Let's Get Back to Reality

Here we are, end of the year again.  If you had a properly diversified portfolio, you have done well.  Despite all of the fears and concerns, bonds are up, stocks are up, gold is up, everything is up!

But of course, if you are well-versed in the markets, all boats do not float in the same direction as a rule.  We diversify so that we get a blend of returns, expecting some asset classes to decline while others rise.  In fact, many depend on that $3,000 capital gains loss exclusion to help our taxes along some.  When all asset classes are rising, then you need to really be on guard.  When sentiment changes, you will experience losses in all classes as well. This is not good.  This is why financial planners encourage diversification.

As a fee-only financial planner, I insist on doing an analysis of the client's financial life before I do anything else.  To try to "make as much money as I can" is not compatible with financial planning.  You automatically disregard risk and disregard the probability that you will achieve your long-term financial goals.  Like Vegas, the market will always find a way to take your money.

WHAT SHOULD I BE DOING?

The end of the year is at hand.  At the very least, one needs to REBALANCE the portfolio.   If you have nice gains in one asset class, take something off the table and put it in a class that has underperformed.  Right now, the only class that may be underperforming is Real Estate.

Do the basic things that you need to be doing.  But more importantly, do a financial plan.  Why?

BENEFITS OF A FINANCIAL PLAN

When I do a financial plan, I learn what the client's goals are.  Then, we generate financial projections to see whether or not the client can achieve their financial goals.  Oftentime, they can do it by adding a small sum to their savings and achieving a required rate of return.  Should it be any different?  Why would an individual take on more risk than he or she can survive on?  Run yourself like a corporation. Try to get a required rate of return on your investments.

The financial plan will show you what you need to earn each year to achieve your goals.  Why take extra risk when you don't need to?  You don't need to put all of your money into your retirement or other goal seeking accounts.  You can put excess funds into futures or other high-risk investments if you choose.  But why take a chance with your retirement money?

Financial planning helps you to establish your needs.  Learn what you need to earn to achieve your goals, then develop an investment strategy to earn what you need with the least amount of risk.

Are We Starting to Get Back to Reality?

Retail Sales Rise, Rates Surge

Are we finally breaking out from a multi-year low?  Rates have been manipulated by government and Federal Reserve actions for more than a decade now.  Have we finally reached a bottom?

It seems that we are in an intermediate term move higher.  Time to be long interest rates - short goverment bonds.

The long term stock market prognosis remains negative however.  Should the stock market turn south, the flight to quality will again push interest rates lower, perhaps down to test the 2% level on the 10 year.  One can never predict with certainty.

Rates have been historically low, even though the credit quality of the US Government is suspect at best.  I have been short bonds now for more than a year, primarily using TBT for most clients, futures for more aggressive clients.  We are certain to again test 4% and I believe, break through with a vengence.

The last time we tested 4%, we broke though but then sold off with a vengence.  It must have been a Fed target rate which caused them to buy Treasuries aggressively.  Rates plummeted to 2.4% from 4.1%.  What incredible volatility we have witnessed in rates (10 year).  But markets are interesting in that they test support and resistance level, then do what is required to bust through.

We did not break new levels on the low end and have established credible support.  10 year rates will now blow though 4%.  It's the Trendsetter Slingshot Effect.  They pull levels down lower and when the rubber band is released, it pushes prices (rates in this case) through tough resistance.

I hope for some backing and filling here.  Building a channel would be nice, But I'd say it's time to be aggressively short on Treasuries.  Sell bonds.

What effect will sharply rising rates have on stocks?  Write me at gary@assetdesigncenter.com to get my next stock report.

Rates Will Never Go Up Again!

Rates are breaking lower, dropping below 2.85% on the ten-year basis. As the chart above shows, the recent levels were holding but a break through now shows that we can expect the 10-year rates to test the 2.0% level.

The stock market continues to remain at relatively high levels even though interest rates, another barometer of the economy, languishes at lows, continually making new lows.

