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The Value of Active Management

In our last post in late-May, we stated that “the stock market will anticipate a better economy and better corporate earnings and will trade up to the low 11,000 level, and then new or existing concerns will arise and pull the market down to the 10,000 level.”  The second quarter proved to be difficult for stocks as financial storylines focused on global economic concerns, oil spill ramifications, the unemployment outlook, and further congressional regulation measures.  Yet, after breaching the lower levels of our range in June and early July, the market snapped back in the third quarter to place us currently in the high 10,000s on the Dow.  While this makes for a wild ride for investors, our active management allowed us to accumulate stocks offering good value when the markets recently fell.

We are confident that our active management approach will continue to outperform mutual funds.  Furthermore, it has become increasingly apparent that investors demand a more active approach when it comes to growing personal wealth.  The trend of investors moving away from mutual funds and toward ETFs is staggering.  According to Felix Salmon of Reuters, actively-managed domestic mutual funds saw an outflow of $44 billion (1.45% of their total value) in the first seven months of 2010.  Simultaneously, equity ETFs saw an inflow of $21.4 billion (3.12% of their total value).  Going back another year to 2009, the numbers are -2.07% and +10.78%, respectively.  We can understand this phenomenon due to the main advantages of ETFs as investment and trading vehicles, such as higher tax efficiency, lower costs, greater purchasing/selling price control, and the ability to set downside protection features.

Our active management consists of several conservative strategies: 1) Taking advantage of broad overbought and oversold conditions in the market by using index ETFs, such as SPY, DVY, IYZ, IWM, XLU, QQQQ, SCHA, and SCHF; 2) Maintaining adequate exposure in alternative investments, such as gold; 3) Buying and selling well established blue-chip companies with stable earnings, minimal liabilities, and attractive dividend yields; 4) Buying and selling closed-end bond funds that trade like stocks and provide monthly income streams of 6% to 11% annualized; 5) Utilizing covered calls on stocks and ETFs to enhance portfolio return and protect against downside risk.

While divergence has persisted regarding opinions on the future direction of the market and economy, we believe that Bernanke and the Fed will do whatever is necessary to avoid a double-dip recession in the United States.  Unfortunately, for now we must endure a soft labor environment.  Moreover, accelerating foreclosures point to the housing market as a drag on the economy until all the years of financing abuse has been cleared up.

The good news is that the Corporate America is lean and mean with a lot of cash and record profit margins from squeezing costs via technology and outsourcing.  Additionally, the uncertainty of future tax and regulatory policies that have immobilized consumers and businesses should become clearer after the November elections.  We are hopeful that these results will lead to elevated levels of optimism and create positive momentum for a better growth rate and stock market.  As such, our current trading range target on the Dow is 10,550 to 11,000 prior to the election and 11,000+ after the results are in.

We ultimately believe that 2010 will be an up year for the market but that it will remain range bound for the time being.  We will lighten up and take profits during extended rallies and buy when prices are attractive during corrections.  The net result is superior performance to the market with controlled risk exposure.

In order for investors to take advantage of the investment opportunities in the stock market, we always recommend that investors obtain professional advice when it comes to selecting a portfolio of stocks.  Any opinions expressed in this update may be subject to change without notice, and should not be construed as a recommendation for any type of investment.

Patience Paid Off

Protecting capital requires a mix of caution and opportunism.  For this reason, we have participated in the market with conservative investment strategies.  To take advantage of the upswing that we witnessed over the first quarter of 2010, we have focused on purchasing shares of companies that have demonstrated strong competitive advantages that are likely to be sustainable far into the future, are financially sound, have strong positions in stable and highly profitable industries, and have good management.  Additionally, through such methods as gold exposure, stop-loss orders, and covered calls, hedging of portfolios has protected portfolios from downside risk that has been especially prevalent over the past few weeks.

Our patience and commitment to this conservative strategy has been justified by the lingering economic concerns created by high unemployment, housing foreclosures, securities fraud hearings, and global debt worries.  For the most part of 2010, the market presented a calm, low-volatility environment that slowly inched its way higher.  Yet, after briefly breaching 11,000 on the Dow, as we foresaw back in the November blog, the market has retreated sharply by 10%.  Accompanying the decline has been a surge of volatility, including the historical May 6 that presented an 11.6% intraday move.

