Recipe for a meltdown
The primary culprits behind the market turmoil are sky-high stock prices -- and it's only going to get worse, writes Fortune's Shawn Tully.
By Shawn Tully, Fortune editor at large
Major stock gauges have fallen more than 10 percent, the official signal of a correction. They're about to drop a lot more.
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(Fortune) -- With the S&P down over 10% from its October record high, TV pundits and Wall Street strategists are blaming the most obvious culprits for the sudden reversal of fortune, chiefly the subprime crisis and the looming threat of a recession. But it's neither the credit crunch, nor a slowing economy -- nor a third hobgoblin, the weak dollar -- that pushed the markets into correction territory Monday.
The real reason is so basic, and so antithetical to Wall Street's habitual happy talk about stocks, that it barely rates a mention in the market chatter. Put simply, stocks are extremely expensive relative to the daunting risk in owning them. At current prices, earnings can't possibly grow fast enough to give investors the fat returns they covet.
There's just one way for equities to get their lustre back -- their prices have to fall substantially so that investors can harvest attractive returns from the modest profit growth that's in the cards. Like the biblical sheik who hastens to Samarra to escape death, only to find death waiting for him there, stocks have an inescapable appointment with a withering fate.
The money machine breaks down
Naturally, stocks could bubble back to their old heights in the next few weeks or months. If the recent past proves anything, it's that the course of equity prices is totally unpredictable from day to day or quarter to quarter. As the economist Milton Friedman once told me, after returning my call collect, "Stock prices are rational in the long-term, but in the short-term, they're far from rational. They're full of noise."
But don't let the Wall Street crowd fool you into thinking that the current decline is mostly noise, an irrational blip in a bull market caused by a spate of bad news. What we're probably witnessing is a massive, irreversible revaluation of stocks based on fundamentals. The repricing machine is now in motion. The smart money says it won't stop, despite feints and lurches, until stocks are a bargain again, a prospect investors haven't seen in years.
Why are stocks at a probable turning point? The reason is that investors' perception of the potential perils of holding equities has changed substantially in the last few months. In any major shift, it's impossible to predict what the catalyst will be. In this case, it was the subprime mess. Again, subprime was the catalyst, not the cause. It wasn't just a crisis that would pass, as the pundits argued, but a flashing red warning that triggered a durable shift in investor psychology.
Before the credit crisis, investors took an incredibly blasé attitude toward risk. Yields on junk bonds, corporate debt, and office buildings were at all-time lows. Then subprime struck. Suddenly, investors recognized that the rates on high-risk mortgages didn't come close to reflecting the high probability that homeowners would default on their mortgages. So the prices of subprime paper plummeted. The downward pull on prices spread to all types of fixed income securities, from all types of junk bonds to LBO loans.
Risk returns with a vengeance
Now, the fear of risk is spreading to equities with a vengeance. The problem with equities is that the repricing following the bubble of the late 1990s never fully played out. Stocks roared back from their 2001 lows, reaching record levels this fall. The rub is that they were, and still are, extremely expensive.
The best way to measure whether stocks are giving you enough juice for the risk you're taking is examining the equity risk premium. This is the ultimate number in corporate finance, what Dartmouth economist Kenneth French calls "the holy grail" of stock investing.
Let's run through some simple math. The best measure for the future return on stocks is the earnings yield, the inverse of the price-to-earnings (PE) ratio. Today, the PE, based on trailing 12 month earnings, is around 16. That's not too far above the historic average of 14. Even by that measure, stocks are far from cheap.
But the 16 PE isn't the whole story. Earnings are now near a cyclical peak, having jumped more than 60% since 2001. They're now more than 12% of GDP versus an historic average of around 9%.
Over long cycles, earnings grow in tandem with GDP. It's likely that they will grow more slowly than national income over the next few years to restore the normal ratio. That prediction makes sense: Many of the factors that led to the earnings explosion are now shifting. Rates for corporate borrowing have increased substantially, companies are being forced to invest far more capital equipment to remain competitive, and labor is demanding a bigger share of the pie.
To get a more accurate read on the PE, it's critical to smooth earnings to take out the spikes in the cycle. Yale economist Robert Shiller has developed a profits-smoothing formula that does just. The Shiller model now puts the PE at around 22 or 23, reflecting today's sumptuous earnings.
So where does that put the equity risk premium? With a PE of 22, the earnings yield is just 4.5%. So the return investors can expect from equities is 4.5% plus expected inflation of 2.5%, or around 7%. To get the equity risk premium, subtract that expected return from the 10-year treasury rate of 4%. That's the extra lift investors get for choosing the perils of holding stocks over the comfort of owning government bonds.
At 3%, the equity risk premium is low by historical standards. The recent decline has helped make it more attractive. But the drop hasn't gone far enough. Over the past 50 years, the risk premium has averaged around 5%. Maybe investors don't need that big a spread today, given the ease of diversifying portfolios and the Fed's ability to smooth economic cycles. So let's say the number is now 4%. To get there, stocks still need to drop an additional 18%.
Bye-bye tech party, hello hangover
The most dangerous sector is technology. Just look at the lofty PE's. The big names like Microsoft (Charts, Fortune 500) and Intel (Charts, Fortune 500) boast multiples of between 20 and 25, yet they're now giant, mature enterprises that, because of their sheer size, can't grow profits nearly fast enough to justify their high prices.
