Retirement Watch Lighthouse Logo

November 2007

Last update on: Sep 23 2019

November 27, 2007 01:25 p.m. Some Portfolio Changes

The markets and headlines have been rolling like the ocean surf before a major storm. Try to adjust your portfolio based on the latest sentiment and you will be changing the portfolio every few days. We focus on longer-term trends than the latest headlines, and those trends recently triggered sales in several of our portfolios:

  • Sector and Balanced Managed Portfolios: In the December 2007 issue, which was posted on the web site Nov. 15 and was delivered to most of you last week, we established a sell signal for Oakmark Select of $28.56. The sale was triggered yesterday with a close of $28.46. Put in your sell order today and exit the fund on today’s bounce.
  • Invest with the Winners: Exchange-Traded Funds: The iShares Brazil Fund (EQZ) triggered it sells signal by declining more than 7% from its recent high. You should have sold the fund and moved the proceeds to money market funds. GSCI Commodity fund (GWG) hit a new high last week of $53.00. It is below that high but has not declined more than 7%. Hold until a sell is triggered.
  • Invest with the Winners: ProFunds: We were holding Precious Metals. It fell below the sell signal and should have been sold on November 13. This portfolio now is all in cash.
  • Invest with the Winners: Rydex: Precious Metals was sold on November 13, and the proceeds should be in cash. Commodities hit a new high of $29.93 on Nov. 20. It is just below that high, but has not decline more than 7%. Hold the fund unless it declines more than 7% from a recent high.

November 20, 2007 04:35 p.m. The Fight for Investors’ Minds

Investors are struggling over whether to accept economic reality or believe in wishful thinking. The wishful thinking is that the Federal Reserve will continue reducing interest rates substantially, and this effort will cure the credit crisis, reignite economic growth without inflation, and propel the stock market higher.

The economic reality is revealed in each day’s headlines, showing a weaker economy, a continuing credit crisis, and slowing consumer spending. Take a look at Monday’s headlines in The Wall Street Journal and Tuesday’s in the online Journal. On Monday, there were stories indicating that oil production is likely to limit supply and keep prices high, and that the Chinese government is trying to curb lending to reduce its “investing frenzy.” Also revealed was that commercial real estate, long a growth driver which has been insulated from the residential real estate downturn, now is starting to decline because of the credit crisis. There also was a story that Fannie Mae and Freddie Mac will feel the effects of the decline in residential housing, though they hold only quality mortgages.

Today’s online Journal revealed that Freddie Mac posted a $2 billion loss, said it might cut its dividend 50%, and is considering selling shares to increase capital. Oil surged again. The minutes of the last Fed meeting indicated that the Fed is more concerned about a weak economy than it publicly indicated. Evidence of weak consumer spending in the holiday season abounds. Asian countries are reconsidering their policies of pegging their currencies to the dollar.

Against all this is the hope that the Fed will cut rates, and that this will cure all the problems without pushing inflation higher or causing the dollar to crash.

I don’t know what the Fed will do next or if the economy will slide into a recession. But I do know that this is a good time for investors to have margins of safety in their investments, be hedged in U.S. stocks, and keep portfolios risks low. Betting either for or against the Fed is a high risk investment strategy. It could pay high returns if you are right, but it also could deplete capital quickly.

November 19, 2007 04:40 p.m. Still Looking for a Bottom

Many investors were hopeful that the mortgage meltdown and associated credit crisis ended in September after several financial firms wrote down substantial amounts of mortgages they owned. That hope faded as substantial write downs were announced in October and November. With these latest write downs and the replacement of several prominent CEOs, is the worst over?

Not likely. Most of the mortgages still are performing. That is, debtors still are making their interest and principal payments. Few of the write downs to date are due to defaults. The write downs are recognizing that the market value of the mortgages is less than their acquisition price or the price to which they previously were written down. Because there are few buyers for many of these mortgages now, their values are a guess. The companies are using financial models and other techniques to estimate the values. If the market continues to deteriorate or if defaults increase, values will further decline.

