Market turmoil

This blog ain't for the young and adventurous. Your blog is coming soon.

Wow. What a time. Housing is correcting rapidly, but from a super-high level. The stock market is correcting rapidly, too, but also from a very high level. The dollar is collapsing. As I write this, oil is hovering near $100 a barrel. What to do?

First of all, panic.


Just kidding -- don't panic.

The stock market fluctuates. It's had five good years in a row, with some of them very, very good. Even with recent corrections, at the of end of 2007 it was higher than it was at the beginning of 2007, and dramatically higher on the Dow than it was at its peak in 2000 -- and that doesn't include dividends.

Given the intense feed of negativity into the market from the media and short-sellers, it's not the least bit surprising that the markets would fall. Given the losses from subprime and its related indices at banks, and their reluctance to loan after many years of loaning too much, it's not going to be a total shock if we go into a recession. And if we do, the markets will fall more -- maybe a lot more.

This isn't a development to strike terror into your hearts -- if you're a long-term investor, it signals a time to buy. The history of stock market investing is unequivocal on this point: When the market is low, when the economy is in a recession, it is -- in the long run -- by far the best time to buy.

So continue to buy the diversified domestic funds, especially the FSTVX, and its equivalent total market fund at Vanguard. Continue to buy the emerging markets (which had a super year in 2007) in the form of the EEM or the ADRE. Let me make this totally clear: The emerging markets won't just go up in a smooth line -- they'll fluctuate. They'll fluctuate a lot sometimes, and sometimes in a jaw-droppingly downward direction. Keep buying in a patient, thoughtful way, possibly setting it on autopilot.

Keep buying the developed markets in the EFA, also in a disciplined, ongoing way. Europe has its problems for certain, and so does Japan. But they benefit from the falling dollar and are extremely big economies, and tend to fluctuate a lot less than the EEM as well. But they will fluctuate. Stay in them patiently and you'll be rewarded.

Now, about housing: I fully respect the people who say that housing is going to fall even further than it already has. In my beloved Southern California, housing is falling far and fast, so I see it all around me. But buying a home isn't like buying a stock or a barrel of oil. A home is a unique item -- it's about the heart as much as the head. It's about falling in love with the place in which you live.

In my experience as a homebuyer, there are so few homes that one really falls in love with that if you find one you do love, you should snap it up (if you need it and can afford it). I urge this even though housing is likely to fall even further.

There's some economic rationale to this course of action as well. The history of home prices tells us that when housing reaches a peak, it falls (of course), but then when the next wave comes along, that wave lifts housing higher than it was at the last peak -- often far higher. In the meantime, you get to live in the home rent-free -- with the "imputed rent," which is sort of a dividend composed of the rent you would have had to pay if you'd lived in the home as a renter. (If you owned a bond with that same yield as your imputed rent, you would have to pay tax on it.)

For house flippers, these are really hard times, and I can only say that if they're highly leveraged, get out of the leverage as fast as you can. If that means selling at a loss, it's preferable to an even bigger loss.

Housing cycles, by the way, are usually very long ones. This time may be different, but usually they last five or more years, so don't expect a turnaround soon. (I could be wrong, and in this case I hope I am.)

Again, don't panic. We've been through many recessions since World War II, and we always get through them and go on to a brighter future. And we always look back and say we wish we had bought more stocks and more real estate when times were hard.

As for oil, there's no harm at all in buying a chunk of the XLE, the index fund for energy securities. It's had a phenomenal move in the last few years, and usually that spells correction. But over very long periods, you'll do fine.

Short term investors, look for my blog in the coming weeks. I will have one on profiting in a bear market, and volatile markets.

Time to get the high-yield stocks on the cheap

Recent turmoil in the stock market may be frightening, but the sell-off could turn out to be a blessing in disguise, especially if you're in or nearing retirement and are worried about generating income from your portfolio.

That's because several key groups of equities, especially the blue-chip financials that have been taking a beating of late, are so depressed that they're offering yields not seen since the end of the bear market. At the same time, other stocks that have always paid rich dividends are becoming more attractively priced.

Over the next several months, therefore, you'll have the chance to construct a safe, diversified retirement portfolio of blue-chip stocks paying out 4 percent in dividends.

