Thursday, February 25, 2010

Market Comment 02 25 10

Yesterday’s advance in the stock market just regained most of the previous day’s losses. This morning the market is off sharply again. All the major indexes are right in the middle of the range bounded by the January highs and the February lows.

We just have to wait and see if the market eventually breaks to the upside and resumes trending up, or if it breaks to the downside and completes a potential topping pattern that started in mid-January.

On average, the Market trends up about 50% of the time, trends down 25% of the time and goes sideways 25% of the time. The moving average trend tracking methods we use for high yield / income / bond funds are of little value to us in a trendless (sideways) market, therefore we switch to a stop-loss strategy involving share price support levels to protect our accounts.

(Click on chart to enlarge it for easier viewing)

Tuesday, February 23, 2010

Stocks Slump as Consumer Data Disappoints

A monthly poll showed consumers' confidence took a surprisingly sharp fall in February amid rising job worries. The decline ends three straight months of improvement and raises concerns about the economic recovery. The market reacted with the Dow down over 100 points.

Since we are invested primarily in very low volatility income funds at the moment we need not worry about these day to day swings in the stock market.

Sunday, February 21, 2010

New Position Added

I have added the following fund to client portfolios.  This is a newer fund so I shall watch it closely. It is designed to deliver a total retrun that is 3% over the current US Treasury bill rate. It is a short term position I intend to hold while the market is in a trading range (trendless).

Putnam Absolute Return 300 Y (PYTRX)

(The fund seeks to deliver an annualized gain of 300 basis points (or 3 percentage points) over the Merrill Lynch U.S. Treasury Bill Index.)

Thursday, February 18, 2010

In a suprise move the Federal Reserve raises the Discount Rate

After the market close on Thursday the Federal Reserve announced that it has raised its discount rate (the rate it charges banks for emergency loans) by a quarter percentage point to 0.75%. This is the very first step in the Fed’s inevitable move to normalizing monetary policy.

In reaction to this news the US dollar strengthened and the S&P 500 futures dipped by about 1%. So, we can expect a down open on the market Friday morning.

We have been at a crossroads in the market of late. The market’s reaction to this change in the Fed’s posture should shed light on the road ahead. At the moment we have a big cash position, so we can sit back and watch what unfolds with immunity.

Wednesday, February 17, 2010

Market Comment 02 17 10

During the past week the stock market has staged a good rally off the recent lows. At this point, the rally has been sufficient to end the steep intermediate-term downtrend that started in mid-January, but not yet sufficient to clearly reconfirm the bull market that started last March. Until the market breaks through the January high risk will remain higher than normal.

On a short-term basis, conditions have improved for both stocks and junk bond funds. We continue to monitor the market, looking for further confirmation of a sustainable uptrend.

Saturday, February 13, 2010

Sunday Musings: Modern Finance Explained

I am not sure who wrote this piece; but I think it is spot on. If you have trouble understanding Fed Speak it is worth reading.

Economics 101

Heidi is the proprietor of a bar in Detroit. She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around about Heidi’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit.

By providing her customers’ freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.

Now, do you understand?

Thursday, February 11, 2010

Metropolitan West High Yield Fund (MWHYX) - SELL SIGNAL

I do not know if the current intermediate-term downtrend in stocks is about over or if it is just the initial decline in a much longer-term downtrend. Fortunately, we do not have to worry; we have been out of equity funds since January 22nd.

Junk bond funds tend to follow the general direction of the stock market, but with less volatility and often with a delay.  They also trend very well, both up and down. These are the qualities that make high yield funds very manageable. We want to be invested in these funds when they are in an intermediate uptrend and we want to exit them when an intermediate downtrend develops.

Our high yield / income fund moving average stop loss model delivered a sell signal for Metropolitan West High Yield fund (MWHYX) this morning. Consequently, in line with our strict discipline we have entered an order to liquidate MWHYX.