The main culprit for incredible rise in volatility and fear is the European debt crisis.  While the issue of Greece’s financial instability has been well documented over the early parts of this year, it was largely ignored as a market moving event in the US until it was recognized that the similar problems existed in other European nations, such as Spain and Portugal.  Furthermore, worries of a worldwide domino-effect of debt contagion have led to uncertainty of economic recoveries around the globe.  In an effort to stave off near-term contagion and to stabilize markets, the 16-nation eurozone reacted with a TARP-like $1 trillion recovery package.  This massive European debt bailout may have preserved the future of the European Union, but many challenges remain.  Among them are elevated government deficits impeding growth, lack of labor competitiveness, tepid consumer spending, and the threat of deflation.

The good news is that the United States economy is in much better shape than those of our friends across the Atlantic.  Well into a recovery phase, US company earnings reports of 2010 have been overwhelmingly positive as companies have produced healthy balance sheets, labor productively has increased dramatically, and both corporations and consumers have increased spending.  Also encouraging is that after more than two years of job losses, we have finally witnessed job creation.  The latest figures showed widespread improvement in the labor market, with manufacturers, construction companies, retailers, professional and business services, education and health services, and government all reporting gains.  Nevertheless, labor gains must continue at an increased pace in order to make a dent in the level of unemployment and avoid a “jobless recovery.”

Going forward we believe the stock market will anticipate a better economy and better corporate earnings and will trade up to the low 11,000 level, and then new or existing concerns will arise and pull the market down to the 10,000 level.  Therefore, we feel this range bound market is ideal for our active management approach.

In order for investors to take advantage of the investment opportunities in the stock market, we always recommend that investors obtain professional advice when it comes to selecting a portfolio of stocks.  Any opinions expressed in this update may be subject to change without notice, and should not be construed as a recommendation for any type of investment.

Cooperative Holiday Season Expected, But New Year Brings Challenges

With only 27 trading days left in the year, we foresee the equity mutual funds and hedge funds catching up on performance by buying on dips and taking the market as high as they can before the end of the year, possibly upwards of 11,000 on the Dow and 1150 on the S&P.  We also anticipate volatility as the market gurus forecast 2010.  Through the holiday season, the atmosphere for the markets should be mostly positive as a result of working middle- and upper-class Americans feeling more comfortable spending on purchases that they have postponed.  This will keep confidence up and assist the retail sector, leading to a cooperative stock market for the rest of 2009.

Although we believe that the worst is behind us and that the market should inch higher for the remainder of the year, the beginning of 2010 will present several challenges and the high probability of a significant correction.  Furthermore, a repeat of the past eight month’s market performance is highly unlikely.  As such, we plan on moving portfolios toward more defensive asset allocations once the New Year is upon us.  As always, we will continue to buy high dividend stocks and covered calls to protect our positions.  We will trade the ranges with all of our core stocks and maximize profitable trades for all accounts.

While it is true that the major indices have risen mightily from their 52-week lows, it is also true that the global recession of 2008-2009 has left the economies of the world with several fundamental and systematic lingering effects that may take several more years to resolve.  Our current concerns regarding the US economy and its effort to fully recover are focused about consumer confidence, unemployment, and the strength of the dollar. 

Third quarter Gross Domestic Product (GDP) figures showed that the US economy grew at a rate of 3.5%.  This prompted Fed Chair Ben Benanke to proclaim that “From a technical perspective, the recession is very likely over at this point.”  While the first positive reporting of GDP since the second quarter of 2008 obviously came as great news, a large portion of the growth came from short-term government programs and other initiatives, such as Cash for Clunkers, public works projects, and aid to state and federal governments.  According to Christina Romer, chair of the White House’s Council of Economic Advisors, the stimulus added between 3% and 4% to the quarter’s growth, which shows that the economy would have shown little to no growth without the bump received from government spending.  Consumer spending, on the other hand, rose by 3.4% for the quarter, the biggest increase in nearly three years.  Its portion of GDP accounts for about 67%, still below its 71% share held only a few years ago.

Other upbeat news includes the Conference Board’s Leading Economic Index (LEI) rising for the sixth straight month in September with its largest six-month gain in 26 years.  Additionally, corporate earnings for the third quarter were largely positive, with 80% of companies beating earnings estimates and 48% beating revenue estimates.  The theme from most executive commentary was that the worst is behind us and that they are seeing signs (although tenuous in some cases) of improvement in 2010.  As a result, the market has had enough fuel to warrant its continued run higher.

