Posted on Monday, July 12, 2010 - by Henry Walter
July 2010 Round-up
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.


1. CHARTS THAT TELL A STORY
Our first chart shows the performance of the S&P 500 Index during the first half of 2010. As you can see, since the high in late April, the index fell about 15% by the end of June, so the second quarter was a washout, but thus far the decline is a correction not a bear market. The third quarter started off with a bang. In the first week of July the S&P 500 gained more than 5%, its strongest performance in nearly a year, enough to swing investors’ mood from glum to cautiously optimistic.




2. CHARTS THAT TELL A STORY
Next is a longer term chart of the S&P 500 Index plotted on a monthly basis. Superimposed on the price bars is a 10-month simple moving average. We discussed this in detail in the June issue so suffice to say based on history, the fact that the index is below the moving average line is not encouraging. Investors are starting to consider the possibility that the market is sliding into a double dip, and wondering whether we are in a deflationary or inflationary environment, and what new taxes will be imposed in 2011 and beyond. In spite of all the issues, or perhaps because of them, the market appears reasonably priced. According to Jaqueline Doherty writing The Trader this week in Barron’s, the S&P 500 is priced at about 12 times expected earnings versus a long-term average of 14. The key word is “expected”. (Barron’s, July 12, 2010, page M3).




3. CHARTS THAT TELL A STORY
Most shorter-term interest rates are based on the Federal Funds rate shown below, which is currently 0 to 0.25%. The fact that U.S. rates remain at historic lows indicates that the economy remains extremely fragile and that the Fed is worried about the recovery. The low rates also play havoc with the plans of retirees and others who depend on such vehicles as Treasuries, money market funds and CDs for income.

Historical Graph - Below is a graph of the Federal Funds Rate from 1955 to 2010.




4. CHARTS THAT TELL A STORY
This next chart is one we should all be worried about. It shows people employed in manufacturing, mining, logging and construction versus jobs for federal, state and local government including teachers. This trend isn’t good.




5. CHARTS THAT TELL A STORY
Our final chart is of the Shanghai Stock Exchange Composite Index courtesy of StockCharts.com through July 9, 2010. The index is down 25% from the July 2009 high and is therefore classified as being in a bear market. And it is off substantially more from its high in 2008. We are following this closely because we think China and Asia will be where the growth will be in the next decade, but before we add to our holdings we’d like to see some evidence of a turn. Currently the Chinese government is trying to cool down the economy and when they reverse course the market should rebound, unless we have a worldwide depression. There are over 100 large Chinese companies listed on the New York Stock Exchange, and there are a number of ETFs if you prefer that route. The most liquid ETF right now is FXI, ishares FTSE/XINHUE China 25 Index, which trades over 20 million shares a day.




6. PREPARING FOR THE NEXT BIG ONE
Stock market corrections and bear markets are inevitable. The table below shows the frequency of various types of declines. (The table does not include the 8 or 9% decline in early 2010 or the 15% decline currently underway.) For example, the average frequency of bear markets, defined as declines of 20% or more, is about once every 3 ½ years. Based on this data we like to hold some cash reserves so we can take advantage of opportunities that occur when markets decline. For some reason, many investors remain fully invested all the time and therefore have no funds available when their favorite stocks become priced at bargain levels.




7. IS A ROTH IRA SAFE FROM TAXES?
All taxpayers are now eligible to switch from a regular IRA to a Roth IRA (and pay the one time tax) because the income limit of $100,000 was permanently repealed. Many have already done so: Fidelity Investments says that as of May 31, the firm had handled 87,000 Roth conversions this year, about four times the number for the same period last year. But some investors are afraid of a congressional double-cross.

Laura Saunders, who writes the Tax Report for the Wall Street Journal, recently tackled this question (WSJ, June 19-20, 2010, page B9).

Ms. Saunders quotes Professor Michael Graetz of Columbia University, a former top tax official at the Treasury Department, who thinks it is unlikely that lawmakers would enact a wholesale levy on Roth assets. “That would be like taxing a salary twice,” he says. “Congress has never done this, and there is no reason to expect it will.”

The bottom line: Roth benefits can be real, while cutbacks might not come for years, if at all; meanwhile, tax rates are rising for those at the top. Wary taxpayers who stand to benefit from a conversion but don’t want to be vulnerable to changes might want to do a series of partial conversions instead of one large one.

