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.

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.

http://www.youtube.com/watch?v=uZRpngZRU9M

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.

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.

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)

note:

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.



Whipsaw


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.
       

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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.

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.