Tarp Returns

Saw this over @ "The Big Picture" this AM and had to pass it along.

"Time magazine looks at the TARP, and does some quick number crunching.
Since the Tarp was jammed through in October, Treasury has invested $165 billion into the nation’s eight largest banks.
Those same financial firms are now worth $418 billion less than they were four months ago. CBO calculates the taxpayer’s preferred shares are worth $20 billion less.
The government’s annualized rate of return on its investment in the nation’s largest banks is -1,096%.
As Time snarkily notes, even Bernie Madoff only lost 100%".

Source "The Big Picture." 1.29.09

From Today's Wall Street Journal:
- Government officials seeking to revamp the U.S. financial bailout have discussed spending another $1 trillion to $2 trillion to help restore banks to health, according to people familiar with the matter. President Barack Obama's new administration is wrestling with how to stem the continuing loss of confidence in the financial system, as it divides up the remaining $350 billion from the $700 billion Troubled Asset Relief Program launched last fall. The potential size of rescue efforts being discussed suggests the administration may need to ask Congress for more funds. Some of the remaining $350 billion of TARP funds has already been earmarked for other efforts, including aid to auto makers and to homeowners facing foreclosure.

I've been saying for weeks that the current stimulus package won't be enough and the Government will be going back to the trough later in the year!

Head & Shoulders Pattern.

This was on Trader's Narrative yesterday. I can't post the chart but you can link to it here: http://www.tradersnarrative.com/sp-500-forming-a-head-shoulder-pattern-2244.html.

Here's is a summary of their analysis: "Head and shoulder formations are one of the most fundamental technical patterns. They are arguably one of the easiest to recognize on a chart and are almost always found at turning points in price. Right now we are seeing the S&P 500 Index (SPX) carving out what looks to be the right side of a head and shoulder formation:
The defining element of this patterns is not only the striking silhouette it leaves behind on price charts but also the volume that accompanies it. For down trending reversals, like this one, we want to see heavy volume come in as the right shoulder is created. Ideally, a burst of activity both in price expansion and volume cements the pattern as it decisively breaks through the neckline."

I am no expert in Head & Shoulders patterns. Everybody but me seems to be able to see them develop on stock charts. Still that doesn't mean they aren't there. If it does pan out to be a viable pattern it is another indication of support for the market in this area.

*Long S&P 500 related ETFs in client accounts.

Two Events Boosted Stocks Today.

Analysis: Two events boosted stocks today (that's besides them being in an oversold state which we've talked about for the past week or so). The first was the discussions arising in Washington about taking many of the bad assets out of banks and putting them in a central bank likely managed by FDIC. The 2nd was the Federal Reserve's announcement concerning interest rates this afternoon.

The "good bank/bad bank" concept has been discussed almost since the banking sector fell apart this fall. The toxic assets on financial firm balance sheets can be swept under a rug owned by the federal government. Banks would stop having huge losses and would be able to stop raising new capital. Better balance sheets means more likelihood of banks lending money to businesses and homeowners.
The hardest question is placing a value on these assets. Apparently some of this paper is so exotic that it could be worth just a few cents on the dollar. But presumably there is enough value in this paper overall that putting it on the balance sheet of the Federal Government is a better solution than letting it continue to fester. Presumably the government has the time and the ability to park this stuff until a better day.

According to 24/7 Wall Street, "The greatest fiction about a bad bank is that it keeps the government from nationalizing the banking system. While the Treasury is not likely to take outright control of any of the banks which would sell it assets, the issue remains of what the government gets for that service. Some of these asset pools carry nominal values in the hundreds of billions of dollars. Even the largest US banks like Citigroup (C) and Bank of America (BAC) have market caps below $50 billion. Buying paper that is worth a sum which is much greater than a financial firm's market value begs the question of why the taxpayer does not get most of the equity in these companies for taking most of the risk. Is the bad bank a good idea? Probably. But, the value equation of how America's largest financial firms pass their assets to the government is almost certainly going to work in the favor of the banks and against the interests of the Treasury."

Irregardless whether it happens or whether taxpayers are getting a good deal. this news was enough to send the financial sector up about 15% today.

The 2nd piece of news was that the Federal Reserve said it would keep intact its current policy of record-low interest rates. The central bank also said it's prepared to buy U.S. Treasuries "if evolving circumstances indicate that such transactions would be particularly effective in improving conditions in private credit markets." The Fed said the economy was weakening, but that it still expected a recovery in the second half. The Fed said it was worried about deflation. The Fed said it would continue to flood the financial system with money. The Federal Open Market Committee kept its interest rate target in a range of zero to 0.25%, as expected. Many Fed watchers believe that rates may stay close to zero for more than a year.

The Fed's actions today indicate that deflationary concerns trump future issues of inflation. They also tell you that they want money to come off of the sidelines and get back into all of the channels of the financial system. They have again indicated they will do what they gotta do to strengthen the economy. As Jim Cramer said today, the Fed by their actions is saying "you're making a huge mistake by betting against us".