Aware of the risks, Prof. Graetz himself feels comfortable making a partial Roth conversion this year, and he says many of his colleagues in the tax world are doing the same.

To read the full article Google Is a Roth IRA Safe From Taxes?

High Falls Advisors is planning a series of seminars on the Roth conversion. For details contact your advisor or HFA.


8. BOND FUNDS
If you are heavily into bond funds or thinking of moving money into bond funds, you may want to read the article in today’s Barron’s (July 12, 2010, page L4) with the title Beware Bond Funds – When interest rates finally rise, bond-fund holders will get slammed – far worse than owners of individual bonds.

For questions or additional information on this blog entry, please contact us.

Posted on Thursday, June 24, 2010 - by Henry Walter
Leading Economic Indicators
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.


Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future.

Many of the economists forecasting the economy are hardly independent. They are paid to bring business to their firms and enhance the reputation of the firm and themselves. Sometimes they are right, but often wrong especially at inflection points.

One of the best leading indicators is the Weekly Leading Indicator (WLI) from the Economic Cycle Research Institute (ECRI) because it has a good, though not perfect, track record, and results are published weekly. The Conference Board’s Leading Economic Index (LEI) is published monthly and therefore is not as sensitive to change as the weekly index. ECRI is an independent institute dedicated to economic cycle research in the tradition of its founder, the late Geoffrey H. Moore.

The chart below shows the growth rate of the ECRI’s Weekly Leading Index through June 7, 2010.



Note that as early as mid-2007, the index predicted trouble ahead, and sure enough the S&P 500 collapsed in 2008. Then in late 2008 the index anticipated better times and on March 9, 2009, the market lifted off and staged a roughly 70% rally for the rest of the year and so far into April 2010. With that kind of record it is no wonder that investors are becoming concerned about the recent performance of the WLI and what it portends going forward.

As Randall W. Forsyth points out in Barron’s Up & Down Wall Street (Barron’s, June 21, 2010, page 6) the WLI is down sharply for the past six weeks, although ECRI director Lakshman Acuthan says the slide hasn’t been sustained long enough to signal “an imminent recession,” hardly a ringing vote of confidence.

It seems to us that it would be a good idea for all of us to keep an eye on this indicator until things settle down.

Sources:
The Sub-Zero Economy, Mike Burnick, Weiss Advice
Barron’s (see above)

For questions or additional information on this blog entry, please contact us.

Posted on Friday, June 18, 2010 - by Henry Walter
June 2010 Round-up
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.


1. WHAT AILS THE MARKET?
We think that Alan Abelson’s explanation in this week’s Barron’s article “Bracing for the Fallout” (June 5, 2010, page 6) is as good as any. But if you don’t like his, there are plenty of other choices in the media.

He first asks what happened to that Wall of Worry that provided rock-solid assurances that the market had plenty of room on the upside. These days, it’s conspicuous by its absence.

He then points out that there is plenty to worry about besides the oil spill in the Gulf of Mexico: “The Middle East, the euro, Hungary, China’s real estate bubble, Korea, Iran, softening retail sales, the cloudy outlook for housing, the parlous condition of state finances, intimations that even Uncle Sam the Munificent is toying with the alarming idea of exercising some fiscal restraint – and that is by no means the whole roster of rue.”

“And it’s no great mystery why. Gradually but inexorably, investors are starting to realize that their great expectations for the economy that propelled the indexes 80% higher from the lows of early 2009 are not due to be realized anytime soon. In other words, what’s really ailing the market is a strong whiff of reality – for which, it grieves us to say, there’s no quick cure.”


2. STAYING ON THE RIGHT SIDE OF THE MARKET
Our first chart, courtesy of BigCharts.com, is a long-term plot of the S&P 500 that we showed on a regular basis in the discontinued S.I.P. ADVISER. It is a monthly chart, and superimposed on the price bar (open, high, lo, close) is a 10-month simple moving average line, roughly equivalent to a 300-day moving average. Note that in December 2007, the close on the price bar fell below the moving average and stayed there until June 2009, a good time to be out of the market. Recently, both in May and June thus far, the close is below the moving average. The market is extremely volatile and June’s closing could well be above the moving average line, so think of this as a yellow flag calling for a more cautious approach to the market, but it’s something worth paying attention to.




