A recent article in the Dallas Morning News states that we just don’t have anything to worry about going forward regarding a “double dip” recession. A double dip recession is one where you go through one recession, the recession concludes, and then it comes back again. Of course, that would mean that the stock market would come tumbling down again as well.

September 14, 2009 edition

“I can now report that it’s time to lift up your melancholy spirits and go find something else to worry about. Double-dip recessions are very rare events.”

“Since WWII, there are really no examples-except 1980-82….”

The writer also points out that, “you would think a 50% upside prance in the stock market would be met with some measure of confidence rather than such an undercurrent of distrust.”

The biggest mistake that the media is making in the reporting of this recession is comparing it to normal recessions and normal cycles. The writer would need to go back further than 70 years to take a look at the full length of the Great Depression to get a better comparison. No, I don’t think that we are spiraling into a depression. I do think that in the least a double dip recession is a high probability.

People are distrustful regardless of the rise in the stock market. There is rampant unemployment, a foreclosure crisis, and consumers faced with mountains of debt. That is not even considering a Congress that is trying to ruin this country through socialistic policies.

To get a good comparison, you can’t look at post WWII recessions. It would be a lot like comparing apples to oranges. This is what makes this situation so dangerous. Yes, people are distrustful. At the same time, people are also hopeful. They are hopeful that the worst is behind us. If that doesn’t turn out to be the case, confidence will be destroyed and that will be the biggest problem the markets and the economy face. Today, at least confidence is on life support after a grueling 2008.

Levels in the Market

I haven’t covered significant levels in the stock market in a long time. (Click here for a description of what I mean by levels.) For the S&P 500, we are starting down a few key levels that are right in front of us. It is a range of levels between 1042 and 1062. The ability for the stock market to get above 1062 and stay there would be a very bullish event.

Isn’t a rise of 55% in the stock market a bullish event in itself? Only if the bear market is over. Thus far, the levels necessary to declare the intermediate trend change from a bear to a bull have not occurred. It would take the S&P 500 getting over and staying over the level of 1119 for that to occur.

Tags: bear market, Bob Brooks, bullish, Cycles, Dallas Morning NEws, Deceptive Money, Foreclosure Crisis, Great Depression, Price Levels, Prudent Money, recession, S&P 500, Stock Market

A recent study written about bear markets comes to some dangerous conclusions. The study looks at three different scenarios of recovery following a bear market and how investors should react. The conclusion is that even investors in their middle to late 50’s should stay invested in stocks at all costs. This article appears in Money Magazine which unfortunately is a magazine that too many people look to for financial advice.

Should someone so close to retirement just stay invested with the hope that everything will work out OK? When you read these financial articles, you always have to look at the assumptions that are being used. Just like most financial articles, they are assuming that the worst is behind us and that this is going to play out like any other bear market and recession. They don’t even consider that this could get much worse. If that is the case, being invested in stocks so close to retirement could result in disaster. To understand the best and worst case scenarios, you first have to consider the concept of long-term bull and long-term bear markets. If you go to this link, you can look at a more in-depth study.

A long-term bull market is a period which typically lasts 15 to 20 years, where the market goes up. It is a great time to be an investor.

Long-term bear markets are the exact opposite. They are horrible periods to be invested.

Two great examples to look at for the best case and the worst case scenarios are as follows. The best case scenario is the current long-term bear market which began in 2000 is like the 1966 to 1982 bear market. In 16 years and 7 months, the S&P 500 managed around a 15% return or an average of .87% a year. If we were 8 1/2 (amount of time we are in this bear market) years into that bear market, your investments would have returned around a 4% return for the balance of that bear market which would have lasted another 7 1/2 years. That wouldn’t have been disastrous.

However, let’s look at the worst case scenario of the 1929 bear market. That bear market lasted 13 years with much steeper loses. If this was the bear market of 1929 and you were invested in stocks, you would have lost another 28% over the next 4 years. Keep in mind these are approximations.

The Money Magazine article assumes that anyone in their middle or later 50’s should without question stay invested in stocks. Most people in that age bracket would read it and come to the conclusion that is doesn’t make sense to sell their stocks or reduce their exposure to stocks. What if we are in the worst case scenario? It could result in retirement disaster.