Unfortunately, there are a few major hurdles that must be overcome before the US economy can truly be deemed healthy, namely unemployment and the strength of the dollar.  The Bureau of Labor Statistics recently reported that the number of unemployed persons increased to 15.7 million, bringing the unemployment rate to 10.2%, its highest level since April of 1983.  Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the rate has grown by 5.3 percentage points.  Regarding the subject, The Economist wrote that “the grim milestone demonstrates that, even though the recession is apparently over, for the average worker it remains in force.”  We agree, as it is difficult to imagine a true recovery in which the average individual or someone in his or her immediate family is unwillingly unemployed.

Our second concern threatening the reemergence of the US economy is the strength, or more accurately, the weakness, of the dollar.  Now this concern is really a double-edged sword because there are pros and cons to each perceived type of dollar.  For example, when the dollar is strong, our dollars are able to buy more foreign goods, thus keeping inflation in check and making dollars more valuable in the global economy.  On the other hand, a weak dollar will make US goods more competitive overseas to increase exports and induce foreign investment.  It also creates inflation and makes importing goods, such as oil, more expensive.  As Exxon Mobil CEO Rex Tillerson suspected, “If you put the price of oil, which is priced in dollars around the world, and if you look at what some of the currency effects are with the weak dollar – in our view that is contributing about $20-25 a barrel to the price.”  That’s 25% to 30% of the value of oil coming directly from recent currency effects!  Additionally, you can easily see what the weak dollar and federal financial concerns have done to the price of gold, which is currently priced at over $1160 per ounce and makes new record nominal price highs almost every day.  As a nation with a heavy debt burden, it is no accident that the Federal Reserve has devalued the dollar and kept interest rates at all-time lows; however, in the long-term, a strong dollar is desired because it shows global faith in the stability of the economy and controlled inflation expectations.

It has been almost a year since the Federal Fund interest rate was reduced to 0%-0.25% emergency levels and the Federal Open Market Committee ( FOMC) has unanimously decided to continue this policy.  The question now becomes when economic improvement will necessitate raising interest rates from current exceptionally low emergency levels.  Liz Sonders, Schwab Senior Vice President and Chief Investment Strategist, believes that the Fed will raise rates sooner than many believe, perhaps as soon as the first quarter of 2010, and that it would be worse news if the economy justified 0% interest rates too far into the future.  Immediate benefits to increased rates include the following: increased money market, CD, and savings account rates; stabilization of US dollar; and limiting the risk of more asset bubbles and a higher degree of economic instability that comes with staying at 0% for too long.

Finally, I would like to take this opportunity to wish you and your family a Happy Thanksgiving and to thank you for allowing us to serve your financial needs.

Wall Street’s Summer Rally

Following our latest economic outlook post, the S&P 500 fell 67 points to 879, plummeting through the 890-950 range that contained it for more than two-and-a-half months.  Just six sessions later, though, it had soared higher to the top of the range.  Since then, it has proceeded to continue riding momentum to a level of 1010.  The question becomes whether the March-May run was the first leg of a new bull market, followed by a 10-week consolidation, and now the second leg of the bull.  At this time, we do not foresee a new bull market; however, it is possible to see a fun summer rally for another 5 to 10%, especially given the amount of short-covering that is occurring from hedge funds.  This is a traders’ market and we are continuing to take advantage of the volatility.

On the technical side, the following points in the S&P mark the most widely cited levels of overhead resistance, some which we just broke through today:

1000 is deemed “psychologically important,” just as it was on the way down.
1006 provides chart resistance from the early November high.
1007 is the 38.2% retracement line of the 1982 to 2007 bull market.
1008 sets off trend line resistance from the early May high.
1011 is a Fibonacci extension resistance based on recent consolidation width.
1016 is the 38.2% retracement line of this bear market, so far.
1150 marks the down trend line from the 2007 top.

If we can maintain a level above 1016 on the S&P 500, we could see Goldman Sachs’ near-term targets of 1050-1100 on the S&P 500 and 10,000 on the Dow.  Should this occur, we would then recommend extreme caution, as the country will still be faced with the grim reality that when the rally is over the economic recovery will be going at a snail’s pace.  Specifically, we feel there are still risks to overcome before the economy begins to fully recover, such as the diminished likelihood of near-term rebound in consumer spending, unsustainable profits based principally from corporate cost-cutting, the expensive and controversial health care package, increasing default rates of commercial real estate and consumer finance securities, and a slower than expected recovery in residential home sales.

