Friday, April 30, 2010

The Gerritz Letter

The May 1, 2010 issue of The Gerritz Letter has been published. It should be in your email inbox now. If you do not see it, check your junk or spam mail folder and mark it as not junk mail.

SmartStops QuickAlert

SmartStops QuickAlert

Equity:  SPDR S&P Retail (XRT)                                 

Symbol Trigger:   Short-term       

Type Price:  $42.83

Date Time:  4/30 1:16 PM

A SmartStop Was Triggered.

The price of this ETF in your portfolio has fallen to the point where it’s triggered today’s SmartStop.

Action taken:   Position sold.

What this alert means.

This is an indication that this equity is experiencing abnormal risk of further decline.

Short-term SmartStops are optimized for stocks you intend to hold for approximately six months or less. As such, they are designed to trigger quickly when downtrends are detected, and are thus more sensitive than long-term SmartStops, which, as their name implies, are “buffered” for longer-term investments. True, we can “dial down the sensitivity” of your short-term SmartStops by changing them to long-term ones, but be advised that the increased sensitivity of short-term SmartStops is there for your protection.

Thursday, April 29, 2010

Markt Comment 04 29 10

In my market comment blog for Tuesday, the 27th, I quoted the S&P 500 being off 213.04 points. This should have read that the Dow Jones Industrial average was off 213 point rather than the S&P 500. At any rate it was a large decline.

The good news is that the S&P500 was up 1.29% Wednesday. None of our positions were stopped out this week even though they came close.

The Greece debt default situation remains unresolved. Until some of the problems in Europe are resolved we should be prepared for more volatility.

Our accounts have a big weighting in low volatility bond and income funds. These funds are not affected in a big way by the day to day swings in the stock market. Moreover, our stop-loss discipline protects our equity positions.

All we really need to do is sit back and let the systems we have in place do the job they were intended to do. This is the benefit of employing a risk management system that we can rely on.

Tuesday, April 27, 2010

Market Sells Off on news of Greek Dept Downgrade

The market declined sharply on Tuesday following reports of credit-rating downgrades from Standard & Poors on Greece and Portugal. Greek sovereign debt is cut to junk status. The Dow Jones Industrial Average dropped 213.04 points.

The sell off brought us pretty close to our stop-loss trigger points.

Smart Stops for 4/28/10 are set as follows:

If the above short-term ETF prices are breached, the affected positions will be sold, limiting
further downside risks.

I highly recommend that you view the following short video on SmartStops.

Click on the link below to view short video on
why Smart Stops are so effective
and how they work.

Sunday, April 25, 2010

Tax Benefits Of ETFs

Exerpts from a recent article on tax advantages of ETFs vs. mutual funds:

“E.T.F.’s are substantially more tax-efficient” than mutual funds, said Harold R. Evensky, president of Evensky & Katz, a financial planning firm. That is especially true when the portfolio follows indexes dominated by large companies like those of the Standard & Poor’s 500 or the Russell 3000.

The reason is arcane and comes down to differences in the way E.T.F.’s and mutual funds create or eliminate shares to meet investor demand. A rule generally allows E.T.F.’s to do so without triggering taxable transactions.

“If you’re invested in an S.& P. or Russell 3000 E.T.F., there is no tax consequence until you sell,” Mr. Evensky said. In an equivalent mutual fund, he added, “you may have tax consequences if you just sit there and hold it and haven’t done anything.”

“An E.T.F. is almost like having money in a retirement account.”

Of course, keep in mind that if an ETF pays any kind of dividend, that will be subject to taxation in a taxable account.

What the above article references are the year-end distributions (capital gains and a losses) that mutual fund companies are required to pass on to the investors whether the fund has made money or not. That’s where ETFs have a huge advantage in being able to avoid this issue.

If the tax aspects of investing via a taxable brokerage account are important to you, ETFs definitely have the edge over mutual funds.

Friday, April 23, 2010

10 Reasons to Love ETFs

REPRINT of a Tom Lydon piece:

March 22, 2010 at 1:00 pm by Tom Lydon

You say you want a revolution, and it’s here in the form of exchange traded funds (ETFs). Dig down into the reasons why ETFs are superior to stocks and mutual funds, and you’ll find more than enough to love.

Are you paying massive fees for a poor-performing mutual fund? Read on to see why ETFs rock:

1. ETFs are diversified. One ETF can hold dozens or hundreds of stocks. Where else can you get that kind of exposure without lopping off an arm, leg or both?

2. With ETFs, you can spice it up. If you find a straight fund too bland, perhaps a leveraged fund is more your speed. There’s no need to buy on margin; you can buy a leveraged ETF just as you would any other ETF.
3. ETFs are transparent. It’s 2 a.m.; do you know what’s in your ETF? Well, you can find out by going to the provider’s page or other sites. Now, go back to bed.

4. You can sell an ETF whenever you want. That is, when the markets are open. Mutual funds are priced once a day, at the end of the day. ETFs are continually priced and you can trade them just like you would a stock.