It makes more sense to approach it from the standpoint of managing risk rather than buy and hope that everything works out in the long-term. If you don’t have someone managing your money that has the philosophy of managing for both risk and growth, then base your investment decision making on risk levels of the market. If the risk level is too high in the market (I believe it is) then it makes sense to lower the percentage you have in stocks for now. Remember, you take risk (invest in stocks) when there is a high probability that you are going to be rewarded in the future for taking that risk. Remember, it is Prudent to always consider the worst case scenario in your decision making process.

Tags: bear market, Bob Brooks, Deceptive Money, long-term bear markets, long-term bull markets, Money Magazine, Prudent Money, retirement, risk, stocks

New Stock Market Alert : Summer Time Blues

New Debt Tip : Prudent Mortgage Refinancing Isn’t About Getting a Lower Payment

I had the opportunity to go on vacation last week. My family and I went to Red River, New Mexico. I guess this was good for me. There was no internet where we were staying. The satellite went in and out not giving me much access to news. My iPhone would work only when we were in town. So, for the first time in as long as I can remember, I was literally out of touch with the crazy world of markets.

It gave me some time to think through what was happening in the economy and stock markets without the constant interruption of market news. There are so many various risks that you could consider right now. In thinking through it, there is one risk that should be followed by an explanation point. In fact, it is one risk that I think will ultimately be a real problem for the stock market.

Allow me to take you through my thought process. We invest money in order to make it grow so that we can use it for specific financial goals down the road. Unfortunately, things aren’t always rosy when it comes to the wonderful world of investing. There are periods of time when you can lose a lot of money. So, you have two choices. First, you can just buy and hold and HOPE that everything works out well in the end. I adamantly disagree with the financial services industry that you just hold tight and take the losses during those times. Second, you can be more proactive and reduce risk (reducing how much money is invested in any type of stocks or stock funds – for further explanation see below) and reduce the potential for losing money.

Today, it is tough to consider reducing risk in the investments. If you listen to politicians and Wall Street, the worst is behind us. Thus, it would be crazy to reduce your risk now. Then you start thinking of all of the craziness that is occurring. I think you would agree that it is risky out there but to what extent?

This is what every 401(k) participant and anyone invested in stock needs to know about risk. For me, there are many known and unknown situations today that create risk for investors. However, there is one that is easy to explain and one that I feel will ultimately spell a great deal of trouble for those who are not proactive. It comes down to what I would now refer to as the unemployment crisis.

Think through this cycle with me. For the stock market to be positive, we need a positive economic outlook. For a positive economy, we need consumers to spend money. For consumers to spend money, there needs to be plenty of jobs. Unfortunately, the unemployment situation gets bleaker as the months go by.

Before I write about it, let me make sure that I debunk a few counter-arguments. First, Wall Street will tell you that you are looking at the past when looking at the unemployment report and that things could already be getting better. Unfortunately, we look at unemployment numbers on a weekly basis and those are real time. Those look just as bad. Second, Wall Street will tell you that things always look bad before they get better. When there are no real solutions, unemployment can get much worse.

The latest unemployment report showed 467,000 jobs were lost. That was after the Government “estimated” 185,000 jobs were created (for an explanation of how these estimates work, read this report). If you didn’t count that “estimate”, we would look at a loss of 652,000 jobs for just last month. Since the beginning of the year, the Government has “estimated” over 500,000 jobs that were created out of thin air. Out of those 523,000 “estimated” jobs that were created, 56% of those jobs were “estimated” to be created in the…Leisure and Hospitality Sector. Of course, you could see where the Government would assume that sector is hot. After all, think of all of the money that Americans are spending in the Leisure and Hospitality Sector during the greatest recession since the Great Depression (please note the sarcasm).

The “stated” unemployment rate of 9.5% is the highest in 26 years. The Department of Labor has another employment rate that they follow, which adds back into the total, the workers who fall out of the system. That rate is 16.5%. Shadow Stats, which is a company that takes economic data and calculates the real numbers, shows an unemployment rate of close to 21%.

President Obama reassures everyone that this problem is getting fixed. He claims that many of these “infrastructure” projects are about to be started. In other words, he is about to create a handful of jobs to work on infrastructure projects. This is far from a fix for unemployment.

So this remains a major risk for the stock market and why I will continue to suggest that investors consider the risk that they are taking. Yes, the market could start to look better and could start making money for a period of time. However, any gains are going to be tough to sustain with this unemployment crisis hanging over our heads.