As long as the Fed keeps rates down to zero, the bank arbitrage between the cost of money 0% and guaranteed income Treasuries will continue. It now becomes a no-brainer that rates will continue to fall and we will drift into the dreaded DEFLATION!!!!

I reviewed my notes from 4 years ago and the economy was weak, unemployment was rising and interest rates were falling. We were coming off of 5% on the 10-year. What a bond market rally! It is the mother of all bubbles. I guess you've got to be long the bond market. There is little hope for our economy at this point, not until we have a new administration.

Will we get to the point when the dollar is so devalued that interest rates will have to rise? On no, at that point, the Federal Reserve will step in and buy the Treasuries.

One thing for sure, if the interest rates ever do rise, it will probably cause another economic disaster for the banks as well as countries that continue to pour into Treasuries at miniscule rates. When are we ever going to get our economy together? Is there any hope???

Should Stock Averages Be So High?

I often like to compare the 10 year treasury rate to the SPX or other major index to see if things are flowing as they should. I've long believed that rates and stock averages should be correlated as a strengthening economy lifts not only stocks but the demand for money. Thus interest rates. But this is not what we have been seeing.

Rates on the 10-year treasury topped out in April after breaking through the 4% level. The surge was short-lived and for the next three months, rates have dropped hard. First it was the European crisis that caused a "flight to quality" and a run on Treasury securities, pushing rates lower. But since then we have seen the Euro currency trade back up to 130 against the dollar from 119, nearly a 10% jump. Yet interest rates have hardly budged to the upside.

I first started observing this correlation back in 2005 and noted in a different blog how the two were sorely out of line. When stocks crashed though, the SPX came back down to meet the TYX 10 year rate! Again, we see quite a divergence in pathways. Again, is the rate chart reflecting the true reality of the market? Is the world-wide treasury market a more convincing indicator of what is truly going on? Or should we buy into stocks, that rally without much conviction in terms of volume?

I suppose that it's best to be short both the Treasury Market as well as the Stock market. At some point, these two chartlines will again meet up, either by the falling stock market, dropping to meet the low level of rates, or with rates rallying (and Treasuries selling off) to meet the higher stock market average. Or will it be a combination of both?

In either case, such a divergence will probably render the traditional stock/bond diversification methods null and void. With Treasuries already so high, yielding a scant 3% on the 10-year, how much more can they rally should the stock market again collapse? Will we wind up like Japan? with low rates and no growth? This can't last much longer. Which market will give it up the most? I don't know. I remain short, more so the treasuries than the stocks, but none-the-less, I have little confidence in either market.

Basic Material Stock Stats tell the Story

Generally, at the beginning of the year, I design a number of investment portfolios; some geared for $100,000 portfolios and others for $1,000,000. Although I am a technician by trade, when looking at stocks that I want to discuss here, or refer to those interested, I have to know my stuff, and that means looking at the fundamentals.

I have to admit, that I did not design stock portfolios this year and the reason is, I was unable to find high quality stocks that presented any kind of value. Just take a look at the table above. The stocks represented here are industry leaders! All members of the Basic Materials sector. PE's are high! Very high. The stocks are now awaiting the economy to catch up and provide the earnings to justify high prices. Perhaps Transocean (RIG) is the only "cheap" stock in the group, despite having gained more than 10% in as many days this year. RIG continues to advance today, up another 1% as I write.

BASIC MATERIALS are not the only "expensive" stocks. Virtually every industry I reviewed in every sector looked the same. But prices continue to rise and a review of momentum across sectors and countries show that stocks are still headed higher. But this could be and probably is, a trap. There are other ways to make money than to bet on the direction of a stock or market. In uncertain markets such as this, I like trading the volatility by selling options. I generally stay far out of the money so that if the underlying instrument does go through my limit, I wind up buying or selling something at an extremely advantageous price. Most of the time, I am making sure that volatility is declining and as a result, options expire worthless.

If you are interested in seeing some actual trades, move on to Current Options Trades to see what I am up to.