Why is this so important? If you've ever used a retirement calculator or gone to a financial planner to figure out how much you can safely withdraw from your nest egg, you know that 4 percent is a kind of magic number.
To avoid the risk of outliving your money, academic research says, you should tap only 4 percent of your portfolio in the first year of retirement, and then increase that amount to keep pace with inflation in subsequent years.

But is it really so difficult to hit that target? Don't blue-chip stocks return around 7 percent a year even after inflation?

Yes, they do. But that's just an average - sometimes the results are better and sometimes they're worse. So creating a portfolio that relies solely on capital appreciation comes with a built-in risk - the danger that if you suffer big stock losses early in your golden years, you'll have to worry about running out of money.

If potential stock market losses are the problem, why not stick with bonds? After all, many investment-grade corporate bonds are paying out more than 5 percent. And some government bond funds are yielding almost that much. You could spend 4 percent, reinvest the remainder and keep your money growing, right? It's not that simple.

There's a reason bonds are called fixed-income investments. Over time, the income a bond portfolio generates won't rise much, which means you won't keep up with inflation.
If you want to put together a portfolio of high yielders, you may be smart to build slowly. The market slump that has pushed share prices down (and yields up) may not be over.

What to do now: In uncertain times it's important to make sure your portfolio is well diversified. The simplest step to take now is to buy the S&P Dividend SPDR, an ETF that spreads its bets among 52 stocks.

What makes this fund so attractive is that it tracks the S&P High Yield Dividend Aristocrats index, an elite group of stocks that have steadily increased their payouts over the past quarter-century. These include blue chips like Consolidated Edison and Coca-Cola.

If a company can boost dividends every year for a generation, it should certainly be strong enough to survive the current market storm.

Integrys Energy Group, which runs electric utilities and distributes natural gas in the Midwest, is yielding 5.2 percent. And Vectren, an electric and gas utility in Indiana and Ohio, is offering 4.5 percent. What to watch for in the coming months: Some of the best long-term opportunities to nudge your yield above 4 percent will be in stocks and other investments that will require a bit more patience.

But keep in mind that battered stocks also offer the greatest opportunity for gains. As long-term values, Katz favors Pfizer among the depressed drug giants and Bank of America among the financials weighed down with shaky loans.

A more conservative way to cash in on financials is through PowerShares Financial Preferred Portfolio. This ETF holds preferred stock in domestic and foreign banks.

Preferreds are like bonds - they're safe and pay high yields. Other industrials, such as DuPont and Leggett & Platt, a mid-size maker of furniture parts, also look attractive once the economy shows signs of picking up.

There's one last group to watch. Real estate investment trusts not only offer growth and fairly high yields, their property holdings also offer long-term protection against inflation.

Only trouble is, property prices could be weak for another year. A diversified fund such as Vanguard REIT Index fund is the safest way to invest in the group, but given current uncertainties, it's smarter to wait and watch.

You're going to be depending on your retirement portfolio for decades. You should be willing to spend a little time fine-tuning your holdings.

3 Way Oil Play

The market's been such a roller coaster ride lately. Dow at 14000, 13000, 14200, 12800, then 13600 today. I know many "pundits" would tell you it's a bad investing environment, and want to put your cash on the sideline. Well...i know my readers won't fall for that.

Lets' concentrate on oil. We all know gas in southern Cali is not $4 a gallon. What economics does that reflect? Short term volatility poses good opportunity. Oil is no longer predictable like the 90s. They were either on the rise, or down with little short term volatility. In recent weeks, prices of oil has fluctuated more than 15% on OPEC decisions and Iran issues. It is wise to try and capture profit from these momentum swings. A conservative hedge in this trading strategy is using a three-way trade. Allows investor to bet on the upside or downside while maintaining a hedge in case of sudden shifts.

Here's how three-way trade works: each trade consists of a futures contract combined with a pair of options. A call and a put. A futures contract is an agreement to buy oil at a certain price today and collect it at a later date, regardless of its future value. Options are contracts that allow the buyer the right to buy (a call) or sell (a put) an asset an agreed-upon price during a specified time frame. Traders use puts as protection when they expect a price to drop, and buy calls at a low price when they expect the price to go up.