Earnings season has shown us that companies have taken drastic actions to beat expectations and maximize profits.  Unfortunately, the largest cost-cutting measure that has enhanced earnings is layoffs.  In other words, while companies have typically had reduced revenues, their earnings are higher due to trimmed payroll expenses.  These sorts of corporate earnings victories are not sustainable in the long-term and re-focus our attention to the most important figure to track, unemployment.  Today’s unemployment report showed that 247,000 jobs were lost in the month of July, a vast improvement from prior months and better than most analyst expectations.  Hopefully job creation is right around the corner, although most signs point to that occurring only once businesses feel comfortable about their outlook in a post-recovery economy.

On a related note, consumer spending, which accounts for two-thirds of domestic output, has taken a hit during the recession as individuals cope with the realities of decreased income and the need to increase savings.  As a nation highly dependent on consumers for economic growth, it follows that the economy cannot fully recover without consumers recovering first.  For that to happen, a drop in the levels of both unemployment and the underlying fear of unemployment are crucial.

While we are confident that the economy has stabilized significantly and made vast improvements from its gloomiest days of the economic meltdown, there are simply too many reasons to remain cautiously prudent and avoid getting caught up in the “irrational exuberance” of the market, especially if we reach Goldman Sachs’ target levels.  Last week, second quarter Gross Domestic Product came in at -1%, which was slightly better than expectations.  We are hopeful for the return of positive GDP for the third quarter with continued growth into 2010.  In summary, if the upper ranges are broken we can take advantage of a further rally; however, signs of a slow recovery will eventually lead to a correction, especially when Congress is back in session.  Such events, of course, would provide a good opportunity to protect your portfolio from the downside.  The recovery is certainly an ongoing process and we will continue to provide updates on our economic outlook and investment strategies.

As Seen In Forbes… TMG a Leading Provider of Wealth Management Services for Two Years in a Row

As was published in Forbes Magazine, we are pleased to report that Tellone Management Group was selected for a second year in a row as one of the leading Wealth Managers of Southern California.  For more details, please view a copy of the press release of this recognition (see below).

Equally exciting is Charles Schwab’s limited time “Make the Move” promotion.  In an effort to assist clients in this challenging financial environment, any new-to-Schwab clients that open an account with Tellone Management Group prior to December 31, 2009 will be reimbursed on all transfer of account fees and waive all security fees on executed trades through June 30, 2010.  This combination helps offset the cost of transferring assets and enables us to more economically invest cash and rebalance your portfolio.  Furthermore, as a firm that actively works to increase client account balances through short-term trading opportunity, we believe that this offer provides incredible value to potential clients.  For those of you with friends and family that may benefit from this unique opportunity, please know that we welcome referrals and the chance to help individuals who can profit from our wealth management experience.

Tellone Management Group, Inc. Selected as One of the Leading Wealth Managers of Southern California

Anaheim Hills, CA, June 25, 2009 – Tellone Management Group, Inc., a provider of personalized Investment and Financial Planning services for over 30 years, has recently been selected by Goldline Research as one of the leading Wealth Managers of Southern California for 2009.  Following last year’s recognition in Goldline Research’s “Most Dependable” series, this marks the second consecutive year in which Tellone Management has been evaluated by the independent market research firm and satisfied its strict benchmarks to be deemed among the best in the wealth management industry.  The list of Southern California Wealth Managers receiving this distinction can be seen in the June 22nd issue of Forbes Magazine.

During the course of Goldline’s research study, which was conducted from late March 2009 through mid May 2009, more than 2,100 Securities and Exchange Commission (SEC) registered investment advisors (RIA’s) and more than 5,100 individuals holding the Certified Financial Planner (CFP®) designation in the region were identified and evaluated.  Out of that substantial and diverse group, a total of ten firms were chosen to comprise the list of “Leading Providers.”  “Those selected provide extensive client service that exceeds the industry standard,” said George Shaeffer, Analyst for Goldline Research. “We believe that they are setting the benchmarks for the industry as a whole.”

Dean Tellone and Steven Wolfe, wealth managers at Tellone Management, expressed their thoughts on the firm’s recent recognition.  “Our mission has always been to increase our clients’ wealth while providing excellent service for their financial needs.  By applying a direct managed account approach rather than relying on a mutual fund management style, we were able to protect our clients’ assets during a very difficult time in our country’s history.  We are proud that our dedication and integrity have been noticed.”

