Wednesday, September 7, 2011

Investing Pundits

I am always fascinated watching these "investment advice givers" on television and their view of "what to do now." In addition, there are a group of people who routinely appear on television and in the Wall Street Journal and other print publications. The producers and journalists have their trusty list of contacts and they always seem to use the same people. The question is always the same. "Where should people put their money now?"

The answer is usually targeted to the kinds of clients that the person being interviewed has in their business. Rarely ever, is the advice good advice for the general public. There is a reason for this fact. This reason is that there is no good advice for the general public. Each individual's circumstances are different and the advice should also be different.

There are times, however, when advice can be consistent for all. In the year 2008, I had enough of the insanity going on at the time, so on October 6th, 2008, I went to 100% cash. This decision was easy for me. It is my job to protect my client's assets in the best possible manner. This is what I did back then.

Fast forward to the recent past. On August 8th, 2011, approximately one month ago, I sold all equity investments in our client's accounts. I kept short term bonds, gold, managed futures and commodities for those who already held these in their accounts. Some clients I kept 100% in cash, because it did not make sense to run up transactions costs. Nor did it make sense to buy assets classes like Gold when they had already run up so much.

So, why did I do this again?

I evaluated the world's economies, along with my partner, Stan Rosenthal and after validating what we believe to be happening right now, we made the decisions that we did. By evaluating the world's economies, this is what I mean:

Europe has shown an unwillingness to really address their fiscal problems and uniformity of austerity decisions seems unlikely. I believe that the markets will force their hand. United States institutions most likely hold European sovereign debt. Sovereign debt is debt issued by the country in question. Such as Greek debt, Italy debt and so on. If the U.S. is currently holding the sovereign debt of Europe, then there will be a domino effect on our markets. Do we know how much sovereign debt our institutions hold today? Does anyone really know for certain? No, I do not think so. Therefore, it stands to reason if Europe goes, then so goes the world economies, including the U.S. A double dip recession would be certain.

Another concern of mine is China. Can we really trust what the government of China says? I look at the U.S. economy and I see a stark lack of demand. The lament from all businesses is that we do not have the demand. It does not take a smart fellow to figure out that if our businesses are not seeing the demand, then can China continue to export their products to our economy without any demand? I do not think so. They have to be feeling the effects of our lack of demand.

In addition, in China, they appear to be having a real estate bubble. They have built and overbuilt buildings for the anticipated growth of their economy. I suspect that the Chinese government will institute some controls to slow things down a little, but being a true neophyte on capitalism, I doubt that they will be able to control things like they think. There is a business cycle of booms and busts and there always will be. It makes no difference if it is China, the U.S. or any other capitalism based country.

When you factor in the political implications of Washington, D.C. politicians, overly burdensome regulations, the government trying to "make the banks pay" for 2008, then you have all these things combine to make you want to call a timeout.

Now, they are talking about "writing down" mortgages to currently appraised values. This means that there are going to be a lot of losses if this happens. Who is going to decide whose mortgage gets written down and whose doesn't? I can see lots of real estate investors and banks losing lots of money if this happens. This will not be good if it does. Lawsuits will come flying from everywhere. You wait and see.

Technical analysis is something that I follow very strongly. I look at Technical Analysis on new housing sales, existing home sales, employment trends, retail sales, manufacturing, GDP and other areas. Other people look at the numbers. It is better to look at the charts, because you can clearly see the trends. Nothing in these charts gives me "turnaround confidence".

Further, when I look at the major indexes from a Technical Analysis standpoint, I see a waterfall in August and an attempt to establish a base in September. A waterfall is where the price of the index drops off a cliff similar to a real waterfall. A base in technical analysis terms is when the price of the index is going sideways. There appears to be a ceiling on the upside, or not enough buying volume to sustain upward momentum. In addition, we are into an uncanny period of moves up and down over triple digits. Contrary to popular belief, this is not the "new normal".

These investment pundits trot out there everyday and say "this is a good buying opportunity." Hogwash! They also talk about "missing out on a great return." More Hogwash! What great return has the market given us over the last 10 years?

Here is something to really think about. The Baby Boomers are getting into their retirement years. I doubt very seriously that they will be holding 80, 90 or 100% stocks as they get closer to retirement. This means that they will be selling. There will be lots of selling. In my mind, in order to be successful in a selling environment, (like this country has never seen before), you are going to have to pick your spots. Sometimes, you have to go against the status quo of advice you hear on television and read in publications.

I'm afraid that in order to be successful at advising clients on their investments, then you are going to have to be prepared to sit on the sidelines sometimes. So, what if you sit in cash for a few months. You will still have that cash after a few months. The trick, as I discuss in detail in my book, is to not take big losses. Also, you never want to hold 80, 90 or 100% in equities.

Keep Your Assets. Take My Advice. It is Easier to Climb Out of a Shallow Hole.

Good advice for all.