Wednesday, August 31, 2011

Is The Yield Curve Telling Us Everything Will Be Ok?

Treasurys' Curve Ball: Yield Spread Hints at Growth Optimism .

Probably not. One of the side effects you get when you start messing around with free markets are all sorts of distortions. The Fed can bring short term interest rates to zero but they don't have as much influence on long term rates. This is the danger you can run into relying on indicators that sometimes are predictive.

Tuesday, August 30, 2011

The Perils of Fighting the Trend

Pimco's Gross Has 'Lost Sleep' Over Bad Bets .

Longer term Bill Gross will probably be right, Treasury yields are extremely low and you are not really getting compensated for the risk or inflation. In a rational world 3.5% 30 yr Treasury bonds do not make sense but in the shorter and intermediate term the technicals can eclipse the fundamentals. The Wall Street graveyard is littered with traders and money managers who tried to go against the trend. Remember the famous quote by John Maynard Keynes----"The markets can remain irrational longer than you can remain insolvent"

Monday, August 29, 2011

The Right Way to Create a "Black Swan" Strategy

How to make a black-swan tactic fly
This is not the right way.

Buying out of the money puts costs you money until the market goes down, if you hit a period like 1982-99 that stinks. The right way is to create a basket of "safe haven" assets like gold, Swiss Franc, Treasuries, etc. You can also put in some stock fund or ETFs. Then trade the basket using a trend following approach. This will have you in safe haven assets at some point during a downturn and in the stock stuff in a sustained up trend in stocks. It probably will not make a killing in a down year but it should protect assets and it can make money during up years.

Friday, August 26, 2011

Anyone Who Still Believes That Wall Street Analysts Can Produce Unbiased Advice I Have a Bridge in Brooklyn to Sell You

AIG Gets Tough on Analyst Views


Lets assume for a moment that research analysts can actually predict what stocks to buy and what stocks to sell. The bottom line is, and will always be, research is not a profit center, investment banking is. Do you want to be the research analyst who blew your firm's chance to get in on investment banking business with AIG come bonus time?

Thursday, August 25, 2011

The Pitfalls of Automatic Portfolio Rebalancing

Was just quoted in the Franklin Prosperity Report on portfolio rebalancing. I would provide you a link to the quote but I sent them my headshot to go along with the quote. There must have been a mixup, they got the quote right but put in someone elses headshot. Below is the quote:

The Pitfalls of Automatic Portfolio Rebalancing
If you participate in a 401(k) or other retirement account, you may have
been given the option to have your portfolio “automatically rebalanced” for
you at set junctures, such as quarterly or yearly.
The idea behind rebalancing is to minimize investing risk by reverting the
balance of stocks and bonds to percentages you initially set, based on
your time horizon to retirement (generally heavier on stocks when you are
younger, more bonds as you age).
For instance, if your portfolio holds 50 percent
stocks and 50 percent bonds, your stock-to-bond
ratio may have shifted to 60 percent stocks and
40 percent bonds during years when the stock
market is rising and equity values appreciate.
Traditional rebalancing basically forces
you to take the profits you made from equities
and use them to buy more bonds, thus achieving that initial 50-50 ratio.
The question is: Should you agree to have your portfolio rebalanced
automatically?
Absolutely not, says Matthew Tuttle, CFP, MBA, CEO of Tuttle Wealth
Management in Stamford, Conn. “Automatic portfolio rebalancing is stupid,”
Tuttle says. “The idea that you’d rebalance a portfolio based on a calendar
date to me is kind of crazy.”
The correct way to rebalance is to understand the underlying market dynamics
and act accordingly. “The key to safety is staying in harmony with the
major market trends,” Tuttle says. “So, if you see that those trends are
favoring small caps over large caps, you overweight small caps; if stocks
are doing better than bonds, you overweight stocks. To me, age has very
little to do with it.”
Nor does Tuttle like the method of portfolio rebalancing that calls for
investors to increase the portfolio percentage of bonds as they move closer
to retirement.
“Conventional wisdom says that, as investors get close to 65, they should
have most of their portfolios in bonds,” Tuttle says. “That pretty much
guarantees that, at age 80, you’re going to be working at Walmart, because
life expectancy is increasing. I’m going to my grandmother’s 96th birthday
party next month.”
Shifting almost everything to bonds as you age is risky because rising
interest rates will bring capital losses and because bonds don’t keep pace
with inflation, Tuttle says.

