Archive for the ‘Market Commentary’ Category

When you’re on an airplane and hit turbulence or rough weather, the flight crew tells you to stay seated and buckled.  Unfortunately, when the markets hit bad weather, there is rarely such a warning.

You might want to call it “Black Thursday.”

Yesterday, the markets around the world went into a tailspin reacting almost violently to the ongoing drumbeat of dour economic news.

On the radar, we’ve seen the storm clouds moving in for a while now:

  • lower than expected GDP in the US last quarter,
  • downward revisions of the GDP to a negligible 0.4% for the first quarter,
  • lower business and consumer confidence surveys,
  • sharply lower than expected new jobs created,
  • higher unemployment,
  • foreign debt crises weighing down our Eurozone trading partners.

There was a temporary distraction over the last couple of weeks as we in the US focused on the debt ceiling debate to the exclusion of all else.  Self-congratulatory press remarks by politicians aside, nothing done in Washington really changed the fact that we are still flying into a stiff head wind and storm clouds that threaten recovery prospects.

Eventually, though, the accumulation of downbeat news over the past few weeks seems to have finally come to a head yesterday.  No one thing seems to have caused it.  It just seems that finally someone said “the Emperor has no clothes” and everyone finally noticed the obvious: global economies are weak and burdened by debt and political crises.

All of this has been creating doubt in the minds of investors about the ability to find and implement policies or actions by governments or private sector companies.  And doubt leads to uncertainty.  And if there’s one thing we know for certain, it is that markets abhor uncertainty.

While many commentators may have thought that the “resolution” of the debt ceiling debate in Washington would have calmed the markets, it seems that upon further review of the details the markets are not so sure.  And in an “abundance of caution” market analysts who once were so OK with exotic bond and mortgage investments are now reacting overly negatively to any and all news and evidence of weakness by governments or companies.

What’s An Investor to Do?

Don’t panic.  It may be cliché but it’s still true.  If you hadn’t already put in place a hedging strategy, then what is past is past and move forward.

So the Dow has erased on its gains for 2011 and has turned the time machine back to December 2008.

If you sell now — especially without a plan in place — you’re setting yourself up for failure.

Here’s a simple plan to consider:

  1. Hold On:  You can’t lose anything if you sell.
  2. Hedge: As I’ve said before in this blog and in the ViewPoint Newsletter, you need to put in place a hedge.  There are lots of tools available to investors (and advisers) to help:  Exchange Traded Funds (ETFs) on the S&P 500, for instance, can be hedged with options or you can use “trailing stop-loss” instructions to limit the market downside; another option – inverse ETFs that move opposite the underlying index. These aren’t buy-hold types of ETFs but can be used to provide short-term (daily) hedges.
  3. Rebalance:  If you’re not already diversified among different asset classes, then now’s the time to look at that. You may be able to pick up on some great bargains right now that will position you better for the long-term.  Yes, every risky asset got hit in the downdraft but that’s still no reason to be bulked up on one company stock or mutual fund type.
  4. Keep Your Powder Dry and in Reserve:  Cash is king – an oft-repeated phrase still holds true now.  Take a page from my retirement planning advice and make sure you have cash to cover your fixed overhead for a good long time.  With cash in place, you won’t be forced to sell out at fire sale prices now or during other rough times. This is part of what I refer to as “Buy and Hold Out.”
  5. Seek Professional Help:  Research reported in the Financial Planning Association’s Journal of Financial Planning shows that those with financial advisers and a plan are more satisfied and overall have more wealth.  Avoiding emotional mistakes improves an investor’s bottom line.

As a side note:  The old stockbroker’s manual still says “Sell in May and Go Away.”  Probably for good reason.  Historically, the summer months are filled with languid or down markets and volatile ups and downs.


While it’s tempting to give in to the emotional “flight” survival response that you’re feeling right now, don’t give in.  Stand and fight instead.  But fight smart. Have a plan and consider a professional navigator.

If you are seeking a second opinion or need some help in implementing a personal money rescue plan, please consider the help of a qualified professional.


Let’s Make A Plan Together:  978-388-0020

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Shakespeare was right.  In Hamlet, one character, Polonius, counsels his son “neither a lender or borrower be.”

While not entirely realistic, then or now, it does have a grain of truth in it.  Too much debt limits one’s flexibility and options.  If you borrow too much, you are forced to service that debt with resources that can’t be used for other things.  If you lend too much, you are at risk of never seeing your money again (or being forced to take less when your borrower defaults).

Cash Flow Impacts Personal, Corporate and National Choices

This is as true for individuals as for sovereign nations and corporations. You can’t eat your shoes or your car.

You may have assets but without cash flow, the grease that keeps the system running smoothly, you can only keep going for so long.  Just ask your neighbor who has lost a job and run out of unemployment benefits.  While the house, car and stereo all are assets with value, unless he can turn them into cash he can’t use them to eat. And when you’re forced to sell them, don’t expect to get the same sort of cash money price for them. Boon to the buyer but not to the seller.

Debt Crises and Dominoes

Earlier this year, the banking crisis in Greece occupied the top spot in the headlines.  While a loan from the EU backed by the Eurozone’s largest and most healthy economy so far, Germany, placed a bandage over the immediate crisis, structural problems persist.  This has led the Greek government to roll out a number of stringent and very unpopular austerity measures.

At the time, the open question was how would this crisis in Greece impact the rest of Europe.  No country in the developed world has been spared by the current global recession and slow down.  Would this create a domino effect where weak economies lost the faith of the markets and were forced into their own crises?

The Story of the PIIGS – Scarier Than the Bedtime Story

The targets to watch were the PIIGS of Europe:  Portugal, Ireland, Italy, Greece and Spain.