How you should structure the three-way trade would depend on whether oil seems headed up or down. When oil prices are on the rise, I would buy a futures contract, sells a call, and buys a put. But since oil prices have marched downward in the past three weeks, I have inverted the formula to instead sell futures contracts, buy calls, and sell puts.

S&P is negative for the year

It is now official that our market is in a correction, and near a bear market. Dow has declined more than 10% since its October peak. Investors often call a 10% pullback a correction and a 20% fall a bear market. Given our current market condition, it is making investing a more difficult task. Let’s start with the overall landscape of the U.S. market. Prices of U.S. Treasury bond soared as investors fled to their relative safety. Banks are suddenly retreating, and consumers who had been loose with their spending are counting their pennies more carefully. What results is the there will be a pullback in the willingness for bank to lend on all fronts. Summarilarily, we have our first correction since 2003, when we invaded Iraq.
Fears that financial institutions will reduce access to loans for businesses and consumers at a time when they most need them are lading some economists to revise their forecasts. Some are warning that a recession now looks like a bigger threat. And oil at $100 a barrel certainly does not help.
So why is the Fed not lowering rates more? Some may ask. Well, if the Fed lowered rates further, it might encourage investors to dump the dollar in favor of higher-yielding currencies, which would contribute to further slumping of the dollar. Also, the Fed is holding onto their forecast that U.S. economy would still grow in the coming year, albeit around 1%.
In the current market, it would be a good idea for investors to look to emerging markets. Two ETFs that I recommend are Austria Index Fund (EWO) and the Netherlands Index (EWN). These funds track the emerging market of the two European nations, both of which are forecasted to outpace U.S. economy. This is a time where being behind during the last few years while Asia has taken off, actually puts these ETFs in a good position to grow. China and India have been red hot, and U.S. also had its glamour while housing market was red hot. Now, it’s these developing nations turn.
If you have little faith in the emerging markets, here is also another play. DBA is an ETF that invests in agricultural products. With the world's population is expected to double by 2050, food is becoming more and more expensive. Ethanol production is also pushing up prices of corn to record numbers. While these benefit countries and sectors of industry that traditionally were never looked at by the market, investors can jump on the wagon by investing in these companies. U.N.'s food program reported that food costs increased by 20% in the last year. That's stuff like corn, wheat, sugar…pretty much stuff in find in your own kitchen. If you don't invest now, with everything around you shooting up in prices, pretty soon you'll find your paycheck shrinking in reality.

Stocks to own

After getting emails from several of you about individual stocks to own, for a volatile 2008, I've came up with a few picks. Before I give those out, I want to hammer in points from a previous article. The point is, you must diversify across the globe, to ensure a gainful 2008. There are way too much risks in the market right now, especially the U.S. So in order to protect yourself, you must not put all your eggs in one basket.

But for those brave souls, here is a play you can consider. Try the defensive stocks. Note the difference between defense stocks, which are more weapons/arms companies like Lockheed, and defensive stocks, such as food stocks. In a volatile market, it serves us well to not be too brave and optimistic. So well known players like Coca-cola, Altria, Colgate-Palmolive, Clorox, and Avon are good investments. They still pump out good earnings, real profits (which is hard to come by nowadays, and are products that consumers must purchase as necessities.

You could even look into bonds, and preferred stocks. Citigroup, in their dire need of cash flow, is issuing a 7.85% preferred stock. Contact your broker for those shares, as they provide great returns, and Citi is extremely unlikely to go bankrupt on you. Good luck!

Think global, diversify

Anyone nearing retirement is old enough to remember the recession of 2001. If you want to keep your nest egg, invest in global value funds now.

While the experts were debating whether the country really was in a recession -- and if so, when it would bottom out and when the recovery would start -- your portfolio was probably losing value.

It's rotten enough to see your nest egg decimated when you have 10, 20 or more years for it to recover.
But millions of Americans on the cusp of retirement experienced the devastating effect of a recession on their portfolios just prior to, or shortly into, their retirements.

Now, six years later, the news is peppered with stories of a slowing economy and talk of a possible recession. If retirement is in your near future, or even if it's years off, consider taking steps to protect your assets against a potential downdraft in the stock market.