Slow and Steady ALWAYS Wins the Race

The Case-Schiller Real Estate Index data for August was revealed today showing that for the third straight month, real estate values across the country rose. Those in Minneapolis can rejoice with a 3.3% rise in prices while on average, prices across a 20 city range rose just 1.2%. One must also keep in perspective the level of supply held by banks that has yet to reach the marketplace and first time buyers were helped along with a potential $8,000 tax incentive.

While I remain skeptical on the numbers, it is clear that real estate has outperformed the stock market by a large amount over the past ten years. While I was in California as a financial planning director for a large organization, real estate was an integral component of our financial planning advice. Clearly, accumulating wealth in California required a component in real estate, not only for the nearly 7% average annual gain the market was achieving there but also for the tax breaks that clients were able to take advantage of.

Can you imagine the advice of cutting back on your 401(k) investment to buy a bigger piece of real estate? Well, it made sense. If you think through things logically, while you do get some level of tax reduction from contributions to your 401(k), you also get tax breaks from mortgage interest and real estate taxes when you invest in a home. When you retire, for many of us, the kids are now gone and we don't need so much house. What a great time to downsize. The good news is that when you sell your principle residence and achieve a gain, up to $500,000 of the gain can be tax-exempt!!!! Try taking $500K out of your 401(k) and get the same results. You will be taxed to the max!

As the chart shows, real estate, even with the huge downdraft it has experienced, has still outperformed stocks across the country over the past 10 years! For those who have constantly claimed that real estate was a bubble and too risky, they have failed to see the overall bubble in stocks as well. Again, who is selling what and to whose advantage????

It's clear from the chart above that real estate has been the better investment over the long term and if you plan carefully, probably can help you in your financial dreams if used appropriately and with the proper planning.

THE LOST DECADE

It's unfortunate though that those who have been saving regularly and following their financial adviser's advice could be down significantly over the past 10 years. $100,000 invested ten years ago (not counting dividends, reallocations, etc) would be worth only $77,296 now where as the average real estate investment of $100,000 would now be worth some $162,300. What a difference, no? Those who did purchase homes and had stocks as well can find some comfort in the overall diversification they held. Those who chose to rent and invest the savings lost!!!

SLOW AND STEADY

But what if someone had a good understanding of all of the tools available in the marketplace and designed their portfolios to achieve an 8%, after-tax, annual return? Holy Mole!!!, One would have more than $220,000 now with just an 8% annual, after-tax return!!!!

WHERE ARE THEY NOW???

I remember in 2002, so many begged me, Gary, can you get me 5% a year? I would be so happy with this kind of return. Sure, they had experienced account devasting 30% annual losses in 2001 and 2002. How quickly they forgot!!! Markets went crazy again, spurred on by goverment and Federal Reserve policies which cause people to think that they deserve 30% annual gains (at a minimum) or else they just aren't playing the game right. It's incredible how many people I talk to in the course of a month and when I ask them, what kind of stock market return would you expect me to achieve for you? I've not heard less than 25% expectations since 2002!

Yet, if you look at mutual funds or other accounts that experience a lot of year-to-year volatility, you will find that they just don't do as well as Slow-And-Steady. A consistent 8%-10% return is not only obtainable with the right strategies, but will enable you to achieve your goals!! If you are in your 50s or 60s and focusing on retiring soon, can you afford to leave your fate to the whims of institutional investors who gyrate the markets? Can you compete now with the billions of shares traded daily, pushing the market to and fro? Billions go in, billions come out at the mere rumor of news. In the end, we are supposed to ignore the day-to-day fluctuations, but I propose that this is no longer true. YOU MUST BE ACCOUNTABLE and not allow yourself to be at the mercy of a conventional money manager who will allocate you 50-70 percent stocks, 30-40 percent bonds. They are all going to crash as they are all at bubble levels! Real estate too. While it has done well in comparison to stocks, the next downdraft WILL WIPE YOU OUT! if you don't use all of the tools available in the marketplace now.

