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.

The Case for Stocks as a Long-Term Investment

The following is an article entitled “The Case for Stocks as a Long-Term Investment.”  It was written on October 10, 2008 by Mark W. Riepe, CFA, who is the Senior Vice President of the Schwab Center for Financial Research.  We believe that this is an excellent piece for all investors with long time horizons because it stresses the potential benefits of staying the course and remaining invested in the market during this extremely volatile time.

It’s been a tumultuous time in the markets, for sure. While it’s important to learn from the past, good investing requires more than looking in the rearview mirror. You’ve got to keep your eyes on your long-term goals. Even if the recent market plunge set you back, you can still achieve those goals if you keep saving and investing in a disciplined, diversified manner. We believe that for the vast majority of investors, this means not abandoning the equity markets, even if your gut is telling you to do just that.

Here are five reasons why we believe sticking with equities makes sense for most investors.

1. Cash may feel safe short-term, but long-term it’s far from it. Right now, returns on money markets and Treasuries are negative after inflation. So, rushing to cash is not a very sound long-term investment strategy. Of course, everyone needs an emergency fund of three months of vital expenses in case you hit an economic bump in the road. And for that, money market funds or interest bearing FDIC-insured checking deposits work well. If you’re retired, we think you should also have a full year’s worth of spending in cash, so you don’t need to pull money out of your equity portfolio during a bear market, thereby undermining your portfolio’s long-term growth potential. As you can see in the graph below, cash has significantly underperformed stocks over time, and is the best defense against the ravages of inflation and taxes.

Equities have been the best defense against taxes and inflation

2. Stocks are volatile over the short-term, but long-term they remain the key to portfolio growth. As you can see in “Equities Have Outperformed Other Asset Classes” below, stocks (both large-cap and small-cap) have dramatically outperformed bonds and cash over time. During a down period like we’re in, it feels like “this time is different.” But is the present time really so different? The graph below includes periods such as the Great Depression, three major wars (World War II, Korea, and Vietnam), oil embargos (1973 and 1979). In all cases, the equity markets have demonstrated short-term vulnerability, but long-term resilience.

Equities Have Outperformed Other Asset Classes

3. Market rebounds historically have preceded economic rebounds. We believe the economy has been in recession since late last year, putting it at the average length for post-World War II recessions. As you can see in the chart below, which combines all of the 10 prior recessions into a single average line, the market typically peaked about seven months before the recession began, but bottomed quite decisively by about six months into (or 60% of the way through) the recession, with an average peak-to-trough decline of just under 25%.

S&P 500 Performance Pattern Around Recessions

Indexed price-only data from 1947-March 31, 2002. Source: Ned Davis Research, Inc.

Now let’s break that trend down into all 10 recessions. As you can see in the table below, three months after the trough (but still in the throes of bad economic news), the market was up an average 16%, six months later up 24%, and a year later up 32%.

S&P 500 Performance Following Recession Lows

	S&P 500 Percentage Gain
S&P 500 low date in recession	3 months later	6 months later	9 months later	1 year later
06/13/49	15%	19%	27%	34%
09/14/53	10%	18%	28%	39%
10/22/57	6%	10%	19%	32%
10/25/60	16%	25%	28%	31%
05/26/70	17%	21%	39%	45%
10/03/74	14%	30%	52%	35%
03/27/80	18%	31%	39%	37%
08/12/82	38%	42%	61%	58%
10/11/90	7%	29%	29%	29%
09/21/01	18%	17%	3%	-14%
Mean	16%	24%	32%	32%
Median	15%	23%	28%	34%

Source: Ned Davis Research, Inc.

We think this recession could be longer and deeper than average, but we do NOT think we are headed into anything like the Great Depression. Not only are we much stronger economically (see below), but there are many more safeguards in place currently to prevent a further downward spiral. Among them: FDIC insurance (which insures bank deposits for consumers who ultimately drive the economy), globalization (which provides a market for U.S. exports), more proactive countercyclical fiscal and monetary policy, and signs that housing may be bottoming.

So, if history repeats itself, the market should bounce back before the economy, and when it does, the bounce back tends to be fast and furious. If you leave for the comfort of cash, you won’t enjoy any of the rebound when it arrives. And if you think you can time the turnaround, beware. That means you have to make two timing calls correctly, getting out and getting in, which experience shows is extremely difficult. Typically, individual investors bail at market bottoms and reenter after the market has had its initial big rebound.

