of problems.  There is no way we can go from almost a depression to everything is great in 6 months.  This is going to take some time to work through all the problems.  I do think things are “getting less bad”, but there are still many issues.  I am very concerned about many of the decisions coming out of Washington.  We undoubtedly will see higher taxes and higher costs of doing business, as we cannot spend our way out of this problem forever.  I will admit to being an optimist, and I believe Americans will figure out how to adjust and make a profit from all this mess. 

I have read several doom and gloom reports, and most of those claim to have predicted this last market decline.  Many of them have been predicting a decline for a long time.   Eventually they are going to be right!  So, I do not put much stock in any one of them, but try to accumulate as much information I can to formulate my own opinion.  I am not one that believes the stock market is a bad asset class.  I do, however, believe that we need to spread our money among several asset classes.  I also believe each one of us needs to establish financial goals and develop and investment strategy that will get us to those goals.  We are in the process of reviewing each of our client’s strategy with them.  In that process, we are going to help them establish financial goals.  This process will take some time, but is very worthwhile. 

ARE WE GOING TO RETEST THE LOWS?

April 21, 2009

The stock market has had a fantastic run off the low made on March 9^th.  Normally, off this kind of rally off a bottom, we would see a pull back of some kind.  I do not believe we are going to revisit the March 9^th lows, but the market is “overbought” and there should be at least some sideways movement for some number of days.  The good news is that there seems to be more hope that the problems have at least stabilized.

Companies are releasing their earnings for the first quarter, and they are beating the analyst’s estimates.  However, those estimates had been lowered significantly.  Their earnings are way off their earnings for the same period last year.  Few disagree that there are still a mountain of problems in the economy, but many are more hopeful then they were just a couple of months ago.  There is significantly more optimism than there was. 

There is an old saying “sell in May and go away”.  They mean go away for the summer.  The third quarter of the year is not great many times.  With the recent run up in the stock market, and with the charts indicating that stocks are generally overbought, it is possible we will see a gradual decline in the stock market over the coming weeks.  I’m no longer worried of a major pull back, though.  I will most likely work money back into the market on days the market is down. 

If you pulled out of the stock market earlier this year in your 401K plans, then you might do the same thing.  At least, start putting your new contributions back into the market.  Your existing money can be moved into the market in small pieces, and preferably do this on days that the market is down, especially bid down days. 

As I said, there is a chance we will get some kind of pull back, but I do not think it will be huge. This will be a time to buy in.  I still believe that there will be times where we need to take profits, let the market settle down and then buy in again.  The volume (ie. the number of shares trading) is increasing.  This is happening on up days which means we are getting buying volume.  This is good.  In summary, it appears the level of fear is subsiding, and buyers are returning to the market.  The volatility index is still high, so we can expect big swings in any given day. 

ANOTHER BIG DAY AND A CRITICAL LEVEL

March 23, 2009

Treasury Secretary Geithner finally announced his plan for the “toxic assets” on the banks’ balance sheets and the stock market reacted strongly to the upside (+7.13%).  I am not sure that necessarily says that it is a good plan, but who cares at this point!  What is amazing to me is that the market is up 20% off its low, yet it just now got back to where we sold out!  In other words, it feels like the market has run way up, but it is still way down from the start of the decline.  There is still room to the upside, but most (including me) believe this is going to peak and come back down.  We are at a critical level because we closed above 800 on the S&P 500 Index.  This is an important support level.  Many believe the market will continue to run up if it will stay above this level.   I am watching this very carefully each day as I intend to take profits when I think we have run as far as we are going to.

There are some incredible yields on some corporate bonds.  I have been looking daily for them.  I am looking for big companies I am familiar with (like Xerox, Motorola, etc.) whose bonds are trading either at the bottom end of “investment grade” or just below investment grade.  I’m finding yields of about 10% for 1 - 2 years.  Many of these bonds were trading at full value last August and before, but the credit crisis panic drove the prices down.  I am especially looking for high yielding bonds that mature in less than 1 year.  Yields are so low on highly rated bonds that I am hesitant to lock them up, so I am looking for these short term bonds just to get some yield while we wait for yields to come back up.  Many of our bond clients do not want to take this kind of risk, so I am not using them for all clients.

My wife and I decided over the weekend that we should all turn off the news, because we are not seeing the signs of a bad economy around Texas.  I have heard of very few instances of businesses who are struggling.  Many say their business is off, but one guy said yesterday “Our business is down this year compared to the last couple, but we are significantly higher than back in 2000.”  I thought that was a great way to look at things!

“BEAR MARKET RALLY” UNDERWAY

March 13, 2009

Most believe A “Bear Market Rally” is underway.  This means the stock market stages a rally within a bear market (ie. a market that is trending lower), and by definition, it will not last.  A rally like this can last for several weeks and be very strong.  The last one we had (November 21 to January 6) ran up about 24%.  This rally started on Tuesday of this week and has already run 10% in 3 days.  We started buying in yesterday.  We plan to invest more on “dips”.  We most likely will not go 100% invested, but we want to take advantage of an opportunity.  We are buying in at lower values than where we exited the market, so that is good.  We plan to take profits on these trades as the rally continues, as we believe this rally will rollover and come back down.

This rally started when Victor Pandit (CitiBank’s CEO) sent a letter to his employees stating that they were profitable in the first two months of this year.  Then, JP Morgan’s and Bank of America’s CEO’s said the same thing the next day.  Then, yesterday GM announced that they will NOT need the $2 billion from the government that they thought they would need.  This was huge news and the markets loved it.  Also, yesterday retail sales were announced and they were not as bad as was expected.  These are small glimmers of hope, and this caused the markets to respond strongly upward. 

Each piece of positive news will have a powerful effect on the markets.  However, big negative news will have a huge negative effect, because investors are very nervous.  One of my reasons for wanting to go back into the market is that there has been a huge increase in withdrawals from the stock market by retail investors.  This usually signals a bottom.   That fact combined with the fact that the market was extremely “oversold” (ie. it had sold off a lot since January 6^th) set the stage for this rally. 

Most believe this rally has more room to go.  In fact, many believe this will run another 15-20%.  As I said, we plan to buy more on dips.  We buy during the day so we can buy on dips in the middle of the day.  We are buying exchange traded funds (ETF’s) as they trade like stocks.  Mutual funds only trade at the end of the day.  So, it is harder to buy dips in your 401K’s, but you can buy on down days.  Watch the S&P 500 Index.  It is at about 750 right now.  Some believe this rally will go to 900.  800 is a critical level.  If we can get above 800, then it can run further.  We will go 100% out of the market again once we feel the rally shows signs of exhaustion.  The longer it lasts, the longer we can afford to wait to get out. 

I wanted to keep you informed on what is going on.  Call if you have any questions.

THE STOCK MARKET IS WAY OVERSOLD

March 6, 2009

The trend seems to be down for the stock market day after day.  Just a couple of weeks ago, everyone on CNBC said the stock market was heading lower.  Now, some of the most negative people are starting to buy into this market.  They are “nibbling” which means they are buying small pieces and not doing it all at once.  Many are saying we should get a bounce any day now.  Some are even predicting a “vicious” bounce.  We got out of the market a couple of weeks ago with about 60% of the assets and then the rest last week.  This has been a great move thus far, but now we have to determine when to go back in.  I want to explain what we are looking for in today’s comments.

We watch the “intraday” (during the day) movement of the S&P 500 and the Nasdaq 100 (100 of the largest Nasdaq stocks which are mostly technology and healthcare stocks).  We also watch the intraday volume of the S&P 500 Index.  We have been seeing the volume pick up when the market is selling off, and the volume decrease when the market is going up.  This means there are more sellers than buyers.  We need to see increased volume when the market is going up.  That would mean buyers are stepping back in.  The market has been going down mostly with low volume.  That means there are no buyers and frankly not many sellers.  The volume has picked up since February 20^th and those have been mostly selling days.  We are watching carefully to see if the buying volume picks up.

We have also noticed that the market sells off in the last 30-45 minutes of the day.  The last hour of the trading day is commonly referred to as the most important hour of the trading day.  That is because this is when most professional investors make their trades.  The emotional trading is typically done in the morning.  We are watching for buying to pick up in the last hour of the day. 