About Tellone Management Group, Inc.

Tellone Management Group’s team of professional advisers has been providing wealth management services since 1975.  The Anaheim Hills based Registered Investment Advisor offers services in the areas of finance, tax, and estate planning, manages over 800 accounts through Schwab Institutional, and controls ten successful investment partnerships which provide varying degrees of financial investments in stocks, bonds, and mortgages. Using active investment strategies, Tellone Management provides added value to their client accounts by quickly adapting to the current market environment with a dual emphasis on short-term trading and long-term investments.  Above all, they work to maximize net-worth by integrating a personal and comprehensive financial program.

About Goldline Research

Goldline Research (www.goldlineresearch.com) is an independent market research firm that specializes in evaluating professional services providers to help consumers identify and select leading services firms. Goldline Research’s proprietary research process includes market analysis, individual company interviews and, in many industries, interviews with consumers of those services to gain feedback on market conditions and provider service levels. Goldline Research’s lists have been published in leading publications including local, regional and national magazines.

Too Far, Too Fast

We have been waiting to predict the next move in the market, but current technical and fundamental data is flashing warning signs of a near term pullback.  The question is: When will this downturn take place?  Since the S&P’s low of 676 on March 9, the market had soared upwards 40% to 946 over the past three and a half months.  Yet, the past five weeks of the rally have shown a clear range, with support levels around 890 and resistance around 950.

During the recent rally, we have witnessed a reduction in the extreme fear generated by the fall of Lehman Brothers and the accompanying financial crisis.  Such measures confirming fear retreat include the falling volatility index (VIX), decreasing credit spreads, and rising Treasury yields.

The reality may be, however, that the market has come too far, too fast.  While cognizant of the fact that the market tends to lead the economy by three to six months, we simply do not see the type of economic recovery that has been built into current market prices.  A survey from our business-owning clients confirmed this belief, as the general consensus was that they do not see their businesses getting any worse, yet they do not see the level of optimism that Wall Street has been projecting.  Much of the optimism from the market centers around a recovery in corporate profits, but according to Doug Kass, founder and president of Seabreeze Partners Management, “63% of companies in the S&P 500 missed first-quarter revenue goals, but 67% beat profit expectations.  That smacks of accounting games and unhealthy cost cutting via layoffs, not real progress.”  Additionally, as NYSE volume has lightened up from its March 20 peak at 2.4 billion to its 20-day exponential moving average of 1.3 billion, buying pressure has eroded from its recent highs, and selling pressure has continued to move sideways; we tend to believe that momentum may be exhausted for now.

From a financial planning standpoint, one positive note that has come from the recession has been consumer deleveraging, which can be seen from a 5.7% savings rate reported in May, and is a vast improvement from the negative rate of last year.  Unfortunately and ironically, what is good for the individual is not necessarily good for the economy in the short-term, as this increased emphasis on postponing discretionary spending essentially hurts corporate profits.  In the long-term though, it will be good to get away from a debt-based economy.  However, the U.S. government continues to print money and spend at an increasingly alarming rate. This has led Federal Reserve Chairman, Ben Bernanke, to encourage Congress to confront spending issues, including Social Security and Medicare, highlighting that a crucial component was the setting of tax rates that “achieve an appropriate balance of spending and revenues in the long run.”  According to Liz Sonders, Senior Vice President and Chief Investment Strategist for Charles Schwab, “While we have few doubts that some government action was necessary to address the financial crisis, the danger is that the U.S government won’t know when, or how, to stop its interference in the private markets.”  We will see how this all plays out.

In the meantime, with unemployment and debt keeping consumers on the ropes and our recent occurrence of big moves off the bottom, the potential for revisiting the lows and disappointment in economic results remains a real threat.  Therefore, caution is warranted.  We continue to use covered calls to protect our high dividend stock holdings and have used puts and Proshares to hedge our gains.  As always, we continue to trade the ranges and stay diversified with gold stocks to enhance our clients’ yields.  For any specific questions, call us if we can be of assistance.

Getting Closer to the Bottom

According to the National Bureau of Economic Research, the recession in the United States officially began in December of 2007.  Over the last 15 months, we have watched the market react violently to the economic slowdown.  Just last week, the Dow Jones Industrial Average reached its 12-year lows, thus bringing us back to levels that we have not seen since 1997.  Todd Kenyon of Seeking Alpha writes that “since 1900, there have only been two occasions where the Dow cracked 12-year lows: April 8, 1932 and December 6, 1974. In the first case, it occurred 3 months prior to the bottom. In 1974, it marked the exact bottom.  In each case, the recession still had months to go, and unemployment was months from peaking.  In 1974 the market rocketed 45% in six months, and about 65% in 15 months off the bottom.” 

