THE BLOG'S THREE MAIN OBJECTIVES:
~*Revealing and Getting Rid of Scams | Creating Honest Sustainable Wealth | Offering Happiness, Safety and Legitimacy*~

Friday, 30 April 2010

Extraordinary Bullishness

by Mark Hulbert

Commentary: Nasdaq timers now most bullish in nearly a decade

These are times that try contrarians' souls.

Maddeningly, it's unclear whether the mood out there is too positive (which would be bearish), or too negative (which would be bullish).

On the one hand, individual investors remain profoundly skeptical of the stock market. Domestic equity mutual funds, for example, over the last year have actually suffered a net outflow. That's extraordinary, since the usual pattern is for investors to pour huge amounts of new money into the stock market in the wake of rallies as strong as the one we've experienced over the last year.

Furthermore, according to the latest data for April, there is no sign that this trend is about to change.

On the other hand, investment advisers are bullish right now -- more bullish, in fact, at least by some measures, than they have been in a decade.

Since I devoted a column earlier this week to discussing the mutual-fund flow data, I'm focusing this column on the data showing the mood to be too optimistic.

Consider the Hulbert Nasdaq Newsletter Sentiment Index (HNNSI), which represents the average recommended stock market exposure among a subset of short-term Nasdaq market timers tracked by the Hulbert Financial Digest. This is a useful sentiment measure on which to focus, since the Nasdaq market is one in which sentiment plays a particularly large role (remember the Internet bubble)?

The HNNSI's latest level, at 80%, is dangerously high.

To put this current level of bullishness into perspective, consider that the HNNSI as recently as early February -- at the depths of the January-February stock market correction -- stood at minus 16.1%, or 96 percentage points below where it is today. That represents an extraordinary swing in sentiment for just 2-1/2 months.

In fact, to find another occasion on which the HNNSI was any higher than where it stands now, you have to go back to July 2000, almost 10 years ago. That earlier occasion, need I remind you, came just as the Internet bubble was unraveling and the mood was still quite giddy.

How can a contrarian resolve the inconsistent messages of the mutual-fund flow data and the investment advisory sentiment data?

One way might be to view the advisory sentiment data as having more short-term significance. This helps to make sense of the data, since the mutual-fund flow numbers have painted a largely consistent picture over the last 12 months of investor skepticism, while the sentiment measures based on investment advisers have fluctuated widely -- on the whole, reaching peaks of optimism before the market fell, and reaching troughs of despair before the market rose.

What might this mean for interpreting the sentiment data today? Given the profound skepticism towards the rally among fund investors, the bull market should be given the benefit of the doubt.

However, given the extreme optimism among investment advisers, the odds of a short-term correction are now dangerously high.
Copyrighted, MarketWatch. All rights reserved. Republication or redistribution of MarketWatch content is expressly prohibited without the prior written consent of MarketWatch. MarketWatch shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Thursday, 29 April 2010

Sentiment Is Contrarian, Not So Reliable

Acting on feelings might seem like wisdom in romantic comedies, but it's a lousy way to make investment decisions.

In fact, it's such a crummy way to invest that some sentiment indicators work in a contrarian fashion. In other words, when the market seems to be telling you how much it loves stocks, it's time to grab your wallet and run.

The problem with sentiment indicators is that they're inconsistent. IBD lists several on the How's The Market? page, today on Page B2.

They are best used as a confirmation of your primary guide. Your primary guide is the price and volume action of the major indexes, along with the action of top-rated stocks.

Here are a few contrarian indicators you can find on the How's The Market? page:

• Bulls vs. Bears: This contrarian indicator from Investors Intelligence measures bullishness and bearishness among investment advisers. When the bullish percentage is 20 percentage points greater than the bearish percentage, that is considered a warning. When it hits 35 or 40 points in the bulls' favor, it is considered dangerous.

It hit 42.6 at the market's October 2007 high, on the eve of a bear market. It was 37.5 in mid-January, just before a 9.7% decline in the Nasdaq. It's also had false signals (see chart).

The most useful signal, though, is when there are more bears than bulls. That often has worked as a bottoming signal.

• NYSE Short Interest Ratio: This contrarian metric involves dividing monthly short interest on the exchange by the average daily volume. The result is how many days of average trade it would take to cover all the shorts.

When the ratio is at a five-year high, it indicates that traders are bearish. According to contrarians, this means the market is about to rise. When the ratio is at a five-year low, it says traders are bullish, which means the market might top.

In mid-March 2000, the ratio was at a five-year low, pointing to bullishness. This was just before the start of a nasty bear market. So in this case, the ratio worked.

But in late September 2007 to mid-October, the ratio marked five-years highs. This suggested that traders were bearish. By contrarian theory, that meant the indexes were about to rise. But a couple of weeks later, the bear market began.

When short interest is elevated, market gains force shorts to buy to cover their positions. Once that starts happening, there's fuel for more market gains.

Some say arbitrage transactions distort the short interest ratio and make it unreliable as an indicator.

• Puts vs. Calls Volume: A ratio of 1.0 and up is considered a sign that the market is about to rise. This tool picked the short-term lows on Nov. 27, Feb. 4-5 and Feb. 23. But it was too early on Jan. 22.

Other indicators are subjective. Many brokers and market watchers find contrarian feedback in the views of ordinary people.

For example, as the market rose in the months after the follow-through in March 2009, many ordinary people were either convinced that the market was still doing terribly, or didn't trust the rebound.

Deeper in a bull market, people at social gatherings will fish for advice from brokers and market watchers. Later, they'll try to give advice.

And late in a bull market, you run into people who say they're thinking of quitting their day job and investing full time. When you hear that, the run is about done.

Legendary investor John Templeton described the cycle this way: "Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

Bears, Is it Time to Throw in the Towel?

Simon Maierhofer

They say that the first step in overcoming an addiction is to admit the problem and eliminate the denial component.

Ok, here it is: 'I am a bear! Am I cured now?'

'Not quite. Explain to me, what moved you to become a bear?'

Oh my, where to start. There is so much that went wrong and so much that can still go wrong.

Anytime the broad indexes a la Dow Jones (DJI: ^DJI), S&P 500 (SNP: ^GSPC) and Nasdaq (Nasdaq: ^IXIC) rally more than 75% in a one-year span is concerning. I think the last time this happened was in the 1930s.

Reasons for denial

I'd like to be a bull, but being a bull would have gotten me burned twice already in the past decade. In 2000 it was the tech bubble (NYSEArca: XLK - News) that busted, in 2007 it was the financial spill (NYSEArca: XLF - News) that flooded the system.

Being a bear wasn't wrong back than. And today it feels just like 2000 and 2007 all over again. Ok, there are a few major differences.

Unemployment is higher today, much higher. For much of 2000, the unemployment rate was below 4%. For all of 2007, unemployment was below 5%. Today, unemployment is around 10%.

It's not just the cold hard unemployment numbers that concern me, it's the negative feedback loop created by a lack of jobs. Jobs are money. Without jobs there is no money, without money there is no economy.

Without consumers willing to spend, there is also no real estate recovery. If there is no real estate (NYSEArca: IYR - News) recovery, how will banks (NYSEArca: KBE - News) deal with all the toxic assets on their balance sheets?

It seems like nobody really cares, but the FDIC has already shut down 57 banks, mostly regional banks (NYSEArca: KRE - News), year-to-date. That's more than for the same timeframe last year.

Don't worry, be happy

'Well Mr. Maierhofer, you shouldn't worry about all this, nobody else does. Mr. Bernanke and his team are taking care of matters. You just have to trust them.'

'You mean trust 'them'like in 2000 or 2007 or even in the late 1920s.'

'No, this time it's different.'

'Isn't that what you bulls say every time before the market crashes? It seems to be different every time, yet the outcome is the same - investors get hurt.'

'No, this time it's really different. Haven't you looked at the government deficit? It's at an all-time high, which means the Fed is doing everything they can, even more than in the past. Even the bailouts are working. Did you hear that General Motors has repaid all their bailout funds?'

'I heard. But didn't they use bailout money to repay bailout money? Neil Barofsky, the inspector general for the Troubled Asset Relief Program (TARP) told the Senate Finance Committee that GM used bailout money to pay back the federal government.'

Abandon common sense

'As I told you - don't worry about that. People think the economy is getting better, that's all that matters. Look at prices, they are going up, whether you are a bear or not.'

'I can see that, but ...'

'Shush, nobody wants to listen. Nobody does listen. We are in a bull market, just face it. That's why consumer spending is up.'

'CNBC just reported that mortgage defaults may be driving consumer spending. Lender Processing Service reported that the nation's foreclosure inventories spiked 51.1% year-over-year. That means that 7.9 million Americans are not paying their mortgages. Assuming the average mortgage is $1,500 a month that would free up $11.85 billion every month of extra spending money for iPads. Perhaps that's why Apple now makes up 18.12% of the Nasdaq (QQQQ). What will happen to the Nasdaq if Apple stumbles?'

'I can see you are pretty set on being a bear. Have you always felt this way?'

'No, in fact I was one of the first to say BUY in March 2009. Via the March 2nd Trend Change Alert, the ETF Profit Strategy Newsletter issued a strong buy signal and predicted the biggest rally since the October 2007 all-time highs. We gave Dow (NYSEArca: DIA - News) 10,000 as upper target range. I was bullish when nobody else was. Now it seems like I'm bearish again when nobody else is.

History, does it matter anymore?