5. ETFs go hand-in-hand with a trend following strategy. Mutual funds tend to have investment minimums and early redemption fees that can leave your portfolio hurting if you don’t want to buy and hold. ETFs have no such restrictions, making them an ideal companion for a simple strategy.

6. ETFs are tax efficient. Because ETF shares are created differently and no cash changes hands in this process, ETFs are highly tax efficient and rarely shoot off capital gains.

7. ETFs are cheap. On average, ETFs cost less than most mutual funds. But beware: some mutual funds are cheaper than similar ETFs, so do your research to ensure you’re getting the best deal.

8. You have choices galore. Commodities, currencies, emerging markets, exotic hedge fund strategies, active management and more are available via ETFs. And that’s on top of the wide array of sector ETFs available. Not long ago, only institutional investors had exposure to things like commodities and currencies; now you can have it, too.

9. ETFs give you power. You, the investor, have control when you’re using in ETFs. You can choose your level of exposure (broad or narrow), you can choose your sector, you can compare funds on key points and choose from several competitors. The growth of the ETF industry has really helped put the control back in the investors’ hands.

10. ETFs have brains. The vast majority of ETFs passively track index, but we’re now seeing more actively managed funds come to market. Actively managed ETFs give investors transparent access to an experienced manager, but at a lower cost than mutual funds.

Thursday, April 22, 2010

Smart Stops for 04 23 10

As you know one of the ways in which we protect accounts from large declines is to make use of sell stops. Since no one can predict the future and our gut instincts seem to fail us at crucial turning points, it is essential to make use of a safety net of some kind.

Sell stops are essentially lines drawn in the sand. If the share price of one our portfolio holdings drop below a certain price (sell stop) a sell signal will be given. Sell stops should be loosened up during strong market uptrends (helps keep you invested during the normal market fluctuations) and tightened in sideways or declining markets when a change of trend may be imminent.

SmartStops is a service I subscribe to that takes the current trend strength in to consideration when determining effective and productive sell stops and re-entry points.

While Trend Line Analysis (discussed in previous blogs) is still the primary tool we use to guide us, smart stops are an important secondary line of defense.

The chart below shows the smart stops and potential re-entry points for various sector ETFs. Many moderate risk accounts currently hold XLY and XLI. Notice that the health care ETF (XLV) received a SmartStop sell trigger alert today. Had we owned XLV, it would be sold tomorrow.

(Click on chart to enlarge it for easier viewing)


Short-term smart stops are more conservative and do more to limit portfolio volatily, but result in more transactions and whipsaws.

Long-term smart stops are more aggressive and create more portfolio volatility, but result in less transactions and less whipsaws.


What Does Whipsaw Mean?

A condition where a security's price heads in one direction, but then is followed quickly by a movement in the opposite direction. The origins of term is derived from the push and pull action used by lumberjacks to cut wood with a type of saw with the same name.

Investopedia explains Whipsaw

There are two types of whipsaw patterns. The first involves an upward movement in the share price, which is then followed by a drastic downward move, which causes the share's price to fall relative to its original position. The second type involves the share price to drop for a little while, and then suddenly, the price abruptly surges towards positive gains relative to the stock's original position.

04 21 2010 Sector Performance Chart

Below is a chart representing the 9 major industry sectors of the S&P 500.  Each sector is represented by their corresponding ETF.  The chart graphically illustrates the relative performance of these various industry sectors compared the S&P 500 benchmark. This would be a good chart to get a good understanding of because I intend to use it often.

Most moderate risk portfolios currently have positions in XLY (Consumer Discretionary) and XLI (Industrials).

(Click on chart to enlarge it for easier viewing)

If we have money in the market, we want to be invested in the best performing sectors.
Some sectors are riskier that others and will always remain a constraint for more conservative investors.

Tuesday, April 20, 2010

My Meeting with Michael Price

I spent the day with Michael Price of Price Capital Management and about 40 other advisors and investors in Houston this weekend. I have referred to Michael as my mentor in the past. As a manager of six hedge funds totaling over $200,000,000, he is one of the best in my book.

Michael's management style is both pragmatic and adaptive. I asked him if he could give a simple description of his investment style. What he tells his clients is simply that he invests his client’s money the exact same way he invests his own.

The key to Michael’s success is his belief that the much touted buy and hold strategies are to be shunned in favor of an active management style that seeks to reduce risk. He made it very clear that neither he nor his clients will ever ride a bear market down.

Michael believes that volatility is the investor’s enemy. Consequently, he structures his portfolios to minimize risk and to provide consistent performance year after year. So while some investors may brag about huge returns from time to time, the real key is consistency and sustainability over the long run.

I once again got to spend the whole day with Michael as well as having a great dinner with him and his wife and a few of his investors. I definitely feel privileged and appreciate whatever time I can spend with these marvelous people.