For the Googles and Yahoos, the outlook is far scarier. Google's PE now stands at 52. Say you're expecting a 10% a year return from Google (Charts, Fortune 500). Its market cap would have to double to more than $400 billion by 2014. Even if Google kept a stellar PE of 30, it would need to earn $13 billion by then. Today, it earns about $4 billion. So its profits would need to more than quadruple in seven years. It won't happen.
For the bulls, the coup de grace is the math -- earnings growth cannot bail out the market. The reason is that what really counts, earnings per share, don't even grow as fast as GDP. That's because companies regularly issue more shares and dilute their current shareholders -- the explosion in stock options is only the most obvious example. Because of the big dilution, earnings per share grow far more slowly than GDP; the best estimate is around 2%, adjusted for inflation.
Investors can't get fat returns from profit growth. But they can get good returns from a combination of far higher dividend yields plus modest profit growth. And for dividend yields to rise, prices have to drop. That's the inexorable math we now see playing out.
Forget the chatter, ignore the headlines, and follow the math. Prices will get a lot more attractive. The process is underway. All investors have to do is wait.
Wednesday, November 28, 2007
Sunday, November 25, 2007
Previous market Dips 2000-2003
Look for lower lows and get in when higher high happens.
The previous down trend existed from mar 00 thru aug 02 which is 30 months for
the correction
Retailers, Home Builders, Bank & Investment Banks down big
Retailers down 40%
KSS down 39% JCP 53% down
Homebuilders down anywhere from 70 to 90%
PHM down 70% HOV Down 82% CTX 70%
Banks down 30% & more
JPM, C , BBT 21% down C 40% down
MER, BSC down 36% LEH 31% MS 45%
KSS down 39% JCP 53% down
Homebuilders down anywhere from 70 to 90%
PHM down 70% HOV Down 82% CTX 70%
Banks down 30% & more
JPM, C , BBT 21% down C 40% down
MER, BSC down 36% LEH 31% MS 45%
Saturday, November 24, 2007
Defining moments sometime last for one to two months in which due to the vagaries of
stock market, millions could be lost.
For eg, take a look at ntap stock price in the 60 day period from 21 Aug 00
thru 23 Oct 00
21 Aug 00 closing was 101
23 Oct 00 closing was 122
18 Sep closing was 147
16 Oct was 148.
Anytime during this period of 2 months, ntap options would be worth 400k (at 101)
to 972k. Say an average of $750k.
However that opurtunity to sell atleast some forward looking option was missed
and for the remaing time i had stayed in the company which as of today is 100 months
that oppurtunity never arose.
Moral: When due the vagaries of market, if the value of what you hold sky rockets in a very
short period of time, protect atleast part of your profit.
stock market, millions could be lost.
For eg, take a look at ntap stock price in the 60 day period from 21 Aug 00
thru 23 Oct 00
21 Aug 00 closing was 101
23 Oct 00 closing was 122
18 Sep closing was 147
16 Oct was 148.
Anytime during this period of 2 months, ntap options would be worth 400k (at 101)
to 972k. Say an average of $750k.
However that opurtunity to sell atleast some forward looking option was missed
and for the remaing time i had stayed in the company which as of today is 100 months
that oppurtunity never arose.
Moral: When due the vagaries of market, if the value of what you hold sky rockets in a very
short period of time, protect atleast part of your profit.
Tuesday, November 13, 2007
Mike Mayo says $400 billion in credit losses for banks
http://www.cnbc.com/id/21753862/for/cnbc
Deutsche Bank's Mike Mayo estimates as much as $400 billion in credit losses for banks
updated 9:05 a.m. ET, Mon., Nov. 12, 2007
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NEW YORK - Bad mortgage debt may cost banks as much as $400 billion by the time the credit crisis has run its course, a widely tracked Wall Street analyst wrote in a research report Monday.
The major banks have recorded $43 billion in charges stemming from deteriorating mortgage credit quality so far. Plus, they have warned that roughly $25 billion in additional charges are forthcoming.
Deutsche Bank analyst Mike Mayo suggested they are perhaps halfway finished. Eventually, the big banks will write off $100 billion to $130 billion, Mayo estimates.
Worldwide, total losses from "subprime" mortgage credit _ or home loans issued to people with spotty credit histories _ could total $300 billion to $400 billion, Mayo said.
The costs are rooted in this year's breakdown of credit markets. Stung by mounting payment defaults on home loans, the Wall Street investment banks that finance much of the mortgage industry pulled their money out earlier this year.
This left dozens of cash-starved mortgage lenders scrambling to raise cash by selling home loans into a market with few buyers. The market value of many types of mortgage debt plunged, forcing banks to adjust their balance sheets to reflect investments that are worth less.
These charges have cost two Wall Street chief executives their jobs and forced many banks to slim down their mortgage businesses, leading to thousands of layoffs. Numerous hedge funds have imploded, and many homebuilders blame the distress in the mortgage industry for prolonging the housing slump.
Deutsche Bank's Securitization Research group estimated that among the $1.2 trillion in "subprime" mortgage loans outstanding, 30 percent to 40 percent could reach default. This would force losses of $150 billion to $250 billion.
Plus, the bonds and securities that investment banks layered with subprime loans could lose as much as 80 cents on the dollar, Mayo said.
Deutsche Bank's Mike Mayo estimates as much as $400 billion in credit losses for banks
updated 9:05 a.m. ET, Mon., Nov. 12, 2007
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NEW YORK - Bad mortgage debt may cost banks as much as $400 billion by the time the credit crisis has run its course, a widely tracked Wall Street analyst wrote in a research report Monday.