It's lonely and tough being a bear. Who likes to swim against the stream when it's so much easier to float downstream? But historically, there has rarely been more of a pronounced sell signal than what we see today.

The CBOE Equity Put/Call Ratio dropped to the lowest level in nearly a decade, the Volatility Index (Chicago Options: ^VIX) dropped to the lowest level since July 2007. Investors' cash allocation is the lowest since April 2000 and investor sentiment is the most optimistic since 2007.'

Even though the market continues to rack up new historic extremes, stocks (NYSEArca: IVV - News) continue to climb higher. Higher beta stocks like small caps (NYSEArca: IWM - News) and mid caps (NYSEArca: MDY - News) rally harder and faster than its more conservative counter parts.

Does this mean the rally is over? Not necessarily. But historic patterns suggest the upside potential is limited.

Stock market jam

Take for example your commute to work, perhaps downtown L.A. or New York. Chances are there'll be traffic jams at or around rush hour. Does that mean there has to be traffic? No. But you are going to work prepared to encounter traffic.

This is the same with the stock market. When you see historic extremes like we do right now, you should prepare for what's coming. It's simply common sense. Over the short-term, the common sense approach is not always profitable, but it keeps you safe in the long run.

The ETF Profit Strategy Newsletter has outlined a road map with long, mid and short-term pit stops. The long-term forecast provides the general direction; the mid-term outlook further shapes the investment approach.

Technical indicators are used to compile the Technical Forecast, a market update published twice per week. Technical indicators include pivot points, relative strength measures, moving averages and candle formations.

This combination of indicators has provided some low-risk entry points just this past week and point towards higher prices. How high? The ETF Profit Strategy Newsletter outlines the target range for the top of this rally and the ultimate market bottom.

My name is Simon Maierhofer, I am a bear and I am prepared for what might be coming.

Wednesday, 28 April 2010

Protect assets from the next Bernie Madoff

Chris Morris

Determining whom to trust with your money isn't as easy as it once was. As Bernie Madoff proved, some of the most successful crooks have the right diplomas on the wall, the right credentials and plenty of references. If heeded, these tips can help you protect yourself and your assets from fraudulent financial advisers.
Use an independent custodian
Giving funds directly to an adviser is an invitation to fraud. Instead, ensure that an independent, reputable custodian, such as Schwab, Vanguard or Fidelity, holds your money. Doing so adds transparency and additional oversight.

Your adviser will still have the power to conduct trades on your behalf -- but because a neutral third party holds your money, it ensures the adviser isn't claiming to execute trades while actually just taking cash out. Also, be sure you have full access to the custodian account online and via phone (through the client service desk).

"Never make out a check to your adviser," says Laurie L. Klein of Harvest Capital Advisors in Bellevue, Wash.
Beware unrealistic returns
Like the old saying goes: If it sounds too good to be true, it probably is. The market, historically, has increased about 10 percent per year. If your adviser is promising more than that -- especially these days -- it should send up a red flag and a blast of bugles.

"We have to take lessons from history, says Bonnie Kirchner, author of "Who Can You Trust with Your Money?"

"I think now if I were investing with somebody and they were really bucking the trend, I would do some investigation and see how they were outperforming the market."
Do it yourself
No method is perfect, but the best defense against fraud is to ensure that your adviser has no access whatsoever to your money. The easiest way to do that is to use your adviser's advice, but implement the trades yourself. Check your adviser's references carefully to minimize your chances of getting bad advice. But at least you'll be protected from Ponzi schemes like Madoff used.
Use scarecrows
Odds are you have a few people helping you out as you plan your financial roadmap. Use them to monitor each other. It's a lot more difficult for a fraudulent financial adviser to rip off clients when other professionals are examining his or her advice and actions.

"No investment adviser should make decisions in isolation of your other advisers," says attorney Martin M. Shenkman, a Paramus, N.J., attorney who specializes in financial and asset protection needs of high net-worth individuals. "If someone is uncomfortable or unwilling to work in coordination with your CPA, estate planner, general attorney, insurance consultant, etc., then there is an issue. ... Often the reluctance is due to the fact that the adviser doesn't understand the real (tax or legal) implications, or is just hustling the client."
Compare statements
You should be getting regular statements from both the custodian of your money and your financial adviser. Examine both carefully and be on the lookout for any discrepancies. And if you're not getting statements from your custodian, find out why -- and fast.

"Blindly handing over your life savings and walking away is asking for trouble," says Cheryl J. Sherrard, Director of Financial Planning, Rinehart Wealth Management in Charlotte, N.C. "If the only documentation you receive about a particular investment is from your adviser, and there seems to be no other way to verify what is occurring, you should be concerned."

Monday, 26 April 2010

The Bears are Wrong: "The Consumer Is RE-leveraging," Jon Markman Says

The recent data is convincing; The U.S. consumer is making a comeback. New home sales jumped 27% percent in March, rising to a seasonally adjusted annual pace of 411,000, the Commerce Department said Friday. Meanwhile, durable goods orders (large manufactured products) rose the most since the 'great recession' began.

As sure as buying low and selling high is a winning formula, an American with money will purchase goods, says Marketwatch columnist and author Jon Markman. "Anybody who's bet against the American consumer over the long term has gone broke," he tells Aaron in this clip.

Markman believes renewed consumer confidence starts with an improving job market. In a recent column Markman writes, "household employment has increased at a rate of 371,000 jobs a month, on average, over the past three months - the strongest run in over three years."

Retailers are enjoying this return to form. "Retailers are already well on their way to their next bull market," says Markman, noting several retail indexes and ETFs have returned to 2007 highs. The breadth of recovery is also something Markman thinks is bullish. He notes stocks from mass marketers like Amazon and Target to high-end yoga retailer, Lululemon – are trading at or near all-time highs. (In the case of Lululemon, the stock has gone from less than $5 per share last March to trading near $44 per share today.)

It's a clear sign the bears are fighting a losing battle, Markman says. Contrary to popular sentiment, consumers are not deleveraging; "The consumer is releveraging," he says.

Saturday, 24 April 2010

NORMAL RECOVERY? DON’T BELIEVE IT

By Comstock Partners:

The “Street” and the financial media are portraying a totally misleading impression that the economy is now undergoing a normal recovery as each new piece of economic data is issued. At the same time the stock market has been in the process of pricing in the so-called great news. Let’s have a look at the actual numbers.

1) March retail sales were up 8.6% from the low a year earlier. However, this was still 3.6% below the peak sales in May 2008, almost two years ago. Moreover, sales are still slightly below the level reached back in December 2006, over three years earlier. Over the last 43 years retail sales had hardly ever gone down at all, even in recessions.

2) March industrial production (IP) was up 6.1% from the June trough, but was still down 9.1% from the top December 2007. At its current level IP is still where it was over 10 years ago in December 1999. Never since the depression in the 1930s has IP failed to exceed a level established 10 years earlier.

3) New orders for durable goods in February were up 12.8% from the low in March 2009, but were still 22% below the peak in late 2006. In fact orders are back at the same level as in the fall of 1997.

4) Initial weekly unemployment claims for the latest reported week are 456,000. Claims declined from a peak of 643,000 for the week ending March 29, 2009 to 477,000 on November 15. Since then, however, the number of claims has flattened out to a range between 439,000 and 490,000 weekly over the five-month period. This is still a recessionary number.

5) March housing starts were up 31% from the low April 2009, but still down 72% from the peak in January 2006. Except for the current recession the number of starts in March was the lowest in any month over the last 51 years.

6) As reported today, existing home sales were 535,000, up 6.8% from the prior month and 19% from the low in late 2008. However, this was still 27% below the peak in late 2005.

7) New vehicle sales in March were at an annual rate of 11.8 million, up 13.5% from the prior month and 28% from the recession low. This is still well below the average of about 16 million vehicles between in the decade ending in 2007.

8) February personal income was up 11.9% from the trough in July 2009, but still 1.5% below the top in May 2008. At the current level personal income is 2% higher than a year earlier after being down for 12 consecutive months. Prior to the current recession personal income had never been down year-over-year in any month going back to 1960, and the current plus 2% is still at recessionary levels.

9) Payroll employment in March increased 162,000 leaving the total 8.3 million jobs below the peak reached in February 2008 and equal to the number of jobs back in October 1999.

10) February consumer credit was down 4% from a year earlier, the biggest decrease on a year-to-year basis since late in World War ll.

The data cited here cover the major indicators of economic activity, and they paint a picture of an economy that has moved up, but only from extremely depressed figures to a point where they are merely less depressed. And keep in mind that this is the result of the most massive monetary and fiscal stimulus ever applied to a major economy. In our view the ability of the economy to undergo a sustained recovery without continued massive help is still questionable, and the data discussed in this comment doesn’t even include the fiscal problems of the states, the deteriorating federal fiscal outlook, sovereign debt problems subject to potential global contagion, the Chinese housing bubble, and the increased threat of “beggar thy neighbor” nationalistic economic policies. At current levels the stock market is substantially overvalued and subject to severe downside risk.

Friday, 23 April 2010

Where's the Goldman Sachs That I Used to Know?

by James B. Stewart

"Surreal" was the word Goldman Sachs Group's (NYSE: GS - News) Fabrice Tourre used to describe a meeting in which the firm of hedge-fund billionaire John Paulson discussed with an investor a portfolio of mortgage-backed securities it eventually planned to short. That Goldman Sachs, a name once synonymous with professionalism and integrity, now stands accused by the Securities and Exchange Commission of fraud also might be deemed surreal.