View the chart below for recent MWHYX performance figures.
(Click on chart to enlarge it for easier viewing)

Tuesday, February 9, 2010

Oversold Bounce

The Market has been very oversold; so we were due for a bounce and that is just what we got today.  The market will have to rally for a number of days to give a clear signal of a real reversal of the current intermediate downtrend. Below is a summary of year to date performance for various markets.

(Click on chart to enlarge it for easier viewing)

Monday, February 8, 2010

Bill Gross (PIMCO fund manager) on CNBC - European Debt Crisis

More about PIGS -

Bill Gross, co-founder of Pimco and manager of Pimco Total Return fund appeared on CNBC recently to discuss the debt crisis in Europe and its effects on the market.   8 minute video

One Third of the Gains Since the Start of 2009 have Now been Lost

It may be hard to believe, but 35% of the S&P 500's gains since the start of 2009 have now been erased over a span of less than 14 trading days. After gaining 247 points in 2009 and the first two and a half weeks of 2010, the S&P 500 has dropped 86 points since its January 19th peak of 1,150.

I liquidated our equity holdings on Dec. 21st and 22nd; so we have avoided the pain of this downturn. 

We are primarily invested in high yield / income bond funds. While these funds have held up very well, they have begun to slowly weaken. Our moving average stop loss program is nearing a sell point. Should our montoring system deliver a sell signal it will be acted on the very next day.

These PIGS Aren’t Flying…

The US Dollar has been on the rise. As a consequence we have seen equities and comodities come under pressure. Part of the blame can go to the PIGS. Below is a reprint from an article by Brian Mikes; it will help you understand why PIGS are in the news and why they are a problem.

These PIGS Aren’t Flying…

by Brian Mikes, Editor

“I love Wall Street. They have an acronym for everything. If you buy and sell Exchanged Traded Funds, you’re investing in ETFs. If you buy a BRIC, you’ve just invested in one of the emerging market countries like Brazil, Russia, India, or China. You can even buy a CDS, or Credit Default Swap, to protect an investment in government debt.

Just this week, a new acronym hit the market courtesy of the European Union - PIGS.

PIGS stands for Portugal, Italy, Greece, and Spain. In other words, it’s the European countries in deep economic trouble. As you know, real pigs wallow in the mud… and these countries’ economies are wallowing in the mud as well.

Some would say the PIGS are covered in… Well, you get the picture.

Why are the PIGS getting so much notoriety these days?

The PIGS countries have massive government debt levels. Their economies are struggling. And now there is a serious concern over their ability to make payments on government debt.

These troubles aren’t localized anymore. The troubles, like a bad cold, are being passed from one country to the next. And it’s hurting the entire European Union. Nowhere do you see the impact more than in the crumbling value of the Euro.

Now I’ll admit, when I first heard about the troubles in Greece I dismissed them…

But then I started digging. I got down in the mud and the slop (with the PIGS) and what I found was quite disturbing.

This issue could lead to huge problems in Europe.

The big problem is government debt. The PIGS countries have all issued debt to finance government works and deficit spending. While each country is independent and controls their own economic situation… they all share a common currency.

Let’s follow the money…

By being part of the European Union and using the Euro as a common currency, the PIGS have been able to issue low cost debt. And debt levels continue to mount. There doesn’t seem to be an end in sight. Government spending, especially on welfare programs, is skyrocketing.

And that’s scaring even the most hardened investors.

If the PIGS countries can’t pay their debt, the entire European Union is going to get hit hard. Why? Because some of the largest holders of government debt are other European banks! And some of that debt may have even been pledged to the European Central Bank (ECB) as collateral.

If the government defaults… or if analysts think they might default, they will see their credit rating quickly cut. And that means the value of the debt will fall. It will strangle the ability of these government banks to lend.

It’s like the home mortgage problem all over again… and we all know how that turned out!

These fears are scaring away international investors.

And that makes attracting international investors difficult. How bad is it?

The equity markets in the PIGS countries are plummeting… Portugal is down 12%, Italy has fallen almost 8%, Greece is down a stunning 16%, and Spain is off over 14%!

It’s so bad the IMF is offering a credit line to Greece!

