The Logical Investor

A little insight on how the global economic landscape is changing at the most basic and fundamental levels. Read the post at Fisk Financial by clicking here.

New post over at Fisk Financial - feel free to subscribe there so you’re kept up to date. I’m moving all Blogging activity over to www.fiskfinancial.com/blog.

Click here to view the new post!

I’ve just posted a lengthy analysis on the housing market on the new blog site - www.fiskfinancial.com/blog/. Feel free to post your comments and subscribe to the new site. If you’re a subscriber of www.carringtonfisk.com, then you don’t need to do anything. I have transferred all subscriptions over to the new site. Enjoy!

- Carrington

I’m finally back and ready to talk about money. For those of you readers and subscribers out there who know me, you already know that I’ve been sprinting around the world getting an incredible amount done to build my businesses. Fisk Financial is off the ground and my Forex venture is going strong. I’ve also started a company that I’m incredibly passionate about and have had so much fun building. Divinity MMA is a faith-based apparel company dedicated to bringing faith to the fighters, fans, and faithful of mixed martial arts and other combat sports. It combines two of my passions in a fun, creativity-intensive business.

Enough about me, onto the goodies…

I’m attending a conference tomorrow about the truth of our current economic situation. It’s so hard to know what to beleive and sometimes I find myself thinking crazy thoughts about conspiracies laced with a little Gordon Gecko for flavor. The bottom line is no one really knows what is actually happening - there is just too much information, too many interconnected facts and parties, and too much self-interested media.

When listening to analysts, it’s hard not to get caught up in what they’re saying because they’re the experts, right? Well, I think I’ve hit on this enough in the past few months, but it bears mentioning again. The analysts, for the most part, missed the bust. They missed this one and the missed the ones before it. They’ll miss the next one and the one after that.

So I’m going to wait until tomorrow afternoon to post my views on where we are because I have high hopes of the amount of content I’ll get in my meetings tomorrow. I hope you’ll stay tuned and come back and visit. If you’re a subscriber, you’ll get an email telling you when the new post is uploaded. If you’re not a subscriber, subscribe below!

I my last post, I mentioned that I wasn’t able to find a broker dealer allowing me to offer financial advising services in addition to my own proprietary trading and my managed investment programs. After a little more research, I’ve learned that I already have the licensure necessary to start my own Registered Investment Advisor company with any state in our great nation.

So, within the next few weeks, I hope to have my company’s investment advising division opened, compliant, and already helping our first clients. I expect to house investor capital for managed account investment with Interactive Brokers for securities and futures trading. I’ll also have the website complete and eventually, I’ll be moving all blogging activities to the new company site. You may have to re-subscribe, but I’ll be making several contacts to my subscribers to ensure they don’t miss out.

I’m extremely excited about this new chapter in my dedication to creating win-win financial situations for people tired of the same old, same old. I hope that you’ll consider allowing me the honor of helping you get !back on the right financial path. The time for action is now and time is not on your side. Things are looking good right now in the market, but remember that we’re still sitting on values that have erased nearly a decade’s worth of wealth.

I’ve gotten some gentle heckling in the past few weeks because the market is creeping upwards and showing signs of continued strength. Yes, I said the Dow would probably go to 5,500 and find a bottom somewhere down around that range. So far, I was wrong. The crazy thing? It didn’t cost me much because I know how to manage my trades!

I don’t pretend to be right every time. I never have. I will tell you that I have defined risk on each position I take. If it’s a good decision, I let that winning trade run. If it’s a loser, I cut it off through preset stop losses or a later-placed technical stop or exit. The bottom line is that my wrong bets cost me very little while my correct ones are significant profit movers.

We are all encouraged to consult with financial advisers and planners when analyzing our retirement needs, investment options, and money management strategies. Half of the things I say or write are required to have legal disclosures telling people to check with an independent financial advisor. Unfortunately, most financial advisers know very little about investing and about making money. I personally put financial advisers in the same boat as Realtors in terms of knowing how to make money from investing. Yes, there are Realtors who are good real estate investors, but I think we can all agree that the percentage is extremely small.