My estimate is that the worst won’t be over until January of 2008. The results most companies announce then will be audited. The write downs to date are based on management’s estimates and their decision of how conservative to be. Auditors are likely to be tougher and force higher write downs unless the market turns around.

In addition, there is likely to be tax loss selling through December 31 on a lot of the investments related to the mortgage problems, such as REITs, mortgage stocks, and other income vehicles.

Stay conservative until next January. Then, we can re-evaluate the situation and see if there is reason to expect a bottom or turnaround.

November 13, 2007 09:30 a.m. Riding the Wild Markets

Last week stocks sure looked ugly. Pessimism reigned, and there seemed no bottom in sight. The major indexes had their worst week since 2002. It didn’t pay to be aggressive or to like equities. Investor’s Business Daily pronounced the market to be in a correction and advised investors to stand aside.

Yesterday was a dramatic change. The Dow soared 319 points, or 2.46%. The S&P 500 gained almost 3%, while the Nasdaq returned almost 3.5%. What changed?

The headlines on the credit crisis were one change. After a few weeks of financial services firms announcing large write downs of mortgage investments, yesterday investors interpreted the latest news from the banks as indicating the worst of the mortgage crisis is behind us.

Wal-Mart also announced strong profits and a brighter outlook for the current quarter.

There also are a couple of possible technical explanations for yesterday’s rally.

Hedge funds allow redemptions only during a certain time frame near the end of the year. For many funds, investors have to notify them by November 16 that they want their investments returned. With many hedge funds having bad years, it likely that redemptions are high this year. The selling we saw last week could have been hedge funds selling stocks to meet raise cash as redemption orders came in. The decline last week might have been exaggerated and artificial as might yesterday’s bounce back.

There also could be short sale covering the financial stocks. Anyone shorting financial stocks in the recent past earned quite a nice return. It would take disastrous news going forward for financial short sales to earn meaningful returns from where stock prices were last week. Today, short sellers might have decided to cover their positions by buying back the financial stocks, giving those stocks a boost.

Just as it was important not to overreact to last week’s decline, we also should not lose discretion in the face of yesterday’s gains. There could be more write downs and other problems with existing mortgages. Other retailers might report poor sales, indicating that Wal-Mart’s success is at the expense of higher-priced retailers.

A warning sign is that market declines of 5% or more that occur close in time usually are not signs of a healthy market.

Yesterday might not be a change from correction to a new rally. It could be the usual short-term reversal that briefly interrupts a market trend. It is best for investors to focus on longer-term trends. In this environment, focus on the global growth, weak dollar, and large U.S. companies-investments that have worked well so far.

November 13, 2007 09:45 a.m. Which Way Will Oil Go?

Many analysts attributed last week’s sharp decline in stocks to oil’s steady progress toward $100 per barrel. Likewise, yesterday’s recovery by stocks is partly attributed to a decline in oil near $90. Let’s take a look at some of the factors moving the oil market.

The long-term factors favor oil to be above the $40 per barrel level (or less) that prevailed until a couple of years ago. Little money was invested in production and exploration from 1985-2000. Oil companies have set investment targets with the assumption that oil will be around $45. With rapid growth in emerging economies, demand for oil also is growing rapidly, at a far greater rate than exploration and production.

Of course, the political instability of the largest oil producing nations makes supply uncertain and puts a premium on the price.

In the shorter term oil probably is priced to high near $100.

There is a good deal of supply above ground, according to at least some analysts. There are high prices, but no reported shortages of oil. There might be mistakes in inventory management especially in the U.S. It is worth noting that prices at the pump in the U.S. have not increased as rapidly as wholesale prices.

The weak dollar pushed up U.S. prices; prices did not rise as much in other countries. Yet, oil prices have increased far more rapidly than the dollar has declined.

Despite all the reports of rapidly growing demand, especially from China and India, analysts are reporting that higher prices are having an effect on demand. Some analysts report flat or slighting declining demand worldwide and a decline of 1% or more in the U.S.

An article in Forbes attributes the recent price rise to a mistake by Saudi Arabia. They reduced production in expectation of modest demand for oil and higher production from other countries. The Saudis do not want a high price for oil, because they do not want to provide incentives for substitutes or reduced consumption.