Anything the Fed can do to stimulate lending to businesses, for mortgages, for cars etc should ultimately be good for the economy. "Cash is trash" is what they're saying. That doesn't mean that the markets are likely to take off to the moon (although anything is possible), but it is again a "No Mas" moment. A line in the sand that should at least continue to put a floor under equities as they start the long slow process of rebuilding trust and value into the system. Or again as Cramer put it today. The Fed is working with investors right now not against them.

an tSionna 01.27.09: More of the Same

I haven't posted a market picture in about two weeks. As you can see we have basically continued in the trading range established last fall, albeit with a negative bias since the first of the year. Stocks are off about 6% so far in 2009 but they are still about 12% off of the lows established in October. Lately the market looks like it has established some short term support and is working off an over sold condition. This is one of the factors that prompted me to revisit some of my trading longs over the past 10 days. {See Post of 01.16.09}

One other piece of what I would consider to be somewhat positive news is that the market has recently stabilized even though bank stocks have continued to be weak. Since banks led us down I think this divergence could be a positive force over time. Incredibly banks now represent only about 3% of the S&P 500.

*Long SPY and related ETF's in client accounts.

Wall Street Research

NY Post:
- As stocks tank and Wall Street is re-made, even the best and brightest in the financial sector are getting their reputations shredded. Take, for example, Goldman Sachs, whose equity-research department is regarded as the gold standard on Wall Street but whose list of the best stocks to buy couldn't even keep pace with the sharp decline of the S&P 500 index, according to research done for The Post. Indeed, Goldman's "Conviction Buy" list of 44 stocks - as its best bets list is called - of July 23, 2008, exactly six months ago last Friday, fell 38.75 percent over the half-year while the S&P 500 was off 35.55 percent over the same period. Which means Goldman's team of $1 million-a-year equity analysts sold to company clients, for a pretty penny, advice that turned out worse than the performance garnered by a suburban family who invested in a low-cost Vanguard index mutual fund. The worst performer on the Conviction Buy List is The Mosaic Company (MOS), which in July was $135.38 with a target upside of 59 percent to $215. On Friday, Mosaic, the once-trendy fertilizer stock, closed at $35.39.

My Comment: Wall Street research is broken. The reality is that it's been broken for probably 5-10 years its just now apparent to everybody that it needs to mostly go away.

Source New York Post. 1/26/09.

Dogs Of The Dow.

CNBC noted an interesting factoid yesterday. If you take these four components of the Dow Jones Industrial Average: American Express {AXP}, Bank of America {BAC}, Citigroup {C} and General Motors {GM} and assume they go to zero then the Dow would only lose 350 points from where it stood yesterday. Assuming they meant yesterday's open that would mean the Dow would be vulnerable to approximately a 4% loss if that happened all at one time. If for instance it happened today the Dow would still be above it's November lows.

Of course what isn't mentioned is what would happen to the Dow if these four names were replaced in the index.

So just for the heck of it. I thought I'd monitor these stocks over the next year to see how they would work from these levels in a portfolio. Sort of a "Dogs of the Dow Strategy". We'll use yesterday's close as the start date.

AXP 16.01

BAC 5.73

C 3.06

GM 3.21

DJIA 8,224

*Long certain legacy positions in C for certain accounts. Long ETFs related to the Dow Jones Industrial Average.

Graph: Government Borrowing

These Graphs courtesy of East Coast Economics. Link: http://eastcoasteconomics.wordpress.com/

The Graph above shows the money borrowed by US banks from the Fed through Dec 2007; the spike marks the Savings & Loan Crisis at the end of the 1980s with borrowing maxing out at $8b.

Now take a look at the 2nd chart. It is the same graph as above, but updated through the beginning of November ‘08.
This might be less scary if the Fed wasn’t creating money out of thin air and at the same time accepting assets of questionable - and deliberately undisclosed - quality as collateral from banks.

This is why so many investment professionals are longer term quite pessimistic on interest rates and most goverment bonds. .

Obama & The Banks.

The Obama Administration is reportedly considering several fixes for the banking system. Many of these are the same solutions as put forth by the Bush Administration.
Some of the specific remedies under consideration include:
-A huge "bad bank" that would buy up bad assets. Unless the government buys these assets at fair value--which is to say, often far below the value that banks say they are worth--this will be amount to a huge transfer from taxpayers to bank bondholders and stockholders.
-Injection of more capital into banks via securities that would convert into common stock (bonds or preferred stock). This would leave the government owning the banks for some period of time.

-Guaranteeing further losses on bad assets but leaving them on bank balance sheets (the Citigroup "solution," also known as "ring fencing.") This postpones the burning of taxpayer money, but it also exposes the taxpayer to massive losses, because the banks will be sure to give taxpayers the worst-valued assets they own.

Why is it unlikely that the government would even consider the solution of paying fair value for the assets (a value much lower than what banks think their worth) and then injecting new capital? Probably out of fear of triggering another Lehman Brothers situation.

Bank stocks are higher this morning in part due to great earnings out of Northern Trust. {Long NTRS in certain legacy accounts. It is not a security we actively buy or sell.}

Meanwhile The Stock Market....