Never Underestimate How Wrong Everyone Else Can Be

Watching CNBC this morning and some guy they were interviewing had one of the best quotes I have ever heard--"Never underestimate how wrong everyone else can be". A lot of people make their investment decisions by getting recommendations from the so called "smart money" the problem with that is that these people are often wrong, sometimes very wrong. As I write this post people are debating over what Bernanke will say tomorrow, what Buffett buying into BOA means, what Steve Jobs leaving Apple means, etc. All of this is just noise if you just stay in harmony with the trends in the markets.

Wednesday, August 24, 2011

Confusion

Just heard CNBC talking about how the portfolio managers they are talking to are confused. Not sure what is so confusing---stocks and many commodities are in a downtrend and Gold and Bonds are in an uptrend. During any uptrend or downtrend you will see reversals---simple as that. You get confused when you try to look at what is going on and predict the market. What is the market going to do today, tomorrow, the next day? I have no idea. But I do know that stock are in a downtrend and that investors need to treat them that way until the trend changes.

Monday, August 22, 2011

No You Can't Catch a Falling Knife

Two weeks ago I had to rush my 8yr old to the emergency room. Somehow he had managed to knock a knife out of the rack and instinctively tried to catch it. A lot of blood and two stitches later he learned a valuable lesson about life and investing----you cannot catch a falling knife. Today I had CNBC on in the background and heard them ask someone that since emerging markets are down about 20% is now a good time to buy? I would not be surprised if they had similar segments when emerging markets were down 5%, 10%, and 15%, and will have another one if they go down 25%.

If you are a long term investor and want exposure to emerging markets then now is a better time to buy than 20% ago was, but if you are a long term investor you also haven't made any money in 10 years so you may want to rethink that. If you can accurately call the bottom you can also make a lot of money, but if you can accurately call the bottom then call me I have a job for you here (you also may want to go out and buy a lottery ticket). Everyone else should wait until the trend reverses in emerging markets, you won't get in at the bottom but you also won't be trying to catch a falling knife either, take it from my 8 yr old, it is not fun.

Friday, August 19, 2011

Safe Haven Commodities

Gold’s not the only safe-haven commodity


I am quoted on page 2 of this article. The key point is that every crisis is different so the safe haven commodities, if any, will be different. The key is to be in harmony with market trends. Buy commodities in an uptrend and don't buy ones that aren't. Don't bother trying to guess what the Chinese might be buying or what the weather in the midwest is going to be.

Monday, August 15, 2011

U.S. Stocks Gain Because There are More Buyers Than Sellers

U.S. Stocks Gain on M&A

I always love how the media always has to have a reason why stocks are going up or down. This morning it is M&A activity. Stocks go up and down because there are either more buyers than sellers or more sellers than buyers. Stuff like this is just noise that distracts you from what is really going on. What is really going on is the trend of the market---long term, intermediate term, and short term. Your time frame depends on what type of investor you are. We look at the intermediate term trend, which is down.

Didn't We Learn Anything From Long Term Capital Management?

The Trade that Killed Dighton Capital?


Leverage + Betting against the trend + financial crisis= Massive Losses

Remember the market can remain irrational longer than you can remain solvent.

Thursday, August 11, 2011

Be Careful Reading Too Much Into One Day In The Market

As I write this we are having a triple digit up day in the Dow. Yesterday was a triple digit down day and the day before was a triple digit upday. Whenever we have moves like this you always see the talking heads on the news talking about how we have hit bottom (on the up days) or how the drop is bottomless (on the down days). If you pay too much attention to all that you will either lose lots of money or drive yourself crazy, or both. Day to day moves are typically just noise, look at the overall trend. In the beginning of the year the trend was up, now it is down. I cannot give investment advice on this blog but suffice it to say you should be doing things differently in an uptrend than you do in a downtrend.

Tuesday, August 9, 2011

Matthew Tuttle on WFIN

Matthew Tuttle on WFIN

I discussedthe market crisis with Good Mornings host Chris Oaks yesterday. The interview starts about two minutes in, and runs about ten minutes.