Note: You manage for risk two ways. First, you reduce your exposure to stocks and stock based funds. This is a very general strategy for reducing risk. Second, you can also have someone manage your money for risk.

Tags: 401(k), Bob Brooks, Deceptive Money, Department of Labor, economic data, economy, financial goals, financial services industry, Givernment, internew, Investing, jobs, news, politicians, President Obama, Prudent Money, risks, Shadow stats, stock funds, stock markets, stocks, unemployment crisis, unemployment report, vacation, Wall Street

John Bogle, founder of Vanguard Mutual Fund Company, says that market timing never works.  Of course, any executive of a mutual fund company does not want investors moving money around.  Besides his obvious bias, I don’t think that he is entirely correct stating an absolute.

Market timing is a misunderstood concept when it comes to investing.  The mutual fund industry defines market timing as a process of attempting to perfectly time the tops of markets (before a market declines) and perfectly time the bottom of stock market declines (before the stock market goes up).

In other words, an investor is trying to sell at the perfect time and buy at the perfect time.  The mutual fund industry doesn’t want you to time the market.  Thus, they came up with a perfect example of why market timing is a disastrous strategy.  

The basis of their argument is that if you try to time the market you might miss the best days of the month or year.  If you miss those days when the market has big gains, then your overall investment return will really suffer.  So they publish these studies.

Barron’s Magazine published an article that showed what an investor would have made if invested in the S&P 500 index from February 1966 through October 2001.  During that 36-year period, an initial investment of $1,000 would be worth $11,710.  

A study done by Birinyi Associates performed a complement study to the one in Barron’s.  They stated that if an investor missed the five best days every calendar year, the $1,000 would have shrunk to $150.

That is pretty convincing.  An average investor would look at that statistic and conclude that market timing is a horrible strategy.  Why would you want to try and pick when to be in the stock market and when to be out of the stock market?  If you just missed a few good days, you might miss the entire opportunity.  

I ran my own study.  I wanted to know what would happen if you missed the worst months to be in the stock market.  I took a look at the S&P 500 between January 1950 and December 2007.

If you invested $10,000 January 1950, it would have grown to $869,120 by December 2007.  

If you missed the 30 best months, that $11,000 would have turned into $284,167.  If you would have just stayed invested and not tried market timing, your $10,000 would have turned into $3,069,325. Instead, you tried to market time and ended up with only $35,404.

What if you would have missed the 30 worst months between January 1950 and December 2007?  

If you missed the 30 worst months, your $1,000 would have turned into $9,509,094.  

Which do you think is more important?  Being in there for the gains or protecting yourself in the bad markets?

This isn’t about market timing and trying to pick tops and bottoms of the market.  This is about protecting your investments when stock market risk gets high.  Remember you reduce risk as you reduce the amount of money invested in stocks.  

When you experience excessive losses, it just takes so much time to gain back the loss.

If you were to lose -40%, it would require a return of 67% just to get back to even again.  It would take a long time to achieve that return.  This is why risk matters and having a risk strategy is extremely important.

Now obviously neither you or I are going to be able to look into the future and pick good and bad days in the market.  This is just to illustrate the impact of loss on a portfolio.  This is primarily directed towards investors who stay heavily invested in stocks.  At some point you have to start taking profits and get your portfolio balanced and properly diversified.  The problem is that most people are not properly diversified.

If you’re concerned about your investments, you can email me through AskBob.

New Stock Market Alert!

Back in December 2002, we went through a terrible bear market. Well, at least for that time period it was a terrible bear market.  Compared to today, it was a walk in the park.  I remember thinking about everything I knew about stock markets and coming to the conclusion that there had to be more to the story.  I began doing a great deal of research on the history of stock markets.  I have always believed that history can tell us a lot about today. 

Yes, the times have changed.  However, investing is driven by human emotions and people react in the same exact way every time. This is why there is so much relevance to the famous Mark Twain quote, “History doesn’t repeat, it rhymes.”   There is always a thread of similarity between time periods.

I remember coming across a book called Stock Cycles by Martin Alexander.  I started reading his book and came across his main thesis for the book that forever changed the way I looked at investing and the stock market.

Here is the chart that drives his thesis:

This was an eye opener.  It shows that the market is a series of really good periods or bull markets followed by a series of bad periods or bear markets.  During these long-term periods, you encounter a series of alternating good (bull) periods and bad (bear) periods.  The type of period that you are in should be your main concern.  If you are in a long-term bear market, investors stand to lose a lot of money or make no money at all during that time period.