Recoveries are front loaded

	Average Annual Return Following Bear Market
	12-month period	24-month period	36-month period
If fully invested	47%	28%	20%
1 month of cash after bear	33%	22%	17%
3 months of cash after bear	18%	16%	12%
6 months of cash after bear	11%	13%	10%

Finally, the deeper the market has fallen, the faster it tends to come back. Schwab’s Chief Investment Strategist Liz Ann Sonders compares this phenomenon to pushing a beach ball into a pool: If you hold it lightly below the water and let go, it bounces back lightly, but push it down deep and let go, and the ball pops high out of the water. The markets seems to be much the same.

4. Long-term savings and stock investing is effective through thick and thin. We’ve experienced down markets many times before: the oil embargo of 1973-1974, the crash of 1987, the bursting of the dotcom bubble, and 9/11. But these downturns don’t have to derail your savings and investment plans. Take a look at the graph below which shows how dramatically a hypothetical and very disciplined saver was able to grow his money over 35 years, through all kinds of markets. Our fellow was making $21,000 a year in 1973 and saved and invested 10% a year. Like most of us, he had raises over time and continued to save and invest 10% of his or her pay a year over the last 35 years. In this case, with an aggressive investment mix and steady investing through some volatile times, he ended up with around $1.5 million. Why was he successful? It wasn’t because he could control the market. No one controls the market. But, you can control your level of savings and investment. In the past, these have proven to be a formidable duo, even through times as tough as we face now.

Progress Toward Goal More Important Than Short-Term Performance

5. Stocks Snapback from Fear-Driven Markets. A hackneyed phrase is that investors oscillate between fear and greed. When one emotion gets too powerful relative to the other, stock markets become volatile places. There now exists a method that some believe is a gauge of the collective fear among equity investors. This mirror into the collective soul of the investing public is called the VIX. VIX is actually the ticker symbol assigned to the Chicago Board Options Exchange Volatility Index. It measures the expectation of traders as to the volatility of the S&P 500 over the next 30 days. The higher (lower) the VIX the more (less) volatility that is expected.

Since the VIX was introduced in the 1990s, there have been a number of periods where the index has spiked upward. Typically, this has happened after periods of poor performance. The question we asked was: “How does the stock market perform after a period where the VIX has been at unusually high levels?” Let’s first focus on days when the VIX has been above 30. In the four weeks after those periods, the S&P 500 index has been up 4% on average and up 22% in the one year after the VIX has been at that high a level. What’s more interesting is that, if we restrict our focus even further to just those days when the index was 35 or higher, the subsequent upward has been, on average even higher whether we’re looking at four-week or one-year periods. Finally, on rare occasions, the VIX breaches 40. This has tended to be an even more positive development for stocks in the past. Where are we now? The VIX closed at 69.95 on October 10.

Snapback Strength

	Median S&P 500 Total Return
VIX Greater Than	Next Month	Next Year
30	+4%	+22%
35	+5%	+24%
40	+10%	+32%

While we believe equities should remain a part of the portfolios of many investors, it is important that every investor be thoughtful as to the percentage of their portfolio that should be devoted to stocks. For investors who need their portfolio within a few years, equities are rarely appropriate. For investors who are uncomfortable with the volatility inherent in equity markets, then we suggest they temper their stock exposure with investments in other asset classes (for example, bonds and cash).

It is important that equity investors maintain a diversified portfolio within the equity asset class. Equity investors should diversify across both domestic stocks and foreign stocks, across large company stocks and the stocks of smaller firms. Finally, equity investors should take care that their equity portfolio is not unduly vulnerable to poor performance in any one sector of the economy, or any one stock.

Important Disclosures

An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money market funds seek to preserve the value of your investment at $1 per share, it is possible to lose money by investing in this type of fund.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Any investments and strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and are not intended to imply future results.

Past performance is no guarantee of future results.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Your Financial Security at Schwab

In light of recent financial events, we are posting an open letter from Charles Schwab, Chairman and a director of The Charles Schwab Corporation since its incorporation in 1986.  Additionally, the links provided below allow for further insight on the subject of your personal finances.

