Search results matching tag 'Investing Strategies'

BUY CLEAN GREEN! BEST INVESTMENT THEME FOR DECADES

RichardSchwartz — Thu, 01 Oct 2009 13:24:00 GMT

CLEAN, GREEN UPDATE. THE NEXT BIG THING IS HERE & WORKING WELL!

For a FREE week of PRINCIPLES OF THE STOCK MARKET, email me at RichardStk@aol.com

Starting back in December 2006, I started writing about the next BIG THING. And have updated it for you continuously ever since. Happily I started on this theme right before the 2007 boom in solar stocks. Since I eat my own cooking, so to speak, I was able to capture some doubles and more in companies like First Solar (FSLR), Suntech Power (STP) and a couple others. Hope you were too. That solar boom is over, for the moment -- a good time to nibble, with today’s oversupply of solar but other subsectors of the greater clean green energy universe are now having their day in the sun (pun intended). “Smart grid” stocks, those that help reduce, measure and regulate power usage have recently been hot and I’ve long recommended EnerNOC (ENOC) and Comverge (COMV). Disclaimer! I own small portions of both but can and do change positions without notice. And that’s even before America really starts to modernize our national power grid. Wind and natural gas stocks have been doing well now as have battery and other storage technology after General Motors threw out that figure of over 200 miles per gallon coming with their Chevy Volt. I did publish a decently all-encompassing list back on June 6th, 2008, right in the midst of the 17-month downtrend and asked you to “print, keep handy and archive” it for future use. Last Wednesday, I listed a few additional technology companies which have one foot in clean green and before that, on September 18^th, I posted a winnowed down list of my December 2006 list of about 80 clean green companies outperforming for possible near term trades. And of course a couple times recently I’ve again recommended that new clean green global mutual fund that Steve Leuthold and crew are now offering, which I recommended to you just back in July, that’s Leuthold Clean Green Tech (symbol LGCTX).

I CONTINUE TO BELIEVE THIS IS SHOULD BE #1 THEME FOR LONG TERM INVESTORS and thus let me pound the table again today (even though it’s not Friday when I’ve gotten in the habit of giving you YOUR CLEAN GREEN WEEKEND UPDATE; I’m a man of routine my friends say.). Just want to point out that holding a bunch of clean green stocks is still working well. What I’m finding is that some good news item seems to pop every few days about one of the stocks in my own IRA portfolio, almost totally composed of small lots of lots of clean green companies, and/or also for many of those stocks on my larger shopping list of clean green. My IRA is up over +30% this year and I’m only 50% invested! (Note! I’d be much less invested if this was my fund management money. Like monies that are designated to only go into sector funds or that only can be moved around minimally or that has no clean green choices, again like the money management I do for others.) Anyway, whether it be wind, geothermal, energy storage, battery technology, fuel cells, etc. etc, whatever, there are lots of clean green niches, I’d buy ‘em all and cover all bases. Yesterday one US wind company got a big contract from a Chinese firm and popped +10% (in a ragged stock market), that’s happened numerous times as China pushes clean green too. Back a week ago a reader sent me an email that three of his very low priced clean greens were all up nicely that day when he checked. I hold one of them so I won’t mention that name but two others I used to hold, not right now but maybe I’ll buy them back on weakness down the road, were Medis Tech (symbol MDTL) up +24% and Hydrogenics (HYGS) up +13%. Schwartz View: Bottom line, pull out my original shopping list of clean green, which I’ve run in various and updated forms numerous times over the last couple of years, review it and then buy small amounts of lots of clean green stocks. That way when a breakthrough occurs, wherever you’ll benefit while the rising tide carries all ships (almost all) over time. That was my original game plan for all of us and remains so and continues working nicely. By the way I’d buy BEFORE the scheduled December Copenhagen global conference. The rationale again is the world is going clean green because it has to. We all know that. Going clean green creates new jobs which we desperately need, cuts down on oil money somehow finding its way into terrorists hands and respects and protects Mother Earth. And when we forget we have to go green for a brief moment, some report about global warming comes out and reminds us.. China knows it, Europe knows it and America, our scientists, our government, our businesses (who wants rules in place so they can move forward with capital spending plans), our venture capitalists know it and our everyday Americans know it. All except for the pure unadulterated capitalists holdout contingent who won’t admit such because in their blindered view “it hurts business.” Let me say again: There is a critical mass for going Code Green and a critical mass means there’s no stopping it, maybe something, some event, can hold it back for a time, but there’s no stopping it.

THIS IS THE #1 BEST INVESTMENT THEME FOR THE NEXT COUPLE OF DECADES!

Come on, get on board!

The Case for High-Yield Bonds

GaryHalbert — Tue, 15 Sep 2009 21:34:00 GMT

IN THIS ISSUE:

"Junk Bond" Basics
High-Yield Bond Whitepaper
by Steven D. Landis, CFP
Is the Party Over for 2009?
Introducing the Columbus High-Yield Bond Program
Performance Evaluation
Conclusions

Introduction

High-yield bonds, or "junk bonds" as they are widely known, have become the subject of quite a bit of attention in recent months. That's because, as of August 31st, the Barclays and Merrill Lynch high-yield bond indexes have jumped over 40% in value so far in 2009. This makes the S&P 500 Index's year-to-date return of only 14.97% as of August 31st paltry in comparison.

Returns of that magnitude have not escaped the notice of investors. Inflows into high-yield bond mutual funds have been at or near record levels since March, based on information from AMG Data Services, a mutual fund tracking firm. However, the question is whether the good times in high-yield bonds will last.

I certainly don't pretend to be an expert on high-yield bonds, but I have found that the cyclical trends in the high-yield market often do lend themselves to being traded by an active money manager. Though "junk bonds" carry with them the reputation for being risky (and they are), we have found a professional money manager who has produced an enviable track record with low historical drawdowns.

This week, I'm going to feature Sojourn Financial Strategies, LLC and its co-founder, Steven D. Landis, CFP. I'll begin by reprinting excerpts from a whitepaper on high-yield bonds that Steve has authored. This paper does an excellent job of explaining the opportunities available in high-yield bonds, and whether or not it's too late to participate in the junk bond rally that began earlier this year.

I'll then finish up by presenting Steve's Columbus High-Yield Bond (CHYB) Program. Just to whet your appetite, this actively managed strategy has produced an annualized return of over 10% since its inception in 2002, with a maximum drawdown of only -6.14%. Year-to-date, the CHYB Program is up over 24% as of the end of August. Past performance, however, is not necessarily indicative of future results.

Junk Bonds 101

Most of us realize that high-yield bonds are called "junk bonds" because they carry a much higher risk of default than government or high-grade corporate bonds. As a result, these bonds tend to carry a higher rate of interest in order to compensate investors for taking on a greater risk of default. Like all bonds, high-yield issues tend to be affected by the interest rate climate. However, what you may not know is that the value of a high-yield bond can also be affected by the health of the economy and stock market.

It just makes sense that a better economic environment sometimes reduces a junk bond's default risk, since the issuing corporation may be less likely to default in a good economy. As a result, the spread between the effective junk bond yield and a risk-free (Treasury) rate closes, and the underlying bond becomes more valuable.

Of course, the skill in managing high-yield bonds or junk bond mutual funds comes in knowing when to be in the market and when to move to cash. Since 2002, Steve has shown us that he has the methodology in place to make these decisions with a high degree of accuracy. However, before getting into the details of his program, I want to reprint excerpts from his recent whitepaper on high-yield bond investing.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

QUOTE:

Investors Ready for a New Way to Invest in High Yield Bonds
By Steven D. Landis, CFP®

High yield bonds have been around for longer than most of us can remember. Anybody who was born earlier than 1960 can recall the days of Ivan Boesky and Michael Milken, the highly creative and somewhat dubious creators of "junk bonds" (the more-to-the-point term for high yield bonds). Eventually, their actions, not the junk bonds, landed the boys in jail for a short time. It should be noted that never was there (then or now) anything illegal about the use of the junk bonds, but their criminal activity, in part, contributed to the bad reputation sometimes attributed to high yield bonds.

In this paper, the terms high yield bonds, junk bonds, and "junks" will be used interchangeably and will have the same meaning and reference. These terms apply to loans that are made to higher risk, corporate borrowers of money. High yield bonds had been in existence long before Boesky's and Milken's involvement in the early 1980s. During the early part of the 20th century General Motors, U.S. Steel, and other well-known corporations borrowed money that, at that time, was considered higher-risk debt. If that debt were issued today, it would be considered to be a junk bond.

Fast forward to today and we find that more than $500 billion (a half-trillion dollars) defines the magnitude of the high yield bond market. Its explosive growth is the result of two factors: 1) more companies needing capital; and 2) the availability of investors who are willing to take more risk in return for a higher yield on their investment.

Bond Ratings

Bonds are rated based on the probability of the borrower defaulting on the bond, that is eventually failing to meet the terms of the bond covenant. The highest quality bonds, those with the greatest probability of paying back the loan principle and interest, are rated AAA. As the chances of a bond default increases, the lower the rating on the bond, as illustrated in Table 1 below.

Table 1.
Bond Rating vs. Default Risk

Standard & Poor's Rating	Grade	Default Risk
AAA	Investment	Lowest Risk
AA	Investment	Low Risk
A	Investment	Low Risk
BBB	Investment	Medium Risk
BB, B	Junk	High Risk
CCC, CC, C	Junk	Highest Risk
D	Junk	In Default

So we can see that the two terms used to describe these bonds, high-yield and junk, come from two features of the bonds: 1) High-yield refers to the increased interest rate that accompanies the bonds; and 2) Junk refers to the low quality of the bond.

Risks of investing in high yield bonds

In 2007, investors and the public became intimately familiar with the sub-prime consumer mortgages and their risk to lenders (and ultimately the economy, in general). The results of consumers overextending themselves by borrowing more debt than they could repay, under terms that were unfavorable, eventually resulted in a near-collapse of the consumer mortgage market. Investors in those sub-prime mortgages soon found their investments suffering tremendous losses. Meanwhile, the ability to sell out of those investments became more and more difficult due to a lack of buyers. A similar scenario also played out in the high yield bond market in which holders of low-quality debt saw their investments lose a substantial percentage of its original value.

A fact of life is that consumers with low credit scores must pay high interest rates when they borrow money. This higher interest rate compensates the lender for the increased chance of the borrower defaulting on the loan. Likewise, corporate borrowers with a lower credit rating have an increased probability of defaulting on their loans and pay lenders accordingly. Those who loan money to these corporate borrowers demand to be compensated for the extra risk they take in making these loans. Should a default occur, the bondholders stand in line with all the other creditors of the company, hoping to get back some portion of their money. The lower the quality the bond, the less chance there will be assets that can be used to pay back creditors. The increased interest rate compensates the lender, at least in part, for this additional risk.

The result is that those entities that lend money to higher risk borrowers, via junk bond offerings, receive a higher interest rate than if they had been lending money to higher quality (lower risk) borrowers. To illustrate this difference, consider that over the past twenty or so years, high yield bonds have paid an interest rate of 3-9% (with an average of 6%) per year more than that of U.S. Treasury bonds. This difference is known as the "spread." In early 2008 the average default rate on junk bonds was about 1.1%. However, as the economy continued to sour the default was expected to increase to around 5.2%. Compare this with an average, long-term default rate of about 4.9% (according to John Lonski, chief economist of Moody's.)

An additional risk of junk bonds is their lack of liquidity. Liquidity refers to the ease of trading the instrument in the marketplace. The author of this paper also refers to liquidity as "how quickly one can sell an investment and convert it to cash". Junk bonds are not traded as freely as, say, government bonds. Thus, the liquidity of high yields is significantly lower than that of high quality debt, which leads to higher costs of trading and selling at one's desired price. All of these factors combined result in the higher interest rate that is attached to junks.

Why Invest in High-Yield Bonds?

Unlike normal bonds, that are greatly influenced by fluctuations in interest rates, junk bonds are less affected by interest rate movement. This is because junks generally have higher interest rates and have, generally, shorter maturities. In fact, junk bonds are affected more by overall economic changes (expansion or contraction) than changes (increase or decrease) in prevailing interest rates. This is because the quality of a junk bond is most affected by the strength of the company issuing the bond.

If the company's profitability increases (since the issuance date of the bond), the quality of their bonds increases. For an investor in a junk bond, this is an almost-perfect scenario: One in which a junk bond with a high interest rate becomes a quality bond with a high interest rate (this being the result of the formerly high risk borrower becoming a low risk borrower).

For example, ABC Corp. had a debt rating of "B" and issued a bond at 12%. Meanwhile, AAA-rated debt was paying 4%. Sometime following issuance of this debt, ABC Corp. enjoys a return to profitability and its debt rating is upgraded to "A". The result is that holders of those old ABC Corp. bonds now hold A-rated debt that is paying 12%! This, in turn, makes the underlying bond more valuable since investors are willing to accept a lower rate of interest on debt issued by a stable company.

How to Invest in High-Yields

In my opinion, investing directly in individual junk bonds should be left to the wealthy and institutional investors. In fact, the majority of investors in junk debt are institutional…mutual funds, pension funds, hedge funds, and others. This, however, does not suggest that investing in junks is only for the wealthy. Most all investors can get involved with junk bond investing by investing in mutual funds that specialize in them.

By investing in a mutual fund that specializes in junk bonds, an investor can take advantage of a professional fund manager. Additionally, the investor will be able to reduce risk via the diversification that mutual funds offer. (A typical mutual fund will hold as many as 200-400 bonds, all of which are owned, on a pro rata basis, by investors in the fund.)

Keep in mind, though, that investing in a mutual fund does not mean that the investor has no risk. Like the bonds held by the fund, a mutual fund can gain or lose value. Plus, in the event of a slowing economy, high yield bond mutual funds can lose significant value. So, for anybody considering an investment in high yield bond funds (or for that matter, any mutual fund) consider your tolerance for and ability to withstand potential losses.

An Improvement on Buy-and-Hold Bond Investing

As much as we really like investing in high-yield bond funds, they have one major flaw. That flaw is that there are times in which high yield bonds (and mutual funds investing in them) will get absolutely annihilated in a bear market. The years 2007 and 2008 are the most recent examples of this. In 2008, the majority of high yield bond mutual funds lost more than 20% of their value. Worse still were those funds that lost more than 50% of their value!

Risk-averse investors may find themselves asking: "Is there a way to invest in high yield bond funds without the risk of losing money in a down market?" Fortunately, the answer is, "Yes, there is." There are any number of advisers whose role is to actively manage money for their clients. (The author of this paper is among those who manage money for investors who want to invest in high yield bond funds.) The goal for most of these advisers/managers is to be invested in a security/market when it's gaining in price and to sell that security/market before its price goes down too much.

If the adviser is able to do this buying and selling successfully (and we emphasize "IF"), then that adviser's clients/investors would be able to make more profit while taking less risk. By reducing the losses during time periods in which high yield bonds are losing money (1998-2002 and 2007-2008) one can dramatically improve the potential for long-term profits.

Is the Party Over for 2009?

At this point, readers of this paper are either eager to invest in high-yield bond funds or skeptical and not interested in the increased risk. For those who are tempted to invest in the high-yield bond market, a question arises: "How much profit is left after the big run junks have had this year?"

It goes without saying that we have no idea how much more high yields can offer. But we can offer a look at three possible scenarios:

Scenario 1. The Economy Improves. If the economy continues to improve, profits of most corporations will rise. At the same time, we would expect profits of many issuers of high yield debt to improve. If this scenario does, in fact, occur then we would expect high yield bonds to continue increasing in price. (Additionally, bondholders would continue to receive interest payments from those bonds.)