This chart shows that we were in a long-term bear market between 1966 and 1982.  That was a horrible period for investors.  Then there was the great long-term bull market of 1982 to 2000.  Did we start a long-term bear market in 2000?  Well, everything fits and would suggest that we actually did.

The last 7 long-term bear markets lasted an average of 13 years.  That could mean we have 4 more years left in this current bear market.  However, this crisis we are facing today is more like the 1929 to 1949 long-term bear market which lasted 20 years.  Do you really think that what we are facing is going to be average?  Beyond the Great Depression this is the most serious situation that this country has faced.  Further, what we are facing with regard to the national debt is unprecedented.

Is there any good news in this chart?  Yes, there is some good news.  Long-term bear markets don’t just go down the entire time.  There are short-term bull markets that occur during these long-term bear markets.  Although I still think that we will go back to the March lows as a minimum, following that could be a period longer than just a few months where the market could actually turn into a short-term bull market.  

If this is confusing, let me give you a visual that puts this into perspective. 

1966 to 1982 was a long-term bear market where the Dow Jones Industrial average was at 991 in 1966 and finished at 784 in 1982.  However, during that 16 year time period where the Dow Jones did so bad, there were two times where investors made lots of money. 

Time period 1 – 1970 to 1973 – The Dow Jones went up 49%.

Time period 2 – 1974 to 1978 – The Dow Jones went up 61%.

Following what might be one more strong decline, we might be looking at a great time to actually be in stocks for a long time period.  Thus far the 2000 long-term bear market looks like this:

2000 to 2002 The Dow Jones Lost -37%

2002 to 2007 The Dow Jones Gained +93%

2007 to March 2009 The Dow Jones Lost -52%

2000 to March 2009 The Dow Jones has lost -42%

The key is taking advantage of the good periods and playing it safe during the bad ones.  I realize it’s easier said than done.  However, the key is to figure out a strategy to at least try versus staying fully invested in stocks during the entire time period.   

Tags: bear market, Bob Brooks, Bull markets, crisis, Deceptive Money, Dow Jones Industrial Average, Great Depression, Martin Alexander, Prudent Money, short-term bull market, Stock Cycles, stock markets

I received this press release the other day and wanted to share it with you.  It is probably not going to surprise you.  Yet, it remains disturbing.

The financial sector invested more than $5 billion in political influence purchasing in Washington over the past decade, with as many as 3,000 lobbyists winning deregulation and other policy decisions that led directly to the current financial collapse, according to a 231-page report issued today by Essential Information and the Consumer Education Foundation.

The report, “Sold Out: How Wall Street and Washington Betrayed America,” shows that, from 1998-2008, Wall Street investment firms, commercial banks, hedge funds, real estate companies and insurance conglomerates made $1.7 billion in political contributions and spent another $3.4 billion on lobbyists, a financial juggernaut aimed at undercutting federal regulation.

During the period 1998-2008:

* Commercial banks spent more than $154 million on campaign contributions, while investing $363 million in officially registered lobbying;

* Insurance companies donated more than $218 million and spent more than $1.1 billion on lobbying; and

* Securities firms invested more than $504 million in campaign contributions and an additional $576 million in lobbying.

Nearly 3,000 officially registered federal lobbyists worked for the industry in 2007 alone. These companies drew heavily from government in choosing their lobbyists. Surveying 20 leading financial firms, “Sold Out” finds 142 of the lobbyists they employed from 1998-2008 were previously high-ranking officials or employees in the Executive Branch or Congress.

The report documents a dozen distinct deregulatory moves that, together, led to the financial meltdown. These include prohibitions on regulating financial derivatives; the repeal of regulatory barriers between commercial banks and investment banks; a voluntary regulation scheme for big investment banks; and federal refusal to act in order to stop predatory subprime lending.

“The report details, step-by-step, how Washington systematically sold out to Wall Street,” says Harvey Rosenfield, president of the Consumer Education Foundation, a California-based non-profit organization. “Depression-era programs that would have prevented the financial meltdown that began last year were dismantled, and the warnings of those who foresaw disaster were drowned in an ocean of political money. Americans were betrayed, and we are paying a high price — trillions of dollars — for that betrayal.”