Monday, August 8, 2011

This is a Riot, E Trade Baby Loses It All

When Funds Turn Cold, Do You Sell?

When Funds Turn Cold, Do You Sell?

Interesting article in the online version of the Journal this morning. When you have a fund that has flexibility this is a tougher decision. All good managers will have cold streaks or periods of underperformance, you need to figure out why. Most funds however, basically just mirror an index that is based on a specific style (ie. large cap growth, small cap value, etc). They don't have the flexibility to invest outside their style box, so when the style is out of favor they are too. The answer here is easy, Modern Portfolio Theory would tell you that you need to have allocations to all asset classes, that didn't help you in 2002, 2008, or last week, and it won't help you the next time the market takes a tumble. Investors should only be in sectors of the market in an uptrend.

Thursday, August 4, 2011

Profile in Dow Jones Newswires

I was profiled today in Dow Jones Newswires for some portfolio moves we made before the major crash:

DJ WEALTH ADVISER: Tuttle Shifts To Safety After Rally Fizzles
04/08/2011 18:52
--An adviser shifts to safety after "relief" rally disappoints

--Clients now have 50% to 80% in cash

--Automated-selling programs and value investors battle


By Daisy Maxey
A DOW JONES NEWSWIRES COLUMN
NEW YORK (Dow Jones)--Many financial advisers urge clients to stay the course when markets show signs of trouble, as they have in recent days. Not Matthew Tuttle.

When an expected rally failed to materialize from the debt-ceiling agreement, Tuttle, chief executive of Tuttle Wealth Management LLC in Stamford, Conn., began selling off exchange-traded funds and headed for safety.

"Once the relief rally fizzled and we broke down, that kind of positioned us on Tuesday morning to sell a whole lot of stuff, and get into cash and Treasury bonds," said Tuttle, whose firm oversees about $100 million in assets.

Tuttle sold off ETFs that invest in the Standard & Poor's 500 index and real-estate investment trusts as well as international ETFs. He maintained his investments in the Nasdaq-100 Index through the PowerShares QQQ Trust (QQQ) ETF and invested in Treasurys through the iShares Barclays 20+ Treasury Bond ETF (TLT). Smaller accounts are invested in two mutual funds, the Rydex Government Long Bond 1.2x Strategy (RYADX) and Rydex Nasdaq-100 (RYAOX).

Tuttle's clients generally entrust all their assets with him, and understand that he's a tactical investor, he says. "Buy-and-hold does not work," he says. "We're 100% tactical, so if the sky is falling I will get to 100% cash if that's what I need to do."

Last week, U.S. stocks, international stocks, REITs and commodities each accounted for 10% to 25% of his client assets.

That's shifted dramatically. Depending on the portfolio, Tuttle now has 10% to 20% of client portfolios invested in the Nasdaq through ETFs, another 10% to 20% in Treasury bonds and between 50% to 80% in cash.

At the time, making the move scared him, Tuttle said, because the stock market had initially moved up on news that a debt-ceiling agreement was in the offing. But the shift quickly saved his clients from a loss, he said.

As soon as the S&P 500 broke through the 1250-point range, automated-selling programs kicked in and the index fell to the 1230s, then value investors began buying and moved it up to the 1240s, Tuttle said. Now, he said, there's a battle going on between automated sellers and value investors.

"I wouldn't be surprised if we end up with a 20% decline," he said. "There's a ton of technical damage that we've done to this market, so for us to rally back from here, there's a lot of stuff we've got to fix."

At some point, there will be a bounce, perhaps if Friday's job numbers are better than expected, Tuttle said. But he's not ready to jump back into the market unless he sees a rally he can believe in, he said.

"I'd have to see sectors or areas of the market that are feeling strength," he said. "A one-day rally isn't going to do it. I need to see some momentum going somewhere."

(Daisy Maxey is a columnist who writes about personal finance. She covers topics including advisory firms, annuities, closed-end funds and new trends in mutual funds, and can be reached at 212-416-2237 or at daisy.maxey@dowjones.com.)

What is the Definition of Insanity?

Ex-Fed Officials Back More Stimulus

Doing the same thing over and over again and expecting different results.