Monday, January 31, 2011


All I can say

With stock futures down all weekend long, the world stock markets today acted as if there was no current and/or future turmoil in the world.

Friday, January 28, 2011

Mama Said There Would Be Days Like This ..

Well, Momma actually did not say that regarding investing, but yours truly did.

The eruption in Eygpt is a prime example that on given given day, "The investment climate can suffer an earthquake."

Almost on cue after two months of a huge stock market run up, I have had a number of clients question my current defensive stance in our portfolios with their money. Hey, don't get me wrong, it's their money and a very legitimate question. That said, having been doing this for 26 years, I understand the cycles of investing and more importantly, how what's going on in the world can heavily influence our collective grey matter!

My response to clients has been as follows:

  1. I believe the stock market to be overvalued.
  2. I believe that a stock market can remain overvalued for longer than it should.
  3. The longer a market that is already overvalued moves in a further overvalued condition, the greater the future cardiac arrest (2000-2002 and 2008-2009).
  4. The U.S. stock market has been fueled by government stimulus, not fundamentals.
There are multiple risks on a worldwide basis that could take the stock market down 20-40%.

I do NOT have a crystal ball.

It is like walking by a house each week that seems to have lots of people in it, having a great party. It is normal human behavior to feel like you are missing out on the fun.
  • It is a great party, until the music stops and there are not enough "safety seats" for the majority of the people in the room.
  • I want my clients to have a safety seat!
I have dedicated an extensive area of my company's website (, click on WFG Advocacy) to the topic of behavioral finance. Lots of great articles, with tons of empirical data suggesting that our brains have been wired since the stone ages to have a two position on/off switch between greed and fear. That's it, no five-position dial.

The single greatest role a professional financial advisor plays is assisting their clients in finding the "middle switch position." That is hard to find on their own.

A day like today was not a matter of if, but more a matter of when. That said, who knows what will happen beyond today. Just so we are clear, no one knows. I repeat, no one knows. If you think you know, or a friend tells you they think they know, well, think again. These are the facts!

What You Should Do

The best course of action remains as follows:

  1. Do not be an "extreme" investor. This means sitting all in cash because you believe the sky is falling. It never works.
  2. As important, walking into the party at 1 a.m. and getting more into stocks when they are overvalued has proven equally as costly.
  3. The prudent, proper, experienced, appropriate, yet often very hard, thing to do is continue to allow a professional investment advisor who operates from a contrarian investment philosophy to keep you well diversified across an ever dizzying array of investment choices.
My investment approach changed as a result of the "sea change" in the world economy that started in 2008. We are now about "making it and keeping it" and less about "making more and then losing it."
  • In baseball terms, singles and doubles win ball games over time, not home run swinging.
  • In real estate terms, we are about "owning" lower, reliable, more consistent returns vs. "renting" higher, unreliable, inconsistent returns.

Thursday, January 06, 2011

More Examples of Fund Managers Who Fail To Invest In The Funds They Manage

Article From MorningstarA version of this article appeared in the November 2010 issue of Morningstar FundInvestor. Greg Carlson is a mutual fund analyst with Morningstar.

Morningstar has conducted multiple studies demonstrating that the majority of mutual fund managers don't invest heavily in the funds they manage.

  • Morningstar strongly believes that a significant level of ownership better aligns managers' interests with those of shareholders. Let's take a closer look at some funds in this situation.
Managers Micro-Cap MMCFX 
None of the managers at any of the four subadvisors who divvy up the fund's assets own a single share of it, according to its most recent Statement of Additional Information. One of those subadvisors came on board in December 2009, and portfolio managers' holdings in the fund were last disclosed as of October 2009. But the 11 managers from the other subadvisors have all worked on the fund since December 2007, so they've had time to build up stakes in it. They simply haven't.

While it's true that subadvisors are less likely to invest in funds they run, that's no excuse. There are a number of subadvisors who own hefty stakes in their charges, such as Jim Barrow of Vanguard Windsor II VWNFX, and Bill D'Alonzo, David Herro, and Dick Weiss of the Masters' Select funds.

Wasatch Ultra Growth WAMCX 
Manager Ajay Krishnan had between $100,001 and $500,000 invested in the fund at the end of 2009. That's not a small amount on an absolute basis, particularly for a small-cap fund. But given his 16-year tenure at Wasatch, including 10 years as manager of this fund, and the firm's intense focus on smaller companies, it's fair to expect a larger commitment. It would make the fund's expense ratio a bit easier to swallow.

Putnam Multi-Cap Growth PNOPX and Putnam Growth Opportunities POGAX 
These large-growth funds are both on the pricey side. Both funds are run by the same manager, Robert Brookby. He's steered the smaller Growth Opportunities since January 2009, and after a solid start there, he was tapped to take over the $3.5 billion Multi-Cap Growth in April 2010. As of Growth Opportunities' November 2009 Statement of Additional Information, he had between $100,001 and $500,000 invested in its shares. Not bad, but given the fund's aims to be a core holding and Brookby's five years as a portfolio manager, we hope to see a bigger stake in the future.

AllianceBernstein Growth AGRFX 
As of July 31, 2010, William Baird (who's served on the fund since late 2006) had between $100,001 and $500,000 stashed in the fund, while Vadim Zlotnikov had between $50,0001 and $100,000 invested in its shares. Meanwhile, Frank Caruso didn't own a single share of the fund. Amy Raskin joined as a fourth manager in November 2010 on the date of the fund's last SAI.

Investing Lesson
Only invest in investments that the financial advisor you work with has a substantial stake and commitment in. I am the largest shareholder in the no load mutual fund that I manage for WFG's clients. This is called "eating your own cooking."

