THOMAS NOGALES FINANCIAL, LLC
March 2007 Update
The S&P500 is at 1406 on 28-February-2007
Year to date, the S&P500 is down -0.5% and the TNF Balanced Portfolio is up 1.8% (with half the stock market risk.)
Symbol
|
Return
|
Asset Class and % of Total
|
PCRIX
|
+4.66
|
Commodity Futures 10%
|
VGSIX
|
+5.90
|
REIT Index 10%
|
VFINX
|
-0.51
|
S&P500 15%
|
VMFXX
|
+.82
|
Money Market 5%
|
VBMFX
|
+1.44
|
Bond Index 30%
|
VGTSX
|
+1.02
|
International Stock 15%
|
VISVX
|
+1.41
|
Small Cap Value 15%
|
As of 2/28/07
On the morning of 2/27 as world markets stumbled I posted this comment on the web site.
27-Feb-2007: World stock markets dropped after a 10% decline in China and comments by Alan Greenspan about a possible US recession at year-end 2007. At this time, TNF sees no signs of accelerating inflation or a recession ahead. Don't sell into fear. Maintain your asset allocations.
I actually watched CNBC for a while in the afternoon on Tuesday - something I rarely do - to see what the commentators were saying about the markets. The Dow down 416 points. Now I remember why I don't watch it. There was some good advice but some of it was pretty bad. They even had a segment with one of their go-to experts; a day trader who apparently works out of his bedroom offering his take on things over his black and white webcam.
We're going through a period where asset prices must readjust. Speculation in emerging markets, mortgages, hedge funds, and other asset classes needs to be washed out.
Market Alert Model
The TNF core model is used to time large cap stocks. It’s currently IN the stock market. Stocks are safe to hold. My indicators show the economy is strengthening not weakening. Inflation is under control. Stay invested with proper diversification. TNF doesn't know what will happen over the next few months but the chances of a large decline are low.
Year Ahead Timing Model
The YAT model is used to indicate periods of buy opportunities within the Market Alert Model’s timing cycle. The YAT model is slightly positive for the year ahead. This means money invested in stocks today will likely be worth more one year from now.
Interest Rate Model
The TNF Interest Rate model is negative on interest rates and long bonds.
Housing
There was plenty of hand wringing this past week over the sub-prime mortgage market - big worry about all the mortgage loans made to people with poor credit and no money down. I have no idea who's now holding all that loan paper since it was repackaged and resold. I wrote a few months ago that investors should expect a shakeout early in 2007 as weak hands are forced to fold. The strongest part of the shakeout could continue into the early summer. About July the housing market will stabalize. This doesn't mean prices will start moving up but will stop going down in most areas.
The Future for Stocks
The TNF Market Alert Model has been in the stock market since February 2003. We’ve done very well. The model’s purpose is to avoid steep losses and this means drops of 10+ percent. TNF doesn’t make market predictions about where the S&P500 will be in six months but things look fine for the present. In the longer term I feel that accelerating globalization is positive for stocks and for smoothing out bumps in world economies.
The current environment has some additional positives. High corporate profit margins (that some believe are unsustainable) have produced lots of cash in corporate tills. Share buybacks are on a roll. China has decided to place 25% of its cash hoard into world stock markets. Plus, interest rates are conducive to economic stability and the market’s PE ratio is at about the long term historical average.
Jeremy Siegel’s fine book The Future for Investors predicted that share purchases by Asian nations could sustain US stock indices and counteract negative Western demographics. So far, he’s correct.
TNF remains positive on stocks and encourages investors to maintain a balanced portfolio. The TNF Balanced Portfolio may appear a bit too conservative but it’s based on research into optimizing risk and return. It’s a personal decision if you wish to allocate a somewhat higher percentage to stocks when we’re out of bonds. For most investors, simply moving to a money market when the models are out of stocks or bonds will greatly enhance long term returns.
The Financial Services Industry
The days are long gone when a long term relationship with a financial institution provided benefits to you. Small investors who exhibit loyalty are played for fools by many bank investment officers and insurance companies. That sounds harsh but I’m afraid it’s true.
Insurance companies provide some valuable products but bad practices abound. It’s essential to check the cost on your car and home insurance every two years. Many firms gradually raise your rates each year and that includes the biggest names. If you’re loyal, that spells sucker and you get overcharged. Specialty policies for funerals, cancer, etc are overpriced bunk. Whole Life insurance is very costly. A person is almost always better served with term insurance while dependents are a concern.
Look at the annuity industry. These products are generally far too expensive although suitable in a few circumstances. A portfolio like the TNF Balanced Portfolio but with only 10% allocations to each stock class plus commodities and REITs provides consistent and better returns than any annuity (25 years: 9.4%; 5 years: 8.8%). Other than a tiny loss in 1974 and -2% in 2002 it’s always made money. How do you know what I say is true. Just run the TNF Asset Mix Calculator from my main web page. See for yourself.