As you may know, I was working on building a financial advisory firm from the ground up. I went out and got my Series 7 and 66 licenses and thought that I would really be able to make a difference for a lot of people. Unfortunately, no broker dealer would take me because of my “outside business activities”. Apparently, the thought of an investment advisor actually profiting from trading something other than stocks (I routinely trade Forex and futures for my own account and trade Forex for others)* is not something they’re comfortable with. Since I provide for my family through my investment activities**, I decided to forgo the idea of putting an investment advisory firm together.

So, here are some questions you need to ask your current advisor or any future advisor you consider giving your money to. Sadly, most people either don’t know the questions to ask or feel uncomfortable asking any questions. Most believe the financial advisers are well-trained in investing and managing investor capital. Not true. The series 7 and 66 are two exams that are required and they teach VERY LITTLE about investment strategy. Even the allocation section is skimpy and limited to four broad categories - large cap stocks, small cap stocks, bonds, and money market funds.

1. What is the risk management strategy in place on my portfolio?
   Basically, how are you going to keep another 2008 from decimating what’s left of my life savings?
2. Why have you chosen the mutual funds that you’ve chosen?
   Hint: it’s largely to do with commission. Isn’t it strange how Edward Jones advisers always recommend Edward Jones funds? It’s the same with every advisor - they get paid more on in-house funds.
3. Are my mutual fund holdings charging excessive fees?
   Did you know that most mutual funds aim to meet or exceed the S&P 500 and rarely do so? Why invest in a mutual fund that rarely meets its target when you can purchase SPDR - an ETF designed to track the ETF exactly without the hefty fees? (Hint: it has something to do with commission)
4. What is the money manager’s (the person/group/company making decisions for the mutual fund) risk management strategy on their current positions?
   The 25 largest mutual funds underperformed the market last year. My guess is that their risk management strategy is “stocks always go up if you wait long enough” (tell that to AIG shareholders!)
5. Have you changed my allocation since the decline started? Have you exited risky positions? Have you dollar cost averaged a lot of my positions? If so, which ones and why?
   Make them explain why they’ve continued to buy GM, Citi, Lehman, Bear Stearns, and other troubled companies as their price drops lower and lower. Did they move you to more protected investments like Treasuries? Did they shorten the term of investments to reduce interest rate risk?
6. What is my exposure to GM, GE, Citi, and other stocks that have erased nearly all their value? Why weren’t these positions closed out?
7. How have you adjusted my plan to reflect the changed financial markets?
   The definition of insanity is to continue doing the same thing and expect a different result.
8. Why am I invested in mutual funds that under-perform the market they track when I could be invested in Exchange Traded Funds that represent the index*** without imposing high management fees?
9. Is my investment plan similar to your investment plan?
   Every investment plan is different - it has to do with your time horizon, future obligations (college for children, dependent parents, etc.), current income, job security, housing and other living expenses, and a host of other things. Sadly, most advisor clients have eerily similar allocations and plans.

* Past performance does not necessarily indicate future performance.

**My performance on my own investments does not necessarily indicate a similar performance on managed investments for others. Past performance does not necessarily indicate future performance.

***Exchange Traded Funds are designed to mirror the results of their index, but do not always exactly do so.

I was going to write some ridiculous post about how awesome our bailouts are and that the more debt we go into, the better it is for our economy, but I couldn’t even stomach the thought even for April Fools Day.

The frightening truth is that our government is going down a road to ruin. It may help for a little bit and cause some interim rallies and perhaps even create short-term jobs. The bottom line is that our children and grandchildren are going to have to pay a horrific price, a price I’m not foresighted enough to calculate. I do know that ther America of our childrens’ futures is not going to be the America of our childhood. It’s going to be a darker shadowy version of what we have today.

The bailout is just a symptom of the problem. The problem I’m referring to is a lack of accountability. Immediately, our lawmakers and policy creators launch into massive efforts to save those who are behind on their mortgages, who have bitten off more than they can chew financially. They immediately create policy to help illegals get new jobs and to spread the wealth from the higher income individuals and families to the lower income families. I don’t get it and I’m not buying it.

