Author Archive

Remember that simple money management begins with simple goals! As we discussed in our example of earning 10% per year for ten years, consistency is what matters when managing your money. With the goal in mind, we now set out to find investments that meet our criteria. This all relates to having a strategy or process for picking, buying, managing and exiting positions for our portfolio. The investment universe is so large we need to have a process to scan and filter the list down to a manageable set of opportunities. I don’t have the time or space to talk about all the details in performing this task, but we can cover simple steps to build a watch list. The watch list, for me, is the key ingredient to simplifying the money management process.

Let’s start by break this down in to three primary categories of lists to build:

• Ideas – Yes, ideas! This can be anything you hear about in the news or your neighbor telling you about the company she works for, etc. For example, homebuilders have been beaten down during the financial crisis. Look for a bottom and reversal on earnings improvement. Tax credits are extended for solar energy? Watch FSLR or TAN for entry points. The key is to keep a list of all the ideas you hear, or create yourself. Filter them periodically based on specific criteria for investing adding to your portfolio based on specific objectives.
• Fundamental Data – How boring! Maybe, but the last two earnings periods have produced some winners by following rising earnings quarter of quarter. Dividend scans are effective for building longer term income and growth portfolios. Take your pick of strategies and build a Watch List accompanied by a specific strategy for entry, exit and target.
• Technical Data – Trend analysis, pattern breakouts, momentum indicators, or price and volume. There are plenty of methods for applying technical analysis to investments. Define the ones you like and build a Watch List based on the strategy. When they hit your entry point, put them into your portfolio and manage them according to your objectives and risk tolerance.

Building a watch list is just that simple. Start by defining your criteria for an investment to be added to the watch list. Once built, apply a specific strategy for entry, exit and target. This is all part of building discipline into your strategy for simple money management. 

Every day we are surrouded with investment ideas. You don’t have to spend all you time reading financial reports or filtering the financial news looking for the perfect investment. Stop for one moment and think about your day, what did you hear of interest? Apply it to investing? What did you read? Who did you talk to that shared an interesting idea? Take the day to day events and filter through them, add the good ideas to your watch list. Keep a journal of ideas and filter for investable opportunities.

Recently British Petroleum (BP) was on every major network regarding the oil spill in the Gulf of Mexico. I received hundreds of emails asking me what I thought about investing in BP? My reply was what about Conoco Phillips (COP)? What about Chevron (CVX)? What about companies that specialize in cleaning up oil spills? What about Crude Oil? You get the point, it was all the other companies that could potentially benefit short term from the disaster that were of interest to me along with BP. They all became my Gulf Oil Watch List.

Building a Watch List is as simple as coming up with and idea. Once the list is built, define a strategy for entry, risk management and targeted gain. We will talk about how to do this in a future article, but defining the opportunity relative to risk/reward is important. Keep the process simple enough to find opportunities and have fun building the watch list. Don’t limit yourself, be creative. Some of the best ideas and opportunities sound crazy at one point. Enjoy the process of building and watching your list develop. Once the list is defined we can now go to the next step, building a strategy for putting them in our portfolio, making money from the ideas! Stay tuned for our next Simple Money Management article.

The market pushed higher today on the heels of what headlines claimed were subsiding fears over Europe! One day fear session and it’s over. The news that Portugal’s bond sale drew increased demand. Wow, glad that is over. The worry will be back, but hopefully it will remain only a worry. More to watch:

• Beige Book shows slowing growth in the summer. Wow – that was insightful! The important part of this news is there is still modest growth in the data. I find that important for the rally to continue into the fall for the broad markets.
• Ten year Treasury yield falls to 20 month low (2.67%) at the auction today! Demand remained strong for the paper which was a positive sign overall. The yield in the open market rose 5 basis points to 2.65%.
• Oil moved higher to $74.65 and XLE gained 0.7%.
• Gold down $2 to $1258 and GLD was flat. GDX was down 0.5%. Both remain at resistance and I am still looking for pullback within the uptrend.
• S&P 500 index still below the 1100 resistance. Still looking for a breakout move higher.
• Semiconductors remain weak and the outlook isn’t much better.

Still have to be patient short term as the trading range remains in play.

The play list remained intact as the market gains back some of yesterday’s loss. The movement was a nonevent for the list and we look for tomorrow to continue the positive ways.

Can gold continue to move higher? The analyst are positive and technically the chart shows a solid move back near the high of $1258 per ounce. The resistance has been a challenge near term and a small pullback may take place before moving higher. My question is more in line with why should gold move higher?

Fear has been one of the primary factors in driving the price of gold higher over the last four months. The financial crisis was the original fear factor in 2008, but the issues facing Europe relative to sovereign debt have weakened the euro and pushed money in the direction of gold. The financial situation worldwide is still not completely resolved, leaving the door open for the fear stimulus to continue.

Inflation is the other primary driver of price. The outlook has projected hyperinflation from a flood of money into the world financial systems as a result of the financial meltdown in 2008. Thus far that has not materialized, but the outlook for inflation remains a part of the pricing structure for now.

The mining stocks have their own risks relative to the cost of mining and the uncertainty of extraction from the ground. The risk is reflected in the stock prices during certain periods of uncertainty. An example was through August of this year, gold had move up 13%, and during the same period the World Mining Index dropped 9.7%. That is quite a discrepancy in pricing. Gold can do nothing as it did for two decades after the run higher in the early 80’s. What if fear subsides and the hyperinflation many expect never materializes? Welcome back to flat pricing or even declining prices.

The outlook is for the price of gold to generate another leg higher. Since 2003 the price of gold has moved from roughly $300 per ounce to the current $1258 per ounce. The fundamental reason for the price of gold to move higher is supply and demand. The common theme among those bullish on gold is demand will outstrip supply based on gold becoming a legitimate currency. A realistic argument and one to watch in the coming months and years.