In summary, we want to see buying volume increase, and we want to see buying at the end of the day.  Once we see 2-3 days of this, then the market may be starting the bounce and this bounce could be huge.  I still do not believe it will last, but it might be one we want to invest in with some of our money.  Each day the market goes down gives us more room to decide this move.  We are still not seeing any positives developing in the economy.  But, once all the sellers are done selling, the market typically will bounce up hard ahead of the good news.  The key is that investors get to the point where they say it may go down, but they do not want to miss out on the rebound, so they start buying.  Then, more and more start buying.  That is why the bounce will most likely be very strong.

It is amazing how beaten up some stocks are.  I keep thinking they cannot go lower but they do.  These are unbelievable times.

WHERE DO WE GO FROM HERE?

March 2, 2009

About a month ago I talked about the stock market was bouncing off the 800 level on the S&P 500 Index.  It blew through that level, and today it may close below the 700 level.  This is a HUGE support level.  There will undoubtedly be further declines if it falls below 700.  So, how low does it go and when do we get back into the market?

The quick answer is “I don’t know” on both accounts.  The long answer starts with this market continues to fall as long as there are more sellers than buyers.  We moved completely out of the stock market over the last couple of weeks, because I felt it was important to protect our downside primarily.  The model I am using was not indicating that the market would go up on a long term basis, and virtually everyone talking on CNBC was saying it was going down.  At some point, those same people will start saying “I think we are at the bottom”.  When everyone starts believing that, you will see buyers come back into the market.  I think that is several months away at least.  I do not know why this is, but most bear markets end in the September-October time frame.  That would fit our model if the market were to sell off more from here.  Right now the model is saying late July as the juncture when the market will turn up. 

A lot of positive news would have to come out for this market to move up.  We would need to see companies stabilizing, layoffs slowing down, and signs that the economy was stabilizing.  Once the good news starts surfacing, then I expect to see a very strong bounce in the market.  The question will then be how long it will last.  Based on my model, if that bounce were to occur now, I would not expect it to last long.  I am not totally sure how long “long” is.  It may last a month, but then I would expect it to rollover and come back down.  The reason this would happen is that “traders” (those just in for quick profits) would start buying, but would then take quick profits.  This run up will sucker some investors in thinking the market is finally going to make a run to the upside and they do not want to miss the run.  But, then the traders start selling to take profits, and the market falls back down. 

The question is what to do with the money that is currently in money market accounts.  For the short term, we sit in money markets IF we plan to go back into the stock market.  We do not plan to go back into the stock market for some clients, so that money will be invested in bonds ultimately.  We are also looking for other investment opportunities, some of which are not correlated with the stock market.  We are searching every day for other investment opportunities, but for now, I think it is prudent to take a breath and pause. 

These are extremely stressful times for many people.  We are experiencing historic events that we will probably never forget.  I have learned a lot through this period, as I am sure many other have as well. 

BOTTOM FORMED?

February 5, 2009

The stock market keeps coming down to the 800 level on the S&P 500 Index and then bounces up off of it.  It has only violated that once (November 20^th) and it bounced back above 800 the next day.  Small bits of positive news are starting to surface and less big, negative news is coming out.  The S&P 500 Index came down to about 820 this morning and now has bounced up sharply.  People seem to be more accepting of risk and less willing to earn the very small returns in government bonds.

There still will be more layoffs announced and businesses will continue to report bad earnings.  However, most companies I have seen that have reported earnings are still making money.  They are just not making as much as they were.  Think about this too….it is widely being reported that consumers are NOT spending, yet most of those people still have their jobs and are still earning the same wage as they were when they were spending.  So, where has their money been going if they are not buying things?  I think they are paying off debt and/or saving money.  I read where the savings rate is over 7% right now.  Americans were NEGATIVE savers in 2007. 

I believe the fact that Americans are starting to live within their incomes and are reducing debt is a healthy change.  It hurts our economy initially, but we will be a stronger nation in the end.  Hopefully, as Americans get their individual financial houses in order, we will demand that our government get our federal financial house in order.  Most economists agree that some financial stimulus is necessary.  The question is will it be the right stimulus package.  Time will tell. 

DON’T STOP SAVING, EVEN IF YOU DON’T WANT TO BE IN THE STOCK MARKET

January 29, 2009

I am hearing people say that they are not contributing to their IRA’s and 401K’s because they don’t want to lose any more money.  Don’t link the two!  The decision to save is two-fold.  First, decide whether to save or not, then decide where to invest it.  You do NOT have to invest your IRA and 401K in the stock market.  You can use money market account or bond funds to reduce your risk.

One of the main problems that caused the crisis we are in is debt, which translated to Americans were spending more than they were earning.  Thus, we were not saving.  I always encourage people to save.  It concerns me when people tell me they stopped contributing to their retirement plans because they were losing money in the stock market.  We need to be saving, so if you stopped your contributions, start back up.  Just choose the money market option if you don’t want to be in the stock market. 

Right now, many people are saying they don’t want to lose any more money.  It is all right to protect your downside and say enough is enough.  So, you can pull your money out of the stock market, but I encourage you to decide now when you intend to go back into the market IF that is your plan.  Most people will wait until it feels good and that is too late, so I generally say you probably should never go back into the stock market if you pull out now.

2008 WAS A EXTREMELY DIFFICULT YEAR FOR MANY

January 7, 2009

Last year was one of the worst years for the stock market in a very long time, and there are many opinions as to what will happen in 2009. They say you learn in bear markets, and I want to share what I have learned.

At its worst point the market was down about 50% last year.  November 20, 2008 was the low for the year.  The S&P 500 Index has bounced up about 24% from that low through yesterday.  Bonds also had a tough year but have rebounded significantly.  There was a lot of panic in the last quarter of the year. 

I kept asking myself “how could I have seen this coming”.  Many money managers were asking the same question, I’m sure.  These bear markets occur every 3 to 5 years and I realized there is an excess of some kind associated with every end of a bull market.  This time it was sub-prime mortgages and real estate prices going through the roof.  Last time it was the “tech bubble”.  Previously, it was a savings and loan blowup, junk bonds, etc.   There is always an excess.  I noticed that the market gets very volatile at the end of a bull run (when the market has run up a lot and for a long period) and at the end of a bear run (when the market has sold off a lot).  Both these volatile periods will last for 2-6 months I have noticed.  Finally, I noticed that the model I use to decide when to get into or out of a stock also works for the stock market generally. 

All of these things I have learned is pointing to what I have been saying lately….the stock market is going to move up and down for a few more months before it will start another long term trend up.  It has been doing this now for almost 3 months.  I believe it will continue for at least another 3 months, but most likely until the summer.  This first half of the year is undoubtedly going to give us some bad news.  This will keep people from taking risk.  Most people I have talked to say they are not spending much.  They are nervous and do not want to commit to anything big.  People are pulling out of the stock market and will most likely not return ever or for a very long time.  Most professionals are saying now is not the time to pull from the stock market.  I am expecting pull backs and bounces up, so the market will continue to be volatile for the next several months.

The credit markets (bonds) have begun to loosen up some.  Companies are still finding it difficult to borrow at what they think are reasonable rates, but it is getting better.  In the panic of September to December, many investors ran from stocks, corporate bonds and municipal bonds and ran into government bonds.  This caused prices of all non-government backed bonds to fall dramatically, and it caused the prices of government backed bonds to rise dramatically.  Nothing goes down forever and nothing goes up forever.  Yields on government bonds were near 0% on short term bonds.  Even 30 year government bond yields got down to about 2.5%.  Eventually investors want to earn more and will be willing to take on more risk.  When that happens, government bond prices will come down and yields will go up.  These investors will move into stocks, corporate bonds and municipal bonds.  This will drive those prices up and yields on those bonds down.  This is beginning to happen.  More are moving into the corporate and municipal bonds than they are stocks.  Eventually, they will move into the stock market when the yields on corporate and municipal bonds are too low. 

In closing, we are trading in and out of the stock market as we get the bounces up and down.  We are also buying corporate and municipal bonds as well as CD’s for our bond clients.  A couple of clients wanted to come out of the stock market and become less risky, so we are buying bonds and CD’s with that money.  We have found some really attractive corporate and municipal bond yields over the last few months.  We are looking every day for bonds and CD’s to buy.   

These have been extremely difficult months for many of us.  I know it is hard to see your investments and retirement plans get hammered in the stock market.  However, America has always solved its problems.  Americans have always been innovative and found ways to improve their businesses.  The stock market has always exceeded its previous highs.  I am confident we will come out of this economic downturn.  No one knows how long it will take, but we will undoubtedly come out of this, and we will be better and stronger individually and as a country.  I feel Americans will start saving more and have less debt.  That is a very positive thing.  I also believe the stock market will rebound, and we will regain what we have lost.  It will take time, but it has always happened in the past. 