Scenario 2. The Economy Sours. If the economy begins to worsen, then corporate profits will likely be depressed. At the same time, profits of issuers of high yield debt would probably suffer. In this scenario, the prices of high-yield debt would probably begin to fall. The buy-and-hold investor would suffer losses to his/her investment. Investors who use skilled, successful active managers have a great probability that their adviser/manager would sell their junk bond fund and invest their money in the safety of a money market fund. This move to safety would preserve the value of investors money.

Scenario 3. The Economy Muddles Along. If the economy becomes listless and neither grows nor contracts, there is the possibility that high-yield bond prices could stagnate. That is, prices would neither rise nor fall. It would be extremely rare for this to continue for an extended period of time, but let's assume it does. In such a situation, the investor neither gains nor loses money on his/her investment principle. However, he/she could continue to reap profits in the form of high interest income being generated by the bonds.

So, looking at the three possible scenarios, the only one that we would expect to pose a threat of significant loss is Scenario #2, specifically for the buy-and-hold investor. The investor who uses a skilled, active adviser/manager has a significantly greater chance of avoiding losses during a "down market". [There are no guarantees, of course. GDH]

In summary, we contend that high yield bond mutual funds can be an extremely attractive way to invest, though subject to substantial losses during falling markets. Furthermore, we believe that investing in high yield bond mutual funds can be an even more attractive method of investing, if managed under the guidance, direction, and oversight of an experienced and skilled adviser.

Steven D. Landis, CFP®
Sojourn Financial Strategies, LLC

References:

Glenn Yago. "Junk Bonds." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved December 20, 2008 from the World Wide Web: http://www.econlib.org/Library/Enc/JunkBonds.html
John Waggoner. USA Today. February 7, 2008.
"Junk Bonds: Everything You Need to Know". Investopedia®

END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Columbus High-Yield Bond Program (CHYB)

As Steve made clear in his whitepaper, active management of high-yield bond mutual funds can potentially allow investors to participate in both capital gains and coupon returns, while also moving to the sidelines during times of downward price pressure. This ability to move to cash in downward trending markets is very important, especially considering the aggressive nature of high-yield bond investments.

It might come as a disappointment that the CHYB Program is up "only" 25.01% so far in 2009 as of August 31, considering that the Barclay's High-Yield Credit Bond Index is up over 40% over the same period of time. However, this analysis is very short-sighted given that historical drawdowns in the Barclay's Index have exceeded -33%, while the CHYB's worst-ever drawdown has been limited to just over -6%.

The value of minimizing losses becomes even more apparent when looking at the rolling 5-year returns as of August 31. The CHYB Program has a 5-year annualized return of 8.94% while the unmanaged Barclays Index has managed an annualized return of only 5.27%. Again, the ability to move to cash in downward trending markets can make a significant difference in long-term returns, though there are no guarantees. And remember that the CHYB returns are net of all fees and expenses.

The Columbus High-Yield Bond Trading Strategy

Steve's proprietary trading model uses technical indicators to determine the high-yield bond market's potential future movements. However, Steve goes one step further by analyzing the technical indicators unique to each of the high-yield bond mutual funds he uses. Like many other active money managers, Steve will sometimes use specialized high-yield bond index funds. However, he also uses traditional high-yield bond funds when his system tells him they have the best potential for future gain.

Doing this allows him to combine his market timing expertise with the bond selection expertise of the mutual fund manager. Plus, traditional high-yield bond funds typically pay a higher "coupon" rate of return than specialized index funds.

As a general rule, the CHYB Program invests in only one mutual fund at a time, though future growth may require him to use two or more funds. Client accounts will either be 100% in a high-yield mutual fund or 100% in cash (money market); there are no graded investments or partial positions taken.

The CHYB trading model does not use leveraged funds nor does it use specialized inverse funds that provide a net "short" exposure to the high-yield bond market. However, Steve may use such inverse funds as a hedge under certain conditions. Best of all, Steve's strategy employs the use of trailing stop orders that close out trades should losses exceed a pre-determined percentage. In winning trades, these stop-loss orders ratchet up with gains, providing the potential to lock in any positive returns over and above the stop-loss trigger percentage.

If I had to describe our observations of Steve's trading model, I'd have to use the term "patience." Steve does not employ any discretion in his trading, so he will allow the system to stay in cash as long as necessary until the high-yield bond market environment improves. For example, the CHYB Program was in cash for much of 2008, which is why it ended the year with only a 2.9% loss rather than a drop of over 26% as was the case in the Barclays High-Yield Credit Bond Index.

Performance Evaluation

The goal of the CHYB Program is not necessarily to "beat the market" over the short run, but rather to participate in market gains while also managing risks. From the historical performance statistics provided below, it is evident that Steve has attained this goal in the past, though past performance cannot guarantee favorable future results:

Performance Statistics
(Net of all fees and expenses)

PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
(Please see Important Disclosures below.)

The CHYB Program is available through the Purcell Advisory Services platform. Accounts are held at Trust Company of America (TCA), an independent trust company located in Denver, Colorado. Clients have online access to their accounts via the TCA website. Both TCA and Purcell issue quarterly statements and TCA produces year-end tax reports. TCA charges a custodial fee of 1/10th of one percent (ten basis points) of the account balance.

The minimum account size for the CHYB Program is $50,000 per account. Management fees are billed quarterly in advance based on the following annual percentages for various sized accounts:

First $500,000	2.50%
$500,000 to $1 million	2.25% (entire account)
$Over $1 million	2.00% (entire account)

It is important to remember that all performance information provided above is net of both the management fee and custodial fee charged on the accounts.

Conclusions

We have been offering the Columbus High-Yield Bond Program for over three years now, and I continue to be impressed with the way it can participate in market gains and then move to the safety of the money market fund when the risk of loss becomes too great. I also like the fact that it is a non-discretionary system, which is an important factor when the model has been in cash for an extended period of time.

Over the years, I have seen money managers disregard their trading systems when they signal to be in cash for weeks or months. Overriding a trading system can also result from clients calling to ask why they are paying a fee to sit in a money market fund. Steve stuck to his guns during the extended cash position in 2008, and we haven't heard many clients complaining about having lost only 2.9% for the year when the stock and high-yield bond markets were in free-fall.

While you may have missed much of the move in high-yield bonds so far in 2009, I think Steve makes a good case for investing in this program now. Since we recommend this program for investors with at least a three-to-five-year time horizon, we feel that the CHYB Program's combination of market participation and risk management is a fit for the less aggressive portion of your portfolio. As always, be sure to read all offering materials and Important Disclosures before making a decision to invest.

If you would like to learn more about the Columbus High-Yield Bond Program or any of our other risk-managed AdvisorLink® investment programs, please feel free to give one of our Investment Consultants a call at 800-348-3601 or click on the following link to complete one of our online request forms. If more convenient, drop us an e-mail at info@halbertwealth.com or visit our website at www.halbertwealth.com to learn more about this and our other actively managed investment strategies.

Special Reminder about the "All They'll Need to Know" Booklets

As I mentioned a couple of weeks ago, we have now exhausted our supply of the end-of-life planning resource entitled "All They'll Need to Know." You can, however, still obtain a copy of the "All They'll Need to Know" booklet directly from Emerson Publications. I have negotiated a discounted price on both the printed and electronic versions of the booklet which you can access by clicking on the Emerson Publications website link below:

http://emersonpublications.com/index.php?pr=ATNTK-Halbert&nosessionkill=1

I am making this valuable resource available as a service to my readers and I do not share in any part of the purchase price of either version of the booklet. This discount is available for a limited time only, so I suggest that you take advantage of this offer as soon as possible.

Wishing you profits,

Gary D. Halbert

IMPORTANT DISCLOSURES: Halbert Wealth Management, Inc. (HWM), Sojourn Financial Strategies, LLC (Sojourn), and Purcell Advisory Services, LLC (Purcell) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from the Advisors in exchange for introducing client accounts. For more information on HWM or any other Advisor mentioned, please consult their respective Form ADV II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor's 500 Stock Index and the Barclays High Yield Credit Bond Index (which both include dividends) were used. Both represent unmanaged, passive buy-and-hold approaches, and are designed to represent their specific market. The volatility and investment characteristics of these indexes may differ materially (more or less) from that of this program, and these Indexes cannot be invested in directly. The performance of the S & P 500 Stock Index and the Barclays High Yield Credit Bond Index is not meant to imply that investors should consider an investment in the Columbus High-Yield trading program as comparable to an investment in the "blue chip" stocks that comprise the S & P 500 Stock Index or the high yield investments that comprise the Barclays High Yield Credit Bond Index. Historical performance data from inception through December 2005 represents a tracking account managed by Steven D. Landis and audited by MoniResearch, an independent corporation, Steve Shellans, President. Performance from January 2006 forward is from an actual account in Purcell Advisory Services Columbus High-Yield Bond Program. Since all accounts in the program are managed similarly, the results shown are representative of the majority of participants in the Columbus High-Yield Bond Program.

Purcell utilizes research signals purchased from Sojourn, an unaffiliated investment advisor. The signals are generated by the use of a proprietary model developed by Sojourn, with the objective of providing superior risk-adjusted returns using high-yield bond investments. Assets in the program are allocated 100% to the appropriate high-yield mutual funds or 100% to the money market according to the purchased research signals. Statistics for "Worst Drawdown" are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

When reviewing past performance records, it is important to note that different accounts, even though they are traded pursuant to the same strategy, can have varying results. The reasons for this include: i) the period of time in which the accounts are active; ii) the timing of contributions and withdrawals; iii) the account size; iv) the minimum investment requirements and/or withdrawal restrictions; and v) the rate of brokerage commissions and transaction fees charged to an account. There can be no assurance that an account opened by any person will achieve performance returns similar to those provided herein for accounts traded pursuant to the Columbus High-Yield trading program.

In addition, you should be aware that (i) the Columbus High-Yield trading program is speculative and involves risk; (ii) the Columbus High-Yield trading program's performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in the program; (iv) Purcell will have trading authority over an investor's account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the Columbus High-Yield trading program's fees and expenses (if any) will reduce an investor's trading profits, or increase any trading losses.

Any investment in a mutual fund or money market fund carries the risk of loss. Mutual funds and money market funds have their own expenses which are outlined in the fund's prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency. Returns illustrated are net of the maximum annual management fee of 2.5%, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Dividends and capital gains have been reinvested. Management Fees are deducted quarterly, and are not accrued on a month-by-month basis. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. Individual account results may vary based on each investor's unique situation. No adjustment has been made for income tax liability. Performance for individual accounts may differ materially (more or less) from the results illustrated. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

IBD 100 'New Names': Using Sir John Templeton's Approach

RichardSchwartz — Tue, 15 Sep 2009 13:17:00 GMT

IBD 100 ‘NEW NAMES.’ Only three new names hit the latest weekly (September 14^th, 2009), computer-generated IBD 100 list of “leading growth companies,” those companies showing good fundamentals, having some institutional sponsorship, producing solid earnings growth and outperforming the average stock. Three new names is about the norm. And Investor’s Business Daily(IBD) in its commentary, is pretty calmed down and happy now that its list is acting normally, leading the general stock market, writing this week that: “Whenever leading stocks post the best gains, it’s a sign of health for the market and its leaders.” When this list lags, it worries IBD and until recently it had been lagging for many months now.

New Names Mkt IBD Industry

Price Cap Rank Rank Business Line

ECPG Encore Capital 16.47 378m 72 45 Resale of unsecured, discounted loans

CNSL Consolidated Comm. 15.26 451m 88 152 Local phone service in TX/IL

WLT Walter Energy 61.86 3240m 99 48 Goal miner/degasifies coal beds

Schwartz View: My continuing strong suggestion for growth investors searching for big winners is to research in depth all ‘new name’ companies when they first show up on the IBD 100 list. I believe this one approach alone could pretty consistently make you handsome profits. (My opinion is arrived at after trying out as many stock market approaches as I could unearth searching full time for over 20 years.) Many of these companies go on to become ‘ten baggers’ over time and you’re finding them, when they first appear on this list, before the crowd, and thus if you do follow through and finding out exactly why they are in fashion, you can be a ‘first mover’ in buying them. Plus your research -- so easy in today’s world of the Internet -- clues you in to many, not so incidental, trends in the economy providing you insight into the Big Picture as well. Again, because companies appear on this list for some reason, “your mission, if you decide to accept it,” is to find out EXACTLY why. One way to manage this approach, once you satisfy yourself about just why a company hit this list, is to use the Sir John Templeton approach, buy a small amount of each stock and put it away for some time. Remember Mr. Templeton bought 100 shares of all NYSE traded depressed stocks trading under $1 a share during WWII. A few years later he had quadrupled his money. His missive to us future generations is that some won’t work out, some will trade sideways but the big winners will provide you with a handsome overall profit. Thanks Sir John Templeton!

Let’s see, this week a cursory look tells me that Encore Capital seems to be in a sweet spot. There’s a ton of bad loans floating around today so business is there for the company which comes up with a way to profit. As for Consolidated Communications, I’m not sure why a company in a very low ranked sector (IBD rank 157 of 197) and a local phone service provider made the list. Maybe a takeover? Your job, again, is to find out why and if you’re satisfied there’s big potential, buy a few shares. Finally Walter Energy, a coal coking company, maybe made the list as coal companies surge as natural gas rebounds on speculation of increased steel output from China. I’m not sure I buy into that as a good enough reason but again there may be some hidden, deeper reason which in depth research will unearth. Net, net, if you find solid reasons for these and/or any ‘new name’ stocks, one fundamentally solid market approach would be to buy a small equal dollar amount of each. Then put ‘em away. Yes, ‘buy & hold,’ exactly the approach most advisors today are saying doesn’t work anymore. Remember, take the road less traveled in your stock market approaches and you’ll generally come out on top. Ask Mr. Buffett and others of his ilk.

Stocks Have Risen When The Economy Is Down

RichardSchwartz — Mon, 03 Aug 2009 14:49:00 GMT

THE BIG PICTURE

The key thought: History shows the economy can be bad and the stock market good! Understanding that one idea is key to making a logical decision about the stock market here. I tried to get this across at Elizabeth’s 9^th birthday party to the family Saturday. The stock market is climbing its “wall of worry.”

