Financial rebound

After free-falling for more than 6 months, has the financial sector stocks finally bottomed? Well, YES.

The financial sector crises, consisting of subprime mess and other credit problems, has driven down the sector more than 30% since last December. Now with all the surprises out of teh way, it looks like the sector is looking to rebound in the second half of the year.

There will be more bad news, yes, but not surprises. As the impact from Fed rate cuts start reflecting, and companies take measures to remedy the losses, this sector is headed for a rebound.

The world's largest financial group, Citigroup, is considering selling its Japanese consumer finance company CFJ KK or cutting the unit's business significantly as part of its plans to shed assets, Japanese daily Nikkei reported on Sunday. This is another bold move to cut the losses, and rebuilding for the future.

The biggest U.S. bank is aiming to unload $400 billion of assets within three years after being hit hard by flagging mortgage and credit markets.

Market in W-shaped rebound

Many gurus in recent weeks have come out with predictions that the market has bottomed, and is ready to rebound. Although anything is possible, the likelihood of a rebound is somewhat unlikely in my opinion. For one thing, the stock market started its decline, if not a crisis in the last days of 2007 and continued well into March of this year. The market dropped more than 20% from its peak of Dow at 14000. Now, as bad as that sounds, a market that has troubles in wide-reaching credit system, real estate bubble, worthless dollar, and inflation in almost everything in a daily need, is one that would certainly drop more than it has so far.

Looking back at the Nazdaq bubble in 2000, many "gurus" also said the market has bottomed is ready for a rebound every time there is a technical rebound. Note that the Nazdaq did not drop from 5000 to 1200 overnight, but it did so with several 1-2 month rallies in between, but only to drop even further when the steam runs out. Traders and fund managers on Wall street hates to see their portfolios drop double digits, and tends to sell at managebal losses and re-balance their portfoilios. Everytime they do that, there is a rally in specific sectors (usually the ones that has dropped the most, getting funding from trades who sold their losses in other sectors that dropped less) and thus bidding up the market. Therefore, the "rebound" we're getting in this couple weeks, really is a technical rebound and one that is NOT sustainable. Especially when many traders go on vacation in the summer, when the market tends to drop in allmost every summer, we will see this rebound dissipate. That would prove a real buying opportunity for the bulls. I would predict 4Q 2008.

Furthermore, the Fed has pretty much ran out of ammo by cutting the interest rate to 2%. Cutting anymore, would cuase a widespread infaltion that is beyond remedies.

The Fed cut rates to 2 percent this week from 5.25 percent in September. With the value of the dollar falling against foreign currencies, and rising commodity costs pressuring consumers at the gas pump and the grocery store, the central bank wants to steer clear of actions that will push prices up even more.

By lending directly to banks, the Fed can provide capital that banks need to lend to consumers and businesses without fueling higher prices in industries that don't.

By relieving the seizure plaguing financial markets, the Fed hopes it can free up the cash many banks are hoarding. This would presumably encourage banks to lend their money out through mortgages or business or car loans.

Recent months have seen surging food and energy costs. Wall Street is concerned that the threat of inflation and the persistent struggles of the housing market would force consumers, who account for about 70 percent of U.S. economic activity, to spend less.

The Fed said Friday it would boost the amount of emergency reserves it supplies to U.S. banks to $150 billion in May, from the $100 billion it supplied in April. The Fed took this action and several other moves to boost credit in coordination with the European Central Bank and the Swiss National Bank.
But even after the Labor Department said the U.S. economy shed 20,000 jobs last month -- fewer than expected -- stocks had a lukewarm response. That suggests that, like the Fed, investors aren't sure the credit crisis has been contained.

So be cautious in this market right now, and don't rush into buying stocks. Especially ones that has seen a rebound in recent weeks, as this market is certain to do a W-shaped rebound, before it really takes off into another bull run.

When insiders buy, u buy!

Whenever a buyback is announced, it is always a good idea to check out the company, its fundamentals and its prospects. Let's take a look at one company that has recently announced a buyback: Friedman Billings Ramsey Group (FBR).

Friedman Billings Ramsey's board has raised its buyback authorization for Class A shares to 100 million, from the earlier approval of 50 million. FBR has already bought back 23.6 million shares under the earlier authorization.
The company has suspended dividend payments for the current quarter. The last quarterly payment of 5 cents a share was made on Oct. 31 for the quarter ended Sept. 30, 2007.