Throughout this process, we have been waiting for the market to reach attractive levels while maintaining downside protection for our client accounts.  While we are not attempting to call the bottom, we do feel that the Dow has major support and unbelievable values at or near 6000.

For those with employee sponsored retirement accounts, such as 401k plans, we advocated a switch to a more conservative mix of cash and fixed income in the last blog.  At this point, we now suggest that new contributions per pay period be directed toward income and growth stocks.  Similarly, we recommend that our clients with mid- to long-term time horizons start dollar cost averaging back into the market with a low of 6000 in mind.  It is important to understand that everyone’s financial situation is unique and there is no single strategy that works for everybody.  For those clients looking for assistance and guidance regarding 401k/403b asset allocation, we would be happy to help you assess your options.

We still believe that the economy will start to show signs of life, especially within real estate, beginning in the summer.  We expect any improvement in GDP to be gradual as consumers and companies deal with the credit market realities and the new saving mentally of the American people.  However, once we start hearing positive news and investors feel confident that we have put in a final low, we will then witness a much improved market.

In an effort to facilitate this upturn and help bring the GDP back to its long-term growth potential, President Obama signed the 2009 American Recovery and Reinvestment Act into law on February 17.  The economic stimulus package consists primarily of individual and corporate tax relief, infrastructure projects, and help for state and local governments.  To read a brief overview of the package, please click here.  The Obama administration believes that the keys to resolving the crisis revolve around shoring up lending, stabilizing housing prices, and reducing unemployment.  The Tellone Management Group investment team, as well as investors throughout the world, will continue to monitor their performance in these areas.

Don’t Try to Call the Bottom

Since our October market update in which I stated that this is the worst financial crisis I have seen in my thirty years as a wealth manager, both consumers and investors are more scared and have retreated even further. The big three U.S. auto companies are in trouble and the markets have made lower lows. Until we see a solid bottom, caution is warranted.

I have recommended our 401K investors to be in fixed income or cash until the dust settles. With the markets trying to find a bottom and the possibility of much lower lows, we sold most of our mutual funds (representing about 10% of our portfolios) in last week’s rally. I have been very disappointed with their ability to protect their investors on the downside. By selling we can lock in capital losses to combat potential tax increases with the Obama administration. What is working well for us is our intraday trading and protecting our portfolios with ultra short Proshares positions.  We are very active in protecting our investor’s principal, as I feel it is better to be safe than sorry. The economy is not going to turn up for a while and we are going to hear negative news from different sectors that are adversely affected by the recession. However, I am anticipating that the markets will present great opportunities going into in the second quarter of 2009.

In other news, a new year is approaching and with this new year comes a new President and administration, and more importantly, new tax policies.  While President-elect Obama has not been specific with details or commitments, the hints he has dropped indicate that the tax increases he campaigned with will most likely be postponed until after 2009.

Even with this uncertainty, it is prudent to take action now and help shape your income tax liability for 2008.  Here are some traditional tax strategies to consider:

• Income deferral into 2009.
• Pay deductable items before the end of the year, such as property taxes, the January 2009 mortgage payment, charitable contributions, state income tax estimates.
• Analyze your stock portfolio and consider tax loss harvesting to offset any stock gains from earlier in 2008.
• Max out your 401K deferral with your employer.
• Business owners should consider any new equipment needs and purchase this year instead of 2009.

These are only a few but enough to start us thinking about tax savings.  For more detailed information on 2008 strategies and tax law changes, check out the “Year-End Tax Planning for Individuals” article, which is located in the news and resources section of the Tellone Financial Services website.  For questions more specific in nature, don’t hesitate to call.

