June 2007 Market Timing Update
""Diversification is a protection against ignorance. It makes little sense for those who know what they're doing."
- Warren Buffet
Cyclical Bull Market
Bob is of the opinion that there is no Bear Market in the near future. A Bear Market is viewed as a market
decline of over 20%.
This month he sets forth his reasons for believing the market is going to reach new highs going forward.
There is a very low chance of
recession with the real GDP as anemic as it is. Bob estimates
the GDP for 2007 in
the range of 2-2.8%. That is pretty anemic. No unrestrained growth here.
People are still adjusting their spending to accommodate for high gasoline prices. No out of control spending in sight.
Overseas however, US companies are enjoying robust sales.
troubles are likely to persist through 2007. The median price
a home is now 212,000,
the lowest since the first quarter of 2005.
Inflation risk - there isn't any. It is being restrained by very slow domestic growth.
Energy - "Although an active
hurricane season could push energy prices higher in the months ahead,
this would have
the effect of restraining economic growth prospects as consumers would be forced to reallocate additional
discretionary spending dollars into their energy budgets. In our view, higher energy prices serve to constrain
economic growth, and thereby have a de facto counter-inflationary impact on the overall price trend."
Inflation and Valuation -
The S&P 500 index is currently 17.6 and Bob is
comfortable with a range of 16-17.
Inflation is only apparent to inflation gremlins trying to find it.
The Secular Bear Market Trend
Somehow I missed this one.
Bob believes the secular Bear Market we have been in since
Bob expects to see significant gains going forward. This is a big deal. Money is out there to be made.
The 60 day Put-Call Ratio
This contrary indicator remains solidly in bullish territory, with a reading of .997.
There is lots of skepticism out
there and the level of short interest is very high.
Bob expects to see significant gains going forward.
In summary, the Market Timing model is solidly bullish and corrections will be minor."The Market Timer Stock Market timing model remains in positive territory, and we expect to see
No portfolio changes. All stocks are still rated hold.
I decided to lighten up a bit
more on international
exposure buy reducing holdings in NBITX and shifting that to
the Hodges fund (HDPMX). NBITX has very little exposure to energy, commodities and transportation. Hodges
does. Hodges has a higher expense ratio than NBITX and is also doing about 4% better than NBITX.
Hodges fund is run by John
Hodges out of Texas. It is one of those funds that don't
quite fit into a Morningstar
category. It can be best described as an All-Cap fund.
The fund is not for
everyone, with a Beta of 1.72 and should things go south -
one of the first to liquidate. If the
market is to continue on to new highs through 2007, this fund could perform quite admirably.
Anyway, this is the latest breakdown.
Well,well. I actually had a request for a topic suitable for lunch time rumination.
I thought I could knock
this out during one lunch hour but after thinking about it a bit,
this looks like at least two lunches.
Establishing an Asset Base
In Tax Deferred Accounts
The best way to establish
an asset base is through a tax deferred account. 401K's, SEP-IRA's,
examples of tax deferred accounts. Picking good, low cost mutual funds for your initial investments is a good
way to start.
Choose funds representing
several broad areas. Large Cap, Small Cap and International
funds give an account
broad exposure and lots of diversification.
Funds which throw off lots of capital gains at the end of the year are perfect for deferred accounts.
One of the ideas behind tax
deferred accounts is to maximize your returns. It makes little sense to
market and bond funds as an investment of choice in a deferred account.
In Taxable Accounts
Choosing the appropriate
funds for taxable accounts is a big deal. Anyone who listened
to the news up to and
after April 15, 2007 more than likely heard some of the horror stories about people getting hammered with
capital gains taxes to the tune of thousands of dollars.
I learned my lesson in
2001. Paying massive capital gains taxes is not
cool. In those days I did not pay much
attention to where I held my tax friendly and tax hell funds. As a result I got walloped with short term capital
owned some funds that did close to 200% turnover and were in taxable accounts. You only need to go
through an experience like that once to see the wisdom in properly allocating funds.
Choose tax friendly funds
for taxable accounts. A Google search on the term provides
lots of sources for tax
Index, Long Term Growth and Growth and Income funds are examples of tax friendly funds.
A few that come to mind are UMBIX, VFINX, FBRVX, JAENX, DODFX, AMANX and of course the index funds.
DRIP's, aka Dividend
Reinvestment Plans are a good way to begin purchase (notice I said
purchase, not trading)
of individual stocks and the first step in further reducing the overall cost for managing your portfolio.
In a DRIP plan, you make
monthly purchases of a stock and the stock's dividends are reinvested
in new shares of
stock. The only thing you pay is a fee for buying shares and taxes on the dividends (currently 15%).
Expenses are an important point here.
Lets say you start a DRIP
plan with GE (General Electric). GE is a good stock to start
with because the company
itself is about as diversified as a mutual fund. A drag on the financial or health sector for example is not going to
cream the stock.
The minimum investment per
month is about $20.00. The plan charges $1.00 for each investment.
That's it - $1.00.
Now lets say you invested
$100.00 a month for 12 months. Total Cost to you is $12.00 and
reinvested for free.