People make the mistake of assuming the business cycle and the stock market cycle move together. That’s not true. TV experts go bezonkers over inflation data or a jobs report and stocks slump for a short while. A few days or weeks later the major trend resumes despite the news. Investors manifest fear as irrational action which is not helpful for success. But, irrationality provides opportunity to those with knowledge.
Banks vs Credit Unions
Consumer Reports had a good article this past month on why you might wish to dump your bank and switch to a credit union. In 1998 the rules were changed so credit unions could serve a larger client base rather than a single employer or employee group. Many have adopted charters that let them sign up anyone living in a county. They offer all the services of banks but at much lower costs because they’re non-profits for tax purposes. Depositors own the CU and it works for their benefit not Wall Street.
Big banks have become very aggressive at charging fees on the accounts of average customers. This is done by linking account balances, raising required minimum balances, limiting the number of checks you can write, and other petty rules. They're out to raise fee income and there’s usually no cost or service reason for their practices. Banks give you a very limited time to challenge the fees. After that, you’re out of luck. This trend away from customer service means people should be watchful.
I’ll wager many people might be paying unnecessary fees if my experience at Bank of America is any indication. I noticed a $20 fee on my checking account and inquired about it. The bank officer said “Sometimes these things just happen and we don’t know why”. When I checked further I found fees on previous months. All were “errors” and were reversed without any argument whatsoever. I guess it’s just a mystery.
I walked across the street to the credit union. The CU pays 3.2% on their money market for amounts under $20,000. BofA pays 0.3%. BofA requires a minimum balance whereas the CU does not. Loan rates, safe deposit box fees, and CD rates were all much better and the debit card is accepted at more locations than BofA’s.
Publicly owned banks have lost interest in giving the average Joe/Jane a fair shake so take your business elsewhere for a better deal.
Banks have a slogan: “Think fee not free”. For personal banking, I’d say Think Flee and fast.
An Unfair Advantage?
I’ve long felt that the enormous trading profits of major Wall Street firms have come from knowledge not available to other market participants. That’s not to say what they do is illegal but they certainly would seem to have an unfair advantage over others. How else could firms like Merrill Lynch, Goldman Sachs and others make over 50% of their profits from trading on their own accounts and do it year after year. Finance theory says that in an open public market system where information is widely available this sort of performance should be impossible. The SEC is investigating possible insider trading.
"In early February, the SEC confirmed that it was investigating whether the major brokerage houses were tipping off hedge funds to the trades the brokers handle for big clients like mutual funds. If that's happening, it would be a scandal. The SEC is also likely to scour trading records to see if the brokers are using info about clients' moves to invest their own capital. If the SEC finds evidence that they are, the scandal would be enormous - and go to the heart of Wall Street's profit machine."
The firms may profit because trading desk information is shared when it shouldn't be.. Maybe it's legal but knowing about large block trades made by mutual funds and buying or selling alongside the trade shouldn’t be allowed. Every investor pays higher share prices when Wall Street takes a rake.
The current Treasury Secretary, Henry Paulsen, is a Goldman Sachs alumnus and worth hundreds of millions. The Democrat’s Robert Rubin is also from Goldman and a former Treasury Secretary and worth many millions. These guys are quick to talk up the benefits of globalization and open markets for everyone else. They’d be perfect candidates to explain how they got so rich solely due to their superior intellect and keen analysis.
The Experts
I’m always careful about accepting a statement by an expert at face value because often it’s wrong. For example, I like some of Ben Stein’s columns but his book on market timing www.YesYouCanTimeTheMarket.com strikes me as an exercise in curve fitting. I understand why someone would follow all the indicators he discusses but don’t see how a list of them employed as moving averages can work as a stock market timing method.
I wonder about the people who accept advice from Robert Kiyosaki – author of the Rich Dad/Poor Dad books. Logic and business experience convinces me his Cash Flow Quadrant talk is superficial at best. Read this analysis of Kiyosaki by John Reed: http://www.johntreed.com/Kiyosaki.html Here’s a quote: “Rich Dad, Poor Dad contains much wrong advice, ... and virtually no good advice.”
I mention concerns about experts because, in many cases, people truly believe what they say but never test it properly. Basically, it’s a defective belief system stated as fact.
Investors should have the same critical view of the TNF models. I’ve back tested my data and done correlation analysis on my models and posted the historical outcomes on the web site. The models’ positions are public and real-time. The TNF stock model worked perfectly during the great 2001 bear market. But there’s always “the next time”. As an investor, it’s simply not wise to bet all your assets on any expert. That’s why I constantly stress owning a balanced portfolio.