Time Will Restore Confidence

In our August market update we stated that we felt the financial stocks had more surprises like that of Lehman Brothers, but the fall out here and abroad has been much worse on the financial markets than originally expected.  In my thirty years in the wealth management business, this is by far the worst financial crisis I have ever seen. However, I am optimistic that the worst is behind us. Time will restore confidence and successful testing with higher lows will stabilize our markets going forward. We are witnessing history in the making with this market. As a result, the economy has increasingly become the main issue facing our presidential candidates. Here is a quick rundown of the main events that have occurred during this turbulent time:

 

• Sept. 7: Government takes control of Fannie Mae & Freddie Mac
• Sept. 11: Lehman Brothers says it is looking to be sold
• Sept. 14: Bank of America purchases Merrill Lynch for $29 per share
• Sept. 15: Lehman Brothers files for Chapter 11 bankruptcy
• Sept. 16: Government provides $85 billion emergency loan to rescue AIG
• Sept. 17: Barclays buys Lehman Brothers’ North American banking division for $250 million
• Sept. 19: President Bush stresses need for a bailout plan to confront the financial crisis
• Sept. 21: Goldman Sachs and Morgan Stanley become bank holding companies
• Sept. 24-27: President Bush, Barack Obama, John McCain, and other Congressional leaders work to create an acceptable bailout plan
• Sept. 26: Washington Mutual becomes the largest thrift failure and bank operations are subsequently acquired by JP Morgan for $1.9 billion
• Sept. 29: Citigroup makes bid to acquire Wachovia’s banking operations for $2.1 billion in stock; Bailout package is rejected by the House of Representatives; The Dow falls 777 points, which is the largest one-day point drop in history
• Oct. 1: SEC bans short selling against 800 financial companies until bailout pact enactment
• Oct. 2: The US Senate votes in favor of the Wall Street bailout plan
• Oct. 3: The House of Representatives passes an amended bailout plan and President Bush signs the historic $700 billion Troubled Asset Relief Program; Despite Citigroup’s previous offer, Wells Fargo acquires Wachovia in $15.1 billion all-stock deal that includes no FDIC assistance
• Oct. 6-10: The US stock market has its worst week ever, falling 18.2% in five trading days
• Oct. 9: The International Monetary Fund announces emergency plans to bail out governments affected by the financial crisis, after warning that no country would be immune from the ripple effects of the credit crunch
• Oct. 10: The Dow falls nearly 700 points to 7882 in the first few minutes of trading, rises over 1000 points, and falls again to close down 128 points
• Oct. 13: The Dow rises by 936 points to 9387, its biggest one-day gain by points and largest daily jump in percentage terms since 1933

 

Over this time period, we have surely seen our financial markets tested and the media has been quick to equate this downturn with that of almost Great Depression-like proportions.  The good news is that this is no Great Depression and while the economic situation is not ideal, the United States will recover stronger than ever with better values. We feel we are currently seeing the final capitulation needed to bring us back to a stable stock market. This term refers to when investors log in to their accounts to sell everything across the board, market orders, current price, wherever – just get me out!  When people say they’ll never touch the stock market again, that is when we have capitulation. This activity, though, generally occurs at the bottom because it both exhausts selling pressure and causes bargain hunters to enter the market to buy stocks that are deemed to have tremendous value.

Of course, having access to cash is exceptionally important during any type of market.  As a good part of a balanced financial plan, we recommend keeping any money you might need in the next year or two in low risk investments, such as our Tellone Mortgage Fund. Conversely, having too much cash because of a stock market downturn has its downsides, including missing out on any opportunity that comes when the market recovers and paying additional transaction costs to make the switch.  Most of the stock market gains lately have come from big one-day rallies, so if you have already made up your mind and plan to sell shortly it is best to wait until the markets get overbought or at least above the Dow 9000+ threshold, which will provide a much better opportunity to sell underperforming stocks.

In general though, for the long-term investor, it is a good idea to remain calm throughout the financial turmoil (see “The Case for Stocks as a Long-Term Investment“).  Know that these periods of extended pullbacks are not uncommon and represent about 12% of the markets history over the past 75 years.  Additionally, markets tend to revert to their long-term averages, so the best strategy during rough times is to ensure that your portfolio is properly diversified in order to capture any rebound.  The market is currently anticipating a recession, so we are focusing on stocks that are oversold and will do well through the recession. We believe that holding what is already way down is a good idea.  You should also take advantage of undervalued stocks that have a great future, as the investment outlook is much better today than it has been in several years.

We have been taking advantage of the extreme volatility to enhance our short-term trading strategy by utilizing Ultra Short Proshares to hedge our portfolios and make money on the downside. However, we have not been happy with the performance of mutual funds (about 10% of our total assets) because they have not protected principle the way they should. We are sticking with stocks so we can protect our downside. It will take several months for this financial turmoil to pass, but America will be better and stronger and the world will be more united.