....laid another egg today. You can thank the banking industry for that. We'll use today's close on the S&P 500 to start a market return log for the new Administration.

A New Chapter.

“Let it be said by our children’s children that when we were tested we refused to let this journey end, that we did not turn back.”—From the Inaugural Speech

We can all sit back in the coming days and agree or argue with what happens next but whether you are a Democrat or Republican or of no particular persuasion, this is one darn cool thing we did today.

Some Other Cramer Thoughts.

Some other thoughts from Jim Cramer's "Stay Mad For Life".

"The focus on short-term performance has infected pretty much every investor I know. You don't need to show good days, good months, good quarters or even good years. You need to show great wealth over many years. Invest for the long term."

"The best way to get your bond exposure is to buy into a bond fund rather than investing in individual bonds, provided that the fees are low....Investing in bonds is something that will always be necessary and boring. Outsource your bond-buying to a bond index fund and stop worrying about it."
Note: We have used and are continuing to use bond ETFs.

Snowed In/Snowed Under

We're snowed in and I'm snowed under this weekend doing end of the year paperwork as well as certain odds & ins. Posting will be slim to none. Look for something on Monday. A reminder the markets are closed on Monday for Martin Luther King Day. I however will be working albeit on a lighter schedule.

Game Plan: Trades

Game Plan: Yesterday towards the end of the day I re-entered some trading longs for risk appropriate accounts. I will look to add to these if the market pulls back over the next several days. These are similar to what I did in December. If I have time over the weekend I'll try to go into a bit more depth of the strategy regarding these trades.

Employer's Stock In a 401(K)

Jim Cramer of "Mad Money" fame has some interesting advice about employer's stock in a 401(K). In his words don't do it. "There are very few situations where you want to own stock in the company that writes your paychecks. Diversification is the single most important principle of investing, and you need to put your income on the table when you look at your investments. Your fate is already tied to the company, even if you don't invest a penny in its stock. If something really terrible happens to the company and it needs to take drastic measures to cut costs, you're already in trouble just because you're on the payroll."

I don't know if I completely agree with this because I know of normal "Joes" who became wealthy beyond their wildest dreams by investing prudently in their company's stocks during good economic times. But I do think that most people who work for large companies tend to put too much of their assets in company stock and then become unwilling to ever take a look at it as part of an asset allocation strategy or make changes when events start to catch up with them.

The single biggest issue I deal with all the time is investors who have too much of any one security as part of of their overall investments and their unwillingness to do anything about that fact.

It's Official

Further fanning the flames of 2008's misery, {Wow I can't believe I just said that} the boys at Bespoke have finished their year end calculations regarding the Dow Jones Industrial Average. According to Bespoke, the Dow with it's roughly 34% loss suffered it's 3rd worse year ever. Only 1907 and 1931 were worse. Each of those years also involved de-leveraging and a financial crisis. The good news is that the following year has seen an average increase of 23.2%.

Source: Bespoke Investments. The Bespoke Report. 1.10.09. {subscription required}

*Long ETFs related to the the Dow Jones Industrial Average.

Barron's Roundtable Review

Each year Barron's magazine publishes a three part round table series where they interview some of the "wise old men and women" of the investment business. It is usually recorded the first week of January (this year it was Jan 5th) and published serially later in the month. Along with their prognostications and picks for the coming year, Barron's also now gives the performance of the stocks recommended by the participants from last year. Here in aggregate is how they did:

-The 63 equity, bond or ETF or mutual fund recommendations the group collectively lost 41.42% (slightly worse than the overall market).

-Each manager's overall picks lost 39.98% (again slightly worse than the overall market).

-Pimco's Bill Gross whose picks were all fixed income related lost 24.3%, pointing to the fact that no asset class was safe last year.

-Gross also picked General Motors and Ford Corporate Bonds as recommendations. Each of these lost over 50% in value. As bankruptcy fears gripped the auto industry.

-Oscar Shafer had the best overall performance down slightly more than 12%. His picks were as far as I can tell mostly small cap European stocks.

-Art Samberg and Archie MaCallaster who have been round table participants for years picks in total lost 62.49% and 72.09%. MaCallaster's picks were heavily weighted in financials . Samberg's had more of an international flavor. Three of Samberg's picks lost over 80% of their value. MaCallaster had one in that category.

-Some of these managers had recommendations that involved certain esoteric items such as pairs currency trades or cotton. I left these out of these calculations as Barron's did not break out the percentage gains or losses for these ideas.

Again this just points to the fact that last year was a real tough year. These guys manage billions of dollars of client funds. Collectively they employ at least hundreds of people who do nothing each day but analyse securities and most can probably call companies up on the phone and speak to somebody pretty high in the chain of command about business. They still collectively did no better than the S&P 500 ETF. Something to think about going forward.

an tSionna 01.12.09

Revisiting the moving average theme we discussed over the weekend. This chart however is of the SPY. It's pattern is similar to the what we previously showed. As I suspected the markets have rejected the positive cross in its short term moving averages. We have simply moved back into the trading range we've been in since mid-October. Market showing signs of not being ready for any major sort of advance although probability does favor better entry points as we get closer to the bottom of this price range.

