“There’s no denying that a collapse in stock prices today would pose serious macroeconomic challenges for the United States. Consumer spending would slow, and the U.S. economy would become less of a magnet for foreign investors. Economic growth, which in any case has recently been at unsustainable levels, would decline somewhat. History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse.”
|The Professional Opinion
Bob starts the letter out admitting he was wrong in thinking the market would settle out at much higher levels than it is now. He did not anticipate the atmosphere of panic selling that gripped the world as fear of collapse of everything economic took hold. Was an almost self fulfilling prophecy.
He goes on to say that anticipating market trends is always a difficult task and getting it right the first time every time is not possible.
Bob also reminds investors that they should never steer far from investing basics:
1. Don't put all your eggs into the same types of investments. A balanced approach of stocks and bonds reduces overall portfolio volatility and provides stability.
2. Wide diversity is a good thing. Avoid speculation.
3. Don't use margin or borrow money as a means of investing.
4. Patience is the key to understanding. Invest in companies which over the long term produce profits.
Bob says the highest priority of his newsletter is to develop a strategy for recovery going forward. He thinks the damage sustained is repairable for an economy with the potential for long term growth (In other words, please continue subscribing to the news letter).
In the meantime, there is much work ahead in attempting to establish another major market bottom. A couple of things to look for are an easing of the selling pressure, increased volume of shares traded and decreased volatility. Bob thinks signs of some stabilization have started.
Bob continues to recommend a dollar cost averaging approach. In the event he issues a new buy recommendation, he will let us know.
Real GDP is expected do decline into the fourth quarter of this year. The housing slump, weak auto sales, falling jobs figures and tight lending have led to this conclusion. The second quarter of 2009 looks to possibly be the first quarter where we will now see some economic improvement.
One party control of the presidency, house and senate is virtually a foregone conclusion and has already been discounted into the market going forward.
Low inflation and low interest rates have the potential for justifying a PE ration of up to 18 times the 2009 S&P operating earnings.
The fed has been very accommodative, lowering the Fed funds rate to 1.0% after the last FOMC meeting. There is now a ton of liquidity in the market. Banks need to start lending and liquidity needs to start filtering down through the rest of the economy, which is going to take some time.
Interest Rates - Fixed Income.
The fixed income portfolio has a weighted yield of 6.2%, a weighted average duration of 3.2 and a weighted maturity of 5.2 years. Duration is the weighted average of the times that interest payments and the final return of principal are received. A duration of 3.2 implies that a 1% increase in corresponding interest rates would result in a 3.2% decline in portfolio net asset value. Bob expects the economy to remain in a recession through the winter season and therefore interest rates should remain low. This portfolio is for subscribers with no stock market holdings. VFIIX, VFSTXC, VIPSX and VWEHX are used for the fixed income portfolio.
No changes to portfolios.
Conclusion (My Opinion)
I am less than thrilled.
Continuing to do nothing in this extremely volatile market to me was the wrong approach so I thought the best thing to do was start selling mutual funds on up ticks and buying bargain basement dividend paying stocks (for the most part) on down ticks, which resulted in a portfolio totally out of whack with what I normally believe in. However, these are abnormal times.
Several months ago I started selling the international and sector funds which resulted in a 100% allocation to the US.
I also took a 5% position in GNMA's and 5% in a good growth and income fund.
This method of minimizing loss was working well enough until October, when everything took a dive.
This is what the portfolio looks like now:
Change - a Closer Look
Going to 60% stocks qualifies as a major change for me. Change is what I need and I am interested in lowering the overall cost of the portfolio. The fees mutual funds charge add up over time and I want to reduce the cost of same with individual stock ownership. Cost is also something to bear in mind if you consider the likes of Adam Bold and the Mutual Fund Store or other financial managers who charge wrap fees to manage your portfolio. They get their slice of your pie whether or not your account makes any money.
I continue to believe the finance and insurance sector is the most oversold and for that reason I over weighted this sector and think it is a fairly safe area. Even Socialists know the value of a dollar.
Finance and Insurance - 18%
BBV, ETFC, MBI, ABK, RF, C, BAC
BBV is the result of a buyout. ETFC, ABK and MBI are speculation. RF, C and BAC are holds.
Large Cap Diversified - 20%
GE, MAS, ITW
I think these are reasonable holds. GE has been a big disappointment though.
Energy - 9%
Bargain basement prices and long term holds.
I would be leery of coal. Google 'Obama Interview Coal Bankrupt Audio'. I think on this Bob and the Candidate agree.
Health - 5%
If you are going to buy a health care stock, might as well buy a big one.
Small Cap Misc - @ 5 %
RNIN, SIMG, BGS
Digital Signage, Tech and Food. Got to play a little.
Large Cap Growth - 16%
The best available options for a couple retirement accounts.
Large Cap Value - 7%
The best available option for a retirement account and if anything, now is the time for a good value oriented fund to shine.
All Cap - 9%
I like Hodges and Low Priced Stock is performing better than I would have thought.
Growth and Income - 4.5%
For more stability and less volatility. Five star fund.
Stability - 7%
A GNMA fund for some security and stability.
That's all the Change I can make for now.
Was this a wise decision? Time will tell. If it wasn't, I am sure my new government will save me by my by confiscating my 401K and replacing it with with a guaranteed return of 3% for the rest of my life.
Annually adjusted for inflation, of course.