THE SITUATION. My stock market and economic history studies of the Great Depression of the 1930s convinced me that stock market can rise while the underlying economy remains in a very weak condition. Because it’s happened before. In the 1930s depression, even while US unemployment remained at horrific, double digit levels for the whole decade and with few safety nets in place to help destitute Americans and with great ongoing divisiveness between political parties, the stock market posted a five year bull market run up, from 1932 to 1937. So, yes, there can exist a great disparity between the stock market and the economy. This confounding, confusing conundrum can exist as long as the economy is not sinking and/or when the economy stabilizes, no matter at whatever low level of economy activity. I believe that’s because the US capitalistic economy is essentially revitalizing and self-healing. Helped today, because over our history our capitalistic system has grown so large and diverse. In other words, first because Americans, with our continued open borders to any nationality, are a breed of extremely ingenious risk takers and thus will find ways to survive and prosper if allowed to do so. If, from time to time, when capitalism gets in a bind, it gets jumpstarted. Or gets the table reset when it knocked awry. Secondly, because today, there just are so many different industries, businesses, ideas, innovations in all parts and regions of America. Just meaning that while construction and manufacturing are down, maybe technology and the media are up. Or while Michigan is down, Tennessee is up. Or while big business suffers, smaller businesses spring up. I’m too provincial to see all this metamorphosis first hand and thus explain this concept more completely but what I see today is an America in downsizing mode, say moving to a rightsizing scale, but not in total collapse mode. Just like China, America in our own way is using this crisis, individuals one by one, businesses one by one, even the government is adjusting, although not totally because the government is itself the ultimate safety net when any major crisis hits. Our government, we’ve learned from past crises, is the rarely needed (thank goodness!) jump start provider, booster or table setter. Thus today America is using this financial crisis to rid our economic system of the bloat, the fat, all the long built up excesses, our bad behaviors and habits, particularly our overspending, even the corruption which always builds up during “unfettered capitalism,” seemingly prosperous but under the surface unhealthy, unsustainable times. Exactly why economists look at recessions as normal, healthy and needed cleansing events and why throwing money at any and all past downturns in recent decades led to this larger than life recent disastrous event. Schwartz View: My conclusion thus -- to get back to my opening statement that stock markets can rise while our economy is down and dirty, weak and lackluster and in substantial downsizing mode -- is that what investors mainly have to fear today is indeed fear itself. That fear partially coming from not being able to understand how the stock market can rise as we read about and see big economic trouble all around us. As I see it that’s investor’s biggest bugaboo now. We all know or should know that, as William O’Neil, founder of Investor’s Business Daily has always stressed, that success favors the optimist. Now I don’t mean the Pollyannas, I won’t besmirch the many of this ilk whom get be angry, they got their comeuppances by getting blindsided and riding the stock market down for 17 straight months between October 2007 and March 2009. But today, since we’ve moved past the bankruptcy risk, at least for the time being, no guarantees about future shocks knocking not us back down, we should overcome our fears and our misunderstanding of the economy and stock market relationship and again participate in the stock market to the extent of our own financial goals and objectives and how we’ve performed over the last two, years, during the bear market since mid-2007. To reiterate since this concept is so darn important, the hardest move to make is to buy stocks after this financial earthquake and while we see all the resulting damage around us. In other words, to separate the stock market from the economy. It’s very difficult for us investment professionals as well because every day we watch the stock market closely and/or read every update about each remaining financial problem. We all need to overcome our fears to make money during this full cycle. Easier said than done!

THE ECONOMY

The economy is so large and varied now that even with the shock and resulting dead stoppage of economic activity for many months, we’ve been able to stabilize the economy. Thanks to our government learning from our past travails and understanding its role. President Bush gets much credit but he’s gone now and thus last Friday I heard the first words uttered about an “Obama Miracle.” Pulling totally out of this massive slump is another thing and may take much time yet although we could post some surprisingly great numbers in coming months. Inventory rebuilding looks good statistically and allowing home foreclosures provides changes of ownership from the overextended to new risk takers. Still, over America’s 200+ year capitalistic history we’ve built a vibrant and reenergizing economic system so there’s always something good taking place somewhere and while the distressed and/or overbuilt areas of our economy right size the in fashion areas keep us moving forward. And our government has and is still performing admirably (sorry, I know many readers don’t agree with me), stabilizing our financial system and thus setting the stage to allow capitalism to provide us with future growth while at the same time realizing that any and all government intervention always adds additional drags on the economy and is trying hard to avoid such. While at the same time smartly tackling our long term deeply entrenched and ignored major issues and thus pointing America towards a more fundamentally sound future, remaining as one of the world’s leaders. Such as taking the lead in going green as the “clunkers for cash” program epitomizes. Americans really want to do their part and this program is providing one capitalistic way to do so. Getting polluting cars off the road while stimulating growth at the same time and in essence cutting back money supporting terrorism. I gotta love it! Schwartz View: So, we’re back on the right track in lots of ways and I’m delighted. But don’t get complacent. Please keep reading!

Please email me at RichardStk@aol.com for how the stock market will respond to the above analysis and whether, in the following THE STOCK MARKET and PORTFOLIO STRATEGY sections it’s time to buy the stock market today or not.

More On Teaching Your Kids To Save & Invest Wisely

GaryHalbert — Tue, 07 Jul 2009 20:11:44 GMT

IN THIS ISSUE:

First, My Own Story About Saving
Teaching Your Kids The Importance Of Saving
Motivating Your Kids To Save
Finding Ways For Kids To Make Money
Get Your Kids Involved In Investing
"Gifting" Money Or Assets To Your Kids

Introduction

At my company, we often have the opportunity to speak with our clients' adult children. In some cases, the adult children are fairly knowledgeable about investing, but in most cases, they are not. It seems to us that talking to their children about how to invest their money must be uncomfortable for many parents. That's unfortunate because the learning curve in investing can be expensive, and years of compounding can be lost.

Given that this issue is so important, we will revisit some of the key points on teaching your kids how to save and invest, such as how to encourage your kids to save more, how to teach them to invest, how you can transfer assets to your kids and minimize estate taxes, and at what (children's) ages you should leave your inheritance to your kids and more.

Many of you will want to save this E-Letter on saving and investing and encourage your children or grandchildren to read it. I will write what follows in my usual easy-to-understand style that even a well-educated teenager can comprehend. So feel free to reprint this letter and share it with others you feel it may help.

First, My Own Story About Saving

I grew up in a lower middle class family in the country outside of Lubbock, Texas. Like many young kids, I dreamed of one day being rich. My parents encouraged me to do well in school so that I could grow up to be a doctor or lawyer or some other profession that would afford me a better lifestyle than their own. And they taught me to save.

I don't recall exactly how they did it, but they continually encouraged us to save. I do remember that my father always had a stash of "emergency money" whenever unexpected events popped up. Even though he didn't make that much money at his job, he always found a way to put away a few hundred bucks in his stash every month. That roll of hundreds looked like a fortune to me as a kid! I wanted one for myself, and this motivated me to save early on.

My parents always encouraged me to work and make money, even as a child. From the time I was about 10 years old, I worked at a neighborhood horse stable after school, on the weekends and in the summers. I did everything from cleaning stalls and shoveling horse manure to grooming horses to teaching other kids to ride horses. I loved the work – it made me feel more like an adult. But more than that, I loved having my own money.

By the time I was a teenager, I had saved enough money to buy a couple of young colts each summer. Over the fall and winter, I would saddle-break them and teach them to become barrel racing horses, and then I would sell them the next summer, usually to the city girls who boarded their horses at the stable where I worked. I made a handsome profit on each horse I sold.

One of the things my parents always told me is that I would have to pay for my own car, when that day came, and this was a big incentive for me. When I turned 17, I had my Dad drop me off at the local car dealership I had selected in Lubbock, Texas. I went in, looked around, and decided which new car I was going to buy. When I told the salesman I wanted to buy the car, he told me I would need to get my dad or mom to come in. I told him I didn't think so. I pulled out a roll of one-hundred dollar bills and told him what I was willing to pay. About an hour later, I drove out in my first new car.

In the summer of my senior year in high school, I got a job driving a bobtail truck back and forth between Lubbock and Amarillo. The pay was good for those days. I was able to keep that job even as I attended college at TexasTechUniversity, and it paid for most of my college education. The only time I didn't work, at least part-time, during college was the year I spent earning a Masters Degree in International Business. I took out a loan from a local bank to enable me not to work and get my Masters in one year.

Teaching Your Kids The Importance Of Saving

It is my opinion that, as parents, we have an obligation to teach our kids about saving and financial matters in general. I believe that teaching our kids about saving and financial matters is just as important as teaching them about honesty and integrity, and even sexual matters. Yet, as is the case with sex, many parents are uncomfortable teaching their kids about financial matters.

I believe this is a big reason why we have had a savings crisis in America. In 2005, the national savings rate fell to ZERO, down from a high of over 10% in the early 1980s. In more recent years, the national saving rate actually fell into negative territory before the trend began to reverse itself in 2008 in the wake of the credit crisis. The point is, if we are going to educate our kids about the importance of saving, we must not only teach them, but we must also practice what we preach. Kids whose parents don't save are not likely to be good savers either.

Motivating Your Kids To Save

My wife, Debi, and I have two kids, a son 19 and a daughter 17. There are many ways to motivate kids to save, especially young kids. For a variety of reasons, our kids are voracious savers as I will discuss below.

Probably the most common way parents encourage their kids to save is by paying them a weekly "allowance." Parents can encourage the kids to save some of their allowance each week or month, or they can require them to do so, and in what percentage.

Debi and I wanted to create a better incentive for our kids to work and save than an allowance (in fact, we never gave them an allowance). As soon as our kids were old enough to understand saving, we agreed to MATCH whatever they saved from the money they earned. If they bring us $20 to put in their savings account, we match it and deposit $40 in the account. You can set the "match" at any level you want, not necessarily 100% as we do.

We made it clear from the beginning that this was their money, in their own separate accounts, but once they put money into the savings account, they could not spend it without our approval. We do allow them to keep "spending money" outside the savings account for day-to-day expenses, etc. We told them from the beginning that their savings would one day be used to buy a car, pay for college expenses, etc.

As a result of this arrangement, both kids were eager to find work they could do to make money, both at our property and for neighbors. As noted above, they quickly became very serious savers. Best of all, they have never asked to make a withdrawal from their savings accounts to purchase anything, and they are very frugal even with their spending money.

Matching what your kids save may not be right for you. Also, not all kids can stay focused on a long-term financial goal like a car. If this is the case, you can use shorter-term incentives of many different types. There are many ways to encourage and motivate kids to work and save money. I will recommend a very good book later in this E-Letter that has many additional ways to encourage your kids or grandkids to be good savers.

Finding Ways For Kids To Make Money

In order to motivate young kids to save, you also have to find ways for them to make money. Early-on, Debi and I made it clear to our kids what types of chores around the house and the property were "unpaid" as a member of the family, and which chores we would pay them for. We live on several acres on Lake Travis (outside of Austin), and have a boat dock on the water, so there are always lots of chores, yardwork and maintenance the kids can do to earn money. They also do work for other people from time to time.

A few years ago, the senior vice-president at my company approached me and asked if the marketing group could hire my son to do some computer analysis for them during the summer. He is quite the math/computer whiz. I agreed but added that he must work for them, not me, and that he was to receive no special treatment or favors for being my son. He quickly proved that he could crunch numbers and analyze money managers' performance data faster than anyone on our staff. Best of all, he saved almost all of the money he made, and the staff asked him to return the next summer.

You might be thinking that our situation is unusual in that Debi and I own the business and therefore have the ability to "make" work for our kids. But the fact is that our company needed some part-time computer help, and we would have likely hired some other young person to do the work. And this leads me to the next point.

Lots of companies can use some part-time or full-time help in the summers. Most teenagers these days have good computer skills that could land them a better part-time job than working in most retail outlets, mowing lawns or other common summer jobs. Have your kids or grandkids consider mailing flyers and resumes to nearby businesses advising them of their skills and availability.

There are some inexpensive books on the subject of finding summer work for teenagers:

Better Than a Lemonade Stand by Bernstein & Huberg
Teen Dream Jobs by Nora Coon
Fast Cash For Kids by Bonnie & Drew Noel

Get Your Kids Involved In Investing

Once your kids have a handle on saving money, the next step is to teach them how to start investing their savings. Unfortunately, many of my kids' friends know absolutely nothing about investing. Many know very little about the stock markets, the bond markets, mutual funds, etc. In addition to motivating them to save, and providing ways for them to work and make money, it is also very important to teach them about investing. Here too, I believe it is an obligation of the parents to teach their children about investing.

There are various ways to get your kids involved with investing. By all means, you should share with them your philosophy on investing and explain why you hold the investments you do, and in what proportions. Teach them how to read account statements. Explain to them what brokers and Investment Advisors are and what they do. Teach them about stocks, bonds, mutual funds, etc., etc.

There are two really good books I would recommend to you as parents or grandparents. The first book – Kids & Money by Jayne Pearl - is simply outstanding as a guide for parents in teaching their kids about saving and investing. One of my all-time favorites is The Wealthy Barber by David Chilton, an excellent book you should have your teenage (or older) children read. Both are available on Amazon.com.

How & When Kids Should Begin Investing

There are differing opinions on when to have your kids actually start investing their own money. Kids are really smart these days, and my view is that you can let them begin investing in their mid-teens, if you have taught them adequately. While kids should keep most of their money in a risk-free savings account of some kind, don't be afraid to let them invest some of it in the stock market.

However you and your kids choose to get started in investing, you must teach them that any non-guaranteed investment carries some level of risk, and that losses will occur from time to time. It is important to discuss – in advance – what levels of losses are acceptable, and what levels are not. In fact, if large losses result, this can actually turn kids off to investing in anything that carries any level of risk. So, make sure they understand that they are investing for the long, long haul.

Some parents actually let their kids take a crack at picking individual stocks. However, since kids are not likely to have any more success picking individual stocks than most adults do, I generally do not recommend this approach. Rather than picking individual stocks, or following a broker's advice, I recommend having your kids invest in equity mutual funds, after having educated them about the value of professional management and diversification.

There are, of course, thousands of equity mutual funds out there, and it can be difficult to decide which funds your kids should invest in. Fortunately, there are services like Morningstar (www.morningstar.com) and others that can help you with fund selection. Of course, there are many companies like mine that will give you direction in selecting the mutual funds in which to invest.

"Gifting" Money Or Assets To Your Kids

Being in the investment management business, we get questions every year from clients who are trying to help their kids or grandkids learn to save and invest wisely. One of the most common observations along this line is: "I would really like to help my kids with investing, but they just don't have enough money to get started."

This is all too true. Most young families just make ends meet and don't have the savings to start an investment program when they really need to. Along that line, another very common comment we hear is: "I would love to give them the money to get started, but I worry they would just blow the money on wasteful things."

Yet there are ways to gift money to your kids or grandkids that are not only earmarked for certain financial expenditures (college, medical, etc.), but can be targeted for investments that will serve them well later in life. And there are ways you can increase the odds that money you gift to your kids or grandkids will be used for the purposes you desire.

I will talk more about that below, but first let's explore the basics of the gift tax exclusion. Current tax law allows that you can gift up to $13,000 per year to a child, grandchild, or anyone, with no tax consequences to either the donor or the recipient. As noted above, a husband and wife can give $13,000 each, or a total of $26,000 a year, with no tax consequences for the donor(s) or recipient(s).

The annual gift tax exclusion is one of the most popular ways that wealthy individuals transfer a portion of their estates to their heirs over the years prior to their deaths, thus reducing the significant estate taxes their heirs will have to pay. Gifting has the double benefit of helping those you love and reducing estate taxes that go to the government.

I'm surprised that more families don't take advantage of the gift tax exclusion. My wife, Debi, and I gift the maximum to our two kids – currently $13,000 per parent or $26,000 a year to each kid. We gift this money each year into trusts that we have set up for each of our kids.

Gifting: Control Is The Issue

One of the requirements of the gift tax exclusion is that the beneficiary must have ownership and control of the assets that are gifted. This is a big deal when considering gifting $13,000-$26,000 (perhaps annually) to a child, grandchild or other person(s). Generally speaking, if you gift it, the money becomes theirs, and it is possible that they can just blow the money on wasteful spending if they want.

This is one reason why many people do not elect to take advantage of the gift tax exclusion, as far as I can tell in talking to estate tax attorneys. But there are ways – directly and indirectly - to effect control of the assets gifted to a child or grandchild. If the child is a minor, the gifts can be made to a trust which can designate what the money may be spent for, such as college, medical expenses or whatever.

As noted above, Debi and I have established trusts for each of our children, and these trusts are where we make our annual contributions. Trust laws vary among the states, so I won't get into what type of trusts may be best in your particular situation, but this can be a very good way to transfer assets to minor children and maintain control over those assets, at least until they reach legal age, or whatever age you specify in the trust(s).