YOUR CONVENTIONAL MONEY MANAGER CAN'T HELP

No offense to the guy or girl who is recommending the research-proven techniques of asset allocation and diversification. But take it from me. I have been in the market about 35 years now and no system or idea lasts. You must use all of the tools available now. You must at least diversify with real estate and even managed futures if you can but more so, you must use the risk-management derivative tools available in the REGULATED marketplace today to manage your risk. People shy away from derivatives because THEY DON'T UNDERSTAND THEM! Or their friends who might have dabbled in it lost everything!! Derivatives are RISK MANAGEMENT TOOLS!!!! They REDUCE YOUR RISK if used appropriately. They lay off the risk THAT YOU DON"T WANT to those who are more willing to take on high risk.

I propose that it's so easy to make a required rate of return each year that will allow you to achieve your goals. You know, corporatations have a minimum required rate of return that must be expected to achieve in every investment they take on. They pay big bucks for finance managers to understand this stuff and they don't enter into investments without having a good idea that #1, they will achieve their required rate of return, and #2, have a good idea of what other outcomes might occur should they be wrong. I have an MBA from Northwestern in this very specialty so I know how it's supposed to work. Yet when individuals try to manage their financial lives, they fall far short, they have no idea of what they need to achieve, leaving their fate to the whims of the marketplace.

NO MORE

You too can achieve your financial goals just as the corporations do. Doesn't matter how well you are doing in the moment. I know a lot of us are struggling. But what is worse is that most don't even know what they need to be doing. They don't have a clue!!! You know the old cliche, if you were going to take a vacation, how much planning would you do? You research where you want to go and either get a map if you are driving or get plane tickets, etc. You get the hotel, you do all of the planning. But how many people spend even this much time in planning out their end game?

How much money do you need to be earning each year? How much do you need to save? And most importantly, how much do you need to be earning on your assets to achieve your goals? If you are just pouring money into your 401(k) and thinking that you are going to be OK, forget it, you are going to lose. Taxes are going to kill you in the end. You've got to plan it all out and focus on knowing what you need and focusing on your annual rate of return in your investments to get where you need to be.

Who cares if the market is up 30% in the moment. Did you get WHAT YOU NEEDED? What happens if the market drops 50% by the end of the year, did you retain what you needed? All through my blog, I have been comparing the market to Las Vegas. If you are just playing the game, you are going to go home busted and be at the mercy of Social Security (if it even exists down the road). You had better wake up and take responsibility for your financial future. If you think you can do it on your own, best of luck to you. Hate to tell you but this is a big game, just like Texas Hold'em. The players want ALL OF YOUR MONEY. They won't be happy until they have it all. Do you understand the game? Can you compete? Can you keep up with it and also have a full time job? If you can, you are a better person than I. Probably you are in the wrong business and you should be making the 10s of millions a year like some others I know.

But if you are the normal person, you had better focus on your work and your income and leave this other stuff to people who know it well. Not only do the professional FINANCIAL PLANNERS have the ability to find ways for you to reduce fees and taxes as well as improve your budgeting, some of us who know the range of risk management tools can help you not only develop your plan but help you achieve it.

ACCOUNTS OPENING UP FOR 2010

Our focused stock accounts gained 15% by June and now hold just a 1050 SP December call short that will provide us with a 20% annual gain should the SP be below 1050 at the end of December. It's 1067 right now. Our managed interest rate accounts gained 30% by the beginning of June. We are done until January. You too can achieve your required rate of return but do you even know what it is? If you are moving forward without having a comprehensive financial plan that covers your financial position (budget, cash flow, net worth, debt, ..), income taxes, insurance coverage, investments and other areas; chances are high that you are going to fail. Start right, manage your budget, establish a budget. Even if you are a do-it-yourselfer, take the right steps. I will guide you on this path. Those who want to receive the Homework Package to start doing their own financial planning (FOR FREE), be sure to contact me.