Asset Safety with Schwab Institutional

How the Crisis on Wall Street May Affect You

Perspective on the Financial Markets and Your Financial Security at Schwab

The current environment for investors is in many ways unprecedented and clearly unsettling. As a long-time investor myself, and a believer in the American economic system, I know it is very hard to sift through all the information out there and make decisions with confidence and comfort.  It is especially difficult when the news around you creates concern not just about your own financial well-being but also about the safety and stability of the financial institutions you depend on.

I would like to offer some perspective on the current environment and on Schwab’s stability and strength specifically.

Financial Security at Schwab

I want to assure you that Schwab is financially strong, that we are absolutely confident in our continued financial health, and that we take appropriate precautions to give you peace of mind about the security of your money here.

• Our capital structure and liquidity are sound.
• Our internal controls and business standards are designed to keep your assets safe.
• We have strong credit ratings from Moody’s, S&P and Fitch, the major ratings agencies.
• Your brokerage assets are held separately from the company’s assets and are protected by SIPC insurance; Schwab Bank deposits are FDIC insured.
• Schwab Money Funds all continue to meet their objective of maintaining a $1.00 NAV and offering daily liquidity for investment and withdrawal.
• Schwab money market funds will participate in the recently announced U.S. Treasury Temporary Guaranty Program.

Is this a tough environment?  Yes.  Is it a time to be rash? No. Everyone, businesses and individuals, feel the effects of this difficult credit market, no one is immune to it.  But because we’ve managed our business carefully and because of the confidence and trust that you-our clients-have placed in us, our business has performed exceedingly well, despite a market environment that is as difficult as I have ever seen.  I mention this because our track record of strong financial performance has helped support a strong and stable company and will continue to do so in the future.

As the founder and chairman of this company and a client with my own assets here at Schwab, I want to reassure you there is no other place I would feel more comfortable with my bank deposits, cash, money funds, and diversified investment portfolio.

The Markets

For this past year, the financial markets have been struggling to overcome problems that arose initially out of a collapse in the subprime mortgage market. That in turn triggered larger economic issues which have led up to the current instability in the credit markets, and subsequent crisis in the financial services industry.

How bad is it? Market cycles like this are part of the process that a free market economy goes through.  But this is certainly one of the more pronounced ones in recent memory.  The discomfort of getting through it is awful for most of us, but in the end, it is a cleansing process that removes excess from the system and returns us to equilibrium. I’m encouraged that everyone within the government is now actively engaged in working on this problem. Over the coming days we’ll learn more about the resolution and how it will be put to work.

What is our advice during these trying times? Clearly, there is no single piece of advice that applies to everyone. Each of us has our own timeframe for investments and comfort level with risk.

But having lived through market downturns like this before, I do believe that everyone should review their portfolio to ensure that their asset allocation is in line with their long term targets. And if they are aligned, stick with it. During times of uncertainty, some investors make the mistake of trying to time the market by simply stepping out. History suggests that asset allocation, diversification and periodic rebalancing are the tools that investors should use to weather market downturns. Having the right investment mix doesn’t mean that the value of holdings will never go down-but rather helps strike the right balance between risk and reward given your goals. We’re available to help with that process if you need it. 

At the same time, I am mindful that some investors have grave concerns and are looking for safety at all costs.  For those people, there are solutions that should provide them comfort.  Despite the more dramatic news over the last two weeks, there are still many financial instruments that are managed to be conservative, and there are protections in the system such as FDIC insurance for banking products and SIPC for brokerages. In addition, the U.S. Treasury Department recently announced a temporary guarantee program that provides increased protection for money market funds.

In the midst of all the negative news, is there anything to be optimistic about?  I think there are some positive signs.  I think ultimately we’ll all be a healthier society coming out of it.  I also believe everyone, both individual investors and businesses are going to put a greater focus on risk management in the future, and regulation will become better, which will be healthy long term developments.

I hope this perspective on the current situation is helpful, but please contact us if you would like additional insight or help, either on the phone or at one of our branch offices. We are here to help.
 

Chuck Schwab

Range-Bound Trading 101

Over the past month, we have witnessed a short-term rally in the market that has been driven by two main factors: increased confidence in the financial sector and a drop in oil prices.  Our strategy of trading the ranges is proving to be the major way to make profits and add value to our portfolios in this current environment and for the rest of the year.  We will explain more as you read.