It's hard to imagine the damage that these developments have done already to Goldman Sachs's reputation. The company has always maintained a public position that the business of investment banking depends on trust, integrity and putting clients' interests first.

Whether those clients remain loyal to Goldman, and whether the firm can attract new ones, remain to be seen. Investors' reaction to the news was swift and negative: Goldman shares closed down 13% Friday after the SEC filed its suit. Goldman says it is innocent and will fight the accusations. The bank deserves its day in court, and legal experts have said the SEC faces a tough task in proving the company misled investors about how its complex investment vehicles were constructed. Given the public anger at Wall Street, and the criticism of the SEC's failure to regulate more effectively before the financial crisis struck, it's worth considering that Goldman makes an enticing political target, regardless of the suit's merits.

Goldman hasn't disputed the basic facts in the SEC's narrative: (1) that the company allowed its client Mr. Paulson, who famously made billions betting that subprime mortgages would default, to play a role in the selection of a portfolio of the worst imaginable subprime mortgages that would be packaged into a collateralized-debt obligation, and (2) that the bank failed to disclose to clients to whom it sold those CDOs that it had, in effect, let the fox into the henhouse. Goldman claims its sophisticated clients wouldn't have cared about such information or considered it important, but if that's the case, why did Goldman conceal it? Goldman collected millions of dollars in fees from Mr. Paulson, who bet against the doomed securities, and from the clients who invested in them.

For many years, I was a Goldman Sachs shareholder. I bought shares soon after the firm went public in 1999 and held them until I sold them last year, as I reported in this column. I owned them and recommended them on several occasions because I believed in Goldman's integrity and the culture that fostered it. I have had friends who work at Goldman or who have worked there. To me, they embody the best of Wall Street. They're smart, well-educated, thoughtful, professional and hard-working. This is the Goldman I invested in, not the Goldman alleged to have collaborated with someone like Mr. Paulson to hoodwink investors. I'm not even that concerned about whether the Paulson deal passes legal muster. To me, it fails the higher standards of honesty and professionalism that Goldman once embodied and urgently needs to restore. Then, and only then, would I want to own Goldman shares again.

In its first-quarter earnings conference call Tuesday morning, the company continued to deny wrongdoing and cited its net losses on the deal. Greg Palm, the firm's general counsel, said Goldman "would never intentionally mislead anyone," and that the company "would never condone inappropriate behavior."

To regain investor trust, Goldman must abandon conventional public relations and legal strategies that call for an all-out defense. It should stop saying it will fight the charges aggressively and that the SEC's suit is "completely unfounded." No matter how wronged Goldman officials now feel, they must put those feelings aside and view this matter from the perspective of clients, investors, politicians and the public. Goldman's mantra should be cooperation, not defiance.

When an institution depends on trust and is accused of wrongdoing, it needs to get ahead of the investigators. It needs to learn the facts, share them with the public, impose accountability on its employees, and take any steps necessary to remedy the problem and restore trust. I say this as someone who has written about wrongdoing on Wall Street for years and watched once-venerable firms like Kidder Peabody and Drexel Burnham Lambert ignore such advice and pass into oblivion.

This needn't be Goldman's fate. It's already unfortunate that we've learned about the Paulson deals from the SEC and the press rather than from Goldman itself, especially because the firm says it's been on notice since last July that it might be sued. But it isn't too late for the firm to move boldly to restore trust. Goldman needs to explain:

• Why was a firm like Mr. Paulson's allowed to choose the securities in the CDO it was planning to bet against? Although Mr. Paulson's firm may have been smart to bet against subprime mortgages, this deal was like shooting fish in a barrel. Who else gets this kind of access, what does Goldman receive in return, and are their roles disclosed? (Though Mr. Paulson hasn't been accused of any wrongdoing, it would be interesting to know how much money from the Troubled Asset Relief Program paid to Amercan International Group (NYSE: AIG - News), Goldman and others ended up going to him.)

• Who at Goldman was responsible for giving Mr. Paulson such extraordinary access and then failing to disclose it? Surely it wasn't Mr. Tourre, the 31-year-old Stanford graduate named as a defendant in the SEC suit. Who did he report to? What was the hierarchy of oversight? In other words, where does the buck stop?

• Legal issues aside, does Goldman really believe this deal meets its own standards of integrity, fairness and professionalism? The notion that purchasers of the securities wouldn't care about Mr. Paulson's role already fails the common-sense test. Such an argument would be far more persuasive if it came from the clients who bought them rather than Goldman. And it's no excuse that other firms were carrying out similar deals with comparable disclosure.

• If Goldman concludes such a deal didn't meet its standards, it needs to acknowledge that and take whatever steps are necessary to prevent it from happening again. Someone has to be responsible and held accountable, perhaps even a highly valued and revered high-level official. Goldman needs to do this before it is forced to do so by a court, regulators or Congress. This will be painful. It takes courage, objectivity, vision, and perhaps most of all, humility.

• How will Goldman prevent such conflicts in the future? What is it doing internally to restore a culture of integrity? If Mr. Tourre or any other employee thought he was caught in a "surreal" situation, to whom could he take such concerns and get a fair hearing?

• The SEC suit isn't Goldman's only potential scandal. The Wall Street Journal reported last week that Goldman director Rajat Gupta is being investigated as part of the sprawling Galleon insider-trading investigation. In the article, Goldman declined to comment on whether Mr. Gupta informed the company about having received a notice from prosecutors. What does Goldman know about possible leaks of inside information? Why, when Mr. Gupta told Goldman in March he wouldn't be standing for re-election, did Goldman chief executive Lloyd Blankfein issue a public statement lavishing praise for his service? And why, for that matter, wasn't Mr. Gupta asked to resign immediately? Mr. Gupta hasn't been accused of wrongdoing, and Goldman is right not to prejudge him. But that doesn't mean Goldman should ignore the evidence or that someone under investigation is entitled to a board seat.

• Are there other investigations we should know about?

These may well be isolated incidents, confined to a few individuals, their timing an unfortunate coincidence. If so, Goldman has all the more reason to get ahead of the scandal, get the facts and disclose them. It may require swallowing some pride and suffering some criticism. It's also the right thing to do.

Why Even Bernanke Sees Trouble Ahead

Simon Maierhofer

Just as you can't be a motivational speaker with a constant frown, you can't be the Fed President without being a 'glass half full' kind of guy. Ben Bernanke fits the bill well.

In 2005, Mr. Bernanke said that a housing bubble was a 'pretty unlikely possibility.' His judgment echoed Mr. Greenspan's assessment given in 2004 that the rise in home values was 'not enough in our judgment to raise major concerns.'

Even in 2007, Bernanke went on record to state that the Fed 'does not expect significant spillovers from the subprime market to the rest of the economy.'

I am not sure what Mr. Bernanke considers a significant spill, but what we got is more than your average Bounty paper towel can mop up.

According to Bernanke's assessment we are at the tail end of a minor spill, or are we?

Some of the comments made at the last Fed meeting certainly leave much room for concern. And when even Bernanke's outlook is less than rosy, there must be trouble looming. Let's take a look at what Ben had to say:

Fed statement:

'The staff did make modest downward adjustments to its projections for real GDP growth in response to unfavorable news on housing activity, unexpectedly weak spending by state and local governments, and a substantial reduction in the estimated level of household income in the second half of 2009.'

Interpretation:

GDP was lowered from its initial projection once again. Real estate (NYSEArca: IYR - News) remains the troubled sector and housing income is not recovering. Spending for consumer discretionary (NYSEArca: XLY - News) remains muted.

Much has been written about strategic mortgage defaults lately. Bank of American (NYSE: BAC - News) is fielding more than 125,000 calls a day from people seeking mortgage help. Hundreds of thousands haven't made a mortgage payment in more than a year.

That is hundreds of thousands of home-owners who decided that they won't pay the mortgage on an underwater home. The only way banks (NYSEArca: KBE - News) could motivate mortgage holders is to reduce the loan principal. If banks were to do just that, they'd have to report some $500 billion in losses, so they don't.

Meanwhile, the banks (NYSEArca: KRE - News) can successfully hide a big black hole, called shadow inventory while home-owners spend their mortgage money on the new iPad or flat screen TV. How does that affect GDP?

Fed statement:

'Real disposable personal income in January was virtually unchanged from a year earlier and would have been even lower in the absence of a substantial rise in federal transfer payments to households.'

Interpretation:

Despite massive government stimulus and billions of dollars freed up via strategic defaults, disposable income is the same as it was in January 2009. We look at the GDP and wonder how much of the Gross Domestic Product (GDP) is based on real economic growth?

By extension, it would be prudent to ask how much of the 75% gain in the S&P (SNP: ^GSPC), Dow Jones (DJI: ^DJI), Nasdaq (Nasdaq: ^IXIC), Russell 3000 (NYSEArca: IWV - News) and many other indexes is based on real growth? How much of the profits that financial corporations' (NYSEArca: XLF - News) are reporting are 'true' profits?

Fed statement:

'While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth.'

Even Mr. Bernanke expects household spending to remain constrained by weak labor conditions. The employment picture is the lynchpin for the U.S. economy. Without jobs, consumer spending won't see real growth, real estate will continue to fall and banks will continue to hoard money rather than lend money.

Perhaps you don't buy the whole 'new bull market' scenario but think that we could have a multi-year secular bull ahead of us. Let's see what we can learn from past secular bull markets.

Real or fake bull market?