Experience has shown me that many people are not capable or not interested in managing their money and are susceptible to the spiels of celebrity experts. They should be honest about their limitations and consider using an ethical financial advisor. I have no problem with advisors who are fair and open about their fees. Personally, I think index funds and no-commission (fee paid) advisors are the best way to go. For the same reason, I’d invest with Vanguard or TIAA-Cref rather than Fidelity. Lower costs are money in your pocket.
Finally, if you’re tempted to buy common stocks, it’s best to be armed with some financial knowledge – otherwise watch a couple movies until the urge passes. One of the best books on analyzing company financials is “It’s Earnings That Count” by Hewitt Heiserman. It shows how to dig out the facts from company financial statements. It takes motivation but isn't that hard. This type of independent research is necessary to eliminate poor selections when building a stock portfolio.
Book Review
I read Ken Fisher’s financial book The Only Three Questions That Count: Investing by Knowing What Others Don’t this past month. $16 at Amazon. The book is 360 pages and could be a lot shorter with some editing but Fisher’s a billionaire so I guess he can write anything he wants. His style is certainly quirky but I liked it.
The paraphrased questions are essentially:
1. What do I believe that is actually false?
2. What do I know that other people don’t?
3. How is wrong thinking hurting me?
Fisher exposes financial ideas most investors believe to be true which aren’t. If you think deficits and war are always bad for stocks then you haven’t done your homework. He encourages you to investigate ideas rather than to believe it just because others do. Develop methods and knowledge that provide an advantage over other investors.
If you know something they don’t then make a bet on it – that’s how you win big. He discounts as financially worthless any information reported in the news or anything widely known. It’s already ‘priced’ as he says. Prove something wrong that others believe to be true and you can make money. He says it’s critical to always be humble and on guard with the stock market – he calls it The Great Humiliator.
Fisher devotes a lot of ink to dissecting wrong thinking in the markets. This alone makes the book worth reading. For example, some experts insist that an inverted yield curve always leads to recession. Fisher says investors need to think global. He calculated the “world weighted” yield curve and found it’s positive. In a globalized financial system, this perspective makes a lot more sense. S&P recently released similar research.
Another reason I like his book is I’ve used similar methods to develop my timing models. I knew there had to be cause-effect relationships that could explain interest rates and stock price cycles. The professors, columnists, and experts were wrong more than right so I ditched them early and determined to figure it out myself. I spent several years searching and then realized the answer was really quite simple and logical. I was looking at things the way experts had conditioned me and it was upside down.
The three questions are useful in other areas of life too. Analytical introspection is useful for examining wrong personal beliefs on social, political, and relationship topics too. I’ve used it to rid myself of prejudices and other negative thought patterns that needed an oppressor or a victim to exist. A person born into bad circumstances may require a lot of effort to get free of wrong thinking but it can be done.
Commodities
The buzz is going around that the big money is leaving commodities and the asset class will have tough times ahead. If that’s the buzz then I’d say do the opposite. The index consists of 25% energy. The Financial Times recently reported on a consultancy report by Wood Mackenzie of Edinburgh and they say we’re in for a wild oil ride in the years ahead.
It states that after 2020 conventional oil may not be able to meet any demand growth. All of the world’s extra oil will come from unconventional sources. This means oil sands, oil shale, and tars. The ability to process this stuff in significant volumes doesn’t yet exist and will be incredibly expensive and environmentally damaging. It requires huge amounts of potable water and natural gas. One expert said “this exercise is like turning gold into lead”.
Oil prices have fallen back to $60 but I believe they’re going up steadily in the years ahead. That doesn’t mean oil company stocks will follow the same trajectory – I don’t know. But, energy commodities and prices on other products requiring energy for processing likely won’t be going down. Maintain your asset allocation.
Worthwhile Technology Changes for Notebook Computers
In May, notebook computers will begin to include some important new technologies. Intel will release the new “Santa Rosa” chipsets under the name Centrino Pro. The major advantages are: Embedded flash memory will allow notebooks to boot up and return from the hibernate state 2-3 times faster. Wireless-N (802.11n) is included as the successor to 802.11g. This new standard will provide up to 3 times the range and much faster transmission for wireless networks. It can individually step down to older wireless devices without slowing down the whole network. Also, included are improved video capabilities to permit display of high definition video.
If you’re planning to buy a notebook computer, I think it will pay to wait for the Centrino Pro chipset.
Best Regards,
Thomas Nogales Financial, LLC (www.thomasnogales.com)
Tom Gleason, Manager & Researcher
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Disclaimer:
S&P500 is a registered trade name of The McGraw-Hill Companies, Inc.
Investing involves risk and the future performance of our models cannot be guaranteed. TNF is not a registered investment advisor and nothing published by TNF should be considered personalized investment advice. Any investment recommendations made by TNF should be made only after consulting with your investment advisor and only after reviewing the prospectus or relevant financial statements. TNF does not receive any compensation for mentioning stocks, funds, or financial products.