The major banks have recorded $43 billion in charges stemming from deteriorating mortgage credit quality so far. Plus, they have warned that roughly $25 billion in additional charges are forthcoming.
Deutsche Bank analyst Mike Mayo suggested they are perhaps halfway finished. Eventually, the big banks will write off $100 billion to $130 billion, Mayo estimates.
Worldwide, total losses from "subprime" mortgage credit _ or home loans issued to people with spotty credit histories _ could total $300 billion to $400 billion, Mayo said.
The costs are rooted in this year's breakdown of credit markets. Stung by mounting payment defaults on home loans, the Wall Street investment banks that finance much of the mortgage industry pulled their money out earlier this year.
This left dozens of cash-starved mortgage lenders scrambling to raise cash by selling home loans into a market with few buyers. The market value of many types of mortgage debt plunged, forcing banks to adjust their balance sheets to reflect investments that are worth less.
These charges have cost two Wall Street chief executives their jobs and forced many banks to slim down their mortgage businesses, leading to thousands of layoffs. Numerous hedge funds have imploded, and many homebuilders blame the distress in the mortgage industry for prolonging the housing slump.
Deutsche Bank's Securitization Research group estimated that among the $1.2 trillion in "subprime" mortgage loans outstanding, 30 percent to 40 percent could reach default. This would force losses of $150 billion to $250 billion.
Plus, the bonds and securities that investment banks layered with subprime loans could lose as much as 80 cents on the dollar, Mayo said.
Monday, November 12, 2007
THE COMING SUBPRIME MESS
http://money.cnn.com/magazines/fortune/fortune_archive/2007/11/26/101232838/index.htm?postversion=2007111212
Big Names, Big Losses
The toll keeps rising Here are the losses that top banks and brokers have booked (or announced) on CDOs, asset-backed securities, and other structured products.
Write-downs on structured products
Citigroup
$9.8 billion
This is the low estimate; Citi says the figure could be $3 billion higher.
Merrill Lynch
$7.9 billion
Analysts project that the broker will have to write down billions more this quarter.
UBS
$4.4 billion
UBS still has nearly $40 billion in CDOs and mortgage-backed securities on its books.
Morgan Stanley
$3.7 billion
Morgan's total subprime exposure after write-downs stands at $6 billion.
Wachovia
$2.1 billion
Wachovia was among the top issuers of subprime mortgage CDO debt this year.
Credit Suisse
$948 million
Credit Suisse lost nearly another $1 billion on leverage loans.
Lehman Brothers
$700 million
Total includes leveraged loans; Lehman does not provide more detail.
Bank of America
$527 million
CEO Ken Lewis is cutting back the company's investment-banking operations.
Bear Stearns*
$450 million
Big hedge fund losses in June kicked off the subprime follies.
J.P. Morgan Chase
$339 million
CEO Jamie Dimon is credited with losing less than his peers.
Structure products include collateralized debt obligations, collateralized loan obligations, asset-backed securities, and mortgage-backed securities. They do no include leveraged loans. *Estimate. Source: Company earnings releases
Big Names, Big Losses
The toll keeps rising Here are the losses that top banks and brokers have booked (or announced) on CDOs, asset-backed securities, and other structured products.
Write-downs on structured products
Citigroup
$9.8 billion
This is the low estimate; Citi says the figure could be $3 billion higher.
Merrill Lynch
$7.9 billion
Analysts project that the broker will have to write down billions more this quarter.
UBS
$4.4 billion
UBS still has nearly $40 billion in CDOs and mortgage-backed securities on its books.
Morgan Stanley
$3.7 billion
Morgan's total subprime exposure after write-downs stands at $6 billion.
Wachovia
$2.1 billion
Wachovia was among the top issuers of subprime mortgage CDO debt this year.
Credit Suisse
$948 million
Credit Suisse lost nearly another $1 billion on leverage loans.
Lehman Brothers
$700 million
Total includes leveraged loans; Lehman does not provide more detail.
Bank of America
$527 million
CEO Ken Lewis is cutting back the company's investment-banking operations.
Bear Stearns*
$450 million
Big hedge fund losses in June kicked off the subprime follies.
J.P. Morgan Chase
$339 million
CEO Jamie Dimon is credited with losing less than his peers.
Structure products include collateralized debt obligations, collateralized loan obligations, asset-backed securities, and mortgage-backed securities. They do no include leveraged loans. *Estimate. Source: Company earnings releases
Protecting Your Nest Egg in a Recession
http://quote.yahoo.com/focus-retirement/article/103856/Protecting-Your-Nest-Egg-in-a-Recession?mod=retirement-preparation
Protecting Your Nest Egg in a Recession
Sponsored by
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by Laura BruceMonday, November 12, 2007provided by
Anyone nearing retirement is old enough to remember the recession of 2001.
While the experts were debating whether the country really was in a recession -- and if so, when it would bottom out and when the recovery would start -- your portfolio was probably losing value.
It's rotten enough to see your nest egg decimated when you have 10, 20 or more years for it to recover.
More from Bankrate.com: • Are we in a recession? • Don't let inflation derail your retirement • Solo 401(k) allows big savings
But millions of Americans on the cusp of retirement experienced the devastating effect of a recession on their portfolios just prior to, or shortly into, their retirements.