As long as stocks (NYSEArca: VTI - News) go up, who cares if the rally is a real or fake bull? It doesn't matter until stocks go down. In a real bull market, stocks recover and continue rallying. In a fake bull market, stocks fall off the cliff.

But, even a fake bull market can last for several years. Take the 2002-07 bull market. The party went on for five years before the 2008 bear drew prices below the 2002 low.

Could this be another 2002-07-like rally?

Theoretically, it could. The optimism we see on Wall Street and in Washington has certainly returned. Now the administration and the Fed simply have to sort out who gets the credit for the recovery.

In fact, this is the same kind of sentiment that we saw in 1930. Right before the onset of the second leg of the Great Depression, President Hoover exclaimed the following:

'While the crash only took place six months ago, I am convinced we have now passed through the worst and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.'

Sorry, I went off track. But today's optimism does parallel the 1930s events. More importantly, many sentiment indicators have reached levels not seen since the last market top in 2007 or right before the technology (NYSEArca: XLK - News) bust in 2000.

If this is a 2002-07-like rally, however, the market will plow past those roadblocks and we have another couple years of rising prices ahead.

To see whether this might be the case, the May issue of the ETF Profit Strategy Newsletter compares today's corporate earnings, consumer confidence, Gross Domestic Product and employment picture with what we saw one year into the 2002-07 rally.

Even more important than past patterns are valuations. The ETF Profit Strategy Newsletter also looks at trustworthy and commonly used valuation metrics - P/E ratios, dividend yields, Dow (NYSEArca: DIA - News) measured in gold (NYSEArca: GLD - News) - and compares today's prices with valuations seen at historic market bottoms.

Having a 'glass half full' type of an attitude is not an investment strategy. It's simply an approach that renders you a genius in a bull market, but what happens when the market turns? Do you remember 2008?

Thursday, 22 April 2010

Don't Let This Mistake Weigh You Down

By Dan Caplinger

Say I gave you a choice between two stocks. Which would you pick?

* One has seen its share price more than double over the past 12 months.
* The other is down an average of 27% per year since April 2008.

The average investor would probably chase performance and go with the winning stock. Contrarian readers would see that that was the obvious pick and go the other way, arguing that the falling stock could possibly be a better value.

But actually, it's a trick question. Both choices refer to the same investment, Bank of America (NYSE: BAC), which has obviously seen a lot of movement both up and down since the beginning of the mortgage meltdown.

Weighing anchor
When you focus on a particular stock price or some other financial metric, you're doing something known as anchoring. Anchoring is a behavioral response to the seemingly random fluctuations of stock prices. In an effort to impose some order on those movements, we latch onto a specific point of reference, even if it's arbitrary and has no meaning to anyone else.

Anchoring can be collective or individual. Whether the Dow would hit 11,000 was something many investors paid attention to, even if Dow 11,000 doesn't really have any particular significance. But because a lot of people pay attention to milestones, the collective response to hitting one may actually make following them worthwhile -- at least for purposes of short-term investing decisions.

On the other hand, nearly all of us are guilty of creating individual anchor points. Sometimes, it's a high-water mark that a stock sets. For years after the bull market ended, investors pined at the tech-bubble highs that Dell (Nasdaq: DELL) and priceline.com (Nasdaq: PCLN) had set in 1999 and 2000. In doing so, they ignored deteriorating fundamentals, such as the slowing revenue growth and stagnant net income at Dell and the big drop in revenue at priceline.com that accompanied the tech bust.

Another common anchor point is the price you pay for a given stock. Given the exact same stock with the same financials behind it, shareholder behavior may be quite different depending on when investors bought the stock. Research has shown that if you're sitting on a loss, you're much more likely to try to ride it out in the hope that the stock recovers to your buy-in point. If you have a small gain on a stock, you're more likely to sell it in order to preserve profits -- but once you have a big gain, you may want to "let it ride" in hopes of even bigger profits.

A combination of those factors may explain part of the rally in Ford (NYSE: F) and Office Depot (NYSE: ODP). Despite all the great news that Ford has had lately, anyone who has owned shares since 2000 is still trying to make back losses, as the stock was 70% higher a decade ago. Office Depot shareholders are still down over 60% from 2005 levels, and the company continues to struggle against heavy competition. But anyone who bought those stocks at the market's lows of March 2009 have made so much profit that it would be almost impossible to lose money. So neither group has an incentive to sell, supporting shares as they climb higher.

Fighting the impulse
The key to avoiding the detrimental effects of anchoring is to pay more attention to actual fundamental events that have an impact on your stocks. In the case of Ford, for instance, analysis of whether Toyota's (NYSE: TM) woes will lead to increased Ford sales is a much better way to decide whether to buy or hold onto shares than a simple desire to see the stock match its 2000 level of $23. For Office Depot, the long-term success of Staples (Nasdaq: SPLS) represents a constant threat, and investors would be better served watching the industry's changing dynamics.

You won't be able to avoid anchoring entirely. Important calculations, such as taxable gains and losses, are based on numbers that will tend to make you think in terms of an anchor. But by being aware of potential mistakes that anchoring could lead to, you're much more likely to avoid them -- and make better investment decisions overall.

It's still a good time to buy stocks. Fool contributor Rex Moore has seven stocks that are headed in the right direction.

Wednesday, 21 April 2010

The great debate: Are stocks pricey?

By Carla Fried

(Money Magazine) -- Equities have soared more than 70% since last March, but they're still down 25% from their 2007 peak. Does that mean stocks are trading at a bargain, or has the recent rally made the market frothy again?

Well, that's at the center of a raging debate on Wall Street.

In one corner you have Yale economist Robert Shiller, who popularized a method of calculating the market's price/earnings ratio -- the most common gauge of valuing stocks -- using 10 years of historical, inflation-adjusted earnings.

Using this system, Shiller famously predicted the bursting of the tech bubble in the late 1990s.

Today the Shiller P/E says the market is less than half as expensive as it was back then. But at 21, this trusted gauge is signaling that stocks are again overvalued -- by as much as 30% -- after last year's stunning rise. And if history is any guide, this means there's a decent chance equities will deliver subpar annual gains of less than 4%, after inflation, over the next decade.

But is the Shiller P/E the right measure for this economy? Jeremy Siegel, a Wharton professor and perma-bull economist, says no.

In fact, the author of "Stocks for the Long Run" has publicly argued that the Shiller P/E isn't appropriate when the economy is pivoting from recession to growth -- as it is today. After all, even if 2010 earnings exceed expectations, that one year will be swamped by several years of unique profit setbacks.

Coming out of a recession, it's better to calculate P/Es using projected earnings over the next 12 months, Siegel has argued. And based on 2010 forecasts, Siegel thinks stocks could be selling at around a 20% discount to the historical norm -- a bullish sign.

Many market pros agree there's a drawback to Shiller's P/E today. S&P's Sam Stovall likens it to "a supertanker making a turn -- it's not going to tell you what you need to know about what is happening now."

But siding with Siegel and projected profits means "you're taking one set of predictions to make another prediction," says York University finance professor Dale Domian.

Fortunately, there's a compromise. Domian and Baylor finance professor William Reichenstein rely on the same 10 years of historical earnings Shiller does, which is their nod to the past. But rather than averaging the entire period, they pick out the highest peaks to calculate a P/E.

Their assumption -- which is a nod to the future -- is that corporate profits will at least get back to their prior-cycle highs. This method says that equities are fairly priced and could see annual gains of slightly more than 6%, after inflation, over the next decade.

Is that a better guess than one using Shiller's P/E? It depends on how fast earnings grow. Yet there are ways to position your portfolio to reflect a frothy market (in case the Shiller P/E is right) while capturing additional opportunities for growth (in case it's wrong).

Economic recovery

Strong Indications...
The Organization for Economic Cooperation and Development (OECD) released its monthly report on composite leading indicators (CLIs) for February, 2010. The CLI came in at 103.57, continuing a streak of higher readings since the bottom of the CLI in early 2009. The OECD noted the strongest readings in the United States and Japan, with weakness in France and Italy.

The purpose of a leading indicator series, as the name suggests, is to give an early sign of a turn in the economic cycle. The OECD said that the CLI usually turns up six to nine months before the economy itself turns up. Although this doesn't always hold true, and a turn in the economic cycle can fall outside that range, the latest data implies that we are already in a fairly strong recovery.

Railing the Competition
The Association of American Railroads reported in its monthly Rail Time Indicators report that U.S. freight railroads originated 1.4 million carloads in March 2010. The weekly average of 289,000 in March 2010 was the highest level since November 2008, and the first year over year increase since July 2008.

The number of carloads originated is still far below levels reached in 2006, when more than 340,000 carloads were originated, but at least the trend is in the right direction.

Obviously, this is good news for the railroad companies, including Union Pacific Corp (NYSE:UNP), CSX Corp (NYSE:CSX) and Norfolk Southern (NYSE:NSC). All three of these stocks are inching closer to all time highs reached in the summer of 2008.

Now Hiring
The American Staffing Association (ASA) reported that in March 2010, the ASA Staffing Index was 83, 15% higher than March 2009, and up 4% sequentially from February, 2010.

The ASA states that temporary employment is a leading indicator for non-farm payrolls by an average of three months during recession, and six months in times of normal economic growth. Once again, this index is far below levels reached in 2007, but the up trend is encouraging.

The Bottom Line
Commentary by managements on quarterly earnings conference calls has also been bullish on the economy. Patrick Pichette, the CFO of Google (Nasdaq:GOOG) said during the first quarter of 2010 conference call that the quarter was strong and that, "Large advertisers have come back in force versus last year, reflecting really an improved economy."