The main thing people have to understand is that there is a lot of risk in our market. People get a false sense of security when the market has been up for quite some time that, this time, it's going to be different. There really is risk in the market and unless people have a well-thought-out plan, there's no way they can protect themselves.So the first thing that has to happen is they have to have a written plan; they have to know how market fluctuations will affect them. They have to know what percentage of their money they can afford to lose before they have to get out. Most people don't know where their breaking point is. They don't know how it affects their ability to retire or how it affects their overall plan because they don't have a written plan.

Most people invest for what I call an absolute rate of return, which is looking at how much money can they make without regard to how much risk they are actually taking in order to gain that return. In their plan they should know what kind of risk-adjusted return they need. How much risk do they need to take in order to get to the return that they need to accomplish their written objectives?

There's no question that there's some sort of downturn on the horizon. You can't see a market that goes up for five years in a row like we've seen without some sort of substantial downturn. I think by late 2008 is when the real pain will start.

I believe that any time you're in the position like we are today, that you must have defensive strategies in place to help protect you from a potential market downturn.
It's all about greed. It's all about how much can I make on the upside. Our contention is, it's not how much money you make, it's how much you get to keep that's most important. Bad markets can take a heck of a lot of money away. When you're 40 years old, you've got lots of time to recover. The bulk of our boomers are past 50 and there are no mulligans after that age. The only mulligan you get is to work for 20 more years.

I think we have some room to go before the recession hits and that technology is going to be one of the leaders over the next several months. In any industry, when a new product comes to market there's zero market penetration for that product. It takes quite some time to get from a zero percent market penetration to 10 percent. And then you have a very rapid movement from 10 percent to 90 percent. It takes as long to get from zero percent to 10 percent as it did to get from 10 percent to 90 percent. And then it takes as long to get from 90 percent to 100 percent as it did to get from zero percent to 10 percent. Most of our major technologies that have been driving our economy for the last 16 to 17 years are at about 80 percent market penetration. Once we hit 90 percent market penetration, that technology will cap out and the profits in those companies will begin to fall. But companies are going to fight to get that last 10 percent. I think it will create some euphoria in that arena that will allow technology to make a splash.

I think the area you want to avoid right now is financials. By and large I think the subprime issues and how deeply involved were the banks in loaning to hedge funds -- those are things that are kind of unknowns at this point in time.

I think you also want to avoid the small-cap stocks now.

They tend to perform best in the early part of a bull market and they perform the worst in the latter part of the bull market, and what we have seen lately is that small caps have begun to lag pretty significantly behind large.

And large caps will typically perform best at the latter part of the bull market.

So in this bear market right now, you want to look to diversify your portfoilo. One way to do that is to invest globally, and not just concentrate on one industry.

Are you shorting Financials?

The Federal Reserve's balancing act between weakening growth and rising prices is getting tougher. Fed Chairman Ben Bernanke said that since the Fed reduced short-term interest rates a quarter of a percentage point to 4.5% a week ago, concerns about credit-market strains have intensified while rising oil prices threaten to fuel inflation and put "further restraint on economic activity."

Mr. Bernanke's testimony to the Joint Economic Committee of Congress yesterday echoed the Fed's statement last week that it saw the risks of economic weakness and higher inflation as roughly balanced, a signal it thought no more rate cuts would be needed.

Since then, stocks have sunk on worries about the prospect of bigger mortgage-related write-offs by banks and other financial institutions. That has renewed expectations the Fed will cut rates, perhaps as soon as its Dec. 11 meeting. That expectation has contributed to a weakening of the dollar, which tends to fall when U.S. interest rates decline while foreign rates are steady or rising, and put upward pressure on oil, gold and other commodity prices.

Now the banks might not be able to pay the dividends, as rumors are floating on the Street, investors really are runing away from the Financials. It is a good time to short those stocks, or play the short ETFs.

There seems to be no end in the short run, for Financials to keep sliding. Some analysts think that this is an oversold situation, but I highly doubt that. The market ran up after the subprime disaster back in August all becuase of rate cuts. There were no "real" reasons for the Dow to jump up back over 14000. I mean, what was the driving force? Not the economy, not the write-offs every bank was posting, not inflation, not oil prices, and certainly not the USD currency. So this correction is long overdue, but due. Play it safe, short some Financials.