My generation is already saddled with the greatest Ponzi scheme known to man - Social Security. This is a program that has been so dismally managed that it probably won’t exist when the time comes for me to receive any benefit from it. Now, we have to pay for the irresponsibility of others?

And how about the auto makers? The financial firms? The bailouts have done nothing but create zombies. I’m not talking about the brain-eating horrors of Hollywood, I’m talking about dead companies that continue to breathe because we continue to stop them from finally dying. All they do is consume resources with a never-satisfied hunger for taxpayer money. And now, to pay for this government free-for-all, I will probably have to pay even higher taxes on my investments - on the money that I’ve worked very hard to create. We already have nearly the highest tax rates of any developed nation…

What the average Joe seems not to understand is that those who are well off financially have probably sacrificed a lot to get there. Yes, you have your occasional old-money inheritance case, but most people that the public considers to be “wealthy” are small business owners. I can speak from experience, creating and maintaining a small business takes a terrible toll on your time, stress, relationships, and sanity. Yet now we’re not supposed to be rewarded for taking these risks?

It’s simple. We have a free market. It’s vicious, it’s brutal, but it’s self-correcting. If there is a company with an outdated business model, the market will force it to change or go the way of the dinosaurs. Yes, it hurts for a little while, but look at the alternative - having those companies languish in our psyche and spreading their cancer to the market and hurting good companies share prices.

And if I hear one more person say that the market will rebound once it starts correcting itself, I’m going to go crazy. What do you think the market has been doing for the past year?? It’s been correcting itself from the inflated earnings created by ridiculously complex derivatives and outright gambling by so many companies. Sadly, I hear this mainly from financial advisors - the people to whom we are supposed to entrust our life savings. You want to create accountability in the financial markets? Prohibit any financial advisor, planner, or money manager from receiving a salary until they get their clients to their breakeven point. Make them give back their compensation for their near-criminal advice from the past year.

But then again, that would go against the government’s policy of rewarding incompetence.

On October 12th, I talked about the “Secular Bear Market’ in my post Black October Gets Blacker and what it was. I tried to explain what it meant for us as investors and hope that you were listening.

Secular bear markets are tricky and difficult to navigate. It’s really important for you to know the difference between a true trend reversal and a bear market rally. Right now, the S&P and the Dow have jumped pretty good amounts - 15% and 13% respectively - in a short time period. This is most likely the result of short term buying pressure. Institutions and individuals wanting to get in at good prices, reworking their portfolios - most of them thinking we’re at a bottom. I personally don’t think we’re there, not for a while.

Take a peek at the image below. The “Double Top” formation is a high-probability reversal setup. The pattern is an indicator of a high-probability reversal. It gives a trader a target and confirmation. The measurement works best on a daily chart, so we’ll instead focus on the confirmation. As you can see in the picture, we broke through the valley floor and major support and then retested that same mark. The market then continued below the mark again. This is the confirmation that the trend is reversed and will continue.

Now, this mini-trend could be extended and continue for several weeks. If you’re flexible and nimble and have a firm trading plan. The key is to shorten up your time frame on your trades and have tight stops. Bottom line, I don’t expect this rally to be an indicator that our wealth-evaporation trend is over.

Analysts are happy that stocks are keeping their gains from last week, the first positive week in quite some time. I believe that it’s just another bear market rally and that you should use it to dump any dogs you still have in your portfolio.

There are bigger concerns though - mainly, the strength of our entire monetary system. As big government gets bigger and continues to print more and more money, the value of our precious greenback will fall. A while back I said that a safe haven would be exchange traded funds (ETFs) that increase in value in relation to the increase in the dollar’s value. I also recommended an ETF that shorted the Euro. If you took my advice, you probably made a modest profit on the UUP ETF that tracks the dollar’s strength and did extremely well on the bearish Euro ETF. Please note that no promises or advice is being given that you will make a profit when investing your money in ETFs. (See Risk Disclosure)

What happened to the Euro could possibly happen to the dollar. Chinese Premier Wen Jiaboa made a statement last week that sounds mild, but is a startling realization that the US is in dire straits:

To be honest, I am definitely a little worried. We have loaned huge amounts of money to the United States, so of course, we have to be concerned. We hope the United States honors its word and ensures the safety of Chinese assets.