*Long various ETFs related to the S&P 500.

an tSionna 01.10.09 Moving Averages

We discussed calculating moving averages back in December. One of the things we screen on a daily basis are sets of moving averages and how they relate to each other. In particular we look for moving average crosses as these can be a harbinger of a change in market direction or trend. We screen moving averages on three different levels: Short, intermediate and longer term. Interestingly we are seeing as in this chart of the Nasdaq 100 ETF (QQQQ) many of these shorter term moving averages looking like they might be ready to go positive. You can see from the chart above that in point 3 this moving average cross (in technical parlance a "death cross") was one of the first signals of negative action. A positive cross here soon (also known as a "golden cross") could signal at least in the short term positive trading action for stocks.

The magnitude of our recent decline is such that I wouldn't be surprised if stocks are rejected at this juncture at least the first time they try to go forward. But it is another sign of a market in the early stages of trying to heal itself.

One final note. Moving average crosses don't by themselves signal the magnitude of a change in trend. That is they can't tell us if the change will last a day or a year. They by themselves are like canaries in coal mines. They alert us to changes we need to factor into our investment process and into the investment plan.

*Long in client accounts various ETF's related to QQQQ.

Thinking About Retail Sales.

"The December chain-store results showed clearly that, for many people, no degree of price-discounting makes an extra sweater or TV worth buying-not when unemployment is in the process of speeding above 7%. A secondary result of this spending discipline, or simple cash shortage, among consumers will become vivid in the coming week. Namely official wholesale and retail price indexes will take on a deflationary look, with broad price declines forecast for each. This helps explain Treasury yields at historic lows and also hints at why big companies are in a rush to raise cheap debt at low rates from investors eager to accept them."--Barrons, Week of January 13, 2009.

John Tamny On Housing.

John Tamny over at Real Clear Markets recently wrote this about housing.

" 'Recession Slows Migration in U.S.' was a recent Wall Street Journal headline. Since new jobs are frequently the main reason people move, the story wasn't a big surprise. Unfortunately, the lack of migration related to a less bountiful jobs picture wasn't the full story. Indeed, the other major factor presently keeping Americans grounded is housing. As the Journal article noted, falling home prices 'have prompted many people to stay put, rather than risk losing money in a declining housing market.'

The housing angle is unfortunate, and it raises the question of why our federal minders have throughout history gone to great lengths to subsidize its health. Subsidies and taxes, for good or bad, are usually implemented to achieve an outcome presently not revealing itself due to natural market forces. But when it comes to housing, history shows any governmental efforts meant to achieve greater ownership were superfluous at best.

That is so because--as historian Niall Ferguson writes in his latest book, The Ascent of Money--when it comes to home ownership in the English-speaking world, 'no other facet of financial life has such a hold on the popular imagination.' Indeed, even though the popular board game Monopoly was created to discourage home ownership, Ferguson points out that its phenomenal success was 'in complete contradiction to its original inventor's intention,' given the American obsession with property.

As Americans learned in The Wizard of Oz, 'there's no place like home.' Even better for most homeowners in the U.S., thanks to periodic monetary mistakes (think the 1970s and this decade) that have led to a greatly debased dollar, housing has served as the ultimate middle-class hedge. Almost commodity-like in its price movements, housing has historically been a safe investment, its long-term value on an upward path no matter the economic climate.

Many have bemoaned housing's recent weakness, but compared to the decline of the S&P 500 over the past year, property has done very well. And since it's a tangible investment that its owners can actually live in, its virtues become even more attractive regardless of any preferential treatment afforded it by the federal government.

Despite housing being an asset class that has needed no help, politicians have regularly sought to subsidize it. Mortgage interest was deductible for federal tax purposes as early as 1913. FDR gave us the Home Owners' Loan Corp., the Federal Housing Administration (FHA) meant to encourage long-term loans, and then the Federal National Mortgage Association (nyse: FNMPRG - news - people ) (Fannie Mae (nyse: FNM - news - people )) was formed to create a more liquid market for loans.

In later years, the Savings & Loan (S&L) industry was propped up when the federal government allowed it to offer higher deposit rates than traditional banks. And when higher-yielding money-market accounts threatened the S&Ls with obsolescence, the government stepped in to guarantee larger S&L deposits alongside reduced regulations that essentially privatized gains in concert with the socialization of losses.

Many on the right today point to the greater empowerment of Fannie Mae and Freddie Mac under President Bill Clinton as the precursor to today's housing troubles, but a more realistic account shows that politically correct thinking with regard to housing infected both major political parties. Indeed, if we ignore how the Bush Treasury's weak-dollar policies fostered a 'flight to the real,' we certainly cannot ignore President George W. Bush's 2002 proclamation that, "We want everybody in America to own their own home."

Given Bush's view that "it is in our national interest that more people own their home," he signed the American Dream Downpayment Act in 2003, which, according to Ferguson was "a measure designed to subsidize first-time house purchases among lower income groups." So make no mistake, the rush into housing by those unable to afford

mortgage payments was very much bipartisan in nature.