In some states, minors do not have the right to execute a contract, and thus cannot own stocks, bonds, mutual funds, annuities and life insurance policies in their own names. In such cases, parents cannot simply transfer assets directly to their minor children, but instead must transfer the assets to a trust. The trust(s) can be a private trust you establish for your kid(s) with the help of an attorney, or a custodial account such as a UGMA or UTMA account, both of which can hold securities.

The Uniform Gift to Minors Act (UGMA) established a simple way for a minor to own securities without requiring the services of an attorney to prepare trust documents or the court appointment of a trustee. The terms of UGMAs are established by state statute instead of a trust document. The Uniform Transfer to Minors Act (UTMA) is similar, but also allows minors to own other types of property, such as real estate, fine art, patents, etc., and for the transfers to occur through inheritance. Whether you use an UGMA or UTMA is determined by the state you live in (most states now use UTMAs).

To establish a custodial account, the donor must appoint a custodian (trustee) and provide the name and social security number of the minor. The donor irrevocably gifts the money to the trust. The money then belongs to the minor but is controlled by the custodian until the minor reaches the age of trust termination. The age of trust termination is 18 to 21, depending on the state and whether it is an UGMA or an UTMA. The custodian has the fiduciary responsibility to manage the money in a prudent fashion for the benefit of the minor. Custodial accounts are most often established at banks and brokerages.

The bottom line is that gifting is a great way to transfer assets to those you love without tax consequences. But there must be a high degree of trust involved. If you do elect to form trusts, be sure to consult with an attorney that is familiar with the laws of your state.

Gifting To Adult Children

As noted above, you can gift to minors by establishing trusts in which the donor(s) can maintain control of the assets. But there is also a way to gift to adult children which can also be effective, at least in my experience.

Consider gifting them an investment account. Here is one way it can work. Let's say you are the parents or grandparents of an adult child. The two of you agree to gift $26,000 (or some lesser amount) to your adult child or grandchild. But you only agree to gift the money if it goes into a specified investment account. And you may agree to gift another $26,000 in the following year (or years) if things go as planned.

This approach is only advised if you have a good relationship with the adult child (or whomever you wish to help). It should be laid out carefully at the onset that this investment account is indeed a long-term program, and that the money should be kept in the account and not withdrawn for expenses, spending, etc.

For donors who have the where-with-all to gift for more than one year, the main gamble is really the first year in regard to adult children. You make it clear that if they maintain the investment, rather than spending the money, you may (at your discretion and under certain specified conditions) continue to make gifts in future years. This provides a huge incentive for the beneficiary to keep the money in the investment account. If they don't, you simply stop the gifts beyond the first year. Sounds simple, but it can be very effective.

This method of gifting will also create a big incentive to the child or grandchild to become more knowledgeable about investing in general, which is what you want. If they get into investing, that means they'll likely get more serious about saving, cutting expenses, building wealth, etc.

As always, the best course of action depends upon your individual situation, so it's important to seek out the advice of a qualified tax professional or estate planning attorney before pursuing any gifting strategy.

Conclusions

I believe that as parents, we have an obligation to teach our children the importance of saving. Likewise, we need to find ways that our kids can work and make money to add to their savings. And in my view, we also have an obligation to teach them how to invest wisely, whether they are teenagers or adult children.

You may want to consider funding investment accounts for your children, whether they are minors or adults. You may want to consider "gifting" money to your kids or grandkids (or others), as discussed above. The IRS gifting limit was increased from $12,000 in 2008 to $13,000 in 2009. So a husband and wife could gift a total of $26,000 a year to a child, or anyone for that matter.

In the case of minor children or grandchildren, you may want to consider using an UGMA or UTMA depending on the state you live in. Like most investment firms, my company accepts UGMAs and UTMAs. This is a great way to transfer assets.

Finally, I generally I recommend only professionally managed investment programs, especially for minors. Minors (and for that matter, most adults) need help in selecting and monitoring their investments. If you would like more information on doing so, be sure to contact us. We have professionally managed programs that only require $25,000 to invest.

I hope this week's information helps. Feel free to share this information with anyone you feel will benefit from it.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Teach Children To Save Resources
http://www.aba.com/ABAEF/teachchildrentosave.htm

Is Obama planning a second stimulus package?
http://online.wsj.com/article/SB124692229711302683.html

How to Recover From the Bear Market

GaryHalbert — Tue, 14 Apr 2009 20:05:16 GMT

IN THIS ISSUE:

Editors Note – The Fed Bails Out Insurance Companies
The Case for Aggressive Allocations
Third Day Advisors
Scotia Partners
Combining Both Programs

Editor's Note - Bailouts for Insurance Companies

Just hours after I sent you last week's E-Letter which alerted you to the serious financial troubles among the nation's largest insurance companies, the Treasury Department announced that TARP bailout monies will now be available for insurance companies. As I indicated, the insurance companies have desperately lobbied for bailouts, and now it looks like they will get them, at least for those that have recently bought up banks or other chartered financial institutions to qualify. I can't say I'm surprised.

Stay tuned as your insurance company may soon be controlled by the Obama administration, along with the banks, General Motors and who knows what else will follow.

Introduction

When you write a weekly E-Letter such as this one that goes out to over one million people, you can expect to get criticized from time to time. After all, people who disagree are more likely to respond than those who agree and appreciate the information provided – nothing new about that – especially since some of my weekly commentaries are devoted to political issues which are almost certain to draw responses from those who disagree with my conservative views.

Recently, however, I have received some criticism from a few readers regarding the fact that I include discussions about the investment programs that my firm recommends in these E-Letters. This comes as somewhat of a surprise, since this E-Letter is provided free of charge, and no one is forced to read it. Still, some readers insist that I should not write about the investment programs I believe in, as to them it somehow taints the integrity of the E-Letter.

I could not disagree more, especially given that we have just witnessed one of the most severe bear markets in history and two bear markets in less than a decade. The active management investment programs I recommend have served to significantly reduce losses in this bear market, and thus they are more relevant than ever. I can only guess that the criticism is coming from those who don’t want to be reminded that their buy-and-hold, low fee portfolios were recently gutted (50% or more) by the Bear Market Express.

This aversion to investment topics may also be indicative of how so many have been misled for so long, and feel they must now stay the course and hope that the market returns to its historical norms. They may make adjustments to their overall portfolio but, as I see it, this is tantamount to rearranging the deck chairs on the Titanic. Of course, everyone is entitled to their opinions.

My firm, on the other hand, is offering a lifeboat to those mired in the clutches of buy-and-hold strategies that have not only failed to meet their investment needs, but in many cases, have resulted in huge losses that have pushed investors even further away from their eventual goals. The reason I mention the investment programs we recommend is that I firmly believe that they offer a viable alternative to some of the failed buy-and-hold strategies that have been so prevalent in the marketplace for many years.

Apparently, many of you are coming around to my point of view regarding active investment strategies that have the flexibility to move to cash or hedge long positions in bear markets. We were pleasantly surprised when about 300 of you who read this E-Letter registered for our March 25 Webinar with Scotia Partners and hundreds more have viewed the recorded version on our website since then. And we have seen the largest influx of new clients and new money in many years in just the last 3-4 months, sadly thanks to the bear market.

Even some mainstream financial advisory firms are now dipping a toe in the active management waters. I am amused at some of the commercial ads that urge investors to come in and visit with an investment counselor to learn of “new” strategies for the current market. In all likelihood, you’ll learn about some of the same strategies I’ve been recommending for almost 15 years.

So, let it be known that from time to time I will continue to discuss how active management strategies can fit into your portfolio. This week, I will revisit two of the money managers that we recommend. You can either read on and see how these two managers have made money this year, despite the bear market, or settle back in your buy-and-hold deck chair and disregard the remainder of this week’s E-Letter. It’s your choice.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Aggressive Programs May Help Recovery

As I have mentioned many times in this E-Letter, the goal of basic active management is to attempt to move to cash in down markets to reduce portfolio risk. However, some investors seek out programs that use leverage or can go both net long and net short in the market for the aggressive portions of their portfolios.

In such programs, the potential for profit (or loss) exists no matter what the market’s direction. As I have written before, I characterize this type of program as being one where the best defense is a good offense. Unfortunately, many of these programs are available only to wealthy investors through hedge funds.

Fortunately, there are aggressive investment programs that are open to virtually any suitable investor. In light of how many retirement portfolios have been decimated by two bear markets in less than a decade, even moderate investors may want to consider having an aggressive investment or two in their overall portfolio. Of course, these allocations should be only a small portion of the assets, but it IS possible to include small allocations to aggressive investment programs and still end up with an overall moderate-risk portfolio.

With that in mind, I’ll spend the remainder of this E-Letter highlighting two aggressive money managers that you have previously read about in these pages. In the discussion below, I’ll briefly summarize the strategy employed by each manager as well as update their performance information.

After that, I’ll show how a combination of these programs might be a viable alternative for aggressive investors who want to diversify their portfolios by including two leveraged, long/short active management strategies. If you would like to learn more about active management strategies in general, see the link to my Absolute Return Special Report in the Conclusion section below.

Third Day Advisors Long/Short Programs

Back in January of 2005, I first introduced Third Day Advisors and its founder, Ken Whitley. The original Third Day program we recommended was the Aggressive Strategy, which allowed aggressive investors the ability to have a leveraged long and short exposure to the Nasdaq 100 Index. Over time, Ken has applied his signal to other market indexes, but all are based on the same underlying trading model.

Ken’s money management strategy is a proprietary blend of momentum, trend-following and overbought/oversold indicators. There are ten basic indicators that Ken uses to analyze the market, with a number of sub-indicators that also factor into each trading decision. Each indicator “votes” on whether to be long, short, or neutral in the market. The model is 100% mechanical, though Ken does reserve the right to override his system’s signals in the case of a national emergency.

Depending upon the market index, Third Day selects among index mutual funds available from the Rydex family of mutual funds. These funds are part of the Rydex Dynamic class of funds that seek to provide investment returns that correlate to 200% of the daily performance of the underlying index. Separate funds are provided for positive and negative (inverse) correlations.

The Third Day investment strategy does not currently employ any traditional stop-loss techniques to automatically exit losing trades. To limit risk, Ken varies his allocation based on the relative strength of his trading signal and market volatility. As a general rule, his allocations may range from a low of 15% to a high of 100% of the account value, depending upon the program. However, maximum allocations are rare and Ken’s various programs are projected to be in cash (money market fund) an average of 42% of the time in any given year based on historical performance.

The lack of a formal stop-loss trades and frequency of trading are additional reasons why Third Day’s investment programs should only be considered for the aggressive portion of an investor’s portfolio, where high volatility and significant periodic drawdowns can be tolerated.

Performance Evaluation

Both the Third Day Aggressive Strategy and S&P Plan have turned in strong performance so far in 2009. As of the end of March, the Third Day Aggressive Strategy posted a gain of over 13% for the first quarter of 2009, while the S&P Plan gained 11.20% over the same period of time. This is even more impressive when compared to the S&P 500 Index which was down over 11% (including dividends), even after an impressive March rally. Of course, past performance is not necessarily indicative of future results.

The Third Day Aggressive Strategy has the longest track record of all Third Day programs with actual trading beginning in November of 2001. This strategy trades the NASDAQ 100 Index, which is often seen as a proxy for the high-tech market sector. Over the course of our experience with this program, we have seen that the heavy high-tech weighting of this particular stock index results in it sometimes deviating from the direction of the overall market. Therefore, investors who elect the Aggressive Strategy should do so with the knowledge that it may be more of a tech sector program than one that is based on the broad market.

In light of the tech sector concentration in the Nasdaq 100 Index, Third Day also began to apply its trading signals to other market indexes. In 2006, the Third Day S&P Plan began actual trading. After watching its performance for a while, we began recommending it to our clients who wanted an active management strategy based on more of a broad-market stock index. Though the S&P Plan had a shorter actual track record than the Aggressive Strategy at the time, we were comfortable recommending this new program because we knew it was traded based on the same signal that Ken Whitley had been producing since 2001.

The actual performance information below provides detailed monthly returns and time window analysis for both the Aggressive and S&P Plan programs. This format will help you to more easily compare the two Third Day programs based on their actual performance. Keep in mind that all of the performance information shown is net of management fees and expenses.

Please see Important Notes at the end of this E-Letter.

As you evaluate Third Day’s performance, it should become clear to you that Ken’s Aggressive Strategy performed much better in the 2000 – 2002 bear market than in the most recent market downturn. Based on our research, we feel that this difference is largely due to a “disconnect” between the tech-heavy NASDAQ 100 Index and the broad market stock indexes.

Third Day’s S&P Plan, on the other hand, was better able to maintain more value during 2007 and 2008 than the Aggressive plan, again owing to the fact that this program is based on the broad market S&P 500 Index rather than the NASDAQ 100 Index. Remember, however, that past performance is not necessarily indicative of future results.

While we would like to have seen the S&P Plan pick up more gains from inverse (short) trades during the worst of the bear market, we have realized that Ken’s trading model is not as adept at handling high-volatility markets as are other programs, such as the Scotia Growth S&P Plus Strategy that I will discuss below.

However, we feel that the Third Day S&P Plan may be a good alternative for the aggressive portion of your portfolio when the market eventually bottoms out and volatility decreases. Also note that both the S&P Plan and Aggressive Strategy have posted double-digit gains as of the end of March. Past performance, however, does not guarantee future results.

The minimum investment for the Third Day program is $50,000 and it is custodied at Rydex Investments. You can obtain more detailed information about Third Day’s strategy and performance on our website at the following link:

http://www.halbertwealth.com/advisorlink/thirdday.php

At this link, you can also learn about an even more aggressive Third Day program called the Ultra Aggressive Strategy. This program also trades the tech-heavy Nasdaq 100 Index, but does so with trade allocations that can be as high as 100% of the account value. As always, read all descriptive and disclosure information on these programs before deciding to invest.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Scotia Partners – Riding the Waves of Volatility

As I mentioned earlier, Third Day’s investment programs experienced difficulty when faced with the high volatility that has characterized this bear market. Scotia Partners’ investment programs, on the other hand, have seemed to almost embrace the increased volatility, performing much better in the bear market than during the previous rally phase of the market.

In 2008, the Scotia Growth S&P Plus Strategy gained over 77% net of fees and expenses, when the S&P 500 Index fell 37%. So far in 2009, the Growth S&P Plus Strategy has posted a gain of over 28% as of March 31, while the S&P 500 Index is still under water. Since its inception in August of 2004, the Growth S&P Plus Strategy has produced an annualized return of 38.83% as of the end of March, while the S&P 500 Index can muster only a negative 4.76% over the same time period. Past performance, however, cannot guarantee future results.

Based on our daily monitoring of Scotia’s performance and trading, we feel that its success has come largely due to portfolio manager Cliff Montgomery’s trading strategy that seeks to trade only on those days that offer the best statistical probability of success. Otherwise, he’s content to sit on the sidelines in the money market awaiting the next opportunity.

Scotia’s Growth S&P Plus investment strategy is a combination of two proprietary trading models developed by Scotia’s owner, Cliff Montgomery. The objective of the strategy is to provide positive returns regardless of market conditions, with significantly reduced risk due to limited market exposure. Of course, there are no guarantees that Scotia can continue to achieve this objective.

Using technical analysis, the basic model seeks to determine a long-term market trend (6-12 months) for the S&P 500, which then sets the overall direction for any trades. Once the long-term trend is identified, the intermediate-term trend is then determined using similar analysis. Only when the intermediate and long-term trends are in agreement will the basic model issue a trading signal.