MADOFF MADE OFF WITH A LOT OF MONEY

December 18, 2008

A huge scandal surfaced last week.  A guy named Madoff who was a high profile money manager (using that term loosely) admitted to running a ponzi scheme and may have scammed investors for as much as $50 Billion.  People are talking about this a lot, and I wanted to explain how to avoid people like this.

Some money managers do not set up accounts in the client’s name at the institution where the money is held.  They produce reports on their in-house systems that they give to their clients.  There are many money managers that do this that are totally honest and do a great job I am sure.  However, there is always some crook in every industry that is self serving and motivated by greed.  Madoff ran a money management firm that operated this way.  He had many very high profile, high net worth clients.  Madoff admitted last week to his sons (who worked for him) that he was running a giant ponzi scheme.  The details are unfolding but it appears he managed to steal $50 billion from his clients.

Most money managers will set up accounts at institutions in the name of the client, and just have trading authority on the account.  The manager does not have the ability to withdraw money from the account (except for their fees).  This is how we operate.  We produce a consolidated report from our system, but our clients receive statements, in addition, from the institution.  These statements allow us (and you) to audit our reports to make sure they match the institution’s statements.  We do this every month.  This audit catches mistakes by the institution or the money manager.  We believe it is a prudent way to conduct our business, and after this Madoff scandal, I would expect many investors will want to see some kind of audit if they do not receive statements from an independent institution. 

It is sad that this world is made up of bad apples.  I like to think there are more good apples than bad in any bunch.  Every one of us is in an industry that has bad apples in it, unfortunately.   That is why it is important to do business with firms that have great systems.  In fact, we have several systems in place where we do “forensic testing” looking for errors.  We find errors we make and institutions make, but through our various systems we are able to uncover most mistakes that occur.  We even keep records of every error we find.  We create “Error Tickets” for each one of them.  Mistakes will occur, so we have implemented systems to catch them.

SELLERS ARE NOT STEPPING IN

December 10, 2008

Even though there has been a constant flow of bad news, sellers are not stepping into the stock market like they did before.  This is causing the stock market to rise.  There is “profit taking” but not a large number of sellers.  We are still seeing volatility during the day, but this week it was not as great as before.  I fully expect at some point to have some kind of pullback, as I believe there are no signs that the economy has bottomed.  In fact, I have heard no one say that the bottom of the economy is near.  Job layoffs are being announced daily. 

We are trading almost daily now, and will continue to do this while we remain in this trading range.  As I have said before, I believe this trading range may extend into next summer.  A “trading range” exists when the market goes up and down when investors do not see a reason it should go up big or down big.  The volatility is usually high and it provides opportunities to buy and sell for 3-5% gains on a very short term basis.  This can be just a day or two.  I do not like trading like this, but until we break out of this range, it is the only way we can make some gains.  At any point we might have a large percentage of the assets in money market or almost fully invested.  That is why you are seeing so many confirmation notices coming through your mail. 

I know this is easier said than done, but the way you make the most money in a down market like this is to add to your investments.  Few believe that over the long term this market will not produce huge returns from here.  Many believe that we have seen the lows for the year.  That does not mean we cannot go back down to those lows, but most believe we won’t go below those lows. 

I went back to the 2000 – 2002 years to look to see how bad the market dropped.  From the high on 3/24/2000 to the low on 10/09/02 the S&P 500 dropped 49%.  Of course, the Nasdaq dropped significantly more.  The reason I am pointing this out is that that is about how much we have dropped this year and the low of the year was in October, ironically.  It took about 5 years to get back to the high in 2000 from the low in 2002.  I believe it will take at least 3 years to get back to the high in 2007 from here.  Of course, if you are adding to your investments as the market goes up, then you will get back to that point much faster. 

On a different note, I find it interesting that more people are paying cash for gifts this year than using credit cards as compared to previous years.  I have not heard whether that is because they are at their limit, cannot get credit cards, or they simply are choosing to use cash instead.  Even China has been reported as suggesting that Americans need to save more money and reduce their debt.  Actually, an increase in savings rate would have a positive affect on our economy now.  While it is helpful for our economy to spend, debt is what caused this problem and less debt and more savings will help solve the problem. 

One client told me his son (a recent college graduate who has a great job) had trouble getting a credit card.  Finally!!!  Hopefully, gone are the days where even our dogs get credit card offers in the mail.  I heard that you have to have a 20% down payment to buy a house.  While this is going to make it hard for your couples to buy houses, I believe overall this is good. 

LACK OF CONFIDENCE PERSISTS

November 20, 2008

I would love to hear from you about how you feel and what you see in the economy.  Most of our clients are in Texas and Texas generally does not get hit as hard as the rest of the country.  I would like to hear whether you are seeing the economy slowing in your area, or if your business is being affected. 

The last downturn in the stock market (2000-2002) involved in a “tech bubble”.  Essentially, one sector of the economy was over-inflated and the bubble burst.  The stock market was down terribly, but we did not have the downturn in the economy like we do now.  Many people saw their net worth decline as much as in this period.  This time, though, the economies around the world are in serious trouble.  Governments are struggling to do whatever they can to cushion the fall.  Individuals and companies have virtually ceased spending money.  What is causing all this?  A lack of confidence!  There is virtually no confidence in our government to do the right thing.  Banks have no confidence that their customers will be able to pay their loans back.  Companies cannot borrow, even on a short term basis, because their lenders are not confident that they will be able to pay the loan back. 

Until we see a return of confidence by consumers, and banks willing to lend, recovery is going to be very slow.  This is an agonizing process for many of us.  I believe this process is now going to take at least 6 months and probably longer.  It will take years for it to fully work through the system, but the stock market will normally start to respond 6-9 months before the economy bottoms, as I have said before.  The problems are severe and it does not appear that there is any confidence that all the things the government has done will work.  I hear it in the conversations I am having with friends.  Yields on government bonds fell sharply today.  This is an indication of fear.  It is called a “flight to quality”.  People are paying whatever they have to in order to get into government bonds, and are running from the stock market. In addition, we closed below the lows made in 2002.  They call this a “support level”, and that support was broken.  Now, the market can go down further because of that breakdown.  It is possible we have been seeing “capitulation” these last two days.  It is further possible that we will see a continuation of the sell off tomorrow morning, and then a sharp reversal.  I don’t expect it to be a long term reversal, but it may be an opportunity to get some of our money back. 

I am curious to know if the average American, who has no money in the stock market, feels as bad.  Are they scared?  Do they worry about their future?  Are kids coming out of college able to find jobs or is it tough?  How many people we know in Texas are losing their jobs?

I would like to hear from you on your opinions or observations.  This helps me take the pulse on the Texas economy.

UNCERTAINTY

November 12, 2008

I have not written in a few weeks, so I thought I should write.  However, I did not have a topic to write about.  I looked up and saw the sun break the horizon and the word “uncertainty” popped into my mind.  We expect the sun to rise every day, and we find comfort in that.  We generally expect to wake up each morning and find the dog lying where he always is.  Our house is still there and our family is generally where they are supposed to be (unless they are in college and you don’t have a clue where they are!).  As long as everything is as it is supposed to be, we are fine.  Uncertainty makes us nervous.

I have a friend whose 24 year old son went to the emergency room on Monday with some kind of problem and did not make it.  I cannot imagine that kind of grief.  Unfortunately, we were never promised a pain free life.  Uncertainty really was a guarantee.  We do not like it, but it is a reality.  I remind myself all the time that no matter how bad my problems are, there is always someone else whose problems are way worse than my problems. 

We are in extremely uncertain times.  Sometimes I just turn off CNBC because there seems to be no good news to report.  I think they try to find good news, but they keep turning over the piles of news and cannot find any.  My wife says CNBC drives her crazy, but the information I get from listening to it is invaluable to me.  It is hard, though, to listen to the news of uncertainty day in and day out.  Investors do not like uncertainty, and uncertainty causes volatility in the stock markets. 

It seems like the bad news has been pouring out for years, but it has only been a couple of months.  The future is uncertain as to how all this mess is going to affect our economy.  I think it is prudent to expect the worse and hope for the best.  I think it is prudent for all of us to eliminate all unnecessary spending and try to build up savings.  We are all going to know people who are going to lose their jobs.  If you have college graduates looking for work, encourage them to take any job they can find.  They can always look for a better one, but the job market is going to get tough if it hasn’t already gotten tough.  I have been preaching getting out of debt now for over a year, so hopefully you have been doing that. 