What's interesting today is that despite a broad consensus that the rush into housing at least partially explains our nation's financial difficulties, there's yet another growing consensus that Washington must fix the housing market. And with housing in mind, economic thinkers on both sides of the philosophical aisle are endorsing governmental efforts to reduce mortgage rates.

What's most surprising here is how many who embrace classical, or supply-side thinking, agree with the above. For one, when we purchase housing, we're merely consuming capital that essentially goes into the ground. This flies in the face of classical theory, which argues for greater savings so that the entrepreneurs in our midst can access the very capital necessary for growth.

Second, it can't be forgotten that housing is by definition a stationary investment. And as an immobile object, housing is one of the easiest assets for governments to tax. While human capital is less easily taxed (for its effectively being mobile), a house cannot move--and tax collectors love it when they can easily see what we own.

But worst of all is housing's often illiquid qualities and their impact on worker migration. It's perhaps a cliché, but we live in a world of fast-moving capital that reaches new locales with the click of a computer mouse. As the aforementioned story from The Wall Street Journal makes plain, housing, particularly during periods of economic uncertainty, keeps the very human capital necessary for our economic revival from traveling to where it is most needed.

So, contrary to the broad economic consensus, efforts to save the property market are paradoxically inimical to its health. Owing to the basic truth that we produce in order to consume, and that consumption of shelter is a given, the best path for the government to take in order to save housing would be to de-emphasize its ownership, or at the very least make it equal in the eyes of the law with regard to other investments.

If so, investments in the ground might decline, but this will occur alongside greater investment in the productive economy. And if the productive economy of the mind flourishes, consumption of existing and future housing stock will surely take care of itself.

http://www.forbes.com/opinions/2009/01/02/housing-subsidies-migration-oped-cx_jt_0105tamny.html

Jim Cramer On Stocks.

Words by Jim Cramer {Star of Mad Money on CNBC} on owning equities:

"There are lots of ways to own stocks. You can invest in individual stocks or you can invest in a mutual fund, a hedge fund or an exchange traded fund that owns stocks. Everyone should own stocks except for wealthy retirees who can afford to support themselves comfortably past the age of 100. Everyone who wants to get rich and stay rich must own some stocks. But not everyone should own individual stocks."

Game Plan: Trades Dec 23.

Game Plan: Note I have scaled out of many of my Dec. 23rd trades over the past several days. I will look to re-enter these at the appropriate time.

John Bogle's Six Lessons.

John Bogle of the Vanguard Group of Mutual Funds has an editorial in today's Opinion Section of the Wall Street Journal. I've decided to excerpt this as this seems to be the week of lists around here.

Here is the full article: http://online.wsj.com/article/SB123137479520962869.html

Six Lessons for Investors
Be diversified and don't assume past performance will continue.

There is almost no limit to the ability of investors to ignore the lessons of the past. This cost them dearly last year. Here are six of the most important of these lessons:

1) Beware of market forecasts, even by experts. As 2008 began, strategists from Wall Street's 12 major firms forecast the end-of-the-year closing level and earnings of the Standard and Poor's 500 Stock Index. On average, the forecast was for a year-end price of 1,640 and earnings of $97. There was remarkably little disparity of opinion among these sages.
Reality: the S&P closed the year at 903, with reported earnings estimated at $50.
Strategists aren't always wrong. But they have been consistent, betting year after year that the market will rise, usually by about 10%. Thus, they got it about right in 2004, 2006 and 2007, but also totally missed the market declines in 2000, 2001 and 2002, and vastly underestimated the resurgence in 2003. Ignore the forecasts of inevitably bullish strategists. Bearish strategists on Wall Street's payroll don't survive for long.

2) Never underrate the importance of asset allocation. Investing is not about owning only common stocks. Nor are historical stock returns a sound guide to future returns. Virtually all investors should keep some "dry powder" in their portfolios.....With all the focus on historical returns that greatly favor stocks, don't ignore bonds. Consider not only the probabilities of future returns on stocks, but the consequences if you are wrong.

3) Mutual funds with superior performance records often falter. Last year was an extreme example. With the S&P 500 off 37% for the year, Legg Mason Value Trust fell by 55%. Fidelity Magellan Fund, after a good 2007, was off 49%. Funds managed by proven long-term pros felt the pain -- Dodge and Cox Stock down 43%; Third Avenue Value down 46%; CGM Focus down 48%; Clipper down 50%; Longleaf Partners down 51%. (Full disclosure: Four of Vanguard's actively-managed equity funds also lagged the market by wide margins.) Only time will tell whether the disappointing shortfalls experienced by these and other funds will be recovered in the future, whether the skills of their managers have atrophied, or whether their luck has run out. Whatever the case, chasing past performance is all too often a loser's game. Managers of funds seeking market-beating returns should make it clear to investors that they must be prepared to trail the market -- perhaps substantially -- in at least one year of every three.