I will give it all to you for free if I must. Otherwise, the big bankers and investment houses are going to take it all away from you. You have nothing to lose and more than 30 years of my experience to gain. I invite you to write if you wish. Otherwise, the homework package to you is free and I will deliver it to you if you are on my list.

All the best and good luck for the end of the year. If you want to achieve your goals, be sure to write and I will show you how you can do it!

Rates, Stocks, Dollar Surge!

Stocks and bonds surged this morning as the long awaited non-farms payroll data for May was released. Results were more positive than expected at a minus 345,000. If the job numbers continue to improve at this rate, by the end of the year, the economy and job picture should be roaring. I had better get my resume polished up!;->

Interest rates especially surged across the board with 2 year rates rising to 1.19% and 10 year rates approaching 4%. Many fear that the spread between these two rates indicates that there is significant inflation ahead however the Fed Chairman Ben Bernanke assured us this week in his testimony before Congress that he is up to the task of preventing inflation. For this to occur though, a significant tightening of the money supply must begin now. And even though the jobs number strengthened over recent months, how will the automotive bankruptcies affect the job numbers in the future? How will the higher interest rates affect individual's ability to manage their budgets as credit card rates continue to advance, mortgage rates soar and capital becomes less and less available.

S&P 500 is breaking out from a significant base. There has been no retracement and test of the lows. Soon, it appears that the markets will be back to where they were prior to the big selloff. Advocates of the buy and hold strategy will rejoice. It doesn't matter what the economic fundamentals indicate. It doesn't matter that still millions and millions are jobless and many more continue to lose their homes. This is a capitalistic society, not socialistic. It doesn't really matter about the common people. It's all about capital. The Fed has injected trillions more dollars into the system expanding the game even more. With all these chips on the table, those holding the chips are making bigger and riskier bets.

Obama says that he is going to eliminate the wild fluctuations in the market, but I've got to tell you, before the jobs report was released, I felt as if I were in Las Vegas or waiting for a lottery drawing. Did I bet right? Do I hold a winning number? S&P futures soared nearly 20 points on the news. The S&P mini contract which allows you to take advantage of the index movement times 50 at a margin requirement of about 6,000, moved nearly 20 points! This is a quick $1,000 return on a $6,000 bet! Not bad. The ten year future play did even better.

The ten year note future plunged a full point on the news. This is also worth $1,000profit if you bet right. You only need to put up $3,000! Hey I love it. I'm a player but this is how it is now. This is truly a casino and anyone who looks at it any differently, well, I guess that's what makes it a market.

Another Vote of Confidence

Federal Reserve Chairman Ben Bernanke told Congress Tuesday the three-year U.S. housing bust may be near a bottom and that he expected the recession to end this year barring a relapse of the financial crisis. CNBC.

Everyone is piling on. The end is in sight. What is it that they say? Buy the rumor sell the news>

10 Year Rate Hits Resistance

Ten Year Note rates rallied above 3.2% today before settling back to rest on the 40 week (200 day) moving average. Notice how the moving average and the upper boundary of a potential channel are identical. One would expect rates to back down from here but as mentioned several times before, volatility is starting to expand and one might expect the current trend to continue.





With the bank stress test results coming out next week along with other important data, it's easy to see how an exceptionally strong market can instantly turn into an exceptionally weak market. When it comes to the stock market, it's all about perception. One analyst today mentioned that earnings overall were down over 30% in the latest reporting period, yet stocks have seen their biggest rally in decades.

While one must respect resistance levels, trends, no matter how solidly in place, don't last forever.




Note the 30 Year Rate chart above. This chart is a daily chart while the 10 year chart is weekly, however the resistance levels are similar (40 week = 200 day). While the 10 year rate was locked in a pennant formation over the past few weeks, we see that the 30 year rate was also in a holding pattern. While the 30 year rate is inherently more volatile than the 10, it was not a respector of the important long term trend.


As the stock market closes the week, the Standard & Poors 500 average also has broken through a key resistance level of 875.


To learn what we think will happen next, be sure to request the May Trendsetter edition.