The doom and gloom crowd and the prediction of another downturn in economic activity get plenty of press, but economic statistics and anecdotal management commentary seem to contradict that prediction.

Tuesday, 20 April 2010

The Three Phases of Fed Tightening

by Jeremy Siegel

The Fed’s action to flood the financial system with liquidity in the wake of the Lehman bankruptcy has prevented another Great Depression. But the Fed’s job is far from over. As the economy recovers, Ben Bernanke must raise interest rates and withdraw the over $1 trillion of liquidity -- now located in the excess reserves of the banking system -- that he has created to shore up the financial system or risk a flare-up of inflation. This will become necessary because as the economy improves, the threat of inflation rises. Fortunately, the Fed now has a new tool to ease the economy and the financial system into a higher-interest-rate environment.

3 Steps to Normalization

The Fed has already taken its first steps to normalize policy. In February the Fed raised the discount rate 25 bps to 75 bps, putting it now 50 bps over the upper level of the 0 percent to 0.25 percent range the Fed has set for the Funds rate. Normally the discount rate is 100 bps above the funds target, but during the financial crisis the Fed wanted to make sure that banks had access to adequate reserves at cheap rates, and lowered the discount rate to 50 bps while increasing accessibility and the maturity of Fed lending.

With the proliferation of other Fed funding facilities, the Fed Funds market became less liquid and the volume of transactions decreased. To bring liquidity back to the funds market, the Fed must continue to raise the discount rate to 1.25 percent, restoring its normal relationship to the Fund target.

Phase II Tightening

The second stage of the normalization will be to raise the Fed funds target and simultaneously raise the interest the Fed pays on reserves.

The thought that the Fed might soon have to raise its policy rate sends chills down the spines of historians who have studied central banking. The mid 1930s were another period, just like today, when the banks held a massive quantity of excess reserves and interest rates were near zero. In order to prevent those reserves from fueling inflation, the Fed sharply raised reserve requirements on banks in July 1936 and again in January of 1937.

But, much to the Fed’s surprise, the banks wanted to keep those excess reserves and responded to the higher reserve requirements by calling in large quantities of loans to restore their reserve position. The decline in deposits and lending brought about a sharp recession and industrial production fell more than 30 percent.

In contrast to 1937, the Fed now has an additional monetary tool that greatly reduces the risk that mopping up excess reserves too early will cause a similar contraction. In October 2008, Congress granted the Fed power to pay interest on both required and excess reserves for the first time.

This new policy is a game changer. Before, the Fed could only raise interest rates by making reserves scarce relative to their demand. This was done by “open market sales,” or selling government bonds and debiting the reserve accounts of banks.
But now the Fed can maintain a large quantity of reserves to satisfy the banks’ desire for liquidity and still fight inflation by raising the interest rate that its pays on reserves in conjunction with the Fed Fund target. This will increase the demand for reserves and reduce the amount of reserves that need to be drained to achieve a given interest rate target.

Phase III of Tightening

But the Fed cannot forever use the interest rate on reserves as its only tool to raise rates. As the economy recovers, banks will want to lend out an increasing fraction of their reserves in the higher-yielding loan market. To prevent excess lending, the Fed must then mop up those excess reserves through traditional open market sales and raise the Fed Funds target well above the rate it pays on reserves. As the funds rate is raised above the rate paid on reserves, the quantity of reserves will decline and the Fed’s balance sheet will then shrink.

Time for Tightening Near

Although inflationary pressures appear quiescent now, the Fed should not delay raising interest rates for long. Several central banks have already been moving into a tightening mode. The Fed’s new tool gives them the opportunity to shrink their balance sheet gradually and allow banks to maintain excess reserves without suffering an undue rise in cost of doing so. When the recovery is well on its wayl, the Fed can then shrink its balance sheet by raising the funds target above the rate paid on reserves.

To be sure, raising rates will at first be painful for the capital market, but in the long run a Fed tightening is good for both the bond and stock markets. It is a signal that the Fed sees the recovery as sustainable and is serious about controlling inflation and maintaining the purchasing power of the dollar. This action will be especially welcome by foreign investors who have funded a large part of our recent deficits. The Fed must not squander its credibility as an inflation fighter and can now do so without unduly squeezing the financial system.

The money coach's playbook

By Christopher Tan
CEO, Providend

WHEN you hear: 'This time it's different', isn't it always a case of de ja vu?

Eighteen months ago, when the markets fell heavily in the last quarter of 2008, detractors of buy and hold strategy scorned at investors who adopted this approach of investing, saying that buy and hold is dead and suggested moving into cash.

Eighteen months later, this same sentence is heard again, in a totally opposite scenario. Singapore's property prices have sky rocketed and despite being warned against buying at ridiculous prices and borrowing at near unhealthy levels in a very low interest rate environment, the answer is the same: 'This time it's different.'

Actually, everything is still the same, whether with tulip bulbs in Holland during the 1630s, real estate bubble in Japan in the 1980s, the Internet stocks in the 1990s, the Singapore's property bubble in the mid 1990s, or the recent financial crisis in 2008/09. Just as contagious euphoria leads investors to take greater and greater risks, the same self-destructive behaviour leads many investors to throw in the towel and sell out near the market's bottom when pessimism is rampant and seems most convincing.

One of the many lessons that we have learnt in the recent melt-down is that while we can put in place a suitable plan for clients, the key to helping clients achieve their financial goals is to really ensure that they stick to the plan and not yield to greed or succumb to fear. The answer to this is money coaching.

In the world of money coaching, we believe that individuals have unconscious patterns, beliefs and behaviours around money that may prevent them from making correct life's decisions, especially financial decisions. As such, in order to help clients stick with their investment or financial plans, besides understanding their latest financial situation, it is important to understand these unconscious beliefs and patterns that made them who they are today. In money coaching, we categorised individuals into eight money archetypes.

The Innocent

The Innocent tends to take the ostrich approach to money matters. Innocents often live in denial, burying their heads in the sand so that they won't have to see what is going on around them. Innocents are easily overwhelmed by financial information and rely heavily on the advice and opinions of others. Innocents are perhaps the most trusting of all the money types.

The Victim

The Victim money type is prone to living in the past and may blame their financial woes on external factors. Victims generally have a litany of excuses for why they are not more successful and are often very attached to their 'story'. That is not to say that bad things haven't actually happened to the Victim. More often than not, Victim money types have been abused, betrayed, or have suffered some great loss.

The Creator/Artist

Creators/Artists are generally those who are on a spiritual or artistic path. They often find living in the material world difficult and frequently have a conflicted love/hate relationship with money. They love money for the freedom it buys them, yet they have little or no desire to participate in the material world.

The Martyr

Martyrs are so busy taking care of others' needs that they often neglect their own. Financially speaking, Martyrs generally do more for others than they do for themselves. They often rescue others (a child, spouse, friend, partner) from some circumstance or other. However, Martyrs do not always let go of what they give and are repeatedly let down when others fail to measure up to their expectations.

The Fool

The Fool plays by a different set of rules altogether. A gambler by nature, the Fool is always looking for a windfall of money by taking financial short-cuts. The Fool lives very much in the moment and is quite unattached to future outcome.

The Tyrant

Tyrants use money to control people, events, and circumstances. The Tyrant hoards money, using it to manipulate and control others. Although Tyrants may have everything they need or desire, they never feel complete, comfortable, or at peace. The Tyrant's greatest fear is loss of control.

The Warrior

The Warrior sets out to conquer the money world and is generally seen as successful in the business and financial worlds. Warriors are adept investors - focused, decisive, and in control. Although Warriors will listen to advisers, they make their own decisions and rely on their own instincts and resources to guide them.

The Magician

The Magician is the ideal money type. Armed with the knowledge of the past, the Magician has made peace with his personal history, and understands that his source of power exists within, in his ability to see and live the truth of who he is.

Money coaching then helps clients understand how their money types were formed and what they can do to change it.

I have a client who has both the archetype of an Innocent and a Victim. She is where she is today because she saw how speculating in stocks caused her father to be bankrupt and her parents' marriage broken. She had a terrible childhood as the family is always on the run from creditors. As a result, she has great fear in the risk of the equities market and tend to want to bail out whenever the markets go down, for fear of her own life reflecting that of her parents. So besides having written a financial plan, I put together a coaching programme that focuses on helping her understand how her money archetypes were formed and as a result, how it is affecting her investment decisions today. I am now coaching her to slowly change her archetype to that of a Warrior-Magician, and also understanding what investing really is and how she can cope with market volatility so as to stay invested and keep investing.

I strongly believe that a key ingredient to our clients' financial success is money coaching. As advisers, we can put up the most suitable plan and find the most suitable instruments for our clients. But if we cannot get our clients to stick on to their plans, we cannot help them reach their investment goals. As a professional firm, we have invested in building up this skill. Money coaching is a very powerful process that provides profound insights into clients' money patterns and behaviours, and invaluable tools for understanding and managing their financial needs and thus, fulfilling their long-term financial goals.


Sunday, 18 April 2010

I think SEC doesn't have strong fact. Goldman created a product, a collateralized debt obligation, for hedge fund Paulson & Co., which “at the time wasn’t known as a particularly smart client,” , that allowed for a bet against the value of housing. To make sure the product was vetted ahead of its sale, Goldman hired an independent company, ACA Management, to do just that. And they released a report telling potential buyers exactly what was in there.