The Chinese government sees our government spending and printing like wildfire and is already beginning to move out of US bonds. Last summer, the Bank of China and the Bank of Communications (weird name I know), two of China’s largest banks, offloaded massive amounts of Fannie Mae and Freddie Mac debt. Since then, the two mortgage-backed security providers have had their debt annihilated.

Here are a couple options if you have a high exposure to fixed income securities and are worried that Wen Jiaboa is right:

Shorten Up on Maturities
The Obama administration can’t continue to print money without inflationary consequences. This will damage your fixed-income portfolio’s value. The longer the maturity, the more volatile it is. Shorten your maturities now so you can be more flexible when the floodgates open up.

Funds that Profit from Rising Interest Rates
It’s a simple function of supply and demand. If you flood the market with a lot of your product, you’ll have to make it more attractive to buyers. In the case of treasuries, the Treasury Department will have to increase the yield to the investor to make their debt more attractive. To put a darker viewpoint on it, suppose that Treasury yields catch up to corporate bond yields. Which one will investors choose? How high can corporations afford to go before they cannot get reasonable loans from the public to expand and revamp tired divisions? Do you see the cycle? It will continue to drive US stock prices through the floor.

Some options to protect yourself from rising interest rates: Rydex Inverse Gov Long Bond Strategy (RYJUX) and ProFunds Rising Rates Opportunity (RRPIX) are both meant to profit from rising interest rates.

Managing the Risk of the Falling Dollar
If you’re willing to bet that the US dollar is headed for major trouble, the Merck Hard Currency (MERKX) fund invests in currencies of countries with the strongest economies and surpluses (definitely not us). This fund could do quite well if the dollar falls. *However you may lose some or all of your investment and this is certainly not a guarantee that you will incur any profit from this or any other investment. (See Risk Disclosure)

Dollar Debt Management
Perhaps the best way to protect yourself may be to invest in long-term, non-dollar denominated debt of countries with strong fiscal and monetary practices (again, definitely not the USA). International bond funds, like T. Rowe Price International Bond (RPIBX) or the American Century International Bond (BEGBX) could be strong plays. *However you may lose some or all of your investment and this is certainly not a guarantee taht you will incur any profit from this or any other investment.

And the Financial Markets - Are we at a bottom?

Let’s look at it logically.

The bailout - FAILURE. The $787 billion stimulus package disgusted most investors and taxpayers. There was very little relief and very much in the way of a Democratic wishlist.  It’s just another Donkey Spending Spree.

GDP contracted at -6.2% last quarter alone. The slump is expected to continue and be even steeper in the coming months. What does that mean to the person on Main Street? Well, this combined with the continued collapse of the real estate market could result in a massive $23 TRILLION evaporation of American wealth.

The stock market broke through major support last week and plunged to 12-year lows. That means that twelve years worth of value dissipated into the ether. What was support is now resistance. If the market breaks back through, we might see a longer rally, but I don’t think it has any legs. Despite the rally, the bottom could be a LONG way off. 

Fear continues to permeate the markets. Credit default swaps are a real time indicator of fear in the markets and the economy. If they go up, it means that fear goes up. A new high was reached in the CDS market and broke through a major resistance level of 300 back in November. We’re now in uncharted territory.

Investors are finally wisening up to the scary truth of how bad things are right now. We’ve been riding inflated and fabricated earnings and free money debt policies. I hate to say it, but in addition to a continued decline in the stock market, the dollar will experience significant decline.

Have you ever felt like you were the only sane person in the room? The insanity continues on Wall Street where money managers and advisers continue to act as if nothing happened, as if the market were still at 14,000.

Suze Orman is great for families looking to create and manage a family budget. If you’re considering the purchase of a new or bigger house, wondering how much car you can afford, or how to start tucking a few bucks away each month for retirement, Suze’s your gal. As for investing, her advice is outright nuts.  She advises investors with a 10+ year horizon to “stay the course”. What if your course was holding WaMu? Citi? GM? In my opinion, it’s going to take a lot longer than 10 years to catch up to our massive losses that will only continue to mount. Remember, if you lose 50%, you now need to make 100% on your money to break even.

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