The company's net loss expanded to $214.7 million, or $1.28 per share, in the third quarter, with heavy writedowns and losses related to its on-balance-sheet securitized loan portfolio. FBR expects its losses to narrow in the fourth quarter to $38 million. The company has completed the sale of its on-balance-sheet securitized loan portfolio and is currently negotiating the sale of the remaining $48 million of the mortgage loans.

FBR has certainly felt the pressure of the housing and financial-market turmoil, but some may feel this one is drastically undervalued because it is currently trading below book value per share.

Stock price of FBR has shot up in the past couple weeks, despite the subprime crisis.

Go Green!

If you have not noticed the increase in prices at gas pumps, grocery stores, and just about everywhere else, it's time to come out of the cave.

A large part of the inflation we are witnessing nowadays is due to the surge in oil prices. Putting aside the reasons behind this surge of oil from $30 a barrel few years ago, to the new $100 mark, it would be nice to make some money in the dire situation.

Turning this opportunity to make some profit, isntead of just paying like a dummy, you can either do energy plays with oil and natural gas. Or, you can consider the following: green energy. By doing so, you'd be investing in the future to come.

Here are six ETFs, and I've included their investment focus, international exposure, market cap, and expenses -- in each fund's holdings:

1. PowerShares WilderHill Clean Energy Portfolio (PBW)

Listed in March 2005, PBW was the first alternative energy ETF and tracks the WilderHill Clean Energy Index. The fund holds 40 U.S.-listed companies that produce green or renewable energy and related technologies. It's focused on small-caps (69 percent weighting) and is dominated by information technology companies (41 percent of holdings). The ETF charges a 0.60 percent annual fee that will weigh on gains. The relatively volatile PBW has returned a 22.5 percent gain since its inception, but dropped just over 6 percent in the past year. See PBW's full holdings.

2. PowerShares WilderHill Progressive Energy Portfolio (PUW)

This ETF differs from PBW by focusing on companies providing "transitional energy bridge technologies" -- that is, technologies that improve the use of existing fossil fuels, rather than entire new approaches. PUW also has heavy small-cap exposure (49 percent), but offers relatively diversified sector exposure: the largest single sector, industrials, constitutes just 28 percent of the fund. Since its inception in October 2006, PUW has returned a strong 18.7 percent; it also charges a steep 0.60 percent yearly fee.

3. PowerShares Cleantech Portfolio (PZD)

This ETF tracks the Cleantech Index, which aims to capture the potential for companies that "produce any knowledge-based product or service that improves operation, performance, productivity, or efficiency, while reducing costs, inputs, energy consumption, waste, or pollution." PZD is heavily weighted toward industrials (59 percent), with 63 percent of its holdings in small-caps; like the other PowerShares ETFs, it has a 0.6 percent expense ratio. See PZD's full holdings.

4. Claymore/LGA Green ETF (GRN)

GRN launched in December 2006, and follows the Light Green Eco*Index, which is comprised of about 200 stocks that are in some way active in alternative energy. Yet a quick look at GRN's holdings reveals the world of difference between this and the PowerShares ETFs. Top holdings of GRN read more like the S&P 500: Mobil, Citigroup, and General Electric -- mega-cap corporations that allocate a certain (no doubt, growing) portion of their investment or R&D in green technologies, but are hardly "pure plays" on the alternative energy theme. GRN has a 0.6 percent yearly fee.

5. Van Eck Global Alternative Energy ETF (GEX)

Launched on May 9, 2007, GEX tracks the Ardour Global Index (Extra Liquid), which is composed of stocks in 30 publicly traded companies that obtain at least half of their revenue from alternative energy activity. GEX is unique among its peers in two key ways: emphasizing large-cap exposure (31 percent of the fund's holdings; small-caps are only 26.9 percent), and international reach (European companies constitute 47.1 percent of the fund, China/Japan 11.1 percent, and U.S. 41.8 percent). GEX charges 0.65 percent annually.

6. First Trust NASDAQ Clean Edge ETF (QCLN)

Launched in February 2007, QCLN follows the NASDAQ Clean Edge U.S. Liquid Series Index, which captures five subsectors of the alternative energy industry: renewable power generation, renewable fuels, energy storage and conversion, energy intelligence, and advanced energy-related materials. The 44 stocks in this basket are almost entirely small-caps. QCLN charges a 0.68 percent annual fee.

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.