The stock market has been trying to form a bottom.  The low so far was on October 27^th.  We have bounced up and down but that low has held so far.  They call it “testing the lows” when the market sells off and goes back down to the lows.  It is important that those lows hold.  If the low is violated, then a new low could be significantly lower.  More uncertainty. 

I want to end on a positive note.  I think all of this is actually good for our country.  We have had way too much debt both as a nation and as individuals.  It is time that we get our financial houses in order.  Unfortunately, our country’s economy has grown significantly because we have been a nation of spenders.  Stopping spending as I’m recommending actually is not great for the economy initially, but I believe we need to go through a period of pain before we can recover in a better condition.  So, the positive note is that we are a nation of survivors and innovators.  We figure a way out of our problems.  We will do the same through all this.  This too will end.  I am guessing that our economy will bottom next summer some time.  We will still have a long road to build after that, though. 

STOCK MARKET IS POISED FOR A MAJOR DROP TODAY

October 24, 2008

The world stock markets dropped dramatically overnight, and our stock market is most likely going to be lower by 10% or more right out of the gates.  It is going to open in 2 minutes, so I will be writing these comments as it opens.  It is important to understand what is likely to happen.

First, obviously I cannot predict for sure what the market will do, but we do have some good systems to help us.  (The market just opened and it down about 8%.)  Last year, I noticed something on the Bloomberg that helped us decided whether to buy or sell a stock.  What I did not realize that we can use it for the stock market generally.  For some reason, it came to me this week.  I can use this tool to help me see turns in the market.  It will help us predict that the market will sell off in a bear market.  I am only talking about long term trends and not just short blips.  This same system will help us determine when to get back into the market. 

The reason I am mentioning this is because if I use that system, then I believe we may not be done with all this.  It can keep going down, or it can turn and go up.  But, if it turns and goes up, I am expecting it to go up sharply then turn and come back down at some point. I intent to “raise cash” (ie. sell some investments and go to money market) if that happens.  The system will show when to do that.  I won’t hit the top of the spike, but it will be close enough.  The next step will be the stock market will come back down and then make a bottom again.  Once it turns on the chart and we have a few days of up days, then we start buying in again.  Eventually, you can see on the chart when the market will finally break out of all this and head up.  This will last three to five years generally. 

Here is why all this is important…I just heard Art Cashin on CNBC.  Art is on every day and he is director of floor operations for UBS.  He is very smart.  He just said that he is looking for a major sell off today.  He said we will then see a “jaw dropping rally that will be talked about for years”.  He said the last Monday of October is the perfect day for this to occur.  I have never understood why this is, but crashes and market bottoms typically occur in October.  Look at the chart I put in my comments on the 10^th.  There were 15 bear markets in that chart and 7 of them ended in October.  Two of them ended in September, and all but four occurred in the second half of the year.  The market is now down only 4%, so this may not be the selloff Art Cashin was hoping for. 

Art also said that if you were not out of the market already, now is not the time to bail out.  He said we should just hunker down as we are near the end of this.  We did pull some out of the market back in the middle of September.  We started putting some of that back in this week.  I know everyone is probably really nervous.  Trust me, I’m worrying enough for all of us.  But, I know worrying is not going to do any of us any good.  This market has been horrible and the economies around the world are slowing tremendously.  I think it is prudent to be very conservative in any financial decisions you are making.  Do not commit to any new debt and try to reduce the debt you have.  That is the one good thing that is happening through all this, people are reducing their debt levels.  Eventually, we will come through this and be better for it.  It is getting through it that is hard. 

STOCK MARKET HISTORY - PERFORMANCE

October 15, 2008

I have received some emails wondering if the stock market is even a good place to be anymore.  They mean now or in the future.  For some people, the answer is going to be “no”.  However, for those that can handle the risk and want long term returns, then the answer is “yes”.  I want to give some historical numbers that might make you feel better about the stock market.  It will not make you feel better about this year, though.  From 1970 – 2007, the S&P 500 Index went up 10.89% per year.  That includes four recessions, the crash of 1987, and the three bad years 2000-2002.  Many of us were not in the market then, so I will pick a more recent period.  From 1990 – 2007, it was up 10.40% per year.

On the other hand, if you got in the market at the first of 2000, then by the end of 2007, your return was only 1.62% per year.  That is because 2000 – 2002 were three bad years, and it assumes you invested $1 on 1/1/2000 and then looked at it on 12/31/2007.  Most people investing in the stock market are doing it through a 401K and are adding money to it every month.  That is called “Dollar Cost Averaging”.  Consistently adding to your investments when the market is going down, is a way of improving your overall performance.  I will admit that is hard to do. 

These are extremely trying times if you are invested in the stock market.  I had some positive feedback about the chart I did last time, so I thought this additional information would make you feel a little better.  Keep in mind that this severe decline started about a month ago.  It seems like YEARS to me!  The market started this decline a year ago (10/09/07), but it was not too bad until this last quarter.  Then, the free fall started a month ago. 

Hope this helps!  I’m working down my list to call every client, but call me if I have not gotten to you and want to speak to me sooner. 

THE WORLD STOCK MARKETS ARE IN A FREE FALL

October 10, 2008

Probably the best thing you can do is not look at your investment statements, because the world stock markets are in a free fall.  The panic that we are experiencing this week may actually be good.  The reason I say this is because when you have a bear market like we have been in, we have to have panic selling (ie. everyone running for the exits at once) to finally get a bottom.  We will see what today holds, but don’t be surprised if the market sells off again today, then on Monday it may very possibly continue to sell off, THEN we might see a sharp reversal.   We have to have high volume for that to happen.  Fortunately, we raised a lot of cash, so we are positioned to go back in.  Our cash position really helped us this week not lose as much as the overall market. 

I’m not going to sugar-coat this.  The stock market is way down from the end of June.  It is really scary.  The world seems to be completely falling apart.  The fear is huge.  The panic is at epidemic levels.  But, now let me try to give you some feeling of assurance.  I saw the following chart which I found interesting.  It is a chart of the various bear markets, and shows how long they lasted, how much they went down, and how much they went up after the decline.  Take a look:

RECORD OF DOW’S BEAR AND ENSUING BULL MARKETS

Historical Bear Market Statistics						Ensuing Bull  Market
START		END		LENGTH	%CHANGE	NEXT TOP		%CHANGE
June	1946	June	1949	37	-14%	January	1953	64%
January	1953	September	1953	9	-8%	April	1956	89%
April	1956	October	1957	19	-20%	January	1960	68%
January	1960	October	1960	10	-16%	November	1961	24%
November	1961	June	1962	7	-25%	February	1966	85%
February	1966	October	1966	9	-25%	December	1968	30%
December	1968	May	1970	18	-44%	January	1973	91%
January	1973	October	1974	24	-46%	September	1976	80%
September	1976	March	1980	42	-27%	April	1981	36%
April	1981	August	1982	16	-23%	January	1984	65%
January	1984	July	1984	7	-15%	August	1987	150%
August	1987	October	1987	2	-41%	August	1990	87%
August	1990	October	1990	4	-22%	July	1998	300%
July	1998	September	1998	2	-21%	January	2000	59%
January	2000	October	2002	33	-36%	October	2007	97%
October	2007	?	?	?	?
Average Length				15.9
Average Loss in Bear Market					25.5%
Average Gain in Bull Market								88.4%

Now, there are no guarantees in the stock market.  We can only use history as a guide.  I will say that I doubt there is anyone that doesn’t think that we are in a severe recession that will most likely play out over a couple of years at least.  I believe the ripple effects have not really even begun to be felt in areas of the country, especially Texas.  Undoubtedly, it will be felt.  These are reasons to shore up balance sheets and prepare for the worse.  I do believe we will see a bottom to this stock market, and I feel it will be soon.  The minute we see the credit markets unfreeze, you will see a turn around in the market.  We are starting to see credit easing.  They are small, but happening none the less.

I know this is excruciating, but as my mother says “this too will pass”.  I have actually started to get excited again.  I hope I’m not premature.  The stock market has always exceeded its previous high.  I do not believe now is the time to bail out of the market.   I’m not saying it won’t go down more.  In fact, I think we may have at least another day or two of declines, but eventually it will go back up.  It has always done that.  That is why I wanted to show you this chart.  Try to have a good weekend.