4) Owning the market remains the strategy of choice. Such a strategy guarantees a return that lags the market return by a minuscule amount, and exceeds the return captured by active equity-fund managers as a group by a substantial amount. Why? Because the heavy costs incurred by investors in actively managed equity funds can easily amount to 2% to 3% annually.....As a group, investors are by definition indexers. (That is, they own the entire market.) So indexing wins, not because markets are efficient (sometimes they are, sometimes they are not), but because its all-in annual costs amount to as little as 0.1% to 0.2%. Indexing won in 2008 by an especially wide margin. Low-cost, low-turnover, no-load S&P 500 index funds outpaced nearly 70% of all equity funds, and (admittedly a fairer comparison) more than 60% of all funds focused on large-cap U.S. stocks.

5) Look before you leap into alternative asset classes. During 2006-07, equity mutual funds focused on developed international markets and emerging markets provided strong relative returns to U.S. stocks. During that period, U.S. investors made net purchases of $285 billion in mutual funds investing in non-U.S. stocks, and liquidated on balance some $35 billion from funds focused on U.S. stocks. This extreme example of "performance chasing" at its worst is hardly defensible. But, disingenuously, it was touted by fund marketers as adding "non-correlated assets," or "reducing volatility risk." In 2008 -- with non-U.S. developed market funds falling by 45% and emerging market funds tumbling by 55%, we learned once again that, just when we need it the most, international diversification lets us down. Commodities were no different. As the global recession developed, commodity funds sank, the largest such fund tumbled 50%. Always keep in mind: When the investment grass looks greener on the other side of the fence, look twice before you leap.

6) Beware of financial innovation. Why? Because most of it is designed to enrich the innovators, not investors.....Our financial system is driven by a giant marketing machine in which the interests of sellers directly conflict with the interests of buyers. The sellers, having (as ever) the information advantage, nearly always win. ....While the events of 2008 reinforced that message, perhaps these stern and oft-repeated lessons of experience will help investors avoid similar mistakes in 2009 and beyond.

Note: I'm not sure I completely agree with Bogle on point six. After all it was financial innovation that gave us index funds of which his Vanguard group is a huge investor. I think I'd rather say beware of financial innovation that has not been around long enough to withstand the test of bull, bear and sideways markets.

10 Things Investment Pros Do That Amateurs Don't!

1. Pros always have cash
2. Pros tend to worry less about the day to day with stocks and try to focus longer term.
3. Pros try not to invest in things they don't know.
4. Pros recognise that not everything is analyzable.
5. Pros are as concerned with the downside as the upside.
6. Pros always look; they never avert their eyes from a downturn.
7. Pros accept that not everything works or is going to work at once.
8. Amateurs are worried that they aren't making enough but pros are worried that they are making to much money.
9. Pros do their homework.
10. Pros know things go wrong. They are more likely to cut losses and let profits run.

2008: Second Worst Year Ever!

2008 Will go into the record books as the 3rd worst year ever for equity investors when using the Dow Jones Industrials. With its 34.15% loss the Dow is only surpassed by 1931's 52.67% loss! It was also the 11th year {excluding dividends} since 1896 that the Dow lost more than 20%. The good news according to Bespoke Investments is that the year after the Dow posts 20+% declines is generally a good one for investors. In all the Dow has risen 80% of the time with an average return of 25.06%.

Here's hoping 2009 is on the mark in that regard. We could all sure use it!

Source: Bespoke Investments 12.30.08. Subscription required.

*Long ETF related products invested in the Dow Jones Industrial Average.

Byron Wien's 10 Surprises.

Below I've listed Byron Wien's list:

Pequot Capital Chief Investment Strategist Compiles 24th Annual List

WESTPORT, Conn.--(BUSINESS WIRE)--Byron R. Wien, Chief Investment Strategist of Pequot Capital Management, Inc., today issued his list of Ten Surprises for 2009. Mr. Wien has issued his economic, financial market and political surprises annually since 1986. The 2009 list follows:
1. The Standard and Poor’s 500 rises to 1200. In anticipation of a second-half recovery in the U.S. economy, the market improves from a base of investor despondency and hedge fund and mutual fund withdrawals. The mantra changes from “fortunes have been lost” to “fortunes can still be made.” Higher quality corporate bonds, leveraged loans and mortgages lead the way.
2. Gold rises to $1,200 per ounce. Heavy buying by Middle Eastern investors and a worldwide disenchantment with paper currencies drive the price of precious metals higher. In a time of uncertainty, investors want something they can count on as real.
3. The price of oil returns to $80 per barrel. Production disappointments and rising Asian demand create an unfavorable supply/demand balance. Other commodities also rise, some doubling from their 2008 lows. Natural gas goes to $9 per mcf.
4. Low Treasury interest rates coupled with huge borrowing by the Treasury send the dollar into a serious downward slide. Overseas investors become concerned that the currency printing presses will never stop. The yen goes to 75 and the euro to 1.65.
5. The ten-year U.S. Treasury yield climbs to 4%. Later in the year, as the economy shows signs of recovery, economists and investors shift their mood from concern about deflation to worries about inflation. A weak dollar, rapid growth in money supply and record-setting deficits (over $1 trillion) are behind the change.
6. China’s growth exceeds 7% and its stock market revives. World leaders credit China’s authoritarian government for its thoughtful stimulus policies and effective execution during a challenging period. The Chinese consumer begins to spend more and save less and this shift is behind the unexpected strength in the economy.
7. Falling tax revenues from the financial sector cause New York State to threaten bankruptcy and other states and municipalities follow. The Federal government is forced to step in and provide substantial assistance. The New York Post screams “When will the bailouts stop?”
8. Housing starts reach bottom ahead of schedule in the fall, and house prices stabilize after dropping 15% from year-end 2008 levels. The Obama stimulus program proves effective and a slow growth recovery begins before year-end. Third and fourth quarter real gross domestic product numbers are positive.
9. The savings rate in the United States fails to improve beyond 3%, as most economists expect. The concept of thrift seems to have vanished from American culture. Peak job insecurity and negative growth drive increased savings early in the year, but spending resumes as the economic growth turns positive in the second half, making Christmas 2009 the best ever.
10. Citing concerns about Iraq’s fragile democratically elected government and the danger of a Taliban-controlled Afghanistan, Barack Obama slows his plan for troop withdrawal in the former and meaningfully increases U.S. military presence in the latter. In a hawkish speech he states that the threat of terrorism forces the United States to maintain a strong military force in this strategic area.