With the overall market trend identified, the basic model looks for short-term movements against the trend. In other words, the strategy seeks to take advantage of the possibility of a “reversion to the mean.” Cliff’s model views a contra-trend market movement as an opportunity, since future market action should move back in line with the overall trend. Thus, Cliff describes his model as being trend-following in the long term, but contrarian in the short term.

In addition to the basic trading model, the Scotia’s Growth S&P Plus program also incorporates a proprietary overbought/oversold indicator that overlays the basic model. This added signal seeks to identify long or short trades that have a high probability of success, without regard to the direction of the long-term trend indicator. Accordingly, this overlay generally results in more trades per year than would be possible under the basic model.

The Growth S&P Plus Strategy is exceptional in that it has historically been in the safety of a money market account over half of the time and trades only on days when Cliff’s proprietary strategy indicates chances are optimal for a gain. As I have said in the past, this is one of the most interesting trading strategies I have ever seen, and it has certainly done extremely well in a market environment reeling in the wake of the subprime/housing meltdown. Remember, however, that past performance does not guarantee future favorable results.

Like the Third Day programs, Cliff’s methodology is 100% mechanical with no discretionary input, and no provision for Cliff to override any trading signal. However, unlike Third Day, the Growth S&P Plus Strategy does not make graduated or partial investments. Instead, the model will be 100% long in the Rydex S&P 500 2X Strategy Fund, 100% short in the Rydex Inverse S&P 500 2X Strategy Fund or 100% neutral (money market), depending upon the signal.

Because of the selective nature of the trading models, the Growth S&P Plus Strategy has historically been in the safety of a money market fund approximately 65% of the time. Scotia does not employ any formal stop-loss techniques to limit risk other than the relatively short duration of trades. If a trade makes money, the model automatically retreats to cash. If a trade loses on its first day, the model may stay long or short for an additional day. However, if even one indicator disagrees with the others, the model exits the market and goes to cash.

The performance information below tells the whole story. As you review this information, again remember that all numbers are actual returns and are net of fees and expenses, and that past performance cannot guarantee favorable future results.

Please see Important Notes at the end of this E-Letter.

As you evaluate Scotia’s performance, you see that its performance has increased dramatically since mid-2007. If you superimpose a graph of the CBOE Volatility Index (VIX), you will find that Scotia’s jump in returns coincides with a big jump in market volatility, as measured by VIX.

Initially, we thought that this might be an indication that Scotia’s programs were somehow “short-biased,” meaning that they entered into predominantly short trades, which would be favorable in a bear market. However, such a bias would be detrimental in a bull market, so we analyzed the individual trades to determine if there were any bias patterns. Our findings were significant:

Over the period of time from the inception of the Scotia S&P Plus Strategy (August of 2004) through December of 2008, Scotia had the following trading history:

165 Long Trades vs. 113 Short (Inverse) Trades
Win/Loss Ratio – Long Trades - 72%
Win/Loss Ratio – Short Trades - 65%
Win/Loss Ratio – All Trades - 68%
(Past performance does not guarantee future results.)

As you can see, there were actually more long trades than short trades, and a higher number of long trades were successful. The conclusion to be drawn is that Scotia’s Growth S&P Plus Strategy does not appear to have any specific long or short bias. However, because of the increased volatility generally associated with bear markets, such periods have the potential to produce greater relative performance than bull market periods.

The minimum investment for the Scotia Growth S&P Plus Strategy is $25,000 and funds are also held at Rydex Investments. You can obtain more detailed information about Scotia’s programs, including a less aggressive option known as the S&P Moderate Growth Strategy, on our website at the following link:

http://www.halbertwealth.com/advisorlink/scotia.php

As I noted above, literally hundreds of my readers have heard Cliff Montgomery personally explain the specifics of Scotia’s money management strategy via our recent webinar. If you missed it and would like to watch and listen to the full webinar discussion (including all charts), click on the link below:

http://www.halbertwealth.com/webinar/sco20090325/scotiawebinar.php

A Combination Approach

As you have no-doubt observed as you reviewed the above performance information, returns in any given time period can be significantly different – even among aggressive investment alternatives that are traded in a similar manner. Third Day’s Aggressive program did better than Scotia during some years in the up markets between 2003 through 2006, but not in others. Scotia has outperformed Third Day during the volatile bear market that began in 2007, but who knows how long this increased volatility may last?

If we had a crystal ball and could know exactly what kind of market environment to expect in the coming months and years, it would be easy to determine which of these programs to include in your portfolio. However, since we don’t have a crystal ball and most of the “experts” have been horribly inaccurate in their forecasts of what market conditions to expect, we have to find another way to take on the possibility of changing market environments.

If you feel that Scotia and/or Third Day would be suitable for a portion of your portfolio and are within your risk tolerance, I suggest that you consider combining the two programs within your aggressive portfolio allocation. While the past performance of these programs cannot guarantee success, we have seen that each has shown the ability to excel during certain types of market environments. Plus, these programs are not correlated with each other, with an R-squared value of only 0.02.

I would like to be able to provide a hypothetical illustration of these two programs together, but the disclosures necessary to do so would be too onerous in an already long E-Letter. Suffice it to say that, in some cases, combining programs can produce a smoother performance with lower drawdowns. While it’s granted that no combination would outpace Scotia’s recent performance, it is also important to realize that no market environment lasts forever, which is why it’s important to have a combination of programs in a diversified portfolio.

While it is difficult in this E-Letter setting to illustrate a combination approach, you can get an idea of how a combination of these two programs would behave by contacting one of our Investment Consultants at 800-348-3601 or by e-mailing info@halbertwealth.com. Plus, our Consultants can also show you how to incorporate less aggressive actively managed programs into your portfolio.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

I hope that by now you have seen that allocating a percentage of your portfolio to aggressive investment programs may help you to recover from the ravages of the bear market. Just keep in mind that aggressive allocations are not suitable for everyone and that such allocations should be kept to a small percentage of the overall portfolio, especially for moderate-risk investors. Never take on more risk than you should in an attempt to quickly recover all of your investment losses.

If you would like to receive more information about any of the programs I have discussed this week, give one of our Investment Consultants a call at 800-348-3601 or e-mail us at info@halbertwealth.com. You can also request information via our online request form. We also have other programs more suitable for less aggressive investors, so be sure to ask about them as well.

If you would like to learn more about active management strategies in general, I invite you to download my Absolute Return Special Report. This informative document explains the difference between active and passive management in much more detail, and also provides expanded descriptions of active management strategies you may want to consider for your own portfolio.

I hope that my discussion of the various actively managed programs available to you through my company is of benefit to you. I realize that some may not be in a position to invest right now, but it’s still important to know about these strategies for the future. We sometimes get calls from long-time readers who suddenly find themselves the recipients of a retirement plan rollover, inheritance, proceeds from the sale of a business or other large lump sum and are glad that they learned about active management before they had the money to invest.

In closing, I want to make it clear that my comments regarding complaints are not in any way an indication that I do not appreciate your feedback. I and my staff go over every response generated by my E-Letters, and I always appreciate your thoughts, concerns and questions. However, in regard to discussing the active management strategies we recommend, I feel it necessary to be outspoken for a number of reasons.

First, I feel that these strategies embody some of the best active managers in the country, and all have undergone our strict due diligence review before being recommended. Second, my firm has been evaluating and recommending active money managers for close to 15 years, so we’re not the new kids on the block. Keep this in mind when your buy-and-hold broker has a sudden revelation about active management strategies.

A final reason that mentioning these programs is important is that the financial media are now catching on that investors are leaving buy-and-hold strategies in droves. In some respects, that’s good. However, it also concerns me because some investors may become the victim of scam artists or enter into investments they don’t understand, all for the promise of making up all of their losses.

It’s a dangerous world out there for the investor, and there is no shortage of individuals who would be more than happy to separate you from the remainder of your nest egg. Therefore, to the extent that I can prevent that from happening, I feel it is my duty to do so and I make no apologies for it. As always, please read the Important Notes and disclosures that follow my signature below.

Offering hope for investors bitten by the bear,

Gary D. Halbert

IMPORTANT NOTES: Halbert Wealth Management, Inc. (HWM), Scotia Partners, Ltd. (SPL), Third Day Advisors, LLC (“TDA”) and Purcell Advisory Services, LLC (PAS) are Investment Advisors registered with the SEC and/or their respective states. Information in this report is taken from sources believed reliable but its accuracy cannot be guaranteed. Any opinions stated are intended as general observations, not specific or personal investment advice. Please consult a competent professional and the appropriate disclosure documents before making any investment decisions. Investments mentioned involve risk, and not all investments mentioned herein are appropriate for all investors. HWM receives compensation from PAS and TDA in exchange for introducing client accounts. For more information on HWM, SPL, TDA or PAS, please consult Form ADV Part II, available at no charge upon request. Any offer or solicitation can only be made by way of the Form ADV Part II. Officers, employees, and affiliates of HWM may have investments managed by the Advisors discussed herein or others.

As benchmarks for comparison, the Standard & Poor’s 500 Stock Index (which includes dividends), the NASDAQ Composite Index and the NASDAQ 100 Index represent unmanaged, passive buy-and-hold approaches. The volatility and investment characteristics of these benchmarks may differ materially (more or less) from those of the Advisors and these Indexes cannot be invested in directly. The performance of the S & P 500 Stock Index, the NASDAQ Composite Index and the NASDAQ 100 Index is not meant to imply that investors should consider an investment in these trading programs as comparable to an investment in the “blue chip” stocks that comprise the S&P 500 Stock Index or the stocks listed on The NASDAQ Stock Market that comprise the NASDAQ Composite Index or the 100 NASDAQ stocks that comprise the NASDAQ 100 Index. Historical performance data represents actual accounts in programs named Scotia Partners Growth S&P Plus, Third Day Aggressive Plan and Third Day S & P Plan, custodied at Rydex Series Trust, and verified by Theta Investment Research, LLC. Since all accounts in these programs are managed similarly, the results shown are representative of the majority of participants in each of these programs. The signals are generated by the use of proprietary models developed by Scotia Partners and Third Day Advisors with the objective of participating, on a leveraged basis, in trading days with the highest probability of success. Statistics for “Worst Drawdown” are calculated as of month-end. Drawdowns within a month may have been greater. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. Mutual funds carry their own expenses which are outlined in the fund’s prospectus. An account with any Advisor is not a bank account and is not guaranteed by FDIC or any other governmental agency.

In addition, you should be aware that (i) these programs are speculative and involve a high degree of risk; (ii) the trading programs’ performance may be volatile; (iii) an investor could lose all or a substantial amount of his or her investment in these programs; (iv) Purcell Advisory Services (for Scotia) and Third Day Advisors will have trading authority over an investor’s account and the use of a single advisor could mean lack of diversification and consequently higher risk; and (v) the trading programs’ fees and expenses (if any) will reduce an investor’s trading profits, or increase any trading losses.

Returns illustrated are net of the maximum management fees, custodial fees, underlying mutual fund management fees, and other fund expenses such as 12b-1 fees. Management fees are deducted quarterly, and are not accrued on a month-by-month basis. They do not include the effect of annual IRA fees or mutual fund sales charges, if applicable. No adjustment has been made for income tax liability. Dividends and capital gains have been reinvested. Money market funds are not bank accounts, do not carry deposit insurance, and do involve risk of loss. The results shown are for a limited time period and may not be representative of the results that would be achieved over a full market cycle or in different economic and market environments.

Weekly Monday Overview

RichardSchwartz — Mon, 06 Apr 2009 13:17:00 GMT

Richard Schwartz's

PRINCIPLES OF THE STOCK MARKET

A learning, teaching, always evolving stock market letter and advisory service

Eighteenth Consecutive Year of Publication; Letter #1; September 18^th, 1990

Post Office Box 1236 · New Paltz, New York 12561 - U.S. A. · (845) 255-6894

E-mail address: RichardStk@aol.com

Subscription · One-Year Morning E-Mail Delivery · $150.00

Monday, April 6^th, 2009: It’s Master’s week so I’m pumped up. It’s golf’s 1^st major of the year, tradition packed, for you non-golfers. Should be great with Tiger back, Phil Mickelson saying he’s playing the best golf of his life, Paddy Harrington going for his 3^rd major in a row and lots of up & comers. All I can say is wow! Even just watching this old southern flower nursery turned into a golf course in the spring, lavished with money for decades, may be worth the watching for any non-golfers out there. For me, it’s just heaven.

THE KEY QUESTION

Instead of discussing The Big Picture today, let’s focus on The Key Question. Since that’s what I keep pondering. Plus it has to be on every investor’s mind as well. “Could this rally be the start of a new bull market?” To intelligently answer -- as during every bear market rally -- necessitates rehashing all the available evidence. I can make a solid case for a cyclical bull market having just started and I can make an even more solid case that this is just a normal bounce in a Papa Bear market. Consider:

MINI BULL MARKET HAS STARTED

·        The economic stimulus is now starting to kick in which will stabilize and bounce the economy.

·        The monetary stimulus, lower interest rates, is also now kicking in and housing sales are increasing.

·        Inventories have been drawn down and need to be restocked which will pump up GDP growth near term.

·        The US and other governments have done everything possible to mitigate this downturn.

·        We now have more coordinated and get along global leadership than in many years.

·        The US economy has proven itself wonderfully resilient to shocks in recent decades.

·        Markets can counter-swing at any time for long periods, posting mini bull markets, versus primary trends.

·        Almost two years has passed since the beginning of the credit implosion back in July 2007.

·        Many independent market gurus think the March 2009 lows will last for a good while, months or longer.

·        The latest government bailout plan has more enthusiasts and support for it than previous plans.

·        Oil stopped falling back in December and is now on the rise possibility indicating growth rebounding.

·        We have recently had a number of better economic data reports from both retail and housing.

JUST A BEAR MARKET BOUNCE

·        The bear market hasn’t lasted long enough to discount all the problems that have come to light.

·        More problems, coming as bearish ripple effects and because of long lag times, are due to show up.

·        The bear market hasn’t fallen deeply enough to factor in the sudden massive shock to the global economy.

·        There hasn’t been enough overall selling or liquidation for a solid bottom. Stock and mutual fund liquidation haven’t reached previous classic big bear market bottom levels.

·        No solid bottom appears on the charts. We need a climatic sell off or a long low volume erosion to bottom.

·        Interest rates have to go up at some point, soon – either with and because of an economic rebound or from panic selling -- which normally depresses stock prices because of this new competitiveness from bonds.

·        The American consumer has suddenly stopped spending. This has slowed down business all over the world and finally exposed the global imbalances problems. Too much manufacturing in China and Asia and too much spending coming from America. Now those imbalances are being forced to readjust. Takes time.

·        The stock market is ignoring soaring unemployment. Yes, employment is a lagging indicator but continuing jobless claims isn’t. A new report just out says that in coming weeks and months, hundreds of thousands of jobless Americans will exhaust their unemployment benefits. Finally, 600,000 new job losses each month is going to add to weaker consumer spending, problems for local communities and cause negative ripple effects.

SCHWARTZ CONCLUSION: In review, we started this big bad bear market back in the year 2000. That was the peak of the last big bull market and thus the beginning of this big bear market. This is evidenced by the benchmark S&P 500 Double Topping in March 2000 and October 2007 and then subsequently and decisively breaking below October 2002’s previous decade-long lows by over 10% in March 2009. Showing that since 2000 and the ending of the Internet boom we’ve really been living on lower interest rates and big tax cuts, a false, “pump me up,” house of cards. Really not any wealth building going on, just paper shuffling to make things look great fueled by easy money credit creation. But now reality has set in. Thus, looking around, we see we’re almost nine years into a bear market which has been interspersed with one bull market, running for five years. So stocks were down almost two & a half years, up five years, now down about another one & a half years, sort of repeating The Visit of the Three Bears. In that infamous and extended bear market run of nine years, netting a -50% loss, there were two cyclical bull markets sprinkled in and surrounded and book-ended by the three bears, Baby, Mama and Papa.