COORDINATED RATE CUT WAS JUST ANNOUNCED

October 8, 2008

There was a coordinated rate cut around the world.  This has never been done before.  The stock markets world wide viewed it as a positive initially.  It is 6:30am so our markets are not open, but the futures indicate a positive opening.  But will it last?

This is just one more attempt to stabilize the world financial markets.  I get up at 5am and I turn on CNBC.  I listen to all the various opinions that are thrown around.  These are extremely intelligent people with many different opinions.  This morning, when they announced the cut, I got to thinking about all the different moves that have been made by our Fed and the countries around the world.  Why is the market still going down?  I believe the answer is there needs to be more time for all these moves to take effect.  The confidence is not there.  I told someone yesterday “now is not the time to make any financial moves”.  I’m apparently not alone.  Banks are hoarding cash because they are afraid to lend it out for fear they won’t get paid back.  Banks are not even lending to other banks.  Eventually, the confidence will begin to return. 

Interestingly, I’ve been asking business owners how their business is, and most are saying they are good.  There is no slow down.  These are Texas businesses and Texas generally does not get hit as hard as the rest of the country.  But, Wal-Mart announced this morning that their monthly sales were good and they expect their customers to continue spending. 

I think most Americans do not have money in the stock market except what is in their 401K plans.  So, they are not directly affected by the stock market decline.  They will not be affected until they lose their job or get their hours cut back.  The key to that comment is that credit must be made available to companies so they can continue to make payroll.  However, in the end, I hope this crisis will cause all companies and Americans to not rely on debt as much.  This crisis is over debt.  I ran through a list of about 100 stocks looking for companies without debt.  I found only nine!  Interestingly, I found several that just started accumulating debt this year whereas they had no debt previously.  I don’t understand that.  When your income drops, you should cut your expenses to not exceed your income.  Don’t wait.  Don’t expect it to get better.  Adjust immediately.  You can always increase your spending if your income returns.  But, if you don’t reduce your spending and you pile on debt, then IF your income returns, you spend that increase reducing debt. 

THE HOUSE PASSED THE BILL, NOW LOOK AT THIS…

October 3, 2008

The House of Representatives voted “YES” to the rescue bill. Wells Fargo bought Wachovia today in a private deal.  The FDIC was not involved.  Warren Buffett has invested a total of $8 billion in Goldman Sachs and GE.  The problem our economy has is a lack of capital.  People are saying Buffett scored two home runs on these two investments.  Why would they say that?  I think the answer may be that we are finally getting to a point where there are MANY very inexpensive investments out there.  The rescue plan’s primary purpose is to free up liquidity.  Wells Fargo and JP Morgan Chase bought deposits.  These deposits give them the liquidity to loan money.  I read where there are some groups pooling money so they can buy up some of these bad assets for pennies on the dollar.  I believe there will be many people making a lot of money on all this mess.  The opportunities are out there.

I still believe the economy is in terrible shape.  Credit is still tight.  The jobless report today showed an increase in the unemployment rate.  But, I think the transactions above are a sign that the bottom is near.  I believe, as I have said before, the stock market will move sideways for awhile.  That means that it will go up and go down, but it will mostly stay the same or flat.  I’m not sure how long that will last, but I’d say maybe six months. 

I heard someone on CNBC today say this problem is all about a lack of confidence.  Banks won’t lend to each other.  Banks won’t lend to companies.  Investors pulled money out of money markets and banks because they were not confident that the institutions would stay in business.  The point he was making is that once the confidence in the financial system returns, then this economy will get going again.  We need to see that confidence return.  That is what I’m going to be watching for. 

This has been an unbelievably crazy week!  I sure hope we do not have any more of these for a long time!

THE AMERICAN PEOPLE HAVE THIS VOTE WRONG!

September 30, 2008

The House of Representatives voted “no” to the rescue bill, largely because the vast majority of Americans wrote and called telling them to vote “no”.  They have never been more wrong.

Let’s rewind and look at what happened over the last two weeks.  The credit markets already were tightening.  That means people and companies were having trouble borrowing.  Then, we had one money market account break the buck, which started a run on money market accounts.  Washington Mutual was taken over and people were calling me left and right asking what to do with their huge balances they had in banks.  My answer to both of these situations was to move to Treasury money market accounts.  So what?

Treasury money market accounts invest in government treasuries.  Regular money market accounts invest in corporate paper.  Large corporations use short term corporate paper to fund their cash flows.  Think of it like a line of credit.  They use this lending facility to make payroll.  An absolute ton of money has left regular money market accounts, so there is little money to buy corporate paper from corporations needing the money for payroll.  So, now what?  Those corporations are forced to cut expenses.  What is every company’s single, largest expense?  Payroll.  They can cut payroll quickly, so people start losing their jobs.  When you cut payroll, you cannot service as many customers, so they stop buying as much from their suppliers.  Now the suppliers have to cut payroll.  See where I’m going? 

Most Americans fund their cash flow with debt.  The instrument is a credit card.  If you do not pay off your credit card at the end of the month, then you are using debt to fund your cash flow.  Many corporations cannot function without debt.  Most people cannot buy a car or a house without debt. I called a bank last week and asked if they had changed their lending standards.  They said basically no, but they are requiring larger down payments on large trucks.  If banks and financial institutions do not have the money to provide the lending for these instruments, then businesses start grinding to a halt.  People stop spending because their incomes go down.  See the downward spiral?

The majority of Americans are calling this a “bailout” of Wall Street.  It is not a bailout of anything.  In fact, as I said before, Warren Buffet said the government (ie. taxpayers) will make money on this “bailout”.   If anything we can call it a bailout of Main Street.  What started this credit crisis?  Sub prime loans.  Who got the sub prime loans, Wall Street or Main Street?  Main Street?  So, Americans are blaming companies for lending them money when they could not afford it.  Where is their responsibility?  Everyone is so quick to point fingers.  Wake up America!  There are some really intelligent people on Wall Street.  Sure there are the greedy crooks.  But, there are some of those people on Main Street too.  Hank Paulson could not sell anything, but he is extremely smart.  He knows what he is talking about.  I realize it is not prudent to give anyone a blank check, but I’ll bet he didn’t expect to get it.  We need a plan that provides liquidity (ie. cash) to the credit markets so companies can borrow, or we will have a lot to worry about.  Write your Congressmen. 

America has always solved their problems.  I believe “this too will pass”; however, we need to be realistic.  This credit problem has become really bad.  It is not prudent to close our eyes and hope when we open them that the problem will be gone.  It might get really bad, so we need to position ourselves for that.  Getting rid of debt is the single biggest thing you can do.  If you do not have debt, then you will be ok.  You will have to adjust accordingly, but you will be ok.

NO DEAL YET AND WASHINGTON MUTUAL TAKEN OVER

September 26, 2008

I’m sorry to keep writing but based on the fact that about 80% of the people I email this to are reading it, I’m assuming you want to be kept informed.  There is tons of news to report too.

I watched CNBC last night after working out and while I was watching, they broke the news that Washington Mutual was taken over by the FDIC.  This was a very large bank.  FDIC apparently brokered the deal and JP Morgan Chase came out on top.  JP Morgan Chase tried to buy Washington Mutual earlier in the year for $8 per share, and now they are getting it for pennies on the dollar.  This was extremely orderly.  Washington Mutual customers woke up this morning to find a note on the bank website that they are now JP Morgan Chase customers.  The branches already had signs stating the change. 

While that sounds like bad news, the real bad news is that Congress is playing politics with our economy.  Both sides are guilty.  Believe it or not the Democrats were willing to pass the Administration’s “bailout” bill but House Republicans bowed up and said “no”.  There are extremely smart people on CNBC.  I have a high level of respect for many of them.  They have all said that a bill MUST be passed to save our economy from tanking.  I feel the politicians are playing Russian roulette with our economy. 

I’m not sure the majority of Americans even know what is going on.  The politicians are receiving tons of mail, email, and phone calls saying NOT to vote for the bailout.  The common theme is that “we should not bailout Wall Street”.  That is the misconception.  This is not a bailout of Wall Street.  This is stopping runs on banks and a total collapse of the financial system.  All you have to do is go to your banker and ask them if they have tightened their standards on loans.  If you NEED a loan, you are going to have a really hard time getting it.  If you don’t need a loan because you have other cash and investments, but WANT a loan, you will still be able to get it.  Credit has literally dried up.  Many businesses cannot function without credit.  They need the credit just to float their cash flow and make payroll.  This is an extremely important point.