Mr. Wien believes these surprises, which the consensus would assign only a one-in-three chance of happening, have at least a 50% probability of occurring at some point during the year. In previous years, more than half of the elements of the list have proven correct.
Pequot Capital Management is a private investment firm.

Source: http://www.businesswire.com/portal/site/google/?ndmViewId=news_view&newsId=20090105005763&newsLang=en

2008: Some Final Numbers.

The Mercury News has the details on the Wall Street's annus horribilis:

The Russell 3000, which covers 98 percent of investable equities, shed $6.7 trillion or 39.7 percent of its value during 2008.
The S&P 500 was down 38.5 percent, its worst performance since 1937!
The Dow Jones industrial average was off 33.8 percent — the worst return since 1931.
The five worst-performing stocks in Silicon Valley all lost more than 90 percent of their value.
Every single technology index fell this year. Biotech did the "best," with a 17.7 percent drop; Internet, computer, networking and semiconductor stocks all were down more than 40 percent, and disk-drive stocks were off nearly 61 percent.

Also Investors Intelligence reported that the average stock lost 54% last year.

Advantages Of ETFs.

I am always asked about the advantages of using Exchange Traded Funds. Here is a quick amended primer sourced from "Investopedia". I will highlight in Red what are my own points.

It was State Street Global Advisors that launched the first exchange traded fund (ETF) in 1993 with the introduction of the SPDR. Since then, ETFs have continued to grow in popularity and gather assets at a rapid pace. The easiest way to understand ETFs is to think of them as mutual funds that trade like stocks.

Trades Like a Stock. The easiest way to highlight the advantage of the ETF trading like a stock is to compare it to the trading of a mutual fund. Mutual funds are priced once per day, at the close of business. Everyone purchasing the fund that day gets the same price, regardless of the time of day their purchase was made. The ETF's stock-like quality allows the active investor to do more than simply trade intraday. Unlike mutual funds, ETFs can also be used for speculative trading strategies, such as short selling and trading on margin. In short, the ETF allows investors to trade the entire market as though it were one single stock. Most important because ETFs trade like stocks they can also be valued like stocks. Therefore a game plan can be put into work regarding their usage.

Low Expense Ratios: ETFs offer all of the benefits associated with index funds- such as low turnover and broad diversification (not to mention the often-cited statistic that 80% of the more expensive actively managed mutual funds fail to beat their benchmarks) - plus ETFs cost a lot less.

Diversification: ETFs come in handy when investors want to create a diversified portfolio. There are hundreds of ETFs available, and they cover every major index and sector of the equities market. There are international ETFs, regional ETFs and country-specific ETFs. Specialized ETFs cover specific industries (technology, biotech, energy) and market niches. ETFs also cover other asset classes, such as fixed income. While fixed-income ETFs are often selected for the income produced by their dividends, some equity ETFs also pay dividends. These payments can be deposited into a brokerage account or reinvested.

Asset Allocation: Studies have shown that asset allocation is a primary factor responsible for investment returns, and ETFs are a convenient way for investors to build a portfolio that meets specific asset allocation needs. For example, an investor seeking an allocation of 80% stocks and 20% bonds can easily create that portfolio with ETFs. That investor can even further diversify by dividing the stock portion into large-cap, growth and small cap value stocks, and the bond portion into mid-term and short-term bonds.

Tax Efficiency: ETFs are a favorite among tax-aware investors because the portfolios that ETFs represent are even more tax efficient than index funds. In addition to offering low turnover - a benefit associated with indexing - the unique structure of ETFs enables investors trading large volumes to receive in-kind redemptions. This means that an investor trading large volumes of ETFs can redeem them for the shares of stocks that the ETFs track. This arrangement minimizes tax implications for the investor exchanging the ETFs since the investor can defer most taxes until the investment is sold. Note however that investors would be responsible for gains as well as losses incurred when they individually sell an ETF in a taxable portfolio. However, ETFs make possible under certain circumstances tax harvesting advantages that might not be available by purchasing individual securities.