Now, six years later, the news is peppered with stories of a slowing economy and talk of a possible recession. If retirement is in your near future, or even if it's years off, consider taking steps to protect your assets against a potential downdraft in the stock market.
We spoke with two money managers, Dean Barber, of Lenexa, Kan., and Alan Lancz, of Toledo, Ohio, who talk about what they're doing for their clients.
Where to invest now:
•
Dean Barber, Lenexa, Kan.: "Late 2008 is when the real pain will start." Read more...
•
Alan B. Lancz, Toledo, Ohio: "Buy and hold is becoming outdated." Read more...
In his own words: Dean Barber
Dean Barber is CEO of Barber Financial Group in Lenexa, Kan. Barber says his main job is to prepare people for an independent retirement. He's preparing for a market downturn that he says may be hard-felt by late 2008.
The main thing people have to understand is that there is a lot of risk in our market. People get a false sense of security when the market has been up for quite some time that, this time, it's going to be different. There really is risk in the market and unless people have a well-thought-out plan, there's no way they can protect themselves.
9 tips from the experts:
•
Understand risk
•
What to invest in now: Lancz
•
Why a recession is coming
•
Be proactive
•
How to create a defensive strategy
•
Know when to sell
•
Insure your portfolio
•
Be aware of costs
•
What to invest in now: Barber
So the first thing that has to happen is they have to have a written plan; they have to know how market fluctuations will affect them. They have to know what percentage of their money they can afford to lose before they have to get out. Most people don't know where their breaking point is. They don't know how it affects their ability to retire or how it affects their overall plan because they don't have a written plan.
Most people invest for what we call an absolute rate of return, which is looking at how much money can they make without regard to how much risk they are actually taking in order to gain that return. In their plan they should know what kind of risk-adjusted return they need. How much risk do they need to take in order to get to the return that they need to accomplish their written objectives?
Get ready for a downturnThere's no question that there's some sort of downturn on the horizon. You can't see a market that goes up for five years in a row like we've seen without some sort of substantial downturn. We think by late 2008 is when the real pain will start.
I believe that any time you're in the position like we are today, that you must have defensive strategies in place to help protect you from a potential market downturn. Those defensive strategies can be things like the put protection that Clark Capital uses, or inverse funds, such as the ones at Rydex, Profunds or Prudent Bear, for a portion of the portfolio.
Put protection takes a lot of time (to understand). Puts are an option so they're a zero-sum game. What that means is for every winner there has to be a loser. What individuals don't want to do is compete with Wall Street. Those people do it for a living and they're trying to win.
You've heard the same commercials I've heard on the radio -- "We're going to show you how to make money in any market, we've got these trade-by-colors type thing." Well, if you're 25 years old maybe that's OK. But if you're 50-plus and you're gearing up for retirement, the last thing you want to do is play with your future.
People need to understand how those strategies work.
Don't use defensive strategies as a gambling technique to try to get rich while the market's falling, but rather as a hedge to try to prevent event-driven declines, or a decline you're not expecting, from destroying your portfolio.
Insurance for the portfolioIt's all about greed. It's all about how much can I make on the upside. Our contention is, it's not how much money you make, it's how much you get to keep that's most important. Bad markets can take a heck of a lot of money away. When you're 40 years old, you've got lots of time to recover. The bulk of our boomers are past 50 and there are no mulligans after that age. The only mulligan you get is to work for 20 more years.
People who have protection strategies on their portfolios need to understand that when the markets are racing ahead, they won't keep up. They'll lag behind a little bit because a portion of their money is in a strategy that's designed to protect. It's like paying an insurance premium to protect your portfolio. If you were just looking for pure return on real estate, for example, you'd never buy insurance on your house because it's just an expense that takes away from your total return. Well, that's just silly. No one would own real estate without insuring it. Yet people all day long want to talk about their investments yet they don't want to pay a little bit extra to ensure that something bad is not going to take it away. Somehow they're magically smart enough to predict what's going to happen.
How to choose an adviserIf a client is getting ready to retire in five years and we know out of the $1.2 million that person has that $750,000 of it is absolutely critical to their ability to retire and the other half-million is going to allow them to do the extras, we probably don't need to insure the half-million but we need to insure the $750,000.
What to invest in now I think we have some room to go before the recession hits and that technology is going to be one of the leaders over the next several months. In any industry, when a new product comes to market there's zero market penetration for that product. It takes quite some time to get from a zero percent market penetration to 10 percent. And then you have a very rapid movement from 10 percent to 90 percent. It takes as long to get from zero percent to 10 percent as it did to get from 10 percent to 90 percent. And then it takes as long to get from 90 percent to 100 percent as it did to get from zero percent to 10 percent. Most of our major technologies that have been driving our economy for the last 16 to 17 years are at about 80 percent market penetration. Once we hit 90 percent market penetration, that technology will cap out and the profits in those companies will begin to fall. But companies are going to fight to get that last 10 percent. I think it will create some euphoria in that arena that will allow technology to make a splash.
I think the area you want to avoid right now is financials. By and large I think the subprime issues and how deeply involved were the banks in loaning to hedge funds -- those are things that are kind of unknowns at this point in time.
I think you also want to avoid the small-cap stocks now.
They tend to perform best in the early part of a bull market and they perform the worst in the latter part of the bull market, and what we have seen lately is that small caps have begun to lag pretty significantly behind large.
And large caps will typically perform best at the latter part of the bull market.
