Forecasts & Trends

We begin this week by looking at the latest report on the economy. GDP rose a bit more than expected in the 4Q, up 5.7% (annual rate). Despite that, many economists are downgrading their forecasts for growth in 2010. Following that, we will take a close look at the latest reports on the housing market. Despite the improvement in the economy, home prices continue to fall in most areas of the country. The housing slump is still not over, and this is a big reason why consumer spending is not likely to recover to pre-recession levels anytime soon. If you are concerned about the housing market, you will definitely want to read this week's E-Letter.

Over the years I have been writing my weekly E-Letter, I find myself returning to some recurring themes that are important to investors. One such topic is how to spot and avoid investment scams such as Ponzi schemes that seek to steal your nest egg. A recent Associated Press story noted that the number of Ponzi-type schemes uncovered in 2009 were almost quadruple the number that were discovered in 2008. With so many investors being affected by these latest schemes, I think it is once again time that I provide some ground rules for spotting and avoiding investment scams.

As the principal of an investment advisory firm, I have to admit that the stock market sometimes causes us to scratch our heads, wondering what in the world it's up to. As the current market rally continues unabated, this is definitely one of those times. In 2009, the S&P 500 Index soared 65% since its lowest closing value in March and ended the year up over 23%. However, this huge rally seems to have driven stock prices beyond where they should be based on the economic fundamentals.

Even more confusing is the fact that statistics compiled by the Investment Company Institute (ICI) show that domestic equity mutual funds have had net outflows of money (more withdrawals than new investments) over the past five months, meaning that retail mutual fund investors have been heading for the exits in favor of cash or other asset classes. So, how can it be that the market goes up even though investor sentiment for domestic equities is still decidedly bearish?

The answer may lie in an obscure market phenomenon known as a 'meltup,' which is a momentum-based rally that usually bears little relation to the underlying market fundamentals. This week, we'll delve into the anatomy of a stock market meltup, discuss possible reasons why stock prices went higher even as retail investors were pulling money out of domestic stock mutual funds and speculate as to whether the meltup might continue in 2010.

The Senate is set to vote on its version of health care reform, possibly as early as Christmas Eve. If they do, it will be the worst Christmas present ever for the American taxpayer. The last-minute negotiations to obtain enough votes to prevent a Republican filibuster have transformed the bill from an ill-conceived attempt to reform health care to a horribly complex piece of legislation laden with exemptions, special deals and downright payoffs for certain states.

The current push to pass a health care reform bill - any bill - has exposed the seedy underbelly of American politics. However, this is nothing new. What bothers me most about these health care bills being jammed down our throats despite public opposition is that whatever is in the final bill, it is bound to fail. In fact, you might say it's been designed to fail.

This week, I'm going to reprint two very good articles, one from Accuracy in Media (AIM) and one from Dick Morris that discuss the major problems with the current healthcare bill before the Senate. Note that these articles were written prior to the late-night negotiations (or, more accurately, bribes) that occurred this past weekend, but they still paint an accurate picture of the health care debate.

Since this is the last E-Letter before Christmas, I also want to take this opportunity to thank all of my loyal readers and clients and wish you a very Merry Christmas or Happy Hanukkah.

For many years, I have written about the Dalbar Organization's Qualitative Analysis of Investor Behavior (QAIB) study. Now in its 15th year, this study has consistently documented how investors' returns do not match those of the major market indexes because investors constantly jump from one hot investment to another. While Dalbar showed us how investors returns suffered, we were left wondering why investors acted as they did.

The answer to the 'why' question may now be found in a recent study showing the part genetics play in a person's investment behavior. The 'Nature or Nurture' study found that up to 45% of a person's investment behavior may be attributable to genetics. Some genetic influences are good while others are not. The Nature or Nurture study also found that genetic investment behavior can persist even after considerable investment education. In other words, nature trumps nurture.

I recognized long ago how some investors can be their own worst enemies, and now I know that their genetics are likely at fault. Fortunately, I developed a way to overcome some of the detrimental genetic behaviors long ago. If you've ever made a bad investment decision and kicked yourself later on for doing so, you need to read this week's E-Letter.

In my June 24, 2008 E-Letter, I wrote about a shocking Morningstar study that revealed that only 47% of mutual fund managers invest their own money in the funds they manage. As I wrote at the time, I suspected that the Morningstar study would result in more fund managers putting some of their own money in the funds they manage. But to my surprise, the numbers have gotten even worse!

The latest Morningstar report finds that an incredible 51% of mutual fund managers have not a dime of their own money in the funds they manage. Frankly, I am stunned once again. Why over half of all highly paid fund managers have none of their own money on the line is beyond me, and I find it very troubling.

I, on the other hand, have my own money invested in EVERY program I recommend to my clients. I would have it no other way. If I don't have my money on the line, why should I ask you to? Let's talk about it.

The announcement on October 29 that 3Q GDP surged 3.5% was seen as a confirmation that the recession is over. However, a closer examination of that report reveals that it was still a disappointing quarter for the economy, especially considering how much government spending contributed to the gain... The government reported last week that US worker productivity surged to the highest level in six years in the 3Q. Normally rising productivity is a good thing but this time, much of the increase is due to massive layoffs -- fewer workers are having to do more work -- and many companies are laying off the best and brightest, such as scientists and engineers... The unemployment rate surged to 10.2% in October, the worst in a quarter century.

This week, we will examine all these issues at length, plus I have included a very worrisome analysis from economic forecaster Nouriel Roubini regarding the US dollar and what he sees as the next credit crisis on the horizon. Finally, I have included an article from the Wall Street Journal that lists the most insidious parts of the new healthcare bill that just passed - prepare to get very angry!

Finally, our thoughts and prayers go out to all of the families of the innocent soldiers who were killed and injured in the tragedy at Fort Hood that occurred on November 5.

This Thursday, all eyes will be on the 'advance' estimate of 3Q GDP, and most analysts expect it to be positive and confirm that the US economy emerged from the recession in the July-September quarter. Yet even if the GDP report is positive on Thursday, we all know that the unemployment rate (currently 9.8%) continues to rise and is likely to go up for at least several more months.

If the government counted everyone who is unemployed, or is working part-time because they can't find a full-time job, the real US unemployment rate was 17% as of the end of September. So even if the recession 'officially' ended in the 3Q based on this Thursday's GDP report, this economy is far from out of the woods. And if the dollar continues to fall, even more dire consequences (ie - a double-dip recession) are likely to follow. It's a lot to cover in one letter, so let's get started.