3. WATCH THE TED SPREAD
Shown below is the TED Spread for the last 12 months (as of June 7, 2010) courtesy of the Bespoke Investment Group (www.bespokeinvest.com ). The vertical scale is in basis points (bps). A basis point is 1/100th of a percentage point. The TED spread measures the difference between the three-month T-bill interest rate and three-month LIBOR, the London Interbank Offered Rate. When the spread is high it is indicative of a higher level of risk in the credit markets. As you can see the spread is higher (39) than it was two months ago (13) but is nowhere near the highs of the credit crisis (450). But it is worth watching for early signs of a renewed credit crisis.




4. CHINA IN A BEAR MARKET
If one defines a bear market as one with a greater than 20% decline, China is in one now as shown in the chart below of the Shanghai Composite Index, courtesy StockCharts.com



The index is off almost 60% from its October 2007 high and about 27% off its July 2009 high. Medium-term we are bullish on China and we have FXI, a very liquid ETF, on our watch list (see topic #8). Here is a funny story from someone who was in Beijing recently checking out investment opportunities. “I was in antique store, negotiating for this antique knife. I was about to make the deal when the guy looked at my Rolex watch and offered to exchange it for the knife. I was ready to do it, but I knew my Rolex was a fake, and I didn’t want to take advantage of this guy. So I told him I didn’t want to trick him and that the watch was a fake. He said to me, ‘That’s OK, this knife is fake too.’ “


5. ENERGY COMPANIES CONNECTED TO THE OIL SPILL
On May 21 we posted an Update on Energy pointing out that as a result of the tragic Deepwater Horizon disaster, prices of oil are probably headed higher, unless we have a full-blown depression.

Russ Britt, writing for MarketWatch (www.marketwatch.com) “Spill Takes a Big Bite Out of Energy Shares” on June 1, 2010, listed the companies most connected to the spill. Here they are.

Key companies: BP, APC, RIG, HAL, CAM.
Some connection: BHI, SLB, XOM, CVX, RDS.A
Other stocks with exposure: DIA, WFT, NE, ESV, RDC, NOV.

This list is purely for information purposes. We are not suggesting buying or selling any of these companies’ shares. That is a decision you and your financial advisor need to make. At some point in time share prices will bottom and become attractive investments. What that point is we have no idea.

In case you are concerned that the demand for oil will slacken, here’s a photo of traffic on a Chinese turnpike. Each of those cars uses gasoline which comes from oil. And auto sales in Asia are still booming.




6. WHY DIVIDENDS ARE IMPORTANT
Ned Davis Research, a well-respected investment research firm, recently updated their analysis of dividend-paying and non-dividend paying stocks in the S&P 500. The source of the data is Ned Davis Research via Oppenheimer Funds. The chart below is a little hard to read but the bottom line is that dividend growers have outperformed over time.




7. IT IS OUR PROBLEM, NOT OUR GRANDCHILDREN'S
The Ira Sohn Investment Research Conference Foundation was founded in 1995 after the untimely passing of Ira Sohn. Sohn was a successful trader on Wall Street who battled cancer and passed away at the age of 29. His courageous battle with cancer inspired his colleagues and friends to launch the annual Ira Sohn Research Conference, the proceeds from which support the treatment and care of pediatric cancer and other childhood diseases. The conference brings together top tier professionals in the financial industry, many of whom do not normally share their insights in any public forum. Here is a partial list of presenters at the 2010 conference held in May:Niall Ferguson, Jeremy Grantham, Seth Klarman, David Einhorn and Sam Zell. (www.irasohnconference.com).

The reason we mention this is to share with readers the first paragraph of David Einhorn presentation. “I have titled today’s talk Good News for the Grandchildren. By that, I mean that I do not believe that there is a need to worry that today’s debts will be passed on to our current youth . . . I believe the government response to the recession has created budgetary stress sufficient to bring about the crisis much sooner. Our generation – not our grandchildren’s – will have to deal with the consequences. If we do one thing, let’s stop bemoaning the fate of our grandchildren on this topic. We might take the issue more seriously if we realize that our own future is at risk.” Amen.


8. VOLATALITY = OPPORTUNITY
The current market decline and increased volatility spells opportunity. That’s when your watch list comes in handy. Usually when we bring this up investors agree but complain they have no money, i.e., they were fully invested at the top. It might be a good idea to keep some cash reserves for the opportunities that come along on a fairly regular basis.


9. GOLD IS IN THE NEWS
Gold is very much in the news. We are planning to post an article on gold investing in the near future. The chart below is courtesy of www.kitco.com as of June 1,2010.

For questions or additional information on this blog entry, please contact us.