In his own words: Alan B. Lancz
Alan Lancz is president of Alan B. Lancz and Associates, a money management firm in Toledo, Ohio. Lancz says one of the key factors in a successful portfolio in any type of economy is managing risk. He has also has taken the unusual step of fully disclosing to his clients, on a real-time basis, the holdings in his personal and retirement portfolios, and his company's corporate holdings.
It's important be strategically in the right areas or sectors of the market. In May, we recommended selling the real estate investment trusts (REITs), utilities and financials. The financials comprise more than 20 percent of the S&P 500. If you look back at 2000, technology was over 20 percent, and whenever you get a sector that comprises so much of the market it's usually a concern, a red flag should go up to investors.
They've gone down quite a bit, so it's not as worrisome, but in our estimation there's too much uncertainty. We don't know if another shoe will drop as far as subprime. Usually when there's fallout that will take longer -- just like with technology, it took more than a year for the sell-off to correct all the excesses in technology -- and we kind of see that with the financials, so it's an area that we would still avoid.
Being in the right areas and, if we're looking at potentially a recession or at least an economic slowdown, being in more defensive areas is important.
We're right now underweight on consumer discretionary mainly because a lot of the economic growth has been the consumer, and with the problems with housing and credit concerns, we think it will be much more difficult for the consumer to be the main catalyst for the U.S. economy. We're overweight on more defensive issues such as health care, telecom and technology. And we're equal weighting consumer staples.
Be proactive, not reactiveIt's more a matter of being in the right companies. Even in technology we're overweight, but our overweight is from a year ago. We plan on selling, and that's my second point: being proactive rather than reactive. What I mean in that regard is we recommended selling the financials and REITs and the utilities in May -- we're going to be selling into the technologies because all of a sudden technology has become a safe haven because it doesn't have the subprime and credit concerns.
If there is a recession, we'll definitely see an economic slowdown that's going to affect technology, too, but investors, with their myopic view, aren't looking at that. They're just looking at, well, you know, there are some hot products that don't have any credit concerns with subprime and this is the sector to be in.
Look overseasInternational is another example. If you talk with other advisers, that's probably going to be their No. 1 answer -- go internationally if you see an economic slowdown or recession in the U.S. That concerns us a little bit. We've been overexposed internationally for most of the last seven years. It initiated with us buying a lot of the infrastructure plays after seeing the growth in some of these BRIC (Brazil, Russia, India and China) countries. We've been taking profits in some of those the last year or two and buying more defensive plays in (global consumer staples and pharmaceuticals).
International is a good way to participate as far as outperforming a slowing U.S. economy, but it's to the point that most advisers are saying 20 percent of your portfolio should be international. That concerns us. You have to look at the market globally, but it's not a panacea that you just have international and it will cure all the problems. Just like being in the right areas of the U.S., you have to be in the right areas globally. But that's one way to help the investor who might be close to retirement or retiring and worried about a recession.
Two common mistakesWhen we get new clients, they often have a great portfolio in terms of great companies. But the two mistakes we see is whenever the bank trust or whoever managed it before we got their money, they just bought a selection of high-quality companies and they didn't really look into the price or valuation, they just bought across-the-board, good-quality issues. So, 20 percent or so of those companies will be overvalued because they were bought at or near their highs and are now historically high-valued.
But the biggest mistake we see, and why a lot of new clients come to us, is that they never sell. Buy and hold is becoming outdated. It's easy for the adviser or the trust company or the mutual fund manager to do it from the standpoint of just buying across the board and just hanging on.
It reminds me of the index funds. You're buying 500 companies in the S&P 500 and whether there's an Enron in there or whatever, you're holding it until you're forced to sell or S&P has finally decided to eliminate it from the index.
Remember to take profits and redeploy them into lesser-risk, low-expectation areas. The best example of what we're doing now is in the energy sector. It's been very hot so we're overweight, but we're decreasing our overweighting. If you still want energy exposure and income, sell some of the high-flying energy companies that have done so well and buy some of the leaders in natural gas.
For the long-term investor, it's a nice way to reduce risk in one area that's done so well for years and still participate in the energy sector, but with less risk.
Cash and CDsCash is important and it's part of profit-taking. For example, when we take profits in tech, as it becomes more and more favorable, if we don't find other places to redeploy those assets we'll put it in cash. And if you're close to retirement, having that cash or fixed-income component is going to be critical.
I think (high-yield) CDs are a good route. I wouldn't do Treasuries because the flight to quality this summer has depressed those yields. High tax-bracket individuals should select high-quality municipals. They're at historically high yields now compared to what you can do with a CD.
If we're not finding the bargains to redeploy as we're taking profits in these areas that are moving up, our cash just automatically builds up. If a client is closer to retirement and more conservative, there will be fewer bargains to buy because we're not going to buy aggressive-growth-type companies, so their cash would build up more quickly than an average investor or younger investor.
The other big mistake I see the average investor making is not being aware of cost or risk. If you're in a quasi-index fund, make sure you don't have extra fees and costs. What I've seen throughout the country is people selling these good, low-cost funds and then charging 1 percent or 2 percent to asset allocate them. That means you're getting an index-type performance, but now you've guaranteed yourself the cost of the fund plus the 1 percent or 2 percent you're paying an adviser. So, you're guaranteed to underperform the market by 1 percent or 2 percent. If you can get active management for that, why are you paying for an asset allocation? If you can put together your own group of mutual funds and avoid the added cost, many times you're going to be better off.