“Congress and the Executive Branch,” says Robert Weissman of Essential Information and the lead author of the report, “responded to the legal bribes from the financial sector, rolling back common-sense standards, barring honest regulators from issuing rules to address emerging problems and trashing enforcement efforts. The progressive erosion of regulatory restraining walls led to a flood of bad loans, and a tsunami of bad bets based on those bad loans. Now, there is wreckage across the financial landscape.”

I remember a day when a 4 to 5% loss was a rare event. Unfortunately today, this is a commonplace event. The markets are getting accustomed to these types of days.

In bear markets, there are time periods when the market will stage a mini-recovery. It is not unusual to see periods of time where the market would go up 20 to 30%. This has not been the case over the last 16 months.  We have not had even one meaningful stock market rally.  Even in 1929 after the initial 47% decline, the market posted a 48% increase over a few months.  

Incidentally, the total decline in the stock market after the first 16 months in the 1929 bear market/stock market crash was a decline of -55%. Today, after 16 months the decline is -53%.

So, why can’t the market find its footing? You can blame the losses from the credit crisis. You can point to the lack of confidence. There are many reasons for the 10 trillion dollar loss of overall market value. The best analysis comes from Jim Cramer.  What he said was more of the real reason this market cannot find any footing.

His rationale is the market’s negative reaction to the Obama agenda.  He feels that the agenda is a good one.  The problem is the timing.  Obama is forcing all of this change on America during a time when we simply cannot afford it or tolerate it.  He wants to raise taxes next year during a time period when we will be at least picking up the pieces if not still in this crisis. He is set on HIS agenda and could care less about the effect on the stock market.

Well, President Obama you need to care. The American people are going to become very difficult to deal with while losing in excess of 50% of their retirement. People are becoming increasingly angry and irritated at what is coming out of Washington. The stock market is down -15% since he took the office.

What is the Obama response to what is happening in the stock market? The market goes up and down (that was the gist of the response). It is amazing how he just doesn’t get how serious this is becoming. He is going to have a huge problem on his hands as the agenda destroys the remaining little bit of confidence that is left – all in the name of HIS agenda.

The statistics are really piling up and they look horrible.  Consider the following:

·     Out of the last 16 months, there have been only 3 positive monthly returns for the S&P 500.  I looked all the way back into the 1920’s and could not find a 16 month period that looked worse. 

·     The S&P 500 is -53% from the top.  That surpasses the 2000 and 1973 bear markets. 

·     We are down -18% year to date (2 months)

Stock mutual fund investors withdrew $182.734 million last year.  In January of this year, investors withdrew $75.832 millions.  That was one month of redemptions.  The problem is that the high rate of redemptions puts further stress on the stock market, causing mutual fund managers to sell stocks to cover those redemptions. 

There is no telling how bad the redemptions were in February.  Now, investors are going to get a horrible February statement showing big losses.  My guess is that the rate of redemptions is going to climb. 

Make sure that you check out the daily stock market outlook.  It will help you navigate through these tough times.

Everytime I receive one of these ridiculous hand-holding pieces from the mutual fund industry, I am going to post it and tell you the other side of the story.  It is their objective to tell you that everything is just fine and not to worry about the fact the you are losing over 50% in their funds.  In other words, just go back to sleep and please don’t sell our funds.

As a result, investors don’t become pro-active about risk and continue to lose signficant portions of their life savings.  Yesterday’s example came courtesty of Oppenheimer.  Today’s piece entitled Braving the Bear comes courtesy of American Funds.

Avoiding Buying High and Selling Low – opening statement

Basically, investors who let emotion dictate their investment decisions run the risk of missing out on the recovery…yada yada yada…Then they go into the basis of their argument which is “Gain Confidence from the Past!”    They go back and find the bottom of bear markets and point out how much investors made had they stayed invested.  Of course, this is assuming we are at that a bear market low.  In fact, they are making a lot of assumptions. 

It is very easy to go back find the low of a bear market and show how much an investor is going to make in a recovery.  They were saying the same thing at the bottom of the bear market in 2002.  They could have written that had you stayed invested in 2002 at the bottom of the last bear market, your investments would have gone up 90% in 5 years.  However, then you would have proceeded to lose all of that and then in some in a mere 13 months.

Then my favorite is “don’t estimate the power of dividends…”  They write about how dividends accounted for a lot of return and insinuate that they soften blow.  They use the Great Depression and the bear market of the 70’s as  examples.  Back then, dividends were a big part of overall return.  That is not the case today. 