But it could get worse. If these countries can’t get their budgets under control, debt levels will spiral out of control. If it gets high enough, they might be asked to leave the European Union.

Talk about a problem.

The Euro is already falling hard on the economic ripple effect from just these few countries… can you imagine if the framework of the EuroZone starts to fall apart? The entire region might be thrown into a tailspin.

Currency investors who have moved over to the US Dollar are doing really well right now.

The Euro is collapsing, and as a result, the US Dollar is moving higher.

I’m watching Spain very closely. They should be a key bellwether for the PIGS countries… they are one of the largest. If they can hold it together, it’s a good sign for the entire EuroZone… if they fall apart… watch out for more trouble ahead.”

An easy way to profit from a rising dollar is with the PowerShares DB US Dollar Index Bullish (UUP). The ETF buys a basket of US Dollar futures contracts. As the US Dollar rises in value, so should this ETF.

I am considering taking a position in UUP in all portfolios.

Friday, February 5, 2010

Market Comment 02 05 10

The S&P 500 dropped 3.11% yesterday and is now 7.57% below its January peak. On a short-term basis, the stock market is deeply oversold again, which means some type of rally is likely to develop soon. The problem is that the intermediate-term trend is now down. It may be early next week before we can make a reasonable guess about the longer-term significance of the January top in the stock market.

Our Low volatility bond / income funds have held up very well. Make no mistake, these funds can and will trend lower if the stock market continues to decline for an extended period of time. We have a sell discipline in place to protect us should that occur. So at this point all we need to do is relax and let our moving averages stop strategy do its job.

Thursday, February 4, 2010

The Dow Jones Industrial Average takes a 268 Point Dive

If you have been following Gerritz InSight blogs for the last few weeks you know that we were expecting potential problems for the market; though I have to admit I did not expect such a large decline in one day.

My decision to sell our stock fund positions in the third week of December proved to be the right move. At this point I am happy to say that we had a big position in cash going into this market decline.

We still have significant positions in high yield funds, but rest assured we will be watching them closely. High yield funds normally trend in the same direction as the stock market, but with much less volatility. The reduced volatility filters out a lot of the short-term up-legs and down-legs in the stock market and this can lead many unwary junk bond investors to become complacent. Just because junk bond funds don't turn down as quickly as stocks doesn't mean they are immune to the market forces that drive stocks lower when a downtrend develops. At significant tops, junk bond funds often lag the stock market, but then turn down and decline steadily lower when investors start selling.

Should the recent weakness in the stock market develop into a protracted downtrend our junk bond positions will be protected by our “moving average stop loss strategy.” 

See this months issue of  The Gerritz Letter for a detailed description of our moving average stop loss strategy.

Tuesday, February 2, 2010

Low Volatility Bond / Income Funds Outperform S&P 500

Low Volatility Bond / Income Funds continue to Outperform the S&P 500
Putnam Diversified Income Fund was featured
in our February Issue of The Gerritz Letter
(Click on chart to enlarge it for easier viewing)


(Click to on The Gerritz Letter)

Monday, February 1, 2010

Important Year End Tax Documents

Shareholders Service Group will mail out 2009 Year End Tax Documents on Feb. 11, 2010.

Gerritz Wealth Management is sending you 2009 Cost Basis reports today, both by email and a copy of the same by regular mail.

Use your GWM Cost Basis reports in conjunction with your SSG Year End Docs.

Market Comment 02 01 10

The stock market is deeply oversold on a short-term basis, so we will probably get a short-covering rally the next day or two. A short-covering rally however won’t tell us if the correction is over. We will just have to wait and see what follows that rally to make a reasonable guess about the near-term trend. At this point, the stock market has shown enough weakness to be of concern, but junk bond and many other bond/debt funds have held up quite well -- but we should not become complacent. If the stock market correction continues, junk bond funds are almost sure to follow. We are paying close attention to our moving average stops and are prepared to act if they are penetrated.

What Does Moving Average - MA Mean?

An indicator frequently used in technical analysis showing the average value of a security's price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.

What Does Stop-Loss Order Mean?

An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor's loss on a security position.

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