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Protecting Your Nest Egg in a Recession
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by Laura BruceMonday, November 12, 2007provided by
Anyone nearing retirement is old enough to remember the recession of 2001.
While the experts were debating whether the country really was in a recession -- and if so, when it would bottom out and when the recovery would start -- your portfolio was probably losing value.
It's rotten enough to see your nest egg decimated when you have 10, 20 or more years for it to recover.
More from Bankrate.com: • Are we in a recession? • Don't let inflation derail your retirement • Solo 401(k) allows big savings
But millions of Americans on the cusp of retirement experienced the devastating effect of a recession on their portfolios just prior to, or shortly into, their retirements.
Now, six years later, the news is peppered with stories of a slowing economy and talk of a possible recession. If retirement is in your near future, or even if it's years off, consider taking steps to protect your assets against a potential downdraft in the stock market.
We spoke with two money managers, Dean Barber, of Lenexa, Kan., and Alan Lancz, of Toledo, Ohio, who talk about what they're doing for their clients.
Where to invest now:
•
Dean Barber, Lenexa, Kan.: "Late 2008 is when the real pain will start." Read more...
•
Alan B. Lancz, Toledo, Ohio: "Buy and hold is becoming outdated." Read more...
In his own words: Dean Barber
Dean Barber is CEO of Barber Financial Group in Lenexa, Kan. Barber says his main job is to prepare people for an independent retirement. He's preparing for a market downturn that he says may be hard-felt by late 2008.
The main thing people have to understand is that there is a lot of risk in our market. People get a false sense of security when the market has been up for quite some time that, this time, it's going to be different. There really is risk in the market and unless people have a well-thought-out plan, there's no way they can protect themselves.
9 tips from the experts:
•
Understand risk
•
What to invest in now: Lancz
•
Why a recession is coming
•
Be proactive
•
How to create a defensive strategy
•
Know when to sell
•
Insure your portfolio
•
Be aware of costs
•
What to invest in now: Barber
So the first thing that has to happen is they have to have a written plan; they have to know how market fluctuations will affect them. They have to know what percentage of their money they can afford to lose before they have to get out. Most people don't know where their breaking point is. They don't know how it affects their ability to retire or how it affects their overall plan because they don't have a written plan.
Most people invest for what we call an absolute rate of return, which is looking at how much money can they make without regard to how much risk they are actually taking in order to gain that return. In their plan they should know what kind of risk-adjusted return they need. How much risk do they need to take in order to get to the return that they need to accomplish their written objectives?
Get ready for a downturnThere's no question that there's some sort of downturn on the horizon. You can't see a market that goes up for five years in a row like we've seen without some sort of substantial downturn. We think by late 2008 is when the real pain will start.
I believe that any time you're in the position like we are today, that you must have defensive strategies in place to help protect you from a potential market downturn. Those defensive strategies can be things like the put protection that Clark Capital uses, or inverse funds, such as the ones at Rydex, Profunds or Prudent Bear, for a portion of the portfolio.
Put protection takes a lot of time (to understand). Puts are an option so they're a zero-sum game. What that means is for every winner there has to be a loser. What individuals don't want to do is compete with Wall Street. Those people do it for a living and they're trying to win.
You've heard the same commercials I've heard on the radio -- "We're going to show you how to make money in any market, we've got these trade-by-colors type thing." Well, if you're 25 years old maybe that's OK. But if you're 50-plus and you're gearing up for retirement, the last thing you want to do is play with your future.
People need to understand how those strategies work.
Don't use defensive strategies as a gambling technique to try to get rich while the market's falling, but rather as a hedge to try to prevent event-driven declines, or a decline you're not expecting, from destroying your portfolio.
Insurance for the portfolioIt's all about greed. It's all about how much can I make on the upside. Our contention is, it's not how much money you make, it's how much you get to keep that's most important. Bad markets can take a heck of a lot of money away. When you're 40 years old, you've got lots of time to recover. The bulk of our boomers are past 50 and there are no mulligans after that age. The only mulligan you get is to work for 20 more years.
People who have protection strategies on their portfolios need to understand that when the markets are racing ahead, they won't keep up. They'll lag behind a little bit because a portion of their money is in a strategy that's designed to protect. It's like paying an insurance premium to protect your portfolio. If you were just looking for pure return on real estate, for example, you'd never buy insurance on your house because it's just an expense that takes away from your total return. Well, that's just silly. No one would own real estate without insuring it. Yet people all day long want to talk about their investments yet they don't want to pay a little bit extra to ensure that something bad is not going to take it away. Somehow they're magically smart enough to predict what's going to happen.
How to choose an adviserIf a client is getting ready to retire in five years and we know out of the $1.2 million that person has that $750,000 of it is absolutely critical to their ability to retire and the other half-million is going to allow them to do the extras, we probably don't need to insure the half-million but we need to insure the $750,000.
What to invest in now I think we have some room to go before the recession hits and that technology is going to be one of the leaders over the next several months. In any industry, when a new product comes to market there's zero market penetration for that product. It takes quite some time to get from a zero percent market penetration to 10 percent. And then you have a very rapid movement from 10 percent to 90 percent. It takes as long to get from zero percent to 10 percent as it did to get from 10 percent to 90 percent. And then it takes as long to get from 90 percent to 100 percent as it did to get from zero percent to 10 percent. Most of our major technologies that have been driving our economy for the last 16 to 17 years are at about 80 percent market penetration. Once we hit 90 percent market penetration, that technology will cap out and the profits in those companies will begin to fall. But companies are going to fight to get that last 10 percent. I think it will create some euphoria in that arena that will allow technology to make a splash.