Now, I would never have bought the CDO, but not everyone was as bearish on housing as he was in late 2006, which is when the product was put together. Though we could see how less informed clients may have found it attractive. But in the end, no one forced people to buy this CDO. And “a *censored* was born the minute the trade was made,” “and the loss booked soon after.”

So did Goldman do something illegal when it vetted the product, letting everyone know what was in it? Or was the buyer just plain stupid for wanting it in the first place?

“I think the latter,”
We likened the situation to the tech boom of the late ‘90s. If someone created a similar product to bet against these stocks, it would have been an entirely legal, but losing proposition until 2000. It was only after that run that the bet would have paid off. Well, housing was exactly like that, , going into 2007. And the buyer of this CDO fully expected to continue making money, only to be shocked awake when the market collapsed. Now Paulson & Co. is known as a house of genius, while the people who went long on housing are the fools.

We learned today that Goldman sunk $90 million of its own money into the CDO. While We are not sure if that absolves the company, we know one thing: The SEC is under tremendous pressure to bring cases against Wall Street right now. And we know that Democrats in Washington are fighting for financial reform. So this is a great time to bring this case before the public and punish the firm perceived as the most arrogant and least reformed in the room.

Goldman Sachs Makes Further Comments on SEC Complaint

New York, April 16, 2010 - The Goldman Sachs Group, Inc. (NYSE: GS) said today:We are disappointed that the SEC would bring this action related to a single transaction in the face of an extensive record which establishes that the accusations are unfounded in law and fact.

We want to emphasize the following four critical points which were missing from the SEC’s complaint.

• Goldman Sachs Lost Money On The Transaction. Goldman Sachs, itself, lost more than $90 million. Our fee was $15 million. We were subject to losses and we did not structure a portfolio that was designed to lose money.

• Extensive Disclosure Was Provided. IKB, a large German Bank and sophisticated CDO market participant and ACA Capital Management, the two investors, were provided extensive information about the underlying mortgage securities. The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side.

• ACA, the Largest Investor, Selected The Portfolio. The portfolio of mortgage backed securities in this investment was selected by an independent and experienced portfolio selection agent after a series of discussions, including with Paulson & Co., which were entirely typical of these types of transactions. ACA had the largest exposure to the transaction, investing $951 million. It had an obligation and every incentive to select appropriate securities.

• Goldman Sachs Never Represented to ACA That Paulson Was Going To Be A Long Investor. The SEC’s complaint accuses the firm of fraud because it didn’t disclose to one party of the transaction who was on the other side of that transaction. As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor.

Background

In 2006, Paulson & Co. indicated its interest in positioning itself for a decline in housing prices. The firm structured a synthetic CDO through which Paulson benefitted from a decline in the value of the underlying securities. Those on the other side of the transaction, IKB and ACA Capital Management, the portfolio selection agent, would benefit from an increase in the value of the securities. ACA had a long established track record as a CDO manager, having 26 separate transactions before the transaction. Goldman Sachs retained a significant residual long risk position in the transaction

IKB, ACA and Paulson all provided their input regarding the composition of the underlying securities. ACA ultimately and independently approved the selection of 90 Residential Mortgage Backed Securities, which it stood behind as the portfolio selection agent and the largest investor in the transaction.

The offering documents for the transaction included every underlying mortgage security. The offering documents for each of these RMBS in turn disclosed the various categories of information required by the SEC, including detailed information concerning the mortgages held by the trust that issued the RMBS.

Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities ended in the reference portfolio or how they were selected.

The transaction was not created as a way for Goldman Sachs to short the subprime market. To the contrary, Goldman Sachs’s substantial long position in the transaction lost money for the firm.

The Goldman Sachs Group, Inc. is a leading global investment banking, securities and investment management firm that provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high-net-worth individuals. Founded in 1869, the firm is headquartered in New York and maintains offices in London, Frankfurt, Tokyo, Hong Kong and other major financial centers around the world.

Saturday, 17 April 2010

Here's What Day Traders Don't Understand

Henry Blodget

As we explained earlier, day-trading is one of the dumbest : According to one academic study, 4 out of 5 people who do it lose money and only 1 in 100 do it well enough to be described as "predictably profitable."

Most of the folks who do it, in other words, would be far better off working at Burger King.

As is often the case when we bring up these facts, some readers screamed. One said that our brain-damage was made patently obvious by the fact that Wall Street professionals day-trade all day. If day-trading were so dumb, then why would professionals do it?

Here's what that particular reader is missing:

Most Wall Street traders get paid to day-trade other people's money.*

That's a huge difference compared to what most stay-at-home day-traders do.

The average professional trader gets paid somewhere between 1% and 3% of assets per year just to trade those assets all day. The average hedge-fund trader gets paid another 20% on top of that for any "gains" he or she makes (regardless of whether the gains are the result of the trader's trading or the bull market).

The average stay-at-home day-trader, meanwhile, trades his or her own money. And while many of these traders do fine on a gross basis (before costs), once the costs of this trading are deducted (commissions, taxes, research and information, time), their performance is usually downright awful.

The reason so many professionals day-trade, in other words, is that getting paid to day-trade other people's money is one of the best businesses in the world.

Day-trading your OWN money, meanwhile, is one of the worst.

* There's another difference, too, of course: Most Wall Street traders have skills, information, and tools that day-traders can only dream of. Trading is a zero-sum game: Market moves aside, every dollar won by one trader comes out of the pocket of another trader. Day traders competing against Wall Streeters is the equivalent of a college football team (or Pee Wee team, depending on the day-trader's skill) competing against a pro team. Is it possible to win? Yes. But it's highly unlikely (1 in 100). Wall Street's winnings do have to come from somewhere, though, so Wall Street thanks the day traders for playing.

Friday, 16 April 2010

Commodities Rally "Just the Tip of the Iceberg," Tom Lydon Says

With exports rising 55% to $737 million in the first quarter, China surpassed the U.S. as the number one market for polished diamonds from Europe's diamond capital -- Antwerp, Belgium, The Wall Street Journal reports.

That, in a nutshell (or maybe a Tiffany setting) explains why we've only seen "just the tip of the iceberg" for commodities demand, according to Tom Lydon, president of Global Trends Investments and editor of ETFtrends.com.

"The average citizen in China who now has an opportunity to make money - the first thing they're doing after buying a cell phone is buying a gold necklace," Lydon says. "There's that inherent demand in many of these emerging market countries as we have more and more people moving up to the middle class and having discretionary income."

For now, he recommends and is long gold mining ETFs such as the SPDR Metals & Mining (XME) and Market Vextors Gold Miners (GDS) vs. ETFs like the SPDR Gold Shares (GLD) that invest in the metal itself. "I don't think we're going to see another double in gold prices," Lydon says. "But it takes the average miner $275 to get an ounce of gold out of the ground; if it sells at $1150 per ounce that's a pretty big profit margin. The same is true for silver and copper."

Lydon also recommends non-precious and less-widely discussed metals such as platinum and palladium, for which there are relatively new ETFs trading under the symbols PPLT and PALL, respectively.

"The pure demand as far as metals and energy with growth we're seeing in emerging markets is huge," he says.

(Gold was rallying and solidly above $1150 Wednesday afternoon as the dollar slid following Ben Bernanke's testimony and Singapore's currency revaluation; copper was trading at its highest level since July 2008 while palladium was at a 2-year high, Reuters reports.)

Having said all that, Lydon acknowledges that speculation in commodities can sometimes outstrip fundamentals as we saw in the summer of 2008 when oil surged to $147 and a lot of investment dollars were summarily vaporized. With more investment managers allocating assets to commodities and more ETFs available for individuals to play the trend, this "boom and bust" cycle is likely to repeat itself in the coming years, even as the broader trends point to higher long-term prices.

Could China's real estate bubble burst?

It may be the world's last real estate bubble, one that is still inflating rapidly. And its end could become the "pop" heard 'round the world.

A growing number of economists are worried that a bubble in Chinese real estate has the potential to rattle the world economy that is still struggling to recover from the shock of 2008's global meltdown.

Soaring real estate prices in China's coastal cities, with prices rising as much as 50% a year, have lifted some rents to levels comparable to Manhattan and driven a building boom of luxury apartments and office space many fear far outstrips demand. "China is clearly in an asset bubble. It's almost like it didn't learn its lesson," said Nariman Behravesh, chief economist for HIS Global Insight. That rapid growth in real estate has led to 10% annual economic growth in China. Among the world's major economies, China is alone in surging at a blistering pace -- a nearly 12% growth rate in the first quarter of 2010. And when the bubble bursts, naysayers warn, the results could be felt far outside China's borders. Developed economies like Germany, Japan and the United States have become more dependant on China's consumer spending and growing middle class. If that growth is wiped out by a bubble bursting there, a major driver in global economic growth will vanish. "There are so many economies that are benefiting from rapid growth of exports to China," said China expert John Makin, a visiting scholar at the American Enterprise Institute. "If that were to suddenly slow, that's a big impact. If they handle it badly, it has the potential to even risk a global double dip recession. I don't think that will happen, but China's record in the area is not great."

Fear of the unknown

Those worried about the bubble say if China's real estate boom disappears, so will the economic growth that the world has been counting on.