My conclusion remains that this bear market is not over. But that the form and shape of it may get tricky going forward. Because the market has a history of posting cyclical or short term or mini bull markets on the way down when the bear gets ahead of itself. Which is why the stock market remains so fascinating!

THE ECONOMY

Well, the BUZZ has died down about how the economy is slowing its prior quick rate of descent. Guess because we’ve started seeing more bad economic data pop up or because the conversation has moved on. But some investors have decided an end to the economic collapse is out there, just over the horizon, so they are shifting into cyclical stocks now as a result. One can see this money rotating out of defensive sectors such as medical care, consumer staples and even gold. You know the concept, buying in advance of a recession’s end since history shows stocks rise roughly six months before the economy turns up. But if we indeed are stuck with a very mild even “anemic” economic recovery, as many figure, then stocks could also soon level off to mirror that trend as well. That is if the economic and earnings data don’t start sinking fast once again showing the economy is still sinking. For example, last Friday it was reported that the ISM Non-Manufacturing Index which now measures almost 90% of America’s economy - America now being a service oriented economy instead of a manufacturing economy - fell faster in March than in February somewhat debunking the idea that the economy has stabilized. Schwartz View: Yes, there is the possibility that economy-wise we are going to V- back up because sharp moves, in whatever areas of endeavor, are generally followed by responding sharp moves back up. We’re seeing that now in the stock market but after this bounce is over, I agree with the camp forecasting an anemic slow economic recovery.

THE STOCK MARKET

The stock market extended its rally to four straight weeks last week. We did see the first crack in this rally a week ago when the market fell sharply for two days. But then we quickly rebounded to new rally highs. That’s normal, the first crack being overcome but it does show this rally may be starting to struggle. We are getting closer to my minimum upside targets of Dow 8303 and S&P 1627, closing Friday at Dow 8017 and S&P 1621. And one can note trading volume has been slowing some, another sign of sluggishness. Or maybe cautiousness. Makes sense as we’re now moving into another corporate earnings reporting season starting tomorrow, the 1^st quarter January-March 2009 report kicking off after the close with Alcoa (AA), traditionally the first of the 30 Dow stocks to report. With the fall-off-the-cliff economy occurring early in last year’s fourth quarter, it only stands to reason that investors have to be wary of forthcoming earnings and thus wary of this rally as well. Schwartz View: It looks like the stock market has some more strength left in it so with stocks already having rallied beyond the 50% retracement level from their latest leg down, the early January peak, the teeter-totter phenomenon comes into play. Getting halfway up means it’s very likely to go all the way back up. Thus we kick off this week at roughly another key Fibonacci 61.8% price in both the Dow and S&P 500. That’s about 8088 and 838 respectively. If we break through those levels, then the next target is those January highs, Dow 9088 & S&P 944. Not guaranteed but increasingly likely.

PORTFOLIO STRATEGY

2009 may indeed prove to be the year to trade. If stocks fluctuate but go nowhere net, up or down, for many months ahead then it’s going to prove very frustrating for investors. In these times and they do happen, more often than the uninformed investor may realize, the best way to make profits is to: (1) trade individual stocks and (2) discipline yourself to continuously fade the market, buying on dips and selling on strength. Toward that end I’ve started incorporating the Commodity Channel Index (CCI) technical indicator into my work. Comes on most charting services like Bloomberg. Basically it shows deviations from the moving average, when stocks get too far overbought or oversold. Naturally you buy when a stock or index gets oversold. For more on the CCI I suggest getting Oliver Perez’s Swing Trading Tactics DVD or Alexander Elder’s book TRADING FOR A LIVING. Over the last month of rally for instance certain stocks have far outperformed the averages. And numerous tradable asset classes or market sectors like the US dollar and oil have been both up and down offering trading profits but no net profits for buy & holders.

Otherwise than scalping profits what should we do? For now favor the long side and the cyclicals. I like technology, renewable energy and natural resources. Move up a notch in your market exposure to about 30% if you haven’t already but continue to hedge your bets and don’t get out on a limb by going too long. Just subdue your ego, don’t think you know more than Mr. Market does and just go with the flow, modestly. Bottom line take what the market gives you, right now there are some trading opportunities but don’t get carried away. There’s lots more trouble to come but the path ahead is likely to get more tricky as well. So don’t fall into the camp that says “fool me once, shame on you, fool me twice shame on me.”

Have a good week!

Go Tiger Go!

Deep Inside the Dow

JohnMauldin — Sat, 04 Apr 2009 02:27:00 GMT

What About the Original Dow 30 Stocks?
Adding and Subtracting Value
The Original Dow 30 Components
A Few Thoughts from Richard Russell
How to Succeed at Writing
Conversations on Banks
Copenhagen, London and Orange County, etc.

Tonight (Saturday) some 450 people will come together in San Diego to honor Richard Russell, who has been writing the Dow Theory Letter for over 50 years. In that spirit, in today's letter we are going to look deep inside the Dow, back to its very roots. The Dow is a price-weighted index as opposed to a cap-weighted index. Does that make a difference in performance? Specifically, does it affect how the Dow has performed since it was expanded to 30 names in 1928? There are some real surprises we have found, and I think you will find this letter very interesting.

What About the Original Dow Jones 30 Stocks?

The Dow Industrials was expanded to 30 names from 20 on October 1 of 1928. Today, only nine names of the original 30 remain in the Dow. The committee at Dow Jones has replaced the other names as the companies grew out of favor, were merged into other stocks, were considered too small, or the committee felt that other companies better represented the industrial prowess of the US economy.

For instance, in November of 1999, Goodyear and Chevron were removed in order to allow Microsoft and Intel to join the Dow 30, where the two tech giants proceeded to rise handily the next few quarters. However, it has not been that pretty since the end of 2000, with both stocks down approximately 60% from their entry price, and much further from their peak price. Chevron proceeded to move up some 60% in price after it was removed, at which point Chevron was inserted back into the Dow 30 on February 19, 2008, where it is now down about 15%. Not a good run for the selection committee.

But it is not all bad. If you look at the deletions and additions, you find some interesting timing issues. Some additions were excellent in terms of performance. Some avoided later bankruptcies.

Thinking about the Dow, I wondered how much the committee had helped or hurt the Dow performance over the last 80 years. What if we went back to the original 30 stocks and simply bought them and held them until today? Good, bad or indifferent, what would the results be?

I asked that question to good friend Rob Arnott of Research Affiliates. It turns out that he and Jeremy Siegel (of Wharton and Stocks for the Long Run fame) were corresponding over that very same question about the S&P 500. Rob helpfully sent my question on to one of his top research associates, Ms. Feifei Li, who spent a lot of time and effort to get me several large spreadsheets, some of which are over 800 pages long. The rest of this letter is based on her research, some very helpful comments, and observations by Rob, with some homework by me. Any wrong conclusions are all mine.

So, the question of the day: would you have been better off investing in the index, or buying the 30 stocks and holding them? Further, would it make any difference if you price-weighted them or equal-weighted them (explanations below)? What about inflation? And how does that compare to the S&P 500?

And before you answer, remember that one stock, Bethlehem Steel, went bankrupt. You would be stuck with Chrysler, which was removed in 1979 for IBM, which itself had been taken out in 1939 for AT&T. There have been 55 changes in the components of the Dow over the last 80 years. Some of the original 30, listed below, we would all recognize. But our kids might not remember Victor Talking Machines or Nash Kelvinator (Nash Auto).

(Sidebar: As a country, we let LOTS of auto companies fail over the decades. My Dad worked at Nash Auto in Wisconsin during the Depression because he could play baseball for their semi-pro team. Remember Rambler or Studebaker? But now we obsess about keeping an auto industry and union jobs.)

The Original Dow 30 Components

The following companies are the original members of the Dow 30 on October 1, 1928:

Allied Chemical, American Can, American Smelting, American Sugar, American Tobacco B, Atlantic Refining, Bethlehem Steel, Chrysler, General Electric Company, General Motors Corporation, General Railway Signal, Goodrich, International Harvester, International Nickel, Mack Truck, Nash Motors, North American, Paramount Publix, Postum Incorporated, Radio Corporation of America, Sears Roebuck & Company , Standard Oil (N.J.), Texas Company, Texas Gulf Sulphur, Union Carbide, U.S. Steel, Victor Talking Machine, Westinghouse Electric, Woolworth, and Wright Aeronautical.

Almost immediately the Dow 30 changed, as Radio Corporation of America bought Victor Talking Machines in January of 1929. Since RCA was already in the Dow, they added National Cash Register instead. Over time, US Steel became Marathon Oil. The remains of what was once mighty Woolworth are now Footlocker. Westinghouse is CBS. So, there have been some changes over time, leaving us only nine of the original Dow 30 still in the index.

For the insatiably curious, you can go to http://www.dogsofthedow.com/djdelete.htm and find a trove of data, including the additions and deletions over time.

Before we get into the actual data, a little about methodology. There is some subjectivity here. For instance, RCA was bought by GE in 1985. We did not then double-weight GE; we simply had one less component in our model. When Bethlehem Steel went bankrupt, that took away another component. While some stocks have clear trails all the way up until December of 2008, like Woolworth/Footlocker, others were taken private. We made our best effort to rationalize the data with the real world.

Adding and Subtracting Value

Now, the rather stark conclusion. As Rob noted to me in the email he sent with the data, "If Dow Jones hadn't tinkered with the index, the 30 companies would have merged or failed their way down to just 9 survivors. Of the 21 companies in the original 30 that are now gone, 20 disappeared through M&A, some were replaced by successor firms and others not, and only one (Bethlehem Steel) failed outright. But this no-fiddling index would have topped out at just over 30,000 in October 2007 and would have finished 2008 at 14,600. Ugly decline, but not as ugly as a level of 8776 [now down to 7300 as I type this]. This compounds out to a 0.7% per year greater return than the actual Dow 30 results. The difference comes from dropping companies when they're out of favor, and trading at deep discounts, only to replace them with popular large-cap, high-multiple newcomers."

Like Intel and Microsoft, as a prime example. And in the graph below, there was an almost immediate difference between the returns as RCA bought Victor, as mentioned above. But RCA was already in the Dow, so we did not double down on RCA but simply rebalanced with one less component for our 30.

The graph below is going to be hard to read for those who print it out in black and white, but I will try and talk you through it.

We track the original Dow 30 equal-weighted, the original Dow 30 using the Dow price-weighting methodology, and the S&P cap-weighted, for comparison. Also the Dow Total Return Index, the Dow price-only (no dividends), and the Dow 30 Real Price Index, or inflation-adjusted.

So, looking at the lines from the bottom and going up. First, let's see how you would have done on an inflation-adjusted basis with just the actual Dow 30. It's not pretty. The price-only inflation-adjusted index returns for the last 80 years are only a mediocre 1.4%! The price level of the Dow 30 is currently less than twice that of its August 1929 peak, net of inflation. Sadly, we last saw the 1929 peak level as recently as October of 1992. That means that an investor in the Dow 30, in August 1929, would have pocketed only the dividends, with no real price appreciation, for some 63 years.

Rob couldn't resist writing Jeremy, "Net of taxes on the dividends and cap gains taxation on the inflation "gains," the real after-tax return would have been awfully skinny. Jeremy, I hope you'll forgive me for saying so, but that's a 'Long Run' indeed!"

The next line is the Dow 30 price-only index (without dividends). That gives us a 4.6% annual average return. The next line up is the Dow 30 total returns, including dividends, which is 8.9%; this shows how important dividends are to the total return of the Dow. And with dividends now fairly skinny and being cut almost monthly by some component or other, we are left to wonder what total return will be over the next few years.

Next, we find that the S&P 500 cap-weighted index outperforms the Dow by about 0.2% annually, for a total return of 9.1%. Not much difference there.

Now we come to the interesting part. The next-to-the-top line is the original Dow 30, using a price-weighted index, just like the current Dow 30 uses. The only changes in the next 80 years are companies getting bought or dying. That "Original 30" gives us an annual return of 9.6%. Just 0.7% a year, so you might think, not much difference. But if you start with $100 and compound it for 80 years, that 0.7% becomes a quite large differential. With the Dow 30, your $100 would have grown to $96,993 as of December 2008, but the Original 30 would have grown to $161,603.

And there is an even bigger differential if you simply equal-weight the components rather than use a price-weighting methodology. Your $100 grows at a 10.4% clip and becomes $272,554, or almost three times the actual Dow 30. This is probably due to the fact that, whenever a change was necessary, it would be natural to add one of the more popular and respected large-cap growth stocks that wasn't already on the list. It's hard to earn a "risk premium" on assets that are not seen as having much risk!

What accounts for the difference? There were 34 changes in Dow components in the first five years. Many were dropped and then added back in. It was a VERY fluid index. There were two changes in 1939. IBM was dropped for AT&T, and Nash Kelvinator was again dropped for United Technologies. (NK was dropped the first time in 1930, only to be added back in 1932.) But, most of our Original 30 survived the Depression, so the Original 30 was largely unchanged during those tumultuous years.

Then, from 1939 there were no changes until 1956, when International Paper was added, followed by four changes in 1959. There were only three changes in the late 1970s and five in the '80s, but since then there have been 17 changes. The past two decades hardly qualify for buy and hold.

And we may see more changes. Anyone care to speculate on when General Motors gets replaced? Can you have a bankrupt component of the Dow, which typically removes a stock below $10? GM is now at $2, which is basically a call option on the Obama administration not completely wiping out shareholders in a bankruptcy. GE was down to $5.89 before rebounding today to $10.89. Could you really replace GE?

Can we find some nuggets of investing wisdom here? I think the thing that stands out most to me is how the slight difference of value over growth builds up over time, which is what a number of other studies show. This goes along with my numerous exhortations that the valuations you start with when you invest in stocks have a great influence on the long-term returns.

A market-cap-weighted index will tend to perform better than a price-weighted index over time, again because of the value orientation of the cap weighting. But equal weighting or, better yet, weighting and indexing according to valuation fundamentals like price to earnings, price to sales, price to book, etc. is even better. We don't have time to delve back into the research on fundamental indexes, but the letters I have written on it are in my archives at http://www.investorsinsight.com/.

A Few Thoughts from Richard Russell

As noted above, well over 400 guests will honor Richard Russell this weekend for 50 years of writing the incomparable Dow Theory Letters. A lot of people ask him how can they succeed as writers. He recently made some comments which I thought I would pass on, because they are so right. Also, he gives us a few fascinating moments, looking back over his career.

But first, let me thank the following firms and people for their generous support of this evening as sponsors, which will allow us to make a donation in Richard's name to his favorite charity, the Autism Foundation in San Diego:

Matthew Connors of ProFunds (www.profunds.com)

Ian McAvity of Deliberations

Bill Bonner, founder of Agora and editor of The Daily Reckoning (www.dailyreckoning.com )

Monex (www.monex.com)

Frank Trotter of Everbank (www.everbank.com)

Martin Zweig

Robert Prechter (http://www.elliottwave.com/)

And now, let's turn to Richard:

"I've been in this business a l-o-o-o-n-g time, and I've known a lot of great people, mostly through their subscriptions. Stanley Kubrick, the genius movie producer and director, was a subscriber for many years. Stan was a gold man, and we used to correspond. Stanley would tear off a piece of yellow paper and write notes to me. He invited me to visit his studio, 30 miles outside of London. When I visited England years ago, damn it, I completely forgot to visit him, a mistake I've always regretted.