Ok, that sounds really bad, but there are things you, we, can do.  First, don’t panic.  Second, make sure you don’t have more than the insured limits in banks.  Third, clean up your balance sheet as I have been preaching for a long time.  Fourth, don’t panic.  Fifth, don’t panic.  I say don’t panic because history tells us that there will be unbelievable opportunities to make money because almost everything is so beat up.  History also tells us that we will deal with the problems and it will get better.  You never make money when you panic.  In fact, you make money when you jump in when it feels the worst.  Oh, I forgot to say….DON’T PANIC.

I was in business in 1990 when we had the savings and loan crisis (remember the Resolution Trust Company??).  I was in business when we had the 1987 stock market crash.  I don’t remember either of those events having some long term negative on my life.  Our country always figures out how to solve the problems.   We always have.  It seems really bad, and I’m frustrated by the politics, but something will get passed and our financial problems will get fixed.  If we have debt, then we are part of the problem.  We all have a part in this mess.  We need to stop pointing fingers, come together and work through OUR problems.

We are witnessing history in the making.  I’m keeping a “market history” diary, so I can look back at what happened and what moves I made.  That will make for some interesting reading some day. 

WARREN BUFFETT SAYS CONGRESS MUST PASS THIS BILL

September 24, 2008

Warren Buffett (Berkshire Hathaway, CEO) is investing $5 Billion into Goldman Sachs.  He was interviewed on CNBC this morning.  I’m assuming you know who Buffett is but in summary he is an extremely brilliant investor and is the richest man in the world (he passed Bill Gates this year).  He said that we are in a “financial Pearl Harbor and Congress must pass this bill”.  He’s betting they will, he said, by his investment in Goldman Sachs.  He said he would not have made this investment if he thought Congress would not pass this legislation.

Hank Paulson is a very smart man.  He knows what he is doing.  I have had several emails and calls from people wondering what I think about this bailout.  My initial answer is that it must be done to avoid a depression.  Most are concerned that we are bailing out companies that caused the problems.  Sure, these companies were greedy and made poor decisions, but I never heard anyone saying they were wrong before this problem was going on.  Many of my friends and clients have benefited from rising real estate prices over the years.  The thing these companies did wrong in my opinion is take on too much debt.  The bubble burst and they did not have enough money coming in to pay for all their debt, and then they could not borrow any more.  I have known many people who found themselves in a similar situation before this crisis had even started. 

We have to look past what caused the problem for now and come up with a solution to stop the bleeding.  That is what Paulson is trying to do…stop the bleeding.  Buffett echoed that this morning.  THEN, we need to figure out how to keep this from happening again.  You can complain about the government going into more debt over this but the government is the only one that can print money when they need it.  None of us can do that.  They have access to low interest rates.  We do not.  That is why Buffett says that if this is done right, and he said Paulson is the exact right man at the right time, the government will make a lot of money.  He said he wishes he had access to capital like the government does so he could make the deals the government will make.

Right now, we need this bill, then all of us needs to clean up our financial houses and demand companies and our government do the same.  We have some control over this.  Do not invest in companies that carry a lot of debt.  Write letters to Congress protesting the level of debt and lack of fiscal responsibility our government has had over the years.  You cannot ask them to do it, if you are not practicing what you are preaching.  Stop borrowing for cars.  Stop borrowing for discretionary purchases.  It is hard because we want it now even though we do not have the cash, but we are seeing what happens if you borrow too much.

THANK YOU!  AND SOME TIPS ON “FINANCIAL LOCKDOWN”

September 18, 2008

I have received several calls and emails this last week or so from several of you with encouraging words.  I want to say thank you again to those people and to our clients.  But, I also want to make some comments on my “financial lockdown” strategy.

It has been very encouraging to me to hear from several of you during this financial crisis.  Your words of encouragement remind me how blessed I am to have the kind of clients I have.  I think you know by now how hard I’m working to make good decisions about your money.  I’m guessing that I’m not hearing from most of you because you trust me to take care of your money.  I have realized I care more about your money than I do my own.

With that said, these are very trying times.  I know many of you are really struggling with the severity of this market decline.  Ask my wife, I am watching CNBC almost all day and night.  The common theme almost everyone is saying is that no one saw this coming.  There are those that are looking back and saying why didn’t so-and-so do something about this.  There are always those that point the finger after the fact, but few that can claim that they said something about it before the fact.  So, now everyone is scrambling to figure out what to do.  We have made some changes to our portfolio as I said and even raised some cash because I felt it was the prudent thing to do.  I have said before that when the low of July 15^th was made, I decided that I would raise cash if that low was violated.  So, I made that decision two months ago, and that level was violated this week, so I exercised that decision.  It wasn’t emotional and it wasn’t a panic move.  I simply executed a decision that I made two months ago. 

Now, I want to comment on my financial lockdown strategy.  If you are in the stock market, you have seen your account balance go down more than 20% this year most likely.  That is a huge decline.  Every time a significant decline in the market happens, I tell my wife we are on “financial lockdown”.  Actually, this is a new term I just started using but the concept has been the same.  What it means for us is this….we simply cease all discretionary spending.  We don’t use savings for anything.  We continue to spend current income, but even cut back there if we can and add to savings.  We don’t plan trips, we don’t buy furniture, we don’t buy welders, and we don’t buy boat parts (I’m into welding and boats).  This is normally not a long term situation, but we wait until the market goes back up. 

If you are making withdrawals from your account regularly, you must try to eliminate or reduce those amounts in my opinion.  You take a double hit if the market goes down and you are making withdrawals.   I recommend you make cuts in spending to keep from making withdrawals from savings.  Right now, it is important to add to savings if possible.

This crisis started over a year ago and it is all about debt, and the problem is still about debt around the world.  I have been preaching over and over about the need to get rid of debt.  This crisis has proven that need.  History tells us that this crisis will end eventually.  It feels REALLY bad.  It IS really bad.  But, we are pretty sure it will end. We do not know when, but we are pretty sure it will end.  We own Garmin stock.  It has gone up 6 of the last 7 days.  I’m scratching my head as to why.  It is a totally discretionary purchase (they sell GPS units).  Why is it going up on days the market has gone down 5%???  I cannot answer that question, but I am speculating that investors are buying because it is extremely undervalued.  That translates to there is a ton of cash on the sidelines and investors are finally saying that this market is too undervalued to wait any longer.  Now, that does not mean that we are going to shoot up from here.  I actually expect more bad news and most likely the market will go down some more.  However, many people are saying that some stocks are ridiculously undervalued, and some day we are going to realize this was an unbelievable time to buy.  If you gave me money today, I would not put it in the market unless you have no exposure to the market.  If you have been sitting on cash through all this, then I would start buying into this market.  Do not do it all on one day, but average it in.  Over the next several years, history tells us you will be rewarded handsomely. 

WHAT ARE WE DOING?

September 16, 2008

This has been a horrible week already for the stock market and the financial markets.  I watched two hours of programming on CNBC last night following the worst day on the markets since the 9/11/01 attacks.  Lehman declared bankruptcy and the world’s largest insurer, AIG, is probably going to declare bankruptcy by tomorrow.  The Fed is meeting today for a regularly scheduled meeting and everyone is waiting to see what they are going to do about this.  This weekend the Fed sent the message that they were not bailing out any more companies, but they are injecting liquidity into the system to try to stave off further financial turmoil.

Here’s the bottom line…..the stock markets both here and abroad are in terrible shape.  Ours is doing better than the rest of the world markets, though.  The markets are actually digesting the bad news pretty well so far.  The unknown is how much farther this will go.  We were watching to see if the market would drop below the July 15^th low, which I was hoping it wouldn’t.  It broke below that low yesterday.  That was critical support.  History tells us that now the market has to figure out where the next low is.  We are making, and have been making, adjustments to our portfolios accordingly.

Our bonds are doing pretty well.  We came into this year with a lot of cash due to many bonds being called.  When we switched from Morgan Keegan to TD Ameritrade in May and June, I immediately bought bonds and got fully invested.  I had no idea we would see the turmoil that we are now seeing.  Long term interest rates have dropped about 1.5%, so we locked in some really good long term rates.  Now, we are hoping our bonds don’t get called.  A few have been.

None of this is going to make you feel better, but I want to keep you informed of what is going on.  I’m hoping, for those of you who are trusting us to manage your money, that it makes you feel a little better that we keep you informed and that we actively make changes as we deem necessary.  I have only received a couple of calls, but do not hesitate to call if you have concerns or simply need reassurance.