"The problem is the housing they're building is not the housing they need. They're building luxury high rises the masses can't afford," said short seller Jim Chanos, the head of Kynkyos Associates hedge fund and one of the most prominent bears about the future of the Chinese economy. "When it pops, there's clearly going to be knock-on effects we can't see right now." While China's government limits foreign banks from doing business there, a lack of transparency in the Chinese banking system has led to plenty of debate about the extent to which foreign banks are invested there. "I think the limits on their market access are actually helpful in this case, but [big western banks] will find ways around them," said Simon Johnson, a professor at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. "Our banks, when they get into trouble, will have to be bailed out again, and that'll be enormously costly."

While there's a growing consensus that there is a real estate bubble in China, not all are worried about ripple effects. Some economists like Behravesh believe that the impact on the United States and Europe will be relatively minimal.

Chanos believes that countries with economies heavily dependant on exporting commodities to China, like Australia and Brazil, are far more at risk than the developed economies in North America and Europe.

Smoke and mirrors

There are economists who aren't worried about a bubble in Chinese real estate. They argue that China's central government is better positioned to deflate a bubble than were the western economies that ignored signs of real estate bubbles in their own countries.

"You can obviously find some parts of China that frothed up at the end of last year into this year," said Anthony Michael, head of Asian fixed income for Aberdeen Asset Management. "But the Chinese government knows this. They're not sitting around doing nothing. They're already telling banks not to lend in cities that are involved in excess development."

Michael also argues that the Chinese real estate boom has taken place with only a fraction of the level of borrowing that occurred in the United States and other western economies, where buyers were borrowing 100% or more of the property's value.

But Chanos and other critics counter that the level of borrowing fueling the Chinese real estate market is far greater than is widely reported. And he says China's real estate bubble could not have grown without the approval of China's government, and that a command economy like China is actually more susceptible to bubbles than a market economy.

"The Soviet Union grew well above U.S. growth rates for 20 to 30 years after World War II," said Chanos. "It was a phony growth, capital projects that proved to be very inefficient."

Thursday, 15 April 2010

Why Traders Fail

Courtesy of Conrad Alvin Lim
Link to original article: http://www.conradalvinlim.com/?p=2422

This lesson looks at the most popular reason why most Traders get wiped out – The Hype

Through the years, trading has always been a pipe dream for most who wanted to get filthy rich. With the advancements in technology over the last decade, this pipe dream has been brought closer to home than ever before. Today, it is a very accessible dream to anyone and everyone. All you need is a computer and an internet connection.

And of course, you need the right kind of market.

This is where the hype starts. We have been over-exposed to all sorts of advertising and promotional rah-rah that makes us believe that it is actually possible to make that fortune a reality. We see ads with winners making really fantastic profits from a single trade and we hear of friends who make a living from trading and living the good life. We see the rich and famous on TV that have made fortunes in the market. We read about people making fortunes from the comfort of their homes.

We believe we can be one of them. Worse, we believe it is really that easy.

What we don’t see in most cases is the real ugly truth. We don’t get to see losers, we never see the many hundreds or thousands that get wiped out and we definitely never hear what happens to the few winners when the market turns.

We never get to see how difficult it is for those successful few to make that living. We don’t see how much studying, hard work and endless hours of practice it takes to achieve that “easy” life. We definitely don’t hear about how much losses were accrued before the wealth accumulation started.

When the market is rallying at full steam, you always get to see new gurus hyping up their courses, authors of all sorts publishing their version of making a fortune from the market and everyone rushing to brokerages to get an account open. Workshops of all kinds will be touting their software that makes profits without the trader having to put in much effort. Some gurus will adapt their classes to ride the trend of the market – if Options is the way to go, you’ll get Options teachers by the dozens … if Forex is the flavor of the trend, then that’s what you’ll get lots of.

The market in itself is a hype. When everything is running up the charts, it is so easy to make money from the market. Everyone seems to be getting in on the action when a bull run is in full steam. The hype worsens as these bull-run winners put more money into the market to help the rally climb even higher. Pretty much like what is happening in our property market today. The aunties and uncles at the coffee shop also seem to have the best tips and everyone in the neighborhood is an expert at stock picking.

Scandals also abound when the market is in full hype. Hedge funds and pillion-trading are two of the many ways these scandals begin. In some recent cases, the owner of the fund or hedge starts spending the money even before the fund is profitable. This adds to the hype. We see fund managers driving fancy sports cars and living it up in penthouse condos and sprawling landed properties. Everyone wants that life and the market can give it to you.

So the average Joe, or in our case, Ah Seng, joins the hype bandwagon and puts his hard earned money into a few bets in the market. It makes money for sure. The bull run continues. So Ah Seng buys more and grows his wealth. He tells his friend, Ah Huat about it and he joins the bandwagon. Soon, the market is flooded with Ah Sengs and Ah Huats who know little about the danger they just got themselves into.

The fact is, the market had already been running up like mad which is where all the hype came from. By the time the new gurus, workshops and books emerge, the rally is almost always halfway there. This is when the aunties and uncles get wind of the easy money and this brings on the Sengs and Huats. Next thing you know, the market is over-cooked. Yet it continues to rally, albeit on suspiciously lower volumes.

The lower volumes are an indication that the smart money is already sidelined and waiting for the inevitable. The smart money knows when to get out and stay out. They know because the ignorant money has started to flood the market.

When the market is greedy, you should be fearful.” ~ Warren Buffet

Then the inevitable happens – the market stutters and falters … the easy money slows down … volatility begins to rule the market … the ignorant money slowly realize that they have left their arses hanging in the wind without protection. But they’ll continue to live in denial because of the hype.

The market slides south. But not in a hyped-up crash, mind you. The market is a sneaky place that gives you more rope than you need to hang yourself repeatedly. It takes a slow and steady slide with the occasional bull-trap to keep the ignorant money believing that the correction is a “normal” thing in this business. After a brief reprieve to bring hope to those living in denial and possibly bring in more ignorant money, the market continues its sneaky slide south. This goes on for a while and before the ignorant money realizes it, more than half the investment is down the toilet.

By this time, some of the gurus quietly “disappear” from the press, some workshops cease to exist, software traders start complaining that the system is not working as promised, fund managers appear in the news for the wrong reasons and my class starts filling out with dozens of traders looking for a fix and a more realistic way to survive the market.

The market gets down to an impossible low. Gone is the hype and all that came with it. In its wake, it leaves a massive trail of destroyed lives and emptied bank accounts. The market is now “a dangerous place” when it was once a dream maker. The market is a “casino” when it was once an ATM. When the hype is all gone along with the money, people get serious and stay away from the market.

This is when the smart money returns.

And this starts a new hype cycle that brings in the new ignorant money.

The question you should be asking is not; “when will the ignorant money start to suffer?
If you thought of asking that question, YOU are the ignorant money.

The only question you should be asking is; “How do I become the Smart Money?

New Ways to Read Economy

by Cari Tuna

Experts Scour Oddball Data for Trends Ahead of Official Releases

When the city's top economist needs a rough prediction of sales tax revenues, he watches the number of subway passengers emerging from the Powell Street Station on Saturdays.

Ted Egan, chief economist in the San Francisco Controller's Office, said he could wait six months for California to release the detailed sales-tax data he needs for city revenue projections. But it's quicker to look at passenger tallies from the station closest to the Union Square shopping district, which generates roughly 10% of the city's sales-tax revenue. The Bay Area Rapid Transit District releases the data within three days, he said: "Why should I have to wait?"

Mr. Egan is among a growing number of economists and urban planners who scour for economic clues in unconventional urban data—oddball measures of how people are moving, spending and working.

Broadway ticket sales are a favorite indicator for the chief economist of the New York City Economic Development Corp., Francesco Brindisi. He says they are a good gauge of city tourism.

In Jacksonville, Fla., community planner Ben Warner keeps tabs on calls to the city's 2-1-1 hotline for social services. Since late 2008, he has seen spikes in calls for help with food, housing, utilities payments and suicide prevention. It is "direct, real-time monitoring of the economic and social situation," he said.

At an economic briefing at San Francisco City Hall last month for officials and industry experts, Mr. Egan flashed slides of traditional indicators, along with the number of customers at parking garages near Union Square and average rents for one-bedroom apartments advertised on Craigslist.

Mr. Egan's parking and rent indicators bottomed out last year and are beginning to trend upward, suggesting the local economy isn't getting much worse. "It's not an exact science," he said. But when it comes to data, he said, "more is almost always better than less."

The focus by economic prognosticators on urban data follows a history of seeking nontraditional signs of impending boom or bust. For instance, some economists consider cardboard-box production a leading indicator of economic activity.

But the newest offbeat indicators, made possible by improving systems for collecting and disseminating data, are painting even timelier and more geographically specific pictures of economic forces, economists say.

One rich repository of predictive data is Web searches, said Hal Varian, Google Inc.'s chief economist. Jumps in such queries as "unemployment office" and "jobs" can help predict increases in initial jobless claims, he said. Other search terms, he added, can anticipate traditional data on travel behavior and sales of cars and homes.

Some economists warn that urban data often are newer and more volatile than traditional indicators, making them harder to incorporate into analysis and forecasts. "I'll look at it, but I discount it very, very significantly," says Mark Zandi, chief economist at Moody's Analytics.

But sometimes, new indicators are more reliable than conventional ones, said Edward Leamer, an economist at the University of California, Los Angeles. He swears by diesel fuel sales, for example.

UCLA's Anderson School of Management recently teamed up with Ceridian Corp., a payments and payroll company, to collect data on diesel purchases by truckers nationwide. The data anticipate increases in U.S. industrial production and gross domestic product, said Mr. Leamer, director of the school's economic-forecasting group.