"Marlon Brando's dad was a subscriber for years. I had met his Marlon while he was shooting On the Waterfront. I exchanged services with the great Hamilton Bolton, genius writer for The Bank Credit Analyst. Marty Zweig is a good friend of mine, and when Marty retired I took over his advisory -- this was years ago, and I still have many of Marty's subscribers on the books. I knew Garfield Drew, the original interpreter of the odd lots. I also knew E. George Schaefer, who authored his famous Dow Theory Trader advisory during the 1940s through the '70s. George used to run four-page ads in Barron's.

"John Magee was a friend of mine. John had a sign posted on his wall. It said, 'Don't tell me what to buy, tell me WHEN to buy it.' Bob Bleiberg, the brilliant editor of Barron's, was my friend and mentor. Bob was responsible for popularizing technical analysis of stock trends. General Marion Cooper was a subscriber. Coop invented the concept of King Kong and he produced the original movie. Coop was also adjutant general to Claire Chennault of the famous Flying Tigers, in Asia. The Tigers, with their outdated P-40s (painted like sharks), played hell with the Japanese off China.

"I'm very friendly with that fabulous pair, the gifted Aden sisters. I count Jim Grant (Interest Rate Observer) as a good friend (Jim is probably the best writer in the business). Then there's Robert Prechter of Elliott Wave fame (I originally urged Bob to go into business, and he's built up a wide following since). A few years ago, I took over Julian Snyder's business when Julie wanted to retire. I still talk with my old buddy Joey Granville. Other old-timers I keep in touch with are Jim Dines and Mister International -- the one and only Sir Harry Schultz.

"I guess my strangest subscriber was a priest who worked in a leper colony in West Africa. I never could figure out why he was interested in the stock market. The Bank of China was a subscriber; I don't know whether they still are. Many Arab organizations are subscribers. I used to say that I was the only Jew who the Arab big-wigs really listened to. Paul Penner, CEO of Agnico-Eagle, was a good friend of mine. Paul devoted his life to that gold mine, which is now one of the leading gold mines in Canada.

"The tireless, peripatetic John Mauldin is a good friend, and how John gets it all done (he has a million readers for his famous column) is a mystery to me.

"And it goes on and on. I did find that the stock market and finance was a totally democratic business. On Wall Street they don't give a damn who you are or what color or religion you are -- they only care about whether you know anything, which I believe is one of the best things about the money business.

How to Succeed at Writing

"I've been asked a thousand times, 'What's the secret of success in the advisory business?'

(1) You've got to be an obsessive nut to start with.

(2) You have to be able to write in a way that people understand and like to read.

(3) You can't come across as a phony who knows it all. Readers know that nobody knows it all.

(4) It helps if you have a long life and don't want to retire.

(5) You need a wife who can put up with a husband whose head is full of the markets 24 hours, day and night.

(6) Woody Allen said the 90% of success in life is just showing up. If you can show up for the markets 250 days a year, you're ready to start an advisory service (but I wouldn't wish this business on my worst enemy -- it's the closest thing to absolute madness. No wonder nobody else has lasted in the business 50 years).

(7) This is a lonely business. So be prepared. Need a friend? Get a dog. Need two friends? Get two dogs.

(8) One last thing -- you must have thick skin, because no matter what you write, some subscriber will send an e-mail calling you a moron or brain-damaged, and the scary thing is, that makes you think, because they may be right."

Conversations on Banks

This week I recorded a special conversation with Chris Whalen and Rich Lashley, two of the real experts on the US banking system. I learned a lot and found it a fascinating time. The Conversation will be up for subscribers the early part of next week. We will send you a notice. If you would like to know more about Conservations with John Mauldin, you can go to https://www.johnmauldin.com/newsletters2.html. The regular price for a yearly subscription is $199, but you can subscribe now for $109 and still get access to the previous timely Conversation with Ed Easterling and Lacy Hunt, as well as one with Nouriel Roubini. Don't wait, as I am sure my staff will only keep raising the price. To find out more, just click on the link and put in code JM75, which will give you the discounted price.

And for organizations that would like to purchase a discounted multiple subscription for all their brokers or partners, just drop Tiffani a note at conversations@2000wave.com and she will get back to you.

Copenhagen, London and Orange County, etc.

I will report at some point on the fascinating afternoon I had with Dr. Hans Keirstead, a professor at the University of California, Irvine, and one of the leading stem cell researchers in the world. We are on the cusp of amazing changes in medicine. Real therapies for numerous major killers like MS and spinal cord injuries are around the corner. It was a very upbeat session.

Today, I am in La Jolla for my Strategic Investment Conference, co-hosted with my partners Altegris Investments. I will be talking on how I see the global economy shaping up over the next few years. Eventually, that talk will make it into this weekly letter. Saturday night is the Richard Russell Tribute Dinner. Then home for a week. Easter weekend, all seven kids will be home. Then the following week I go to Copenhagen for a board meeting; and I will be in London, Thursday April 16 to meet with my European partners, Absolute Return Partners, and clients. The next weekend I go back to California for a conference sponsored by Rob Arnott, and then the next week I'll be a day or so in Orlando, where I'll speak at the CFA conference on the state of the alternative investment industry.

At the end of May (29-31), I will be in Naples, where I will be doing a seminar with Jyske Global Asset Management and Gary Scott. You can see more at www.jgam.com.

A quick note: There has been a lot of writing on mark-to-market. There were a few bloggers who said I was wrong (some rather rudely) about the mark-to-market changes that were coming. I hope by now they see they were wrong and have edited their remarks. And for a sense of what the mark-to-market controversy is all about, I suggest you look at this video presentation by Barry Habib of Mortgage Market Guide. Barry was on top of the issue months ago as the source of a lot of problems. It is done in a way that everyone can understand. http://www.mortgagesuccesssource.com/go/markmarket/index.html

This is a fun weekend. Almost 300 clients and friends are at my sold-out conference in La Jolla. And because of the Russell dinner, so many writers and publishers are here as well. And my business partners from around the world. And Tiffani is her usual well-dressed self. She rarely buys new clothes, but for whatever reason she goes all out for this weekend, and her attire is now subject to oohs and aahs, and she has a reputation to live up to. Dad is proud.

Have a great week, and find a few friends, at least over the phone, to share some time with. It is about the healthiest thing you can do.

Your ready to listen and learn this weekend analyst,

John Mauldin

More Buy-And-Hold Myths Debunked

GaryHalbert — Tue, 24 Mar 2009 20:39:27 GMT

IN THIS ISSUE:

Another Flawed Buy-And-Hold Theory
A More Realistic Analysis
Putting The NAAIM Study In Perspective
The Elusive Bear Bottom
The Recovery Fallacy

Introduction

For years, I have written about the frequent misleading arguments put forth to keep investors in buy-and-hold investments. I am pleased to say that such articles, such as my recent March 3 E-Letter highlighting a misleading Investors' Business Daily article, have been well received by readers and the feedback has been very positive.

The information I have provided over the years allows you to ask critical questions when confronted with these one-sided arguments. In fact, I have even heard from brokers and other financial professionals who now "see the light" in regard to actively managed programs and want to know how to access actively managed strategies for their clients.

Unfortunately, this has not slowed the flood of misinformation being distributed by the usual suspects in an effort to support buy-and-hold investment strategies. It seems that the more I write about skewed articles, studies, etc., the more examples I see of them being generated by Wall Street and the brokerage community to sway unsuspecting investors.

I recently received an e-mail from a major mutual fund family promoting the buy-and-hold concept. While I am not at all surprised that a mutual fund company would be trying to keep investors in their funds, I was disappointed to see that the argument used was a very old, and thoroughly discredited line of reasoning known as "don't miss the best days in the market."

I'm not going to disclose the company that published the e-mail I received, but it really doesn't matter. You can look in the archives of virtually any major brokerage firm or mutual fund family and likely see similar titles. As I pointed out in the March 3 E-letter, it's in their best interests for you to stay invested, even though doing so may not be in your best interest. Thus, you need to look out for your own best interest when you deal with them.

In this week's E-Letter, I'm going to (again!) debunk the flawed argument of missing just the best days in the market. After that, I'm going to take on those who are calling an end to the bear market. Since the new lows in early March, the stock market has rallied. Naturally, Wall Street's cheerleaders are saying that we've hit the bottom and are now on our way back up out of the hole we've dug. Perhaps we have, but they've been wrong before – lots of times – as I will point out.

After that, I'll debunk yet another Wall Street myth that is based on accurate historical data, but is really just another misleading way to convince investors to stay in the market at all times. In the end, I hope that you will feel empowered to resist and even counter the seemingly endless sales pitches, media interviews, articles and other sources of misinformation that seek to hang on to the buy-and-hold message despite the clear evidence that such programs simply don't always work.

If you've read this far, then read what follows very carefully. Traditional investment providers and mutual fund families are making my long-held case against buy-and-hold in spades, even though they don't know it!

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Another Flawed Buy-And-Hold Theory

As I have frequently mentioned in recent E-Letters, Wall Street's media and advertising machines are still trying to defend buy-and-hold and disprove the value of active management. I noted back in January that I had received an e-mail from a prominent mutual fund company that continues to perpetuate one of the worst examples of Wall Street's misguided conventional wisdom. Not only was the material significantly dated, but it also presents a buy-and-hold argument that I have thoroughly discredited a number of times.

The story goes like this: Historically, much of the stock market's upward moves are concentrated in a relatively small number of market days (which is true). Thus, they allege, if following a market timing strategy takes you out of the market on those days, then your returns will suffer dramatically. Therefore, they maintain that it is important that you stay in the market at all times so that you will not miss these good days.

The e-mail I received had an attached file that presented their bogus argument in full color. Pulling S&P 500 Index performance information (including dividends) from 1988 through 2007, the illustration showed that the S&P 500 Index had an annualized return of 11.82%. However, if you missed just the 10 best days of performance over that 20-year span, your return would drop to 9.20%, a reduction of over 22%.

Missing more of the best days means even lower returns. For example, if you missed the 40 best days in the market over that 20 year period, your annualized return would fall to only 3.77%, a reduction of over 68%. Thus, Wall Street's conventional wisdom reasons if you want to maximize your returns, you must stay in the market so that you don't miss the good days.

While the numbers quoted in the sales piece are accurate, this analysis is obviously skewed to fit the viewpoint of the buy-and-hold crowd, but they hope you won't notice. For example, the first major flaw is the time period covered. This e-mail hit my mailbox in early December of 2008, long after some of the worst stock market losses in history. Yet, the best-days analysis only goes through the end of 2007, just a little over two months after the market had hit new highs.

Being in the financial services business, I can understand having to use information that is provided as of a certain cut-off date, since the number crunching required to produce the piece is considerable. However, to send a marketing piece with information as of 12/31/07 when the market has subsequently melted down is, in my opinion, misleading to the extreme.

The National Association of Active Investment Managers (NAAIM), of which my firm is a member, is a trade association of money managers specializing in active management strategies, including market timing. Each year, NAAIM publishes its own study in regard to missing the best days in the market. However, NAAIM's version provides a much more balanced analysis, as I will discuss in more detail below.

Since the e-mail I received was so dated, I used NAAIM's study to get a better idea of the updated numbers. It is important to note that NAAIM's study measured performance over a longer time period – from January 1984 through December 2008 – and excluded S&P 500 Index dividends. However, the basic outcome is the same.

NAAIM's analysis found that a constant investment in the S&P 500 Index (excluding dividends) would have resulted in an annualized return of 7.06%, evidence of the effects of the 2008 market meltdown. However, if you missed just the 10 best days in the market over this period of time, your annualized return would drop to only 4.10%. This is a decrease of 42% – even worse than the analysis for the time period ending in 2007. As you increase the number of days missed, the differential becomes greater, to the point that if you missed the 40 best days in the market, your annualized return would actually be negative.

On its face, you might think NAAIM's study actually supports the buy-and-hold position, but you have to first consider another major weakness of the buy-and-hold argument. The next and most obvious flaw to an informed reader is that the analysis assumes that an active manager would be OUT of the market on all of the best days, but IN the market on all of the worst days. Unfortunately, many investors buy this argument hook-line-and-sinker without thinking to ask the question, "What happens if you miss the bad days in the market?"

This is a very critical point, so let's bring it out into the light!

Using numbers from the same NAAIM analysis discussed above, let's reverse the assumptions and see what happens. Instead of missing the good days in the market, let's say that a market timing Advisor allows you to miss only the worst days in the market. Over the 1984 through 2008 time period, NAAIM's analysis shows that if you missed just the 10 worst days in the market, your annualized return would have been 11.23% vs. the 7.06% Index return.

That's a 59% better return! Compared to the 42% reduction in return we get when missing the 10 best days, we find that missing the bad days in the market is actually more significant than missing the good days in regard to the effect on returns. Now that's impressive! I'll bet your buy-and-hold broker never told you that. As you increase the number of worst days missed, the numbers get even better, resulting in a return of 17.59% if you missed the worst 40 days in the market over this 25-year period of time.

Of course, this analysis is as flawed as the first one, since it assumes that the Advisor is smart enough to be out of the market on all the worst days, but in the market on all of the best days. We, at least, are willing to point out the fallacies in both arguments.

A More Realistic Analysis

Since both sets of performance numbers discussed above are skewed to fit one approach or the other, neither is useful to the knowledgeable investor. However, NAAIM's study also covers what would happen if an Advisor missed BOTH the best and worst days in the market over the 25-year period. The results are pretty amazing.

If you missed the 10 best and 10 worst days in the market, the resulting return would have been 8.15%, as compared to the 7.06% S&P 500 Index return.

As the number of best and worst days missed is increased, the percentage return stays essentially the same. For example, if the best and worst 40 days are all missed, the annualized return would have been 8.82%, still almost 2% better than the S&P 500 Index return over the same time period. The table below shows the effect of missing various combinations of best and worst days in the market over that 25-year period. Compare these numbers to the S&P 500 Index annualized return of 7.06% over the same period of time:

If you missed just the best:	Your return fell to:
10 days	4.10%
20 days	2.15%
30 days	0.54%
40 days	-0.93%
If you missed just the worst:	Your return rose to:
10 days	11.23%
20 days	13.80%
30 days	15.83%
40 days	17.59%
If you missed best and worst:	Your return was:
10 days	8.15%
20 days	8.58%
30 days	8.61%
40 days	8.82%

(Source: NAAIM, Inc., based on an analysis performed by Hepburn Capital Management, LLC, 805 Whipple St., Suite D, Prescott, AZ 86301. This data is for illustrative purposes only and is not indicative of the actual performance of any investment. S&P 500 Index returns do not reflect reinvested dividends.)

Thus, while the average annual return percentages showed the results of the recent bear market, the basic result stayed the same: missing bad days in the market can more than compensate for missing out on the good days. Even when the general direction of the market was downward, missing out on the worst declines still proved effective in enhancing performance.

Putting The NAAIM Study In Perspective

While it may be the goal of every active money manager to be in the market only on the good days and out of the market on all of the bad days, we all know that such a perfect system doesn't exist. Over the course of writing this E-Letter through the years, I have discussed that the ultimate goal of market timing, in my opinion, is not necessarily beating the market, but to attempt to control the downside risk of being in the market.

I base my opinion upon studies such as those done by the Dalbar organization that demonstrate the negative effect of emotional trading upon investors' long-term returns. We all know how it is when we lose money on an investment. Should we stay the course, bail out and go to cash, or move to something that seems to be performing better?

The above analysis by the NAAIM organization shows the value of being out of the market on the worst days, even if you miss some or all of the best days. That's because the worst days are often far worse (in terms of percentage loss) than the best days are good.