THE WORLD ECONOMIES ARE BAD AND SO IS THE STOCK MARKET

September 10, 2008

This quarter has been really rough for the stock market.  The cause is the uncertainty due to the severe financial crisis we have been experiencing.  The problems are still surfacing in the financial sectors and the world economies are struggling after years of sky rocketing growth.  Most believe there is more pain to endure but they also believe that we are near the bottom.  We just made a major adjustment to the portfolios yesterday.  Oil, oil services and commodity prices have dropped like a rock this quarter and caught many mutual fund managers by surprise.  This hurt our performance.  The news is really bad and I think we are seeing panic set in again.  Eventually people throw their hands up and cry "uncle".  That will be the bottom and when the market turns back up.  This market has been declining for 11 months now.  I'm not sure when this turns back up.  I don't think we will have 3 bad years again, but we have to see a light at the end of the tunnel regarding this financial crisis before it will go up.  I think we are close because gold is going down.  Gold usually goes up when there is inflation or economic concerns.  Oil is going down because world demand has decreased.  I suspect the decrease in demand is significant because world stock markets are down considerably more than ours.  I still believe we will see more interest in our stock, bond, real estate, etc. markets because the world markets are tanking and the world markets were rising for years while ours was stagnant.  But, again, we have to see this financial crisis stabilize.  A lot of net worth has disappeared over the last year.  Some guy just said on CNBC that there is a ton of cash sitting on the sidelines, and at some point that money will come into the markets. 

I would be lying if I said I was not squirming in my seat, but I also know from experience that you lose when you panic.  So, we will not panic.  We are constantly analyzing our portfolios and making adjustments as we feel are necessary. 

The Fannie and Freddie government takeover gave the bond market a significant boost.  We hold a lot of their bonds.  Interest rates have declined about one-half percent due to this takeover.  Declining interest rates cause bond values to increase.  Fortunately, we were fully invested with all our cash (that is designated for bonds).  We had been sitting on a lot of cash earlier in the year due to bond calls, but got that all invested in May and June. 

I mentioned in our newsletter that we have found a new asset class to invest in that will be a great alternative in addition to stocks and bonds.  Call me if you are not a current money management client and want to learn more about this new asset class.

While we wait for this stock market to stabilize, I am assuming some of you are nervous.  I truly understand.  I hope it helps to know that I believe we truly actively manage your money.  We have tools that allow us to drill down and see what mutual funds are investing in and which sectors of the economy they are investing in.  This allows us to change our sector weightings by changing which funds we use and how much we put in any mutual fund. We are emailing and calling the various mutual funds we use to question them if their performance is lagging.  We do this when we are concerned about which sectors they are in and we think they are weighted too heavy in any sector.  They are generally surprised by how much we know about their fund and how they are invested.  I truly believe this process is unique compared to most brokers and money managers that use mutual funds.  With that said, though, I want you to call me if you have any concerns. 

DIESEL BELOW $4, DOLLAR IS UP, AND THEY CAN’T STAMP ENOUGH GOLD COINS

August 25, 2008

I drive a diesel truck and diesel is now just under $4 / gallon.  I just heard a report on CNBC that the government cannot stamp enough American Eagle gold coins to keep up with the demand.  Most investors come late to the game, so this could be marking a top in gold and a bottom in the US Dollar.  Generally, gold prices go up when there is fear in the stock markets and when investors fear the economy is bad.  Gold is also bought to hedge against inflation.  When demand spikes for any commodity or stock, it almost always signals a top of that market.  Gold has been higher than it is now, but the demand for the gold coins has spiked significantly.  I read a similar article in the Wall Street Journal a few weeks ago.  The US Dollar has been increasing lately too.  Usually, gold and the US dollar run opposite directions.  Gas prices have come down significantly.  I paid $4.71 for diesel at the high.  Now it is $3.99.  That means diesel prices have dropped 15.3%.  However, oil prices have dropped about 22%.  Assuming oil prices stabilize here, I would expect diesel prices to drop further.

I am no expert on oil prices, but looking at the charts, I said two weeks ago that I thought oil would go to $100 at least, but the charts really predict about $80 according to my interpretation.  This past week, I’ve read several articles predicting $80.  Lower oil prices, which hopefully translate to lower food prices, will help keep inflation down.  Keeping inflation down is important because that delays when the Fed needs to raise interest rates. 

The credit crisis is still a very significant problem.  It is wide reaching and some are saying that we must endure several more months before the bottom has been reached in the credit crisis.  Housing prices are still going down.  Credit is still extremely tight.   

This has been an extremely frustrating year for most investors in the stock market.  It has even been frustrating in the bond market, because of the Fannie and Freddie mess.  It has made it tougher to find alternatives to those bonds.  The hard part is waiting for this to all go away.  That takes time.  As I have said before, the stock markets are “forward looking”.  They tend to turn up or down ahead of what the economy looks like.  The stock market is about 7% above the low made on July 15^th.  In other words, this market turned up on July 15^th, but the credit crisis is not over.  Generally, this means the stock markets are predicting a turn in our economy in the next 6 months or so. 

GLOBAL SLOWDOWN

August 13, 2008

I have been reading several articles that are stating that global economies are slowing, and demand for commodities is down globally.  CNBC just reported that the cause may be that China is no longer hoarding commodities since the Olympics are now here.  In other words, they have been building infrastructure in preparation for the Olympics.  Now that the Olympics are here, they slowed down building and growth considerably. 

I heard a commentator say during the Olympics a statistic that 20,000 cars a day are being added to China’s roads.  That is not slowing demand.  On the other hand, our car manufactures are really struggling.  The demand for cars here is way down.  I believe the slowdown globally has reduced demand for many things.  What is unknown is the trickle down effect of this slow down. 

I read in the Wall Street that even the rich are pulling back.  CNBC had a story yesterday that said the rich are not flying their private jets as much.  Instead of going to Vail twice per month, they are only going once!  Most people I know are cutting back.  We have two in college this year and are planning a wedding for next summer.  I told my family we are on “financial lockdown”.  That is my new favorite term…financial lockdown.  I think a lot of families are in financial lockdown due to the credit crisis.  Overall, I think this is good.  I have said it before that Americans need to get our financial houses in shape.  The problem is that we will have to experience pain before we can get our houses in order.

The decline in oil prices, the dollar going up, and our exports up, have caused foreign money to flow into our country.  This is what I was writing about back in May.  This is one reason our stock market is out-performing foreign markets.  The stock market volatility has returned.  We’re up big one day and down big the next.  The S&P 500 is about 6% above the low on July 15^th, though.

I’ll close with the Fannie Mae and Freddie Mac crisis.  The bottom line is that the government has come in and passed a law that essentially has said it will back those two entities.  This has kept their bond prices up.  There are many reasons why they needed to step in, but I don’t want to take the time here to explain (call me if you want to know more).  However, it has caused me to diversify our bond holdings so we do not just own bonds of these two agencies.  We are starting to buy brokered CD’s and more tax free municipal bonds.

IS THE PANIC OVER (SECOND VERSE)

July 21, 2008

On May 1^st, I titled my comments “Is the Panic Over”.  The market continued to rise until May 16^th.  Then, another sell off (the third this year) ensued until July 15^th.  The S&P 500 is up about 4% since then.  Financial stocks have been absolutely hammered since the credit crisis began about a year ago, but now their earnings are coming in better than expected and the financial sector is up 24% since July 15^th.  Sure, our economy has had major setbacks due to the credit crisis, but was the stock market’s reaction to it in the panic category?

I think it was panic.  But I’m not sure it is done.  I’m watching some charts really carefully.  I am suspicious that we are going to have a “bear market rally”.  That means the market will bounce up, only to retreat again.  The reason I think that may occur is because most believe we have not seen total fear by investors yet, and that is what usually has to happen to turn the market up for the long term.  We are watching the market action very carefully.

The bond market has experienced some panic too due to the problems at Fannie Mae and Freddie Mac.  However, the government stepped in and said essentially they would not allow those two institutions to fail.  Fannie Mae’s stock (FNM) has gone from $7.07 on July 15^th to $16.58 this morning.  You can do the math!  So, it appears investors have decided it is not as bad as everyone thought.  Did the problems disappear at Fannie Mae?  No!  But, panic sent the stock price dropping like a rock.  Now, speculation is shooting it up like a rocket.  Not that much changed in the last 6 days. 