Wednesday, January 05, 2011

Bullish Sentiment Indicators Reach High

Late December of 2010, surveys of bullish sentiment from Investors Intelligence (II) and the American Association of Individual Investors (AAII) showed the ninth highest combined reading since 1987, and it was the sixth period ever where the combined reading was above 120%.

One place where the holiday spirit is not in short supply is the equity market.

Investing Lesson
Be wary of all the "good news"and "good feelings" as we enter 2011.

Tuesday, January 04, 2011

Can You Trust The "January Effect?"

The information below comes courtesy of, Technical Forecast (TF) email to WFG, January 2, 2011.

According to the Stock Trader’s Almanac, the January barometer has a 90% accuracy ratio since 1950. The premise of the January Barometer is simple: As January goes, so goes the year.

The December 19 TF featured charts of the S&P’s performance in January 2007, 2008 and 2009, all of which were down months. However, over the past three years a new pattern has emerged. Year-end euphoria has culminated into sentiment extremes and January sell-offs.
  • Therefore, the January barometer has proved correct only five times over the past decade, a 50% accuracy ratio.
January 2001 was an up month, but the year ended down. January 2003 and 2005 were down months, but the years ended up. And of course, January 2009 and 2010 were down 8.6% and 3.7% but finished the year strong with returns of 23.5% and 12.6%.

As discussed over the past several weeks, sentiment extremes point towards a January correction and a down month. A down January, however, would contradict another high probability seasonality, the Presidential Election Year Cycle, for example. A pre-election year, such as 2011, sports the best historical performance of the four-year cycle. In fact, the last pre-election year loss was recorded in 1939 (Dow down 2.9%). The last significant pre-election year loss occurred in 1931, during the Great Depression.

The pre-election year performance pop is credited to each administration's efforts to pump up the economy (or at least the stock market) to finish strong and persuade voters to re-elect whoever is in office.
  • However, this time around much money has been pumped into the economy before the pre-election year (bailouts, low interest rates, QE1 and QE2). There is a chance that this premature shot of liquidity alters the cycle and mortgaged the market’s otherwise rosy future.
Investing Lesson
Past performance has proven to be a unreliable indicator of future results!

Still Like Gold, But.....

It has been decades since it first came out but Sean Connery as James Bond in the movie classic, Goldfinger, is back in vogue. When gold shows up on the front page of the New York Times, you know that a lot of the news is in the price (see TV ads running 24/7 and radio). We remain big fans of the yellow metal and still see potential for $2-3,000 an ounce over the next decade, as its hedging properties against the integrity of the global financial system will likely remain intact.

The reality is that gold has made such a continual upward move over the past several years that speculative fervor is evident, and the fact that gold is now a front-page story makes it susceptible to near-term pull-backs. Nonetheless, it can correct all the way down to $1,200 per ounce without violating any long-term trendline.

As in 2006-2008, when real estate schemes were all the rage, investors need to be careful when any asset class receives so much attention that your cab driver is talking it up. We will continue to add to the precious metals area at opportune times during 2011.

Monday, January 03, 2011

Europe's Slump = USA Slump = What Should We Do?

Firms Hurting as Europe Slumps
Wall Street Journal


Multinational companies in a range of industries are seeing slowdowns in Europe and bracing for what could be many months of weakness.

Companies in the technology and health-care fields are under pressure from government efforts in Europe to cut costs, while consumer-goods makers have to contend with sluggishness in nations including Spain, Ireland and Greece. They are responding, in some cases, by cutting jobs and investments, steps that will themselves weigh on Europe's economic climate.

"There will be less people working, less people paying taxes, which will weigh further on government finances—all of this is linked to weakening economic growth," said Media Eghbal, a Western Europe analyst for market-research firm Euromonitor International Inc.

The euro-zone's economic growth slowed sharply in the third quarter, as business investment stalled, signaling that companies aren't confident enough to commit more capital. Spain's economy stagnated, and Greece's contracted. Pressure to cut public-sector spending is rising as government debt climbs.

"Central government budgets in many of the countries in Europe are being reduced dramatically," a spokesperson for Cisco said in a conference call with analysts. That factor, among others, led Cisco, which makes routers and switches that connect computers to the Internet and each other, to announce a weaker-than-expected sales forecast, sending its stock price tumbling over the past quarter.

OPINION-What Needs to Happen, But Most Likely Will Not (Jerry Wade)
Unless the U.S. does the right thing (start balancing the budget), which our elected officials have shown a clear lack of guts to do thus far, we will likely relapse into recession. In my opinion, we have never really left the current recession. What needs to happen as soon as possible in America is the following:

  • American households modify their lifestyles in such a way that they achieve positive vs. negative cash flow.

  • American households modify their lifestyles in such a way that they quit spending from investments while still working and instead, start saving more for retirement..

  • Federal Government makes the hard changes necessary to achieve positive vs. negative cash flow.

  • State Governments makes the hard changes necessary to achieve positive vs. negative cash flow.

  • Pension plans are restructured to provide lower current and future payouts, or risk running out of many for all current and future retirees.

  • Social Security restructured to provide lower current and future payouts, or risk running out of money for all current and future retirees.

  • Labor Union Benefit packages for millions of employees are restructured to provide lower current and future payouts, or risk running out of money for all current and future retirees.

  • And yes, higher taxes, for a limited period of time, for all who earn an income.

The impasse we have seen thus far is the Republicans want to cut expenses and not raise taxes. The Democrats want to raise taxes and spend more money. The labor unions do not want any changes; pension plans are inept thus far at seeing that they have a problem; and the folks currently on Social Security and future recipients want nothing to do with any cuts.

Without shared sacrifice, across all the above groups,
the good old U. S. of A. will experience further financial collapse.

Investing Lesson
At this point in time, it is prudent to err on the side of safety vs. taking too much investment risk.