For my company, the practical application of this information is to seek out professional active money managers who are able to miss more bad days than good days and thus provide added value over and above the management fees they charge. Quite frankly, even most professional active managers can't accomplish this, but there are some who have done so and it's our job to find the ones who can.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

The Elusive Bear Bottom

As I noted in last week's E-Letter, it is interesting to me just how giddy Wall Street and the financial media have become at the prospect of a renewed bull market with the nice rally we've seen over the last week or so. While we are nowhere near out of the woods yet, in my opinion, you wouldn't know that from listening to the talking heads on the financial shows.

As you might imagine, those who promote buy-and-hold investment strategies are also experiencing a brief reprieve from the steady drop in their products and portfolios. With a string of market gains at least partially fueled by the Fed's announcement that it will be buying about a trillion dollars worth of debt, happy days are indeed here again. Or so it would seem.

I found myself wondering just how many analysts, journalists, talking heads, etc. have predicted an end to the current bear market over the past year or so, only to be treated to additional losses.

The steady stream of bottom calls reminds me of an old auto repair commercial. It told the story of an unfortunate driver who had to take his car back many times to get a simple repair done. The first time, the mechanic declared that the car was "better than new." The next time, he said it was "much better than new." After a third shot at the same repair, the mechanic declared it to be "much, much better than new." I think you can get the picture.

The same kind of situation seems to be going on in the stock market. Every time the stock market hits new lows, we hear that it is a much, much stronger bottom than before, and should mark the point at which stocks will now begin to rise again. Of course, it seems that, just like the driver in the ad, we are eventually met with disappointment (not to mention additional losses) as the market sets yet another new low.

To illustrate how a market bottom is much, much harder to call than you might think, I have listed below predictions by major analysts and commentators calling a market bottom. For reference, the most recent dip in the S&P 500 Index took it down to 676 on March 9th and the Dow Jones Industrial Average (Dow) hit 6547 on the same date. Compare that to the stock market levels on the dates of these selected bottom callers:

In January of 2008, well-known perma-bull Abby Joseph Cohen predicts that the Dow will reverse its recent downturn and be at 14,750 by the end of the year. At this point, the Dow was not yet in an "official" bear market, and Ms. Cohen evidently thought it wouldn't get there. The Dow started 2008 at 13,265, so Ms. Cohen's prediction was for a gain of over 11%.
On March 17, 2008, the demise of investment banking and brokerage giant, Bear Stearns, led some analysts to declare a "Bear Stearns Bottom." CNBC market maven Jim Cramer declared that the bear market had been tamed, and one-third of the respondents to a CNBC poll declared that they thought the worst was behind us. The Dow was then at 11,972.
On July 31, 2008, Jim Cramer, undaunted by his previous erroneous call, announced that the Dow's July 15, 2008 low of 10,962 would be the bottom of the bear market. His reason, among others, was that negativity was so high that he thought the market had reached "capitulation." As Cramer put it, "Bye, bye bear market."
On October 9, 2008, professional stock trader Tony Oz declared that the market was near a significant bottom. The title of his article was "If We Aren't Near A Bottom, Find A Cave & Buy Guns." The Dow closed at 8579 on October 9th.
On November 20, 2008, the Dow posted a new low of 7552, which prompted some analysts to again declare that the bear market was dead. This call became even louder as the low continued to hold on into 2009. However, the Dow eventually broke through the 7552 low on February 27, 2009.
Finally, many investors thought that the New Year (accompanied by a new presidential administration) would somehow bring about a "hope" rally in the stock markets. It didn't. At the end of 2008 the Dow stood at 8776, yet it continued to fall even further until hitting 6547 on March 9th, its lowest level yet during the current bear market.

And these are just a few of the many incorrect market calls that some refer to as "false bottoms." If nothing else, the above list shows that some very smart analysts with extensive experience in the stock market can be very, very wrong when it comes to calling the market bottom. Unfortunately, many people follow the sage advice of these individuals, resulting in significant losses in their buy-and-hold investment strategies.

Just think, anyone who thought Abby Joseph Cohen was right in early 2008 witnessed a further drop of 6718 points in the Dow from the first of January 2008 when the Dow was at 13,265 through the market's most recent bottom of 6547 on March 9, 2009. That's a percentage drop of over 50%. Unfortunately, many buy-and-hold investors also saw their own investments fall by that much or more during this period of time.

The Recovery Fallacy

The importance of the above market bottom discussion becomes apparent when you consider another bogus argument often used by the buy-and-hold crowd to sell the supposed superiority of that strategy. Specifically, proponents of buy-and-hold strategies claim that one reason that you should not try to "time the market" and move your assets to cash occasionally is that you'll miss out on the early phase of the new bull market.

They then provide statistical analyses to show that most gains are concentrated in the early phase of a bull market, so if you are on the sidelines, it is highly unlikely that you will get back in the market in time to capture any of these gains. Their solution? Stay invested at all times and you'll be sure to be in the market when it eventually turns around.

It might surprise you that I agree with the statistical analyses used in this argument. After all, historical market action is what it is, so the pace of historical gains following the end of bear markets is a matter of fact. Of course, bear market rallies (aka: sucker rallies) also often shoot up quickly, only to return to lower levels later on. However, let's assume that it is correct to assume that much of the rebound in stock prices is concentrated in the early part of a new bull market.

The problem is that this argument is valid only if you are contemplating cashing out when the bear market is at or near its actual bottom. And as we have discussed in this article, it's not always easy (read: impossible) to tell exactly when or where the bottom will occur. Even so, if you get out of the market at the very bottom, then it is very likely that you'd miss out on a significant part of any subsequent market rally.

However, buy-and-hold supporters never discuss how much more you might lose if you're not, in fact, near the bottom of the market when you decide to cash out. Take the above situation where the Dow fell an additional 6718 points after Ms. Cohen made her incorrect call for a market rebound in 2008. This drop represents a 50.6% reduction in the value of the Index, and many unfortunate investors took that same downward ride.

Thus, the fallacy of this buy-and-hold fairy tale is that they don't tell you how much additional loss you may have to incur before the real market bottom and a new bull market begins. And then, there's the matter of the "mathematics of recovering losses." As I have noted in past E-Letters, a loss of 20% requires a 25% return just to get back to break-even. A 50% loss requires a 100% return and so on. Read on and you'll find out how important this is to your investment well-being.

So, how much would investors have "suffered" had they gone to cash just when Ms. Cohen said that it was safe to be in the market? Let's say that an investor moved to cash despite Ms. Cohen's advice in January of 2008. The buy-and-hold crowd would say that he was unwise, since his cash position would likely miss out on the gains concentrated in the early part of the next bull market. Oh really?

Using the Dow as a proxy for an investment portfolio, our sample investor who moved to cash in January 2008 missed out on a further 50.6% drop in value. That doesn't sound unwise to me! Plus, the mathematics of losses of 50+% dictate that a buy-and-hold investor would need a gain of over 102% just to get back to the position he was in by going to cash in January of 2008.

In other words, this investor could stand to miss out on the first 102% of a new bull market's gains before he would be worse off financially than had he not gone to cash at all. Do you think that this investor might recognize that a new bull market is under way sometime before the markets post gains of 102%? I think so, especially if he is using a professional active money manager (no guarantees, of course).

Just for fun, I thought I'd compare where the market indexes were on the dates of the incorrect market bottom calls listed above, and see how much more the market dropped after that using the March 9, 2009 low of 6547. Then, I calculated the amount of return necessary to get back to that point. The result will be an analysis of just how much return you could have missed out on in the early stages of a market rally and still not been harmed.

Date	Dow Position	Additional Loss to March '09 Low	Gain Required to Break Even
January 1, 2008	13,265	6718 (50.6%)	102.6%
March 17, 2008	11,972	5425 (45.3%)	82.9%
July 15, 2008	10,962	4415 (40.3%)	67.4%
October 9, 2008	8579	2032 (23.7%)	31.0%
November 20, 2008	7552	1005 (13.3%)	15.4%
January 1, 2009	8776	2229 (25.4%)	34.0%

The most obvious lesson learned from this analysis is that going to cash during a bear market may not be as dangerous to your portfolio as the buy-and-hold crowd says. As the above table represents, the potential to lose more money before an actual market bottom occurs very effectively debunks the idea that missing out on early market gains in a renewed bull market is a reason to stay invested. While it's true that investors who went to cash on any of the above dates may also miss out on future gains, the figures show that they can well afford to miss out on at least part of the rebound.

The next, and most important, lesson is that using a professional active manager may actually improve your chances to maximize gains in a renewed bull market. The goal of active management is not just getting out of the market at the right time, but also knowing when to get back in. While no active management strategy is perfect, the goal is to move out of the market as it goes down, and then get back in during the early stages of a new bull market. If successful, the end result would be better portfolio performance than if you had stayed in buy-and-hold investments. Of course, no one can guarantee that this goal will always be met.

A recent publication by Fidelity Investments notes that the stock market has typically bottomed out approximately half-way through a recession. Since the stock market tends to anticipate economic recovery, it usually starts rising before the recession is over. According to Fidelity, over the course of the past 14 recessions, the median return between the stock market's lowest point and the end of recessions has been 25.2%, which supports the claim that gains are concentrated during the early months of a new bull market.

Of course, Fidelity concludes that this level of return during the early part of a renewed bull market should convince you to stay invested no matter what. However, considering that only one of the entries in the above table requires a return of less than 25% to break even, I think the Fidelity study shows that it may be worth the risk to jump out of the market from time to time, even if you miss the first "false bottom."

The result is clear – going to cash during a bear market is probably going to be more harmful to your broker or mutual fund company than it might be to your portfolio.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

The question now becomes whether the March 9th low was "THE" bottom, or just one of a series of recurring lows that may or may not mark the end of the bear market. I wish I knew the answer, but I'm one of the rare breed of analysts who will admit that I don't have a clue as to when the bear market may end. As this is written, the market is rising based on the hope that Treasury Secretary Geithner's recent disclosures will bring an end to the credit crunch. Maybe the buyers are right, but then again, maybe they're wrong.

As far as advice, if you are in a buy-and-hold portfolio and have been riding the market down since October of 2007, you might want to see if this rally has legs before jumping out of the market. While I still believe that active management is the way to go, I also don't see any reason to bail out during an upswing, even if it may be short-lived. However, I'd be ready to move to cash at the first signs of weakness.

On the other hand, if you have been on the sidelines in cash for a while and are wondering whether now is a good time to get back into the market, I recommend that you give our actively managed strategies a look before deciding what to do. All of our money managers use time-tested strategies to let them know when to get back into the market, and when to stay out. And some even have trading models that can even make money in down markets.

Whether we have or haven't hit the market bottom, I'm glad that I have most of my money being invested by professional active money managers. As a result, I don't worry about how my portfolio is positioned in the current economic and market environment. If you would like to learn more about these strategies, feel free to give one of our Investment Consultants a call at 800-348-3601, send us an e-mail at info@halbertwealth.com, or visit our website at www.halbertwealth.com.

Finally, I hope that you are enjoying these E-Letters in which I debunk some of the skewed and misleading studies produced by Wall Street firms to convince you to buy investments and hold them indefinitely. While some of the reasoning employed in these articles and marketing pieces are laughable, the losses incurred by investors swayed by these faulty arguments are not.

Hopefully, you have already taken my advice over the years as to the perils of buy-and-hold investing, and you have not incurred all of the historic losses over the past year or so. In any event, you may have friends or relatives who might benefit from this information. Therefore, feel free to forward this E-Letter to anyone you feel may benefit. It might open their eyes to some of the misleading arguments used to promote buy-and-hold strategies.

Hoping we can help you in these tough times,

Gary D. Halbert

SPECIAL ARTICLES:

The Deception Used by Fund Managers to Keep You Fully Invested in Their Funds
http://www.protectyournestegginretirement.com/investment-risk/deception-used-by-fund-managers

The Toxic Assets We Elected (excellent read)
http://www.realclearpolitics.com/articles/2009/03/political_malfeasance_and_the.html

Don't Forget About Inflation
http://www.forbes.com/2009/03/23/inflation-deflation-fed-opinions-columnists-ppi-cpi.html

Big Names Predict Problematic Inflation: What's An Investor To Do?

RichardSchwartz — Wed, 11 Mar 2009 13:48:00 GMT

ECONOMIC VIEW. Rising Inflation Expected. So predicts a whole slew of big names, everyone seems to be jumping on board this train in the last few days. Now Warren Buffett and Bill Gross have joined Marc Faber and Jim Rogers and more in predicting problematic inflation just out there over the horizon. Yep, as soon as deflation became the consensus buzz word – recessions kill inflation is what I’ve heard repeated from many sources – we’re getting a groundswell of opposite opinion. Well, not quite opposite but close enough, let me explain. Everyone agrees this slump will preclude problematic inflation but all say that’s a temporary phenomenon. No one predicting rising inflation will go so far as to say just WHEN rising inflation is going to emerge but more and more observers are saying it’s definitely coming, arriving when this economic slump is over, whenever that is. Again, rising inflation, no, out of control inflation, no, to put it more accurately, hyperinflation is my biggest worry. That America printing money galore – yes, for bailing out businesses too important to the financial system to allow them to fail, and, yes, for keeping the economy greased and running, and, yes, for stimulating new growth and maintaining existing economic activity, and, yes, for overall deficit spending in this economic downturn – will come back to bite us in a big way. I can handle some inflation, I know how to shop for bargains which will help in food and clothing needs, what I’m worried about is a major currency devaluation which wipes out mine and America’s buffer. America’s savings becoming worthless as has happened time and again across the globe when some country’s finances just go kafluey. When a country can’t pay its bills compounded by a wholesale lack of trust in its currency. Schwartz View: Hasn’t happened in the US yet, but …

So I get more nervous when I hear Warren Buffett, America’s richest man and known as the best value investor of our time, say inflation could go as high as it was in the 1970s, that’s almost double digits! I get even more nervous when Bill Gross, who manages one of the largest bond funds going, says that US government efforts to break this recession will cause “costs for goods and services” to rise. I respect both these guys and their opinions. Now they join long term forecaster Jim Rogers, who is also more worried about rising inflation than deflation, best I can figure. He’s long been predicting an US dollar crisis and really bad inflation ahead and says he’s just waiting for the proper moment to essentially “short US Treasury bonds.” Rogers sees commodity inflation returning with a vengeance since today’s global economic slump in his view is just improving the fundamentals underpinning commodity prices. In other words today’s credit crunch and resulting recession causing miners to delay or even shut down exploration and thus leading to a further drop in supply. He loves to mention that global food inventories are already down to 50 year lows. Finally, Marc Faber, the well regarded international investor and past BARRON’S Roundtable panelist, sees rising inflation from another angle. He figures that the US government is going to have all kinds of problems in raising interest rates down the road or in effect withdrawing all the money it’s pushing into the system now to try to end today’s credit crisis. Schwartz View: This rising inflation camp is growing now, with many others predicting a forthcoming inflation problem as well. I am too.

Schwartz Recommendation. If you also worry about rising inflation, one strategy available today is to buy an inverse ETF or inverse sector fund. One that goes up when long term US interest rates go higher. That’s the natural reaction if inflation rises, yields generally rise forcing bond prices down. For example ProFunds has two such funds, RTPIX and RRPIX while Rydex offers up RYJUX and in the ETF camp there’s TBT which “correspond to twice the inverse” of the US Treasury bond. I recommend such.

Disclaimer! I don’t own any of the above now but can and do change positions without notice.

For a FREE week’s sampling of my complete daily e-letter, please email me at RichardStk@aol.com.