The financial sector has been aided primarily by investment banks trying to move forward by selling off their worst performing assets.  One example is Merrill Lynch selling over $30 billion worth of CDOs (collateralized debt obligations) at 22 cents on the dollar.  Even though they are taking a significant loss, investors have been happy to see that these asset-backed securities that represent subprime mortgage exposure are now off the balance sheets.

Another significant event was the signing of the Housing Rescue Bill by President Bush.  The measure, which has been regarded as the most significant housing legislation in decades, allows homeowners who cannot afford their payments to refinance into more affordable government-backed loans rather than losing their homes.  Furthermore, it offers a temporary financial lifeline to troubled mortgage companies Fannie Mae and Freddie Mac and tightens controls over the two government-sponsored businesses.

While both of these developments have helped financials, we are reluctant to say that the worst is over.  It was only two weeks ago when we saw the FDIC close two regional banks, First Heritage Bank, which was headquartered in Newport Beach, and 1st National Bank of Nevada.  Therefore, we believe it is still possible that a few more banks can go under in the near future.  We don’t like how Lehman Brothers has been selling off assets; a major financial institution like Lehman would send the markets back down to the lows reached last month. We feel that could be the final wash out for the financials and would create a great buying opportunity for long term investors.

Oil reached its all-time trading high of $147.27 per barrel on July 11.  Since then, we have seen a decrease of over $30 per barrel.  This alone has been vital in stimulating the market.  The reason for this is simple; high oil prices can essentially be treated as a tax on the consumption of gasoline and other energy products.  Thus, removing the “tax” puts more money back in the wallets of consumers, who are then free to spend their discretionary money elsewhere which should help lead the economic recovery process.

In other news, we are only three months away from the presidential election on November 4.  This is significant because over the past 20 presidential elections, the market is usually in a small trading range during the period between the end of the first-half of the year and the day of the election.  Two of these election years presented double-digit gains in the S&P 500 during the four-month time frame.  The rest have remained within a range of +6.5% and -3.2%.  The thing to note is that this time period tends to translate to relatively little change in the indices, most likely because investors are taking the time to assess the candidates and their proposed policies.  Therefore, we do not expect a long-term rally to develop in the next few months due to the uncertainty of the election.  Similarly, at this point, we do not see the market reaching new highs for the year.  Nevertheless, lower oil prices combined with low interest rates would provide the basis for an improved economy next year and a much better stock market overall.

As mentioned in previous articles, we continue to like technology and feel that the Nasdaq composite will outperform both the Dow and the S&P 500 for the rest of 2008.  Above all, we are confident that our trading strategy will continue to work well and help us to maintain strong performance.  Enjoy the rest of the summer, it is going fast.

Tellone Management Group Recognized in Forbes Magazine

If you were to read the July 21, 2008 issue of Forbes Magazine, you would see that Tellone Management Group has just been named as one of the Ten Most Dependable™ Wealth Managers of Southern California by Goldline Research. We are all very excited to receive this recognition and will continue to live up to our reputation.

To see a copy of the report published in Forbes Magazine, click here.

Below, you may read the press release sent to the Orange County Register:

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

Anaheim, CA, July 14, 2008: Tellone Management Group, Inc. has been selected by Goldline Research as one of The Most Dependable™ Wealth Managers of Southern California for 2008. The list of the Most Dependable™ Wealth Managers of Southern California is scheduled to be published in the July 21st issue of Forbes Magazine.

The President of Tellone Management Group, Inc., Dean Tellone, expressed his sincerest acceptance of this award, stating “Our goal has always been to provide the best possible service to our clients and to establish a loyal relationship that they can trust. This recognition certainly validates our efforts to become one of the most dependable wealth management firms.”

“Tellone Management Group, Inc. truly distinguished itself during our evaluation of the industry,” said Allen Scott, Research Director, Goldline Research. “The firm met or exceeded every expectation we have for holistic, client-centric firms.” Over 780 Wealth Managers were evaluated during the selection process and the response was overwhelming.

Tellone Management Group, Inc. was able to differentiate itself in a candidate pool with an average client to advisor ratio of one advisor for every fifty clients and an average of 33 years of experience. Mr. Scott further elaborated, stating that Tellone Management Group, Inc. stood apart from the other candidates that were evaluated because of the strength of their client references.

Tellone wealth managers offer comprehensive financial, tax and estate planning specializing in active investment management for individuals, trusts, IRAs and pensions.