Bloomberg reported the other day that “The fastest reduction in U.S. dividends since 1955 is depriving investors of the only thing that gave stocks an advantage over government bonds in the last century.”  Although that has a lot to do with the past financial crises, dividends made up a much smaller portion of overall return than the past.

They talk about the past performance of their funds and the strong dividend.  Just two days after they sent out this hand-holding piece, American Funds sent out this announcement:

” The quarterly dividend is being reduced for American Balanced Fund^® as noted below.”

This is no ordinary bear market.  Remember that the mutual fund world does not have an answer for risk. 

I get so much propaganda from the mutual fund industry.  It is all information that I can take back to my clients and make them feel better as they lose 50% of their wealth.  Fortunately, I actively manage my clients’ money and don’t buy and hold investments so I don’t need the propaganda.  However, I want you to see why this propaganda is flawed in the message it delivers.

Example – Just invest for the long-term and see the big picture

Message – Why should an investor stay invested “for the long haul” if the market is tanking? 

Evidence:   Take a look at this bar chart which shows the S&P 500 Index’s best and worst rolling 12-month average returns for different holding periods, from 1975 to 2008.  In its best 12-month period, it was up 61% and in its worst, there was a 38% drop. That could scare any investor. Now look at the market’s best and worst average annual return over a 20-year period: an 18% and 8% gain, respectively.  Not too shabby.  It shows that, historically, time won out over volatility.  Past performance, however, cannot guarantee future results.

Implication:  As long as you stay invested over twenty years, you are just fine.

Reality:  Between 9/1929 and 9/1949, the Dow Jones Industrial Average lost -46%.  How is that for a 20 year period?  Yes, it can happen.  So far the looking at the last 10 years, the Dow has lost -14%.  Buy and hold doesn’t look so good.  

So what is the flaw in the argument?  Yes, they put their caveat that past performance cannot guarantee future results.  However, they fail to point out that there have been periods of history where 20 years ended up being horrible for investors.  They leave out the fact that we could face that again, which is the real risk of buy and hold.  A characteristic of this type of hand holding marketing is cherry picking numbers.  

They leave you with this set of numbers to help releave your pain:

S&P 500 returns

2004   10.9%

2005     4.9%

2006    15.8%

2007   5.5%

2008   -37%

(Incidentally, they don’t show you that the total growth during those 5 years was -10.5%)

What if the same numbers looked this way?

2000   -9.11%

2001  -11.88%

2002  -22.10%

2003   28.69%

2004   10.9%

2005     4.9%

2006    15.8%

2007   5.5%

2008   -37%

Total return -28.41%

Moral of the story:  You can show all of the good years that you want in these examples.  The bad years do much more damage to your return than twice as many good years.

When the market makes a significant low like it did November 08, you want to make sure that the stock market stays above that low.  For the S&P 500 that low was 741.  For the Dow Jones Industrial Average, that low was 7450.  It is very typical for a stock market to establish a low like it did in November and then decline back to that level.

When that happens, investors want to make sure that the markets don’t go to NEW lows.  For example, it would be important for the S&P 500 to stay above 741 versus going below it and for the Dow to stay above 7450.   As I write the Dow is merely 137 points above that level and the S&P is 52 points above that level. 

What happens at this juncture will say volumes about how 2009 might end up.  IF the S&P 500 does fall below that key level, there is a good chance that the S&P 500 would decline to the 575 to 600 area.  That is roughly a 27% decline from the above level.  For the Dow Jones Industrial Average, there would be two critical levels to look at below the November low.  The first level is 7197 which is the bottom of the 2002 bear market.  That is 5% from the above levels.  However, if that doesn’t hold, then it might be a trip down to 6451.  The Dow doesn’t have as clear cut of a potential low as the S&P 500.

So, what is bothering the market today?  The market is speaking very loudly that there is little belief in the stimulus package that was shoved down America’s throat by the Democtratic party.  Speaking of which, it probably would have been a good idea for the politicians in Washington to at least have a good understanding as to what was in the stimulus package.  According to news reports, none of the politicians actually read the 1100 page bill.  They delegated it to their staff.