What I have learned over the years is to keep buying in when markets decline and don’t panic.  It pays off in the end.  I have made several calls to mutual funds lately to inquire about the changes they are making, if any.  Interestingly, they seem amazed at how much information I have about the performance of various sectors and how it relates to their fund’s performance.  The systems we have give us the ability to pinpoint potential problem sectors their fund holds.  These systems help us spot underperforming funds quickly.  We then make calls to verify our systems are correct and to see if they are making changes.  This is working very well for us. 

You can trust that we are watching your money, like we watch our own. 

INVESTORS ARE RUNNING FOR THE DOORS!!

July 3, 2008

I am in Dallas because my mother had to have an emergency surgery. Technology is fantastic.  Between my iPhone, CNBC on satellite radio, and laptop, I am able to stay completely informed no matter where I am.   I am sitting around the hospital and hotel in a holding pattern, but the hospital has WiFi, so I’m on the internet reading a lot.  My brother is there too.  He owns a pension administration company.  He said participants are making tons of transfers out of the stock market and into money market accounts.  I said “good”.  The reason I said that is generally when the market is declining like it has, the smaller investors start bailing out of the market.  This is usually a signal that the end is near.  Many investors (probably most) trade on emotions.  They buy when it feels the best and sell when it feels the worst.  Exactly opposite of what you should do and that is why many people lose money in the stock market.

As I said in an earlier comment, now is time to be buying in.  We may not be at the bottom yet, but history has shown that it is better to add to your investments in the market as it is going down.  I know that is hard to do, but in the long run you are greatly rewarded. 

It is nasty out there.  I admit that, but I truly do no believe now is the time to jump ship.  The charts are extremely “over-sold”.  That means stocks have sold off so much that the stock market will usually rebound from here.  As I have said many times before….time will tell if I am right. 

I have been talking with many business owners (and I would be interested in any comments you have), and most are saying business is still good.  However, they are saying that all their suppliers/vendors are raising prices.  It seems to be across the board.  Our pest control company raised their prices $10, but that represents a 15% increase.  He was long overdue, but the point I am making it seems everyone is raising rates because their costs are up.  I think a lot of companies are using these high oil prices as the excuse the needed to get the prices in line.  After the bad three years, they were hesitant to raise prices, but now they have a scapegoat.  I do not have a problem with that at all.

There is a silver lining through all this, in my opinion.  I am hearing and seeing people pull in their horns.  They are being forced to get their finances in order.  They are reducing spending to pay for energy costs.  They are trying to reduce debt. Somme involuntarily are reducing debt through bankruptcy.  We are all looking for ways to reduce fuel consumption. Even my wife is buying those fluorescent bulbs that are lower energy bulbs, and she hates those things!  Overall, I believe this is good.

I know this feels bad and I wish I could wave a wand and make it change, but I can’t.  I wish I could tell you exactly what is going to happen, but I can’t.  But, I CAN keep writing these comments to keep you informed, and try to encourage you not to panic and to keep adding money to your investments.  I can also encourage you to use this time to analyze your finances and make sure your house is in order.  Let me know if you need help.

INFLATION UP, OIL UP, STOCKS DOWN, NOW WHAT?

June 26, 2008

The Fed kept interest rates the same yesterday but warned about inflation.  I keep saying this, but inflation is real.  We have inflation, and the Fed will have no choice but to address it soon.  Stocks are getting hammered so far today.  It could change, by the end of the day, but it shows the fear that still exists.  Generally, fear and panic signals we are close to a bottom.  Time will tell.

The reason I am writing this comment, though, is because of a chart I just looked at that I believe supports what I have been saying in my comments.  I ran a chart of the S&P 500 Index going back to 1999, almost 10 years.  Interestingly, the index is currently at the same level it was back in March, 1999!!!  That means that, unless you have been adding money to the market since then, your investments have mostly been flat for 9+ years.  If you have been adding money, then you would have experienced good returns most likely.  This is a long period to only be flat.  That is yet another signal to me that our markets are poised for solid returns and international markets will not do as well.

Foreign economies have experienced unbelievable growth which comes with inflation.  Inflation is not good for economies.  Goods and services overseas have become more expensive over the last decade and ours have become more affordable, primarily due to the declining value of the dollar.  I expect we will start to see the dollar increase in value and a continued demand for our goods and services at least for the near term.  Most stocks I’ve looked at have very low P/E ratios compared to their historical P/E’s.  P/E stands for Price/Earnings.  The lower the ratio (relative to their historical P/E), the more potential a stock can go up in value.  This is another signal that our stock market is undervalued. 

The American Economy does not appear to be in great shape.  The world overall has viewed our economy negatively.  However, we are starting to hear about deterioration in world economies.  Nothing goes up forever, nor does it go down forever. 

Here is the answer to the question “now what”.  It is important to not panic if you are invested in the stock market.  If you decided you are going to stay in the market, then it is important to keep adding money to it.  It is the “dollar cost averaging” method.  Investors have always been rewarded, if they buy when the market goes down and they keep buying, and then the market goes up.  Assuming history repeats itself and the market rebounds and exceeds its previous high, that will be the time when you should think about getting out of the stock market.  I truly believe it would be a mistake to bail out of this market right now.  I cannot guarantee it, but I believe I will be proven right given time.  I realize it is hard to wait, though.

On a separate note, it is so frustrating when the market goes up in the middle of a quarter and then comes down by the end of the quarter.  We had a great run through 5/22/08, then the market started coming down.  They call it “window dressing”.  Mutual funds sell off their losers at the end of the quarter and buy stocks that are doing well, so their quarterly reports show they own good stocks.  This process tends to drive the market down in the last week or so of a quarter.

WHAT YIELD CAN YOU EXPECT FROM BONDS?

June 17, 2008

We moved our bonds to TD Ameritrade and have been buying bonds with the available cash.  A couple of the bond traders were indicating investors were weary about locking in yields for a long time.  We buy government agency bonds that are “callable” for retirement plans and clients in low tax brackets, and we buy tax free municipal bonds for clients in high tax brackets.  The question is what yield should we lock in?  I have been only willing to take 6% or better on our government agency bonds and around 5% on tax free bonds, lately.  I just reviewed ALL the bonds we own, and confirmed what I already knew….even though we buy government agency bonds with 20-30 year maturities, they rarely go that long before they are called.  In fact, none of our bonds are more than 7 years old.  They get called before their maturity dates.  And, almost all our government agency bonds have yields of around 6% or less.  So, if we can lock in 6% right now, that is about as good as you can normally get.

A similar result has occurred on our tax free bonds.  That is, the yields we are locking in are right at the highest yields we have received on all the bonds we currently hold.  So, it makes sense to lock in the yields we are obtaining for a long term as they are historically good yields.

Interestingly, I just looked at jumbo CD yields across the country and the highest I saw was 5% for a 5 year CD.  Most were less than 4.5%.  So, again, the bonds are providing much greater yields than CD’s.  Hopefully, this provides some help to those of you who are buying CD’s.

STUDENT LOANS---BEWARE!!!

June 13, 2008

I realize that college is VERY expensive.  This fall I will have two in college at once.  I also realize not everyone has the financial resources to pay for college without using loans.  So, I want to issue some warnings.  Tuition by itself is not what is so expensive (at public universities).  It is the books, fees, and mainly living expenses that are so high.  I just received a call from someone who just got out of college and is starting to have to make payments.  That is when reality sinks in.  Some student loans do not require payments until they graduate, so the student lives on the student loans.  In other words, they use the loans to not only pay tuition and books, but also living expenses.  Typically, the living expenses include all the fun things of college and not just the NEEDS.

Warning #1:  Do not use loans to live on.  Work to pay for the living expenses.  Go to school fewer hours if you have to in order to work enough hours to pay for your living expenses.

Warning #2:  You do not have to live in a fancy house or apartment.  Rent what you can afford, not what you want.

Warning #3:  Spend only what you can afford.  Don’t use credit cards or loans for living expenses.

Warning #4:  Keep your loans to a minimum.  Try to pay as much as possible with the money you earn.

Warning #5:  Apply for scholarships.  If you are having to borrow money and are not receiving help from your parents, then there are most likely scholarships available.  It requires a lot of work, but I have read stories and know people who apply for enough scholarships to pay for all their college expenses including living expenses.

Parents, if you are using loans to pay for college, try to follow all the warnings above.  Don’t try to provide a high life for your child.  It is ok to make them pay for some of their expenses by working.  This will help them when they are looking for work after college too.

I’m hearing it is getting harder to find student loan lenders.  Perhaps they will tighten the rules on them, so students won’t be able to live on the loans.  This will be better for them.