Mr. Leamer discovered that truckers' diesel purchases on Interstate Highway 5 from California to Oregon, a major timber-trucking route, are a leading indicator of construction employment in California. Diesel sales on Interstate Highway 80 from Sacramento to Salt Lake City, a trucking route for the San Francisco Bay area's manufactured goods, can help predict California's manufacturing employment, he said.

If only he had the diesel-fuel data in the first half of 2008, when major government-issued indicators failed to hint at the U.S. economy's impending downward spiral. At the time, Mr. Leamer said, UCLA forecasters chose not to announce a recession because GDP was still growing and the Bureau of Labor Statistics was reporting relatively mild job losses.

Bad call. The government later revised the GDP and jobs data downward, and the National Bureau of Economic Research concluded that the recession started in December 2007. The jobs data are unreliable because they are based on sample surveys and don't adequately capture company openings and closings, Mr. Leamer said in hindsight.

When the UCLA economists reviewed the fuel-purchases data late last year, they saw diesel buying had peaked in mid-2007, indicating that fewer goods were being made and moved across the country in the months after. "Had we been aware of that data in 2008," Mr. Leamer said, "we would have made a different call."


6 Investing Strategies for Retiree Wannabes

by Diana Ransom

Having shaken off the jitters, many investors have either re-entered the stock market or upped their exposure in recent weeks. But for retirees or folks nearing retirement age, simply exiting safer investments such as bonds and certificates of deposits might not be the best strategy.

Some clearly are seeking to recoup losses suffered during the downturn. According to a recent survey by Charles Schwab & Co., in the first quarter of 2010, 46% of investors were focused on growing their retirement savings, while just 29% aimed for protecting their savings. (There is no comparable earlier study). Further, Schwab reports its advisors have to spend less time reassuring their clients these days. This past January, just 31% of investment advisors reported needing to reassure clients about the stock market, down from 49% a year earlier, according to a separate survey.

Fueling the confidence: the belief that the economy is in the early stages of recovery -- not to mention that share prices are still 20% to 25% below where they were before the downturn hit, says Jeff Layman, the chief investment officer at BKD Wealth Advisors in Springfield, Mo.

The question is whether the market has moved too far, too fast -- and if some investors are overly exuberant. "There is a tremendous amount of uncertainty in the environment still," says Layman. Between the extreme market movements in the last two years and the government's expanding debt load, today's investment mantra should more closely resemble cautious optimism rather than overconfidence, he says.

So what should investors itching to recoup their lost retirement dollars do? Here are six investment suggestions:

Retain Some Stock Exposure

As Layman points out, share-price valuations are still low despite the recent stock market rally. In addition, during the downturn companies across the board trimmed costs and boosted productivity -- putting them in prime earnings expansion territory, says Jim Scheinberg, a managing partner at the Culver City, Calif., investment advisory firm North Pier Fiduciary Management. "For five quarters in a row, Wall Street has beat analysts' expectations 50% of the time," he says. Today, companies are largely positioned for earnings growth as revenues start to increase.

Overweight Big-Cap Stocks

Stephanie Rossi, a wealth advisor at AMTD, suggests favoring large-company stocks over those of smaller firms. While "anything is possible," she says, "large companies will be able to recover quicker than small companies." Upon exiting a recession, other factors like technological innovations and human ingenuity kick in.Â

Plan for Bear Markets

Still, as an investor in the stock market, you have to keep in mind that bear markets are inevitable, says Layman. Although it's tempting to bail out completely -- especially after going through two harsh bear markets in a decade -- you likely need to have some exposure to stocks to both reel in returns and beat inflation. "The key is to reach an asset mix that will allow you to sleep at night -- and weather another bear market," he says. "Even the most conservative investors should have at least 25% to 30% invested in stocks."

Be Sure to Diversify

The rest of your portfolio should amount to a mix of fixed income and international investments, say advisors. In the last year and a half, Layman's firm BKD Wealth Advisors shifted its portfolios further into global investments. Specifically, the company has moved from 25% international exposure to 38% today. "We believe that growth in the margins will come from outside the U.S.," he says. "Thinking more globally is very important to investment diversity."

Balance Out Your Portfolio With Bonds

Another investment vehicle that still has legs: bonds. Since the downturn, investors have largely flocked to corporate debt, which caused prices to rise as bond yields dropped. Bill Walsh, a co-founder of advisory firm Hennion & Walsh in Parsippany, N.J., thinks there's still upside in the fixed-income favorite. Specifically, for investors in higher tax brackets, he suggests municipal bonds, which are generally tax free. Those in lower tax brackets might be better off with taxable bonds that offer higher yields, he says.

Buy Bonds With Short Shelf Lives

Steer clear of long-term bonds, though, says Scheinberg. If inflation escalates, which is a definite possibility considering the size of the federal deficit, you won't want to be stuck in an investment where the market will demand higher yields that your bond is paying, he says. Once inflation hits, it's a no-win scenario for long-term bonds.

Copyrighted, SmartMoney.com. All Rights Reserved.

Wednesday, 14 April 2010

That Was Then, This Is Now

by Daisy Maxey

In November, we asked a panel of financial advisers for their 2010 recommendations. We caught up with them recently to see if they have changed their minds.

It has been an eventful five months. The continuing stock-market rally, passage of the health-care bill, financial troubles in Greece -- to name just a few of the most obvious events. In light of it all, we thought it would be interesting to return to a panel of financial advisers we had convened in November to get their recommendations for 2010. We wanted to know: Have they changed their minds about anything?

Here's what they said.

William T. Baldwin, president and co-founder of Pillar Financial Advisors in Waltham, Mass.

In November, Mr. Baldwin said he was recommending more conservative equity allocations than in the past. Because the market has gained since then, some of his clients now tend to be more willing to take risk. But Mr. Baldwin said he doesn't believe it's the time to change that conservative stance.

In the fall, he also said that the "easy pickings" in the bond market were over and that he was moving clients into high-quality taxable or municipal portfolios. That's still true, he says. But, due to higher tax rates on high earners taking effect in 2011, he now foresees even more demand for tax-exempt municipals this year and next. As a result, he's advising clients to invest ahead of that demand for municipals.

In November, Mr. Baldwin said he was emphasizing investments outside the U.S. Overall, that's still true, he says. But he didn't foresee the problems that Greece, Italy, Portugal, Spain and Ireland now face, and the decline of the euro. So, he has held off on investments in Europe.

Richard L. Bellmer, president of Deerfield Financial Advisors Inc. in Indianapolis.

In November, Mr. Bellmer was hopeful. Today, he says, he's downright optimistic. The news that has come out since November, including earnings results, has gotten better, and continues to get better.

After 2010, he says, it's a different story. In the fall, Mr. Bellmer was concerned about the impact of taxes and interest-rate increases moving into 2011. Since then, with the passage of the health-care overhaul and the tax increases to kick in next year, his concerns have only grown.

"The headwinds are coming at us, and we better figure out what we're going to do," he says. He feels he has six months to decide whether he needs to make any investment changes based on that forecast.

Mr. Bellmer continues to allocate client money to corporate bond funds and commodities, as he did in the fall, but he's now re-evaluating. In addition, he hasn't moved into any new investment areas since November, but is exploring some -- including farmland. It provides "a decent income," and prices are down at this point, he says.

Michael Joyce, founder and president of Joyce Payne Partners in Richmond, Va.

Since November, Mr. Joyce says, he has increased modestly his recommended exposure to high-quality, large-cap, dividend-paying stocks. He also has increased his recommended exposure to technology stocks, although focused on quality names. He expects businesses to increase their spending on technology, as more companies try to drive productivity without hiring. In addition, many corporations are now in an inventory replacement cycle, he said.

The concerns facing many longer-term, tax-free municipal bonds worried him in November, and are an even bigger concern now, Mr. Joyce says. On top of other issues and fiscal stresses facing states and municipalities, the issue of municipalities' unfunded liabilities "is just starting to rear its head," he says. As a result, he's focusing on municipal bonds that have shorter-term maturities and are essential-service revenue bonds, such as water- or sewer-revenue bonds.

Diahann W. Lassus, president and co-founder of Lassus Wherley & Associates in New Providence, N.J.

Ms. Lassus is still advising clients to rebalance out of bonds and into stocks, but says she's more apt to accomplish that now by cutting short-term bond funds rather than intermediate-term bond funds. Since short-term rates haven't yet moved up and intermediate rates have, the short-term funds pose more principal risk, she says.

Ms. Lassus was wary of commodities in November, because she expected them to be affected by rising interest rates and a strengthening dollar. She's now maintaining an even more limited exposure.

In addition, in November, Ms. Lassus was buying Treasury inflation-protected securities as insurance against eventual inflation. That remains her stance today, though the price of TIPS has edged down, giving her an opportunity to gradually increase that exposure, she says.

Thomas Orecchio, president and principal of Modera Wealth Management in Westwood, N.J.

Mr. Orecchio says that the basic advice he gave to clients is essentially the same advice he is giving today -- with some "modifications."

Among them, he says, he is "out a little longer on the yield curve with investment-grade bonds. Since intermediate bonds are already starting at higher yields, there is potentially more downside protection than in short bonds if the Fed raises short rates soon."

In addition, he is advising most clients to keep their current equity exposure. Further, he says, "we have recommended that all of our clients keep sufficient cash on hand to weather any correction in the stock markets."

Goldman Sachs Information, Comments, Opinions and Facts