Assume the shares around
$30.00 apiece, and that is 40 shares of GE.
Reinvested dividends are around $20.00.
Taxes on dividends are $3.00
Total cost is about $15.00
Pick an average mutual fund
and run the numbers using the SEC's handy dandy cost calculator
http://www.sec.gov/investor/tools/mfcc/mfcc-intsec.htm and the cost is about $21.00
A DRIP plan in this example
costs 33% less in terms of fees and expenses than one of the better
Start tacking some zeros on to these examples and the difference is dramatic.
Some companies offering DRIP Plans:
CAG, GE, AT,ITW, HD, XOM, JNJ, MAS, BAC
During the early
Accumulation of Assets phase, adequate diversification is the key.
Adequate diversification is
accomplished by the right kinds of mutual funds in the right types of accounts - tax friendly for taxable and high
octane for tax deferred.
Direct stock ownership
should be limited to DRIP or like accounts and regarded as a long term
not as a trading vehicle.
Now that you have a few $$$........
One of the biggest
drawbacks to individual stocks is lack of diversification.
One of the biggest drawbacks to mutual funds is management cost.
What is the right balance?
Somewhere in the middle, I think.
Some professionals say a portfolio of 25 quality stocks broadly diversified throughout the market is optimal.
No more than 4% in one individual stock helps assure proper diversification.
Some professionals consider direct stock ownership in any percentage as entirely too risky.
My own personal comfort
level is currently about 90% in mutual funds and 10% in stock with no
more than about
4-5% in any one stock. Half of the stock is invested for the long term in Drip plans, in taxable accounts. The other
half is invested in a deferred account for growth.
While I would not be
comfortable owning only 25 stocks and I think there are ways to reduce
portfolio costs -
by owning stocks.
ETF's (Exchange Traded Funds) should be mentioned as well.
An exchange traded fund is
a basket of stocks which trades like a stock. Fees associated
with ETF's are
generally pretty low. The thing about ETF's is know what you are buying.
ETF's come in many flavors.
ETF's are indexes of just about anything. You can buy ETF's
which contain all the
stocks of the S&P 500, the Dogs of the Dow, only gold stocks, stocks from Malaysia and a host of other sectors.
Some ETF's trade like water
and others....some days you might not find a buyer at the price you
would like to
unload them at. I would treat narrowly focused ETF's as I would a sector fund or stock - no more than 4-5%.
Looking at the latest YTD
returns for the more popular ETF's, one thing which stands out is some
of my mutual fund
selections are out performing the best performing ETF's.
I think if you own an ETF
in whatever the hottest sectors at the moment are, you could do pretty
well. I traded in and
out of ADRE when oil and metals started moving up and did ok. I ended up being more comfortable with PSPFX,
a global materials mutual fund, which I still own.
Whichever way you go, here are couple of my favorite do's and don'ts.
Educate yourself. This is a great place to start: http://www.bobbrinker.com/books.asp
If you are uncomfortable managing things yourself, use the services of a fee only planner. Get references.
Spend some time listening
to Bob Brinker. You can record shows yourself or sign up for
PodCasts. It's amazing
how much you can pick up by osmosis.
Another option for help in
managing your accounts comes from the Mutual Fund Store. www.mutualfundstore.com.
If you have 50K in assets, they will manage your portfolios for you. They charge a sliding scale from @ 3% down,
depending on how much they manage.
I've listened to Adam Bold,
founder of the Mutual Fund store for several years and I would use his
services if I didn't
like doing it so much myself. He also has another service called Smart 401K where for about $50.00 a quarter
(cheaper by the year), you can log in and input the fund choices you have and a real person gets back to you
with a preferred list of suggestions.
They are active managers -
if a fund fails to perform, they dump it. Compare this to a
broker who sells you
something and that's the last you hear from him.
Be sure to consider Taxes on trades - a rarely mentioned item.
Do Not buy broker sold
funds unless you think giving the broker 5-6% (or more) or your money
to buy from their
house funds is a good idea. No load brokerages have hundreds of funds to choose from.
Do Not get suckered into
buying an annuity. Especially despicable are those who try to
convince you that placing a
tax deferred account like your roll-over IRA in to a "Guaranteed Income" annuity is a smart idea. It is not.
Fees and expenses will eat you alive.
Do Not buy stocks as a
result of Lunchroom Gossip or the latest message board hot topic and
expect to do very
well. Spend some time doing actual research.
Be wary of the 'Cramer Effect'.
There are actually some published papers on this. The short of it, is
on 'Cramer' frequently move up in after-hours trading. Buy first thing the following morning and you pay a premium
price for the stock. The stock tends to drift back down after a couple days. There are other papers out there whose
topic is 'Shorting Cramer', which attempts to take advantage of the short term price spike.
Taxes - one item rarely mentioned is the taxes you get to pay on short term trades.
Someone once gave me some pretty good advice when it comes to stocks:
Buying a good quality stock once for the long term - you only have to be right once.
Buying stock short term - you have to be right twice (when to buy and when to sell).
Which has the better odds?
Well, enough of that. Time to go to press.