Are Interest Rates Bottoming?

Poor Retail Sales Hit Rates

Gary Lewis

Asset Design Center

After weeks of optimism over improving bank earnings, reality slapped investors back to reality with worse-than-expected retail sales numbers in March. Interest rates, which had been climbing prior to the data's release dropped sharply as sales numbers came in at minus 1.1% instead of the plus 0.3% that economists were expecting.





I had mentioned two weeks ago that while I expected rates to rise sharply, there would probably be one pullback. We had sold short put options and bought call options in anticipation of this move.

With rates dropping down to 2.81%, and June 10-year notes rallying to 123-14, I covered the short puts and sold the long calls. The position is now bullish for rates and bearish for the Treasury Notes.

As you can see from the chart above, while we didn't realize the three week test of the low, we could be none-the-less finding support at the trend line shown in red. The week is still young though and how this chart will look at the end of the day on Friday is anyone's guess. Perhaps I am early with my position shift but with more bank earnings and other data due out the rest of the week, markets could turn in an instant and move sharply.

We see this morning that Goldman Sachs earned billions of profits in it's last reporting period. With all of the money that the government has pumped into banks and all of the losses that were avoided by AIG paying off banks such as Goldman Sachs in full, one has got to expect some spectacular earnings numbers coming out. Strong numbers SHOULD reflect in higher interest rates UNLESS the market sees through the market manipulation. Still though, the charts indicated that rates should move higher. Whatever news will drive this is anyone's guess. Perhaps in the end, too much additional government debt will come home to roost and investors will demand more return to compensate for the increasing risk.

FED to buy Treasuries

As mentioned previously, the possibility that the Federal Reserve Bank would enter the treasury market to drive down rates and increase liquidity in the system was a strong possibility. IT HAPPENED!

Today, B. Bernanke, Federal Reserve Chairman, announced that the Fed would go on a spending spree, buying $300 billion on long term treasuries as well as purchasing mortgage backed securites.

Treasury securities rallied sharply. 10 year government rates fell below 2.5% and 30 year rates fell below 3.375%!


It's not a fair market! While we were positioned for this and recommended to be long in the interest rate instruments short term, the long term damage that the fed is doing will only drive the US into ashes.

Accompanying the bond move, the Dollar fell sharply against major currencies.

The basic investment premise put forth at the beginning of the year still holds true. While bonds look like they will continue to rally as the government is going to buy buy buy, look for opportunities to take positions in the TBT (Double Short long term bond ETF), currently at 44 (we entered into this initially at 37 so we are still not adding to our position here). But you should take a position in the Short Dollar Exchange Traded Fund (ETF) (Symbol UDN) currently 25.45.

AIG bailout vs bankruptcy

Asset Design Center Reviws AIG

WASHINGTON – Leaders of the White House economic team and the Senate's top Republican bellowed about bonuses at a bailed-out insurance giant and pledged to prevent such payments in the future.
From one Sunday talk show to the next, they tore into the contracts that American International Group asserted had to be honored, to the tune of about $165 million and payable to executives by Sunday — part of a larger total payout reportedly valued at $450 million. The company has benefited from more than $170 billion in a federal rescue.


Unfortunately, Government action caused this to happen. Why do we allow our representatives to act on impulse without knowing what they are doing???

We are fools for letting these people stay in office.

AIG Merrill Bonuses Rattle Regulators

AIG, whose fourth-quarter loss was the worst in corporate history, earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave the crippled insurer. Liddy has vowed AIG will repay “every penny” to the U.S. for its bailout package by selling subsidiaries, and said the retention pay for talented people helps taxpayers by making the units attractive to buyers. (By Hugh Son and Robert Schmidt)


Reactionary tactics are killing the US Government. Bail out first, see the results later. Just like with GM, personnel costs are killing companies. Bankruptcy seems to be the best method to sort things out, under court supervision. The rush to bail out these companies is surely the wrong approach. Circumventing the laws were a part of the Bush administration. Let's move on.