It might have been a good idea for them to read the 1100 page bill.   To give them the benefit of the doubt, maybe they didn’t have time.  Afterall, President Obama put us all on crisis watch and warned that this bill needed to be passed immediately.  If this bill was so crucial, why wait 4 days to sign the bill?  Better yet, why spend money gasing up Air Force One and fly to Colorado just to have a photo opp and sign the bill?

Since we are over obligated by 65 trillion dollars as a country and remain the biggest debtor country in the free world, wouldn’t it make sense to save a litte change where you could?  It is no cheap affair to arrange for the President to go to Colorado just to sign a bill. 

After all, the politicians certainly had a problem with the CEO’s of the big 3 auotmakers flying their private jets to their meeting (witch hunt, finger pointing session, grandstanding spectacle) with Congress. 

The market is also concerned that GM is heading for bankruptcy.  The big 3 are to present to Congress by the end of the day a plan on how they are going to pay back the money that they borrowed.  It appears that instead of informing Congress how they will be paying the money back that they will be asking for billions more.  I wonder how many billions more it will take before the politicians realize that bankruptcy is the only answer?

Tags: bear market lows, GM bankruptcy

On the 14^th of January, I wrote the following in my blog:

“The first level to watch is 850.  The market appears to be falling below that one day.  The second one is 816.  If we close below that level, I would expect the market to go down to the 740 level.  If the market closes below the 740 level, we could have a real problem on our hands and be heading down to 575 to 600.  The good news is that this should provide a decent buying opportunity.”

Thus far, the only part of that forecast that hasn’t happened yet is the re-visiting of the November lows.  We might see that prior to the close of January, which would be more than a 10% decline in the S&P 500.  A huge economic report is due to come out this Friday.  The Government will be issuing the economic growth numbers for the 4^th quarter and are expecting some pretty bad numbers.

This will be an important week that could give us a glimpse of what is coming down the pike for this year. We have two important indicators that we are watching.  The first is the December Low indicator and the second is the January Barometer.  Both are predicting a negative year at this point unless something changes this week. 

Tags: Bob Brooks, Deceptive Money, Government, market, Prudent Money

I wanted to send out an update on what is occurring in the market.  Unfortunately, the odds are that another serious decline started last week, ending the bear market rally from the bottom in November.

The news flow seems to be worsening again.  Of course, we are in earnings season and most of the earning, as expected, is not good.  However, this morning we find Nortel filing bankruptcy protection, retail sales falling in December at a much greater amount than expected, HSBC holdings announcing they are in need of 30 billlion dollars, etc.

It underscores that the heroic efforts of the Government is hardly working.  Although painful, we would get through this much more quickly with the Government out of the way.  After 350 billion, we shouldn’t be still having these problems.  Remember that a deflationary recession corrects itself.  There is no “medicine” for this problem.

NLet’s take a look at a roadmap for the S&P 500.  This should give you an idea as to the health of the market.  Right now we could be just going back down to the ovember lows and “testing” those lows, which is pretty common in bear markets.  However, we could also be going to brand new lows.  My lower targets for a brand new low are very far away from these levels.

The first level to watch is 850.  The market appears to be falling below that one day.  The second one is 816.  If we close below that level, I would expect the market to go down to the 740 level.  If the market closes below the 740 level, we could have a real problem on our hands and be heading down to 575 to 600.  The good news is that this should provide a decent buying opportunity.

We are working on a new format for the weekly Stock Market Outlook and transforming it into more frequent posts throughout the week to keep you posted during this ongoing financial crisis.

Tags: bankruptcy protection, bear market, Bear Market Rally, Bob Brooks, Deceptive Money, financial crisis, Government, market, new lows, Prudent Money, S&P 500, Stock Market, Stock Market Outlook

The mutual fund industry is out in full force trying to convince you to not sell your investments and just stay invested.  They work to convince investors by presenting statistics that are so convincing that you would never want to sell your investments.

The last thing that the mutual fund industry wants you to do is sell your investments.  Is that advice for their benefit or your own good?  In other words, is there a real strong benefit for staying invested in their mutual funds?  So, they write these papers with all of the statistics showing you why it makes sense to stay.  The problem is that the numbers are misleading and not telling you the whole truth.

One such paper is entitled The Cost of Missing a Market Rebound.  Their premise is that you don’t want to sell your investments because you might miss the rebound.  They illustrate this by showing you the last 9 bear markets.  In the paper, they write that the average bear market lasts 384 days.  Of course, this bear market has lasted about that amount of time.  Thus, you would conclude that since it has lasted the average length of time, it is close to being over.