I think the area you want to avoid right now is financials. By and large I think the subprime issues and how deeply involved were the banks in loaning to hedge funds -- those are things that are kind of unknowns at this point in time.
I think you also want to avoid the small-cap stocks now.
They tend to perform best in the early part of a bull market and they perform the worst in the latter part of the bull market, and what we have seen lately is that small caps have begun to lag pretty significantly behind large.
And large caps will typically perform best at the latter part of the bull market.
In his own words: Alan B. Lancz
Alan Lancz is president of Alan B. Lancz and Associates, a money management firm in Toledo, Ohio. Lancz says one of the key factors in a successful portfolio in any type of economy is managing risk. He has also has taken the unusual step of fully disclosing to his clients, on a real-time basis, the holdings in his personal and retirement portfolios, and his company's corporate holdings.
It's important be strategically in the right areas or sectors of the market. In May, we recommended selling the real estate investment trusts (REITs), utilities and financials. The financials comprise more than 20 percent of the S&P 500. If you look back at 2000, technology was over 20 percent, and whenever you get a sector that comprises so much of the market it's usually a concern, a red flag should go up to investors.
They've gone down quite a bit, so it's not as worrisome, but in our estimation there's too much uncertainty. We don't know if another shoe will drop as far as subprime. Usually when there's fallout that will take longer -- just like with technology, it took more than a year for the sell-off to correct all the excesses in technology -- and we kind of see that with the financials, so it's an area that we would still avoid.
Being in the right areas and, if we're looking at potentially a recession or at least an economic slowdown, being in more defensive areas is important.
We're right now underweight on consumer discretionary mainly because a lot of the economic growth has been the consumer, and with the problems with housing and credit concerns, we think it will be much more difficult for the consumer to be the main catalyst for the U.S. economy. We're overweight on more defensive issues such as health care, telecom and technology. And we're equal weighting consumer staples.
Be proactive, not reactiveIt's more a matter of being in the right companies. Even in technology we're overweight, but our overweight is from a year ago. We plan on selling, and that's my second point: being proactive rather than reactive. What I mean in that regard is we recommended selling the financials and REITs and the utilities in May -- we're going to be selling into the technologies because all of a sudden technology has become a safe haven because it doesn't have the subprime and credit concerns.
If there is a recession, we'll definitely see an economic slowdown that's going to affect technology, too, but investors, with their myopic view, aren't looking at that. They're just looking at, well, you know, there are some hot products that don't have any credit concerns with subprime and this is the sector to be in.
Look overseasInternational is another example. If you talk with other advisers, that's probably going to be their No. 1 answer -- go internationally if you see an economic slowdown or recession in the U.S. That concerns us a little bit. We've been overexposed internationally for most of the last seven years. It initiated with us buying a lot of the infrastructure plays after seeing the growth in some of these BRIC (Brazil, Russia, India and China) countries. We've been taking profits in some of those the last year or two and buying more defensive plays in (global consumer staples and pharmaceuticals).
International is a good way to participate as far as outperforming a slowing U.S. economy, but it's to the point that most advisers are saying 20 percent of your portfolio should be international. That concerns us. You have to look at the market globally, but it's not a panacea that you just have international and it will cure all the problems. Just like being in the right areas of the U.S., you have to be in the right areas globally. But that's one way to help the investor who might be close to retirement or retiring and worried about a recession.
Two common mistakesWhen we get new clients, they often have a great portfolio in terms of great companies. But the two mistakes we see is whenever the bank trust or whoever managed it before we got their money, they just bought a selection of high-quality companies and they didn't really look into the price or valuation, they just bought across-the-board, good-quality issues. So, 20 percent or so of those companies will be overvalued because they were bought at or near their highs and are now historically high-valued.
But the biggest mistake we see, and why a lot of new clients come to us, is that they never sell. Buy and hold is becoming outdated. It's easy for the adviser or the trust company or the mutual fund manager to do it from the standpoint of just buying across the board and just hanging on.
It reminds me of the index funds. You're buying 500 companies in the S&P 500 and whether there's an Enron in there or whatever, you're holding it until you're forced to sell or S&P has finally decided to eliminate it from the index.
Remember to take profits and redeploy them into lesser-risk, low-expectation areas. The best example of what we're doing now is in the energy sector. It's been very hot so we're overweight, but we're decreasing our overweighting. If you still want energy exposure and income, sell some of the high-flying energy companies that have done so well and buy some of the leaders in natural gas.
For the long-term investor, it's a nice way to reduce risk in one area that's done so well for years and still participate in the energy sector, but with less risk.
Cash and CDsCash is important and it's part of profit-taking. For example, when we take profits in tech, as it becomes more and more favorable, if we don't find other places to redeploy those assets we'll put it in cash. And if you're close to retirement, having that cash or fixed-income component is going to be critical.
I think (high-yield) CDs are a good route. I wouldn't do Treasuries because the flight to quality this summer has depressed those yields. High tax-bracket individuals should select high-quality municipals. They're at historically high yields now compared to what you can do with a CD.
If we're not finding the bargains to redeploy as we're taking profits in these areas that are moving up, our cash just automatically builds up. If a client is closer to retirement and more conservative, there will be fewer bargains to buy because we're not going to buy aggressive-growth-type companies, so their cash would build up more quickly than an average investor or younger investor.
