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.

Fed Policy is Killing Us

As the 10-year rates fall below 2.9% and the 2-year rate falls to around 0.5%, it's becoming obvious that the economy is not what is driving the bond market rally, it's the Fed creating still another BUBBLE!!!

When will they stop creating economic bubbles for the benefits of their cronies? While I have been in the Bearish Stock Market camp since 2005 and still expect a test of the lows, I have been encouraged by the corporate earnings that have been coming out in recent weeks. There is an underlying strength in the economy that can come out if we let it. Yet, interest rates continue to plummet. WHY?

It's becoming obvious, although I will check the data, that as the Fed continues to lend money to banks at nearly 0%, the prudent thing to do for them is, of course, buy the treasury market and it's guaranteed return. As long as the Fed continues to provide funds for free, why shouldn't we expect those, who can get free money, to go crazy buying everything in sight?

It's not going to change. While I think that the interest rates HAVE TO GO UP based on the amount of debt we have, the bond market keeps rallying, shaking out the shorts with dramatic moves.

The European crisis is over. I should have staked my dough in the Euro instead of screwing around with a manipulated US system. At first, it appeared that we were derivative trades of Europe. But with Europe doing fine (basis the Euro which is now 130+ versus the dollar), it appears that there is something VERY WRONG with the US stock market and bond market.

After the Flash Crash in May, I got ALL OF MY CLIENTS OUT of the stock market to as much extent as possible. In fact, I don't even want to advise on the stock market anymore as it is now nothing more than a casino with the billion dollar hedge funds, with their computer algorhythms moving the markets. There is no real investment here. It's all a game.

The interest rates, which one would believe was a true reflection of the economy, now also appear to be manipulated or really, out of the market's hand. It doesn't correlate with the economic reality. If it does, then WE ARE TRULY IN A DOUBLE DIP RECESSION and are headed for a depression.

I am really sad. As those who have followed me have noticed, I haven't been writing at all for the last few months. My despair continues and my faith in the US economy wanes. I am not a politician nor do I work for a government. This is where all the money is going.

I suppose that the long-term rates are going to go down very low. This effect WONT STOP UNTIL THE FED RAISES RATES. How sad that the Congress has given the Fed even more rights to screw up our economy. If you are not a banker or a politician, expect that the worst is still to come.

I'm going to start looking at markets away from the US. I just don't think that they are fair anymore. Perhaps no markets are. Unfortunately, the alternative is to start your own business. But you can only do this if you are cash-flushed or have some rich friends.

Good luck America.

Stocks Attempt Breakout!

Stocks surged this morning as the US DOllar continued to plumment. The chart above shows that once again, the S&P 500 is trying to take out the dominate downtrend line on a weekly close basis. The last data point is this morning's trade at 1084. While the week is just beginning, should we maintain these levels through Friday's close, expect a new, major surge of money into the market, pushing prices again up to the old highs!

Does this sound irrational? Yes, but who could have imagined that the markets would have recovered so dramatically. For sure, the big banks (although we hear about continuing bank failures and mortgage defaults)continue to do well and bankers continue to receive their multi-million dollar annual bonuses. Ever-increasing unemployment numbers are dismissed as commentators report that businesses no longer need employees to grow profits.

PLAY IT SAFE

While I have been generally dismissing the continued rally since taking profits in June, I have been participating somewhat by using longer-termed options. I currently hold call option positions for Archer Daniels (ADM), Applied Materials (AMAT) and Williams Energy (WMB). Also in my portfolio are put positions for Boeing (BA) and JB Hunt (JBHT). I previously held Merck calls and they were exercised, the stock was held a little longer and then sold at a profit.

Although I have traditionally been an option seller, as many of my articles attest to, in times like this, it seems to be the prudent way to play the market. With options, you can defend your annual targeted gains but still have some participation in the markets without risking too much of your capital. If the markets continue to soar, you will profit. Should the markets suddenly reverse, your losses will be limited to the cost of the options.

CONTINUE TO DIVERSIFY

As I mentioned, I have some diversification in my option portfolio with some call positions against some put positions. This enables me to perhaps profit no matter what the markets do, I have something on the up side as well as something on the down side. It's also important to buy as much time as you can. My call options are out until 2011! as I like my call choices as bona fide stock picks, but I don't want to ruin my performance record for the year. There is still a lot of risk in this market and the huge runup just continues to show that government and Federal Reserve policies cause asset bubbles. It really is a casino-like atmosphere here but investors have no choice except to participate in high-risk investments. Those who have tried to be conservative cannot exist. Interest rate vehicles have been artificially held down to historically low levels while the cost of goods, services and taxes continue to rise sharply.

Should you wish for more information about how you might better manage your risk, contact me at gary@assetdesigncenter.com.

Market Rally? A Matter of Perspective

We are just minutes away from the stock market attaining it's 9th week in a row with a gain! Markets have not had so much momentum since perhaps the bull runs of the late 1990s. But while US investors may be smiling as their 401(k)s expand close to previous levels, those outside of the US may not be seeing such gains.

US market gains abroad are definitely beginning to be muted by declines in the US Dollar. Today's downward move in the dollar is the second day in a row that markets received a wake-up call as to the US Government's fiscal policies. Yesterday, bond yields rose sharply as investors demanded higher yields on long term treasury debt. Higher yields normally result in a stronger dollar. Not so today.

While President Obama's economic stimulus package my ultimately benefit the country, it will not be without substantial costs. Inflated money supplies and record debt levels may cause a run on US securities resulting in lower prices for US products across the board. Don't leave yourself unprotected. Be sure your positions are hedged appropriately.

Rates Rise - Where's the FED?

Prices on the June 10-year Treasury Note contract fell today as economic data was not as bad as expected. Also exacerbating the situation was a lack of buying on the part of the Federal Reserve. Notice the big spike up several weeks ago when the Federal Reserve announced that they would buy $300 billion of long term treasury securities. With the exception of the recent pop in prices that we predicted in earlier blogs note prices have since been retreating and are almost back to the Pre-Fed announcement levels.


I was a day early in our closing out the short put positions. Today I was happy that I had closed out the short puts the other day. Today I was in a good position to sell puts for a good premium. For risk management sake, I only have one short put and one short call position for each $10,000 invested.






Currently, the 10-year rate is at 2.94 at 12:45 central time. It is breaking out of the pennant formation and could advance on to the top of the price channel. By selling some out of the money puts, I'm am betting that the rate will back down into the pennant by the end of the day. Still volatility levels are low and even with all of the supply concerns and good earnings reports that are coming out; it's important to keep in mind that bank earnings might the products of manipulation and are not as good as they are now appearing. While rising interest rates (and falling note prices) indicate that the economy is gaining strength, I'm not quite yet buying it.

Bond prices might rise early next week one more time before falling. I wonder though how high the Fed will allow rates to rise before stepping in to drive rates down. While I expect rates to rise much higher in the long term, the threat of Fed intervention is always present. While this is disappointing for trend followers, it should present good trading opportunities. As such, with stochastics at the low end, I am taking the chance that prices will rise from current levels, providing a profit opportunity for the new short put position. I will also have the opportunity to establish a short June call position since the May options expire next Friday.