The second point they make is that the average bear market loses -32%.  Thus, you would conclude that since this bear market has lost almost 50%, then the worst is probably behind us.

Then if you conclude that we are probably very close to the rebound, then the good news is that the average investment performance the first year after the bear market is a 36% gain.  So, if you get out now, you might miss the rebound.

Here is what they are not telling you while begging you to never sell your investments.

1)      They are comparing 9 normal bear market cycles.  In a client newsletter I recently wrote, I talked about normal bear market cycles versus unusual bear market cycles.  A bear market cycle is one that occurs because of normal recessions or high inflationary periods.  An unusual bear market cycle occurs when an economy is facing major imbalances and problems.  That would describe our situation today.

This paper that I am referencing only looked at the last 9 bear markets.  All of those bear markets would be considered normal bear market cycles.  To compare today’s bear market with the last nine is comparing apples to oranges.

2)      If you compare this bear market cycle to the last one that occurred as a result of a credit crisis, history would show that we have a long way to go before this thing is over.  In addition, the average loss has the potential to be much greater.     

The bottom line is that if you are going to stay invested and not make any changes, then do so on the basis that you are confident in your investment strategy and not because a financial advisor told you to stay invested because you are a long-term investor and that you don’t want to miss the rebound.  The key is not that you miss the rebound.  The key is that you miss the next 30% decline.  

Tags: bear market, Bob Brooks, credit crisis, Deceptive Money, financial advisor, investment strategy, mutual fund industry, normal bear market cycles, Prudent Money, unusual bear market cycles

This really does feel a lot like no man’s land right now.  The market goes up and then the market goes down and really goes nowhere.  The news is decidedly negative and yet the market continues to weather the storm.  It feels like a market on life support to me.  Let’s take a closer look at what is going on right now.

First of all, this week looks like a make or break week to me.  Let’s take a look at the positives:

1)     We are in what is typically a positive season for the stock market.  However, this is Christmas and Santa is supposed to be showing up on Wall Street for the famed “Santa Claus Rally”.

2)     The biggest positive that you hear on Wall Street these days is the market’s ability to continue to advance even when there is so much bad news.  Yes, the economic news continues to be very negative.

3)     The second biggest positive is that everyone is convinced that the stock market hit a bear market bottom in November.  I would agree if this were a normal bear market cycle.  Unfortunately, my analysis shows a best case scenario of a bottom is down -31% from Friday’s close and the absolutely worst case scenario for this bear market is down -48% from Friday’s close in the S&P 500.  Incidentally, you want to back up the brinks truck and buy stock in the event that worst case scenario plays out.

4)     35 more days – President-elect Obama becomes President.  The market seems to really place a positive on an Obama Presidency.

The negatives remain the same:

1)                 The credit markets are still in very bad shape.  With the exception of the Libor rate, nothing has really shown improvement in a very critical part of our markets.  In fact, I don’t think that we can get any type of a healthy stock market rebound until the credit markets get out of the ditch.

2)                 The real estate markets remain in lock-down.  Prices continue to fall and supply of homes is still very high.  It is going to take a while for things to improve. 

3)                 Corporate bankruptcies could really surprise investors in January.  It looks to me that companies are doing everything possible to stay afloat.  It is a worrisome trend when you start seeing retailers going into bankruptcy before the biggest part of the Christmas shopping season.   Congress didn’t come through for the automakers as I wrote about last week.  Bail-out or no bail-out, a bankruptcy of one of the big 3 automakers still has a high probability.

4)                 The health of the consumer is still quickly deteriorating.  Between foreclosures, unemployment, and extremely high levels of debt, the consumer worries me the worst.  This creates a crisis of confidence.  That is a huge problem.

So, watch the behavior of the market this week.  We have a Federal Reserve Board meeting which always sparks some drama plus some key bank reports and economic data.  If the market can pull through this week, Santa will show for the market.  If not, things could end the year as badly as it started.  If I had to place a higher probability, I don’t think that we end the year on a good note.

As always, I am not trying to be gloom and doom.  I am just trying to balance the financial media who want you to drink the kool-aid.   

Tags: bankruptcy, bear market, bear market bottom, Bob Brooks, credit markets, Debt, Deceptive Money, Foreclosure, market, President-elect Obama, Prudent Money, real estate markets, Stock Market, Unemployment, Wall Street