The other big mistake I see the average investor making is not being aware of cost or risk. If you're in a quasi-index fund, make sure you don't have extra fees and costs. What I've seen throughout the country is people selling these good, low-cost funds and then charging 1 percent or 2 percent to asset allocate them. That means you're getting an index-type performance, but now you've guaranteed yourself the cost of the fund plus the 1 percent or 2 percent you're paying an adviser. So, you're guaranteed to underperform the market by 1 percent or 2 percent. If you can get active management for that, why are you paying for an asset allocation? If you can put together your own group of mutual funds and avoid the added cost, many times you're going to be better off.
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Focus On Retirement View more retirement stories
Sunday, November 11, 2007
REMEMBER
1) take losses at 8 to 10% range
2) never buy around results
3)buy puts for covering large positions
4)if market/stock goes up after a downtrend on a low volume be aware of a "bull trap"
2) never buy around results
3)buy puts for covering large positions
4)if market/stock goes up after a downtrend on a low volume be aware of a "bull trap"
Weekly balance on izone - CITI SAGA
Nov 11 - $160395
The CITI SAGA
10/01 - 100 C at 47.34
10/22 - 500 C at 44.5
11/07 200 C at 35
11/08 200 C at 33
The CITI SAGA
10/01 - 100 C at 47.34
10/22 - 500 C at 44.5
11/07 200 C at 35
11/08 200 C at 33
How long mark downtrends have lasted?
Examples on how long has market downtrends have lasted?
Need to work on this?
Need to work on this?
Wednesday, November 7, 2007
DUMP FINANCIALS when things get a little better
DUMP FINANCIALS when things get a little better
xlf dump 200
options close some.
Buy FXA & LUK
xlf dump 200
options close some.
Buy FXA & LUK
Tuesday, November 6, 2007
sometime waiting is the most import thing
10/19/2005 100 csco 1690
08/22/2006 100 csco 2119 $500 profit
11/06/2007 csco 35.00 profit would have been $2000 if waited.
So after buying some stock it makes sense to buy a put for an extended period and wait
08/22/2006 100 csco 2119 $500 profit
11/06/2007 csco 35.00 profit would have been $2000 if waited.
So after buying some stock it makes sense to buy a put for an extended period and wait
So what did i learn from my mistakes???
Mistakes
1) IAAC
2) GROW
3)C
a)Never buy at or near the results declaration. IAAC & GROW.
b) Take losses when they are in the 8 to 10% range as a discipline. Save your capital first.
c)Buy defensive puts if you plan on buying large quantities.
1) IAAC
2) GROW
3)C
a)Never buy at or near the results declaration. IAAC & GROW.
b) Take losses when they are in the 8 to 10% range as a discipline. Save your capital first.
c)Buy defensive puts if you plan on buying large quantities.
2006-2007 DownDrafts to remember
12/20/2006 Bought 200 IAAC @47.5
01/04/2007 Sold 200 for $25. Loss of $4400 nov 06 2007 $28 march 2006 $15
Loss = $4400
12/29/2006 200 GROW @69 13805
01/04/2007 sold 200 GROW @59 loss $2000
Merill Lynch $1000
Citigroup $7300 & counting
01/04/2007 Sold 200 for $25. Loss of $4400 nov 06 2007 $28 march 2006 $15
Loss = $4400
12/29/2006 200 GROW @69 13805
01/04/2007 sold 200 GROW @59 loss $2000
Merill Lynch $1000
Citigroup $7300 & counting
The CITI Trades
03/13 - Bought 200 C @ 48.75
07/25 Sold 200C @48.85
07/31 Bouhgt 300 C @47.3
08/01/ Sold 300C @46.4
10/01 Bought 100C at 47.3
10/22 Bought 500C at 44.5
11/06 C at $35
07/25 Sold 200C @48.85
07/31 Bouhgt 300 C @47.3
08/01/ Sold 300C @46.4
10/01 Bought 100C at 47.3
10/22 Bought 500C at 44.5
11/06 C at $35
Monday, November 5, 2007
Dump financials when the market improves a bit
dump c/xlf & the options of xlf/c when market moves up.
Said that on Oct 24th and didnt do anything.
Oct 26h C closed at $42 Todays close $36. $3600 washed out on 600 shares.
Said that on Oct 24th and didnt do anything.
Oct 26h C closed at $42 Todays close $36. $3600 washed out on 600 shares.
Sunday, November 4, 2007
If i had not sold or if i had a discipline
Dell sold 07/21/2006 - $19.9 bought 12/21/05 - $31.1 loss = $1200 percentage loss 36%
nov 04 2007 - $30. Should have taken a 8% -10% loss at $310 or held it for another year for a
50% gain. Could have added some at 20 and that would have given a 30% gain
Bought EMC @14 on 12/13/2005 and sold 08/22/06 @11.25. 11/02/2007 EMC is @ 24 which
from the sold is up 100%.
BSC sold short on 09/12 108 bought to cover on 10/02 for $127 price on 11/ 03 $102
nov 04 2007 - $30. Should have taken a 8% -10% loss at $310 or held it for another year for a
50% gain. Could have added some at 20 and that would have given a 30% gain
Bought EMC @14 on 12/13/2005 and sold 08/22/06 @11.25. 11/02/2007 EMC is @ 24 which
from the sold is up 100%.
BSC sold short on 09/12 108 bought to cover on 10/02 for $127 price on 11/ 03 $102
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