Each of these economies have structural deficit issues and are the weakest links in the Eurozone chain.

Just like the children’s tale, these little PIIGS are threatened with being gobbled up but in this case by the firm hand of the market in the form of higher interest rates and loss of investor confidence needed to keep their debts financed.

Sure, there is the potential for bailout from other Eurozone members. While Germany continues to be a relatively strong economy, it alone cannot support all of these economies.

So Ireland is the latest victim to the excesses of easy credit.  Now their economy and banks are saddled with real estate loans gone sour and no one to buy the leftovers. Even Great Britain, not part of the EU, has its own issues that they are trying to tackle by implementing severe cuts in their social services, government programs and employment.

Cash Flow and Jobs Closer to Home

Looking back to 2008, the loss of faith in the financial system by nearly everyone cut off the money lifeline to otherwise solvent businesses.  Companies with lots of assets (real estate, machinery, equipment and workers) lacked the cash to continue operations.  Typically, a business (and governments, too) finance themselves from short-term borrowing to cover operational and payroll costs while waiting on the collection of accounts receivable.

But when the faith in getting repaid dried up so did the credit forcing many to the brink.

Eventually, here in the US we saw the Fed and the federal government step in to provide the needed liquidity to the system.

Now while other economies are being forced to make unpleasant choices about their economic structure and priorities, we in the US continue to avoid any real adult discussion about our own issues.  Since market investors continue to buy up our public debt, we continue to run as if nothing has changed.

As the world’s primary reserve currency, we continue to benefit from the world’s use of the US dollar as a safe haven.  But as has happened to Greece, Ireland and companies like Lehman Brothers before them, a flick of a switch can change investor sentiment and the near-term financing needed to keep our economic engine running can be shut off.

Whether or not this will lead the political classes to do what is right in the long-term (beyond the next election cycle) to get our finances in order is another open question.  The President’s debt commission has come out with a number of laudable, if not popular or pleasant, options that offer ways to share the pain to make sacrifices that will keep us on track for continued economic growth and national security. Unless we follow through and take up the hard choices that have otherwise been forced on other nations, we risk our own crises more nightmarish than we have seen as we are forced to make bad or worse choices with limited options.

Let the adult conversation begin.




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Da-Dum … Da-Dum … Da-Dum Da Dum Da Dum … Da Da Da Da Da Da Da Da … Da Da Daaaa …..

Sound familiar?  While you could mistaken it for my toddler son Spencer calling me, it’s really the eerily memorable theme song from the classic water thriller Jaws. (Or at least that’s what it sounds like when I’m singing it).

Like many, after seeing this movie I was more than a bit afraid to go swimming even in my own backyard pool.  Let’s not even talk about trips to the beach!

Just as investors thought it was safe to get back into investing waters as the market continues to sport positive numbers on several indexes like the Dow and S&P, news of another potential scandal comes out that may cause investors to pause once again.

After a decade that has included three stock market busts, a real estate bubble burst, a mutual fund industry timing scandal, the greatest Ponzi scheme ever and a whole lot of smaller ones coupled with a long and wearying Recession and near financial meltdown, we now have another cloud on the horizon.

Since a November 20 article in the Wall Street Journal, there has been an increasing amount of media scrutiny about a widening investigation by the FBI, Securities and Exchange Commission and the New York Attorney General’s Office into possible insider trading by several well-known mutual funds, hedge funds and investment managers.

How this plays out is anyone’s guess.  But the last time there was a wide-spread scandal in mutual funds, the bedrock investment that allows many retail investors to get in on the action of Wall Street, it resulted in not only bad PR but in more than $3 billion paid out to investors to make up for the inequity of favorable market timing by a select few.

In fact more than six years after the scandal, I continue to receive checks in the amounts ranging from $2 to $30 from mutual fund companies that used to hold my investments.

Will this result in the same sort of long-tail remedy?  Who knows but the more immediate concern will be if individuals decide that this is one more piece of evidence that the Wall Street game is rigged against them.

I hope that is not the case.  Throwing the baby out with the bath water will ultimately do no good for an investor saving for long-term goals.  Sure, you can take all your marbles and go home.  In fact, more than $90 billion has been withdrawn from mutual funds since the beginning of 2009.

The general gist of this investigation is centered on so-called expert networks that offer research of various stocks to investment managers.  Since investing is all about determining what is a fair value to pay for the stock of a company, it’s important to understand the company’s cash flows and things that can affect the top and bottom line.  So certain research companies go about like investigative reporters developing contacts with companies, asking questions about new products or sales and then reporting this to stock analysts that work at other firms.

There is nothing inherently wrong or illegal about asset managers using third-party research.  Since there’s no easy to see bright line about what is or isn’t insider information in some of these cases, nothing wrong may have been done.

The problem for many investors right now is one of perception.  There is the cockroach theory in accounting and finance.  When you turn on a light in a room and you see something scampering off, it’s almost safe to say that there were probably more bugs running about when the lights were off.  So to avoid future surprises, you might want to relocate from the apartment and in investing you might be inclined to also get out of Dodge.

I think it’s too early to simply paint the whole industry with a broad brush and say that they’re all corrupt.  Yes, there were some bad apples.  But you should think about this sentiment best expressed by Frank Black in Investment News (11/29/2010, page 2):  If they are getting inside information … why did the average fund decline almost 50% in 2008-2009?

Trying to get a leg up on the other guy is pretty normal in a competitive marketplace.  Information is king after all.

But there are more honest fools in this business than corrupt ones.

Even a lump of coal is something useful even if it is dirty and messy right now.

So stay calm and avoid shooting first before asking questions of your financial adviser.  This is just another type of risk to be aware of and there are ways to lessen the adverse impact on your long-term portfolio and goals.

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