Once oil prices started rising, speculation probably pushed prices higher until there were no more buyers left to pay higher prices. Details of this cyclical argument are in my book, Invest Like a Fox…Not Like a Hedgehog.

There are few fundamentals that support $100 oil in the short term. It will get there eventually and stay there. But the current supply and demand situation probably cannot sustain the price. Because of the conflict between long-term and short-term trends, the price of oil will be extremely volatile. But I expect a correction to continue for a while.

November 5, 2007 11:30 a.m. It is All About Risk Management

The big banks continue to shock investors with reports about huge losses in subprime mortgages and related investments. This is dragging down their stocks and the financial stock indexes. Lost in all this action is that financial services firms are no universally hurt by problems in housing and mortgages. The reasons for this are useful for all investors.

The companies with the biggest problems are banks and brokerage firms. These are firms whose main businesses are retail-oriented. Investing, trading, and sophisticated lending are not their core businesses or expertise. Insurance companies, investment banks, and even most hedge funds are not stunning investors with their losses.

Expertise in mortgages is not the main reason for this dichotomy. The key difference is risk management. The firms not reporting losses most likely invest in mortgages and risky debt other than treasury bonds. They also know the risks of those investments, how to limit their potential losses, and how to balance assets in a portfolio. Citigroup, Merrill Lynch and others simply failed in their risk management functions. They did not have enough experience in these investments or in the sophisticated risk management the investments require. Goldman Sachs most likely owned a lot of the tainted investments. But it also was diversified and knew how to hedge the risky investments, so it did not incur large overall losses.

That is why we focus on risk management and a margin of safety in our portfolios. We want to avoid large losses. The markets will grow over time, and we will benefit from that. The key to successful long-term investment is to limit losses. Avoid over-priced assets, even if it means giving up some gains in the short-term. One never knows when an inflated market will start to deflate, and as subprime mortgage owners have found it is difficult to find a buyer at any price once the deflation starts. The mutual funds we recommend usually are value-oriented funds whose managers realize the importance of avoiding over-priced assets and having a margin of safety. Citigroup and Merrill Lynch are so big that they will be able to survive these major losses. But individual investors like us need to be more careful and focus on limiting our risks.

November 1, 2007 06:40 p.m. Will the Stock Slide Continue?

Was the latest interest rate cut by the Fed a good idea or a bad idea? Wednesday investors thought it was a good idea, pushing stock prices higher. Thursday investors changed their minds, sending stock prices significantly lower. Or perhaps investors liked the rate cut but did not like the statement indicating that no more cuts would be made until it was clear the economy slows.

The stock markets remain in a broad, volatile trading range, because the economic and financial data are contradictory. Consider the following:

Housing is a mess and getting worse. The peak of the mortgage resets in the subprime loans issued the last few years will occur in May 2008. Until then, and perhaps beyond, we should see higher foreclosures and more write downs at banks and other financial institutions.

The dollar continues to decline. This helps U.S. multinational companies. But it can make imports more expensive for U.S. consumers. It also might cause higher interest rates. The falling dollar also might be supporting the stock market, because it makes stocks cheaper for overseas investors.

Yet, the non-housing economy appears to be doing fine. There still are few signs that the housing problems are spreading to the rest of the economy.

Commodity prices continue to surge. That could lead to higher consumer prices. So far, many businesses have not passed those costs on to consumer. Instead, they are increasing productivity or absorbing the increases through lower profit margins.

Higher economic growth outside the U.S. appears able to sustain itself without strong U.S. growth. That could change, especially since housing prices outside the U.S. also were on a run the last five years and now are slowing.

The three factors we use to monitor the credit crisis are stable at best. Interest rates are low; the amount of asset-backed securities issued is level; and the dollar continues to decline.

There remain opportunities in the markets, but investors need to exercise caution. That is why we have our hedged position in Hussman Strategic Growth along with value-oriented mutual funds that are investing primarily in large U.S. companies or international stocks.

bob-carlson-signature

Retirement-Watch-Sitewide-Promo

Log In

Forgot Password

Search