Most successful people in the investment community try to keep their investment methods and strategies under lock and key. Michael always shares exactly how he does what he does with his clients and fellow advisors. I ask so many questions of Michael that I sometimes feel embarrassed, but he answers each question with eloquence and generosity.

Sunday, April 18, 2010

Market Comment 04 16 10

On Friday the stock market fell sharply despite good earnings reports from Bank of America, Google, and General Electric. In the afternoon news came out that the SEC is investigating Goldman Sachs for selling subprime instruments without disclosing to their buyers that they had an interest in a hedge fund that was shorting them.

A one day market decline does not make a trend. We will have to wait to see what transpires this coming week to make a judgment as to the extent of damage done to the current uptrend. If support levels for our equity holdings are breached we are prepared to sell.

As the week progresses, the market will reveal it’s true strength or reinforce those that have been skeptical about the underpinnings of this bull market. Either way, we are monitoring the situation and are prepared to act if necessary.

Tuesday, April 13, 2010

Oppenheimer Floating Rate Fund (XOSAX)

If you hold Oppenheimer Floating Rate fund in your account you would have received a tender offer for 25% of your shares. Just disregard this notice. No action is necessary.

This was offered to all Oppenheimer investors, but really only has a benefit for those investors subject to a sales charge. As a client of an investment advisor such as me, you never pay any sales charges, even for funds that charge a load to the general public.

Just discard the notice.

Monday, April 12, 2010

Stocks follow interest rates

Are rising rates bullish or bearish for the stock market?

Those answering bearish may want to consider the chart below. Over the last five years, there appears to be a positive correlation between the 10-Year Treasury Yield ($TNX) and the S&P 500. Both rise and fall together. Also notice that rates led the stock market in July 2007 and December 2008.

Sector Performance Update

The chart below shows the year to date performance of the 9 major sectors making up the S&P 500.  Each sector is represented by their related ETF. Note the outperformance of the consumer discretionary sector (symbol XLY), the industrial sector (XLI), and the financial sector (XLF).

GWM client accounts currently hold XLY, XLI, and KBE which is a banking sub-sector of XLF.

I suggest you study this chart carefully as it will be used on a regular basis.

Last month's issue of The Gerritz Letter included a discussion of our sector rotation strategy. This chart illustrates the benefit of being invested in the best performing sectors.

(Click on chart to enlarge it for easier viewing)

ETF - Exchange-Traded Fund

What Does Exchange-Traded Fund - ETF Mean?

A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.

Investopedia explains Exchange-Traded Fund - ETF

Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does.

By owning an ETF, you get the diversification of an index fund as well as the ability to sell short, buy on margin and purchase as little as one share. Another advantage is that the expense ratios for most ETFs are lower than those of the average mutual fund. When buying and selling ETFs, you have to pay the same commission to your broker that you'd pay on any regular order.

One of the most widely known ETFs is called the Spider (SPDR), which tracks the S&P 500 index and trades under the symbol SPY.

Sunday, April 11, 2010

Market Week in Revue

The market closed out the week higher despite a mid week pullback. Bulls continue to buy any weakness, and what looked like the beginning of another pullback quickly vanished. The markets have been on a tear since February and have remained well above their 20 and 50-day moving averages the entire time. In fact, the market indexes have not closed under their 10-day moving averages for several weeks. Despite the strength, there are some cracks starting to show, so a little caution is called for moving forward. While a bearish stance would not be appropriate considering the price action over the past year, now would not be a prudent time to be chasing the market higher. After the market digests some of these gains I will look to add to positions on weakness.

(Click on chart to enlarge it for easier viewing)


What Does Pullback Mean?

A falling back of a price from its peak. This type of price movement might be seen as a brief reversal of the prevailing upward trend, signaling a slight pause in upward momentum.

Investopedia explains Pullback

Often pullbacks are seen as buying opportunities after a security has had a large upward price movement. It is important, however, to analyze closely any pullback as it may be a sign of a definite trend reversal or a slight pause in the upward trend, each having very different trading implications.

Moving Average - MA

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.

Investopedia explains Moving Average - MA

Moving averages are used to emphasize the direction of a trend and to smooth out price and volume fluctuations, or "noise", that can confuse interpretation. Typically, upward momentum is confirmed when a short-term average (e.g.15-day) crosses above a longer-term average (e.g. 50-day). Downward momentum is confirmed when a short-term average crosses below a long-term average.

Thursday, April 8, 2010

Up Trends have Up Legs and Down Legs

The market has been in a low volatility uptrend. The market, however, never goes straight up; rather it has up legs and down legs.

An Up trend is defined as a series of higher highs and higher lows.

The recent uptrend will not last forever. At some point we will have a reversal and a down trend will develop. For the moment the uptrend remains intact.

Thursday, April 1, 2010

The Gerritz Letter

The April 01, 2010 issue of The Gerritz Letter has been published. It should be in your email inbox now. If you do not see it, check your junk or spam mail folder and mark it as not junk mail.

Click the following link to have a free copy
of The Gerritz Letter delivered to your email inbox monthly.

The Gerritz Letter