Conclusion: The reasons for the popularity of ETFs are easy to understand. The associated costs are low, and the portfolios are flexible and tax efficient. The push for expanding the universe of exhange-traded funds comes, for the most part, from professional investors and active traders. Nevertheless, long-term investors will find that the broad-market based ETFs can find a place in their portfolios when they have an opportunity for occasional large-size purchases of securities. Investors interested in passive fund management, and who are making relatively small investments on a regular basis, are best advised to stick with the conventional index mutual fund. The brokerage commissions associated with ETF transactions will make it too expensive for those people in the accumulation phase of the investment process.

Source except where noted above in Red: "Investopedia". http://www.investopedia.com/articles/mutualfund/05/060605.asp?viewed=1

Doug Kass 20 Surprises.

Doug Kass over at Realmoney.com yearly comes out with a list of 20 surprises. Since he was spot on with many of these last year, including nailing the banking crisis, these are at least worth a read. Kass describes his yearly surprises this way. "These are not intended to be predictions but rather events that have a reasonable chance of occurring despite the general perception that the odds are very long. I call these "possible improbable" events.

The real purpose of this endeavor is to consider positioning a portion of my portfolio in accordance with outlier events -- with the potential for large payoffs. After all, the quality of Wall Street research has deteriorated (in some measure because of brokerage industry consolidation) and remains, more than ever, maintenance-oriented, conventional and "groupthink," even despite the mandated reforms over the past several years. Mainstream and consensus expectations are just that, and in most cases they are deeply imbedded into today's stock prices. If I succeed in at least making you think about outlier events, then the exercise has been worthwhile."

Here in an abbreviated version are Kass's surprises.

Without further ado, here is my list of 20 surprises for 2009. In doing so, we start the new year with the surprising story that ended the old year -- the alleged Madoff Ponzi scheme.
1. The Russian mafia and Russian oligarchs are found to be large investors with Madoff.
2. Housing stabilizes sooner than expected. President Obama, under the aegis of Larry Summers, initiates a massive and unprecedented Marshall Plan to turn the housing market around.
3. The nation's commercial real estate markets experience only a shallow pricing downturn in the first half of 2009.
4. The U.S. economy stabilizes sooner than expected. After a decidedly weak January-to-February period (and a negative first-quarter 2009 GDP reading, which is similar to fourth-quarter 2008's black hole), the massive and creative stimulus instituted by the newly elected President begins to work.
5. The U.S. stock market rises by close to 20% in the year's first half.
6. A second quarter "growth scare" bursts the bubble in the government bond market. The yield on the 10-year U.S. Treasury note moves steadily higher from 2.10% at year-end to over 3.50% by early fall, putting a ceiling on the first-half recovery in the U.S. stock market, which is range-bound for the remainder of the year, settling up by approximately 20% for the 12-month period ending Dec. 31, 2009. Foreign central banks, faced with worsening domestic economies, begin to shy away from U.S.
7. Commodities markets remain subdued. Despite an improving domestic economy, a further erosion in the Western European and Chinese economies weighs on the world's commodities markets.
8. Capital spending disappoints further.
9. The hedge fund and fund of funds industries do not recover in 2009.
10. Mutual fund redemptions from 2008 reverse into inflows in 2009.
11. State and municipal imbalances and deficits mushroom. The municipal bond market seizes up in the face of poor fiscal management, revenue shortfalls and rising budgets at state and local levels. Municipal bond yields spike higher. A new Municipal TARP totaling $2 trillion is introduced in the year's second half.
12. The automakers and the UAW come to an agreement over wages.
13. The new Administration replaces SEC Commissioner Cox.
14. Large merger of equals deals multiply.
15. Focus shifts for several media darlings.
16. The Internet becomes the tactical nuke of the digital age. The Web is invaded on many levels as governments, consumers and investors freak out.
17. A handful of sports franchises file bankruptcy.
18. The Fox Business Network closes.
19. Old, leveraged media implode. The worlds of leverage and old media collide in a massive flameout of previous leveraged deals. Univision and Clear Channel go bankrupt. The New York Times (NYT) teeters financially.
20. The Middle East's infrastructure build-out is abruptly halted owing to "market conditions." Lower oil prices, weakening European economies and a broad overexpansion wreak havoc with the Middle East's markets and economies.

Source: Real Money 12.29.08 (Subscription required).

Back From The Holidays!

Well I'm back from the holidays. Went skiing and managed not to break anything! Stocks cooperated by recording two back to back nice days on the 31st and Jan 2. For reasons that I will put forward shortly I am convinced that there is one heck of a rally in the offing. It may not be starting quite yet as what we have seen could be typical end of year performance boosting by institutions and money being reinvested after the new year began. However I'm increasingly confident that we will see a pretty decent rally at some point in 2009. As I stated, I'll explain that in a later post.