Goldline Research is a third-party, independent research firm specializing in evaluating professional services firms. Goldline Research undertakes an extensive, in-depth research process to review all qualified companies in a respective area. Its proprietary research process includes individual company interviews and quantitative analysis of key company data, as well as customer reference checks to confirm high levels of customer service. Those companies that ultimately earn Goldline Research’s Most Dependable™ designation demonstrate a commitment to service unparalleled in their industry.

Wine(s) of the Month – July

We at Dino’s Blog are now making our wine of the month a regular feature. Here, we will recommend one of our preferred wines so you can add it to your list of favorites. We try many wines to find the best for our friends and clients.

While it is true that wine is considered to be a form of an alternative investment due to its nature of being an asset that appreciates over time, these wines will always be affordable and perfect for celebrating the end of a long work week or any family gathering. Lastly, it must be noted that drinking wine does have its health benefits. Not only does it relax you and help your attitude, it also improves cardiovascular health, prevents cancer, and many other benefits for your wellbeing. So relax and enjoy a glass of wine and this blog.

Ponte Super Tuscan 2005

We discovered this wine on a recent trip to Ponte Family Estates in Temecula. While they had several excellent wines, this was by far our favorite. An excerpt from the May edition of their monthly magazine explains more:

“One of the most well-loved wines at Ponte, Super Tuscan is a fantastic wine to drink year round, with anything from tomato basil bruschetta to roast chicken.

The origin of Super Tuscan dates back to the 1970’s a group of Tuscan winemakers wanted to make a Chianti-style red wine using unconventional methods. They began producing wines composed of Sangiovese and French varietals like Cabernet Sauvignon, and aged them in French oak to create a highly desirable wine. However, since they did not follow Chianti’s winemaking rules, the wines could not be classified higher than table wine. They eventually called these wines Super Tuscans and by the late 1980’s they had gained notoriety as superior Italian wines.

Ponte’s 2005 Super Tuscan is bold and dense with flavors of blackberry and pomegranate followed by oakey vanilla. Enjoy this red with Veal Chops or Shrimp Pasta.”

Mondavi Carneros Pinot 2005

Wine Weekly, which prides itself on its wine reviews, tasting notes, and education for the non-snob, tells us about Mondavi’s Caneros Pinot 2005:

“Open nose filled with forward, ripe raspberry fruit, touch of spice, and hint of earth. Smooth texture on the palate, with slightly green / unripe red berry fruit showing upfront. A good dose of spice and mild sweet earth arrives in the midpalate to even out the flavor, followed by mild tannins and decent acidity that carries the wine through the finish.

Try it with mildly seasoned chicken and pork chops, fish (salmon, trout, snapper), turkey, and vegetarian dishes (lentils and other legumes). Aside from the low-production beauties from esoteric producers, it will be difficult to find a better Pinot Noir at this price point.”

Market Mid-Point Review

The market is hitting its lows again. Don’t worry, stay invested in the right sectors.

This time, high oil prices have scared investors and put a damper on the market. Leading the downturn is the financial sector, which declined over 28% in the first half of the year. This has been a major reason for the 14.44% decrease in the Dow Jones Industrial Average over the same time period, as one in six Dow members is in the financial/insurance sector. Financials have not been the only ones hurt, as autos, housing, and retail are a few more sectors that have been feeling the pain of this market. The good news for us is that we have not liked those sectors and have not been hit like the stock market indices. Moving forward, we feel that there is the possibility of another bank or two, domestic or foreign, to go under. As a result, we recommend waiting to see that before bottom fishing in the financial sector.

With lower interest rates (read How Do Interest Rates Affect You?), we expect the second half of year to be a better environment overall. This assumes that oil will level and/or start to decline. We still like the internet and tech, but be cautious of risky sectors (i.e., financials, retail, autos), as we might have to wait until the fourth quarter for a better market.

There is a great deal of money to be made in this environment, especially with our short term trading strategies. There will surely be plenty of volatility going forward and we will continue to lighten up when the market is overbought and look for bargains when the market is oversold, like we are currently doing.

We are continuing to improve upon our website at www.tellone.com by adding new links and functionality. We always welcome any suggestions or comments.

Enjoy the moment, your friends, and your family while we wait for a better stock market. Have a happy 4^th of July and a relaxing summer.