Gold is at a decision point short term, break higher or test the previous low while remaining in an uptrend. Either way the likely direction is higher. The question is where to buy? Using GLD, SPDR Gold Trust as a barometer for investing, a break above $123.25 would be the first scenario as a break to a new high. The second, a test of support at the $119 mark or 50 day moving average. If it holds and bounces that would be a reasonable entry point. The key will be patience in letting the opportunity play out.

When it comes to the mining stocks, GDX, MarketVestors Gold Miners ETF has hit resistance at the $54.50 level and a break higher would be a reasonable entry point. The key is to be patient and put on your longer term investing hat if you are interested in gold at the current levels. Remember having a disciplined strategy for any investment is vital! Define you entry point, exit point and target before putting your money at risk.

Simple money management starts with understanding what you want from your money. What do you want? That is my favorite question to ask investors when discussing portfolio management, or position management. Define the goal first and foremost! Then manage the money to accomplish the goal. Making money is the implementation of money management in order to achieve the objective. 

Make a strategy.  For example, if you have a 401k plan or an IRA account, and you are accumulating money towards our retirement, how much do you need to earn per year to accomplish the end goal? For arguments’ sake, let’s say 10% per year for the next 10 years. This is a simple calculation you can perform in an excel spreadsheet or on a HP12C financial calculator. The important part of this calculation is often overlooked by investors, advisers and others. You made a compounding calculation of 10% per year for 10 years. If you are up 20% one year and down 10% the next year what happens to the compounding? If you started with $200,000 and earn 20% or $40,000, you then have $240,000 which loses 10% or $24,000 to net $216,000 at the end of year two. You are behind the pace needed to achieve the goal. Your simple goal is now getting complex. Why? Because now in order to accomplish your goal you will need to earn 11.54% for the next 8 years. Therefore, consistent returns are the key to achieving this goal.

Stop and think for a moment about the last 10 plus years in the markets. What has the average annual return been for the S&P 500 index? The answer is negative. What would that have done to achieve your goal? Take the last couple of years and factor the impact to your money. In 2008 the index was down 38.5%, in 2009 it was up 23.45%, and in 2010 YTD it is down 2.1%. Apply that to the $200,000! Your current balance would be $148,645 vs the $258,214 you should have in the account. Get the picture yet? Volatility creates complexity to your portfolio and most of the complexity comes from emotions, along with taking too much risk as you play catch up. Simplify the process of managing your money and you will find it easier to accomplish the goal with less stress.

Implement the investment plan. Going back to the original goal of earning 10% per year over 10 years. How do we manage this process along with  market risk? First, if we break the goal down to a dollar figure, we need to earn $20,000 in the first year. If we break it down to a quarterly number it is $5,000 per quarter. Second, we need to evaluate the current market risk of putting our money to work. Assuming the market has the same risk regardless of when we start is a bad assumption. Looking at the market, the first question would be, what is the current trend? From there we can break the market into 12-15 sectors and define the trend of each. Fixed income (bonds), commodities, international and international bonds are the same exercise. Once we define the trend for each we can start assigning risk parameters to each. This is where the strategy for investing your money starts to take shape. Do you want to use technical analysis, fundamental analysis, or a  combination of the two?

Let’s put our previous example into practice. The goal is to earn 10% per year for 10 years and limit the volatility or downside risk of the portfolio. We want the returns to be as consistent as possible. If the current trend of the market is up, we go with the flow and manage the downside risk of each position while managing the overall portfolio. If the trend shifts to a downtrend, we become defensive with the primary objective - principle preservation. We may shift a larger percentage of assets to fixed income during this period (assuming interest rates are declining or stable, versus rising.) The key is to manage the risk of the market in light of the goal. Too often investors focus on maximizing returns, versus managing the risk of the investment/market in light of the goal. Investing is all about the goal, not beating the market. If you beat the market, odds are you took more risk, and if you fail to manage the risk, you lose money. This takes us back to taking more risk trying to play catch up.

 Keep it simple by managing your expectations in view of the market and relative to the goal. Simple money management begins with the end in mind, the goal. Setting a goal for your portfolio is first, building and defining your strategy for money management is next, and implementing the investment plan puts it all into motion. In the beginning it is hard work (remember I said money management isn’t easy), but once the plan is built, and the strategy defined, the process of implementation (money mangement) becomes simple  discipline.

The play list hangs tough as investors take some money out of equities. The global markets held up fairly well as EFA (EAFE Index ETF) fell just 1.3%. IEV (Europe ETF) fell 1.8% as the comments focused on European banks. Spain was down 3.4%, Germany -2.1%, UK -1.4% and Italy -2.9% in response to the comments.

No new plays added today as the watch list was focused on a follow through or test of support. The latter is in motion and tomorrow we will see how this follows through.

Raised the stop on GLD as gold move higher in response to the banking comments relative to sovereign debt. Watch gold as it was ready to pullback and the move higher today may not last if the debt issue become subdued near term.

Watch and manage the risk of positions in light of the current market events.

Testing last weeks move. The market is poised to pullback and test the bounce off support from last week. This is not an unusual response and one to watch for additional opportunities. Financials are seeing the biggest test today down nearly 2% at one point. This opens to door to hold support or retest the lows. I like the potential set up short term.

The banking sector has come back to life after selling below support. The big question mark remains relative to the balance sheet. The bounce is worth watching and adding some of the banks to our watch list if they continue higher. BAC, C, AXP, GS and others were higher on the momentum. KBE and KRE are interesting currently and we watch to see how this works out.

Technology is still lagging, but the software sector continues to lead. Oracle announced the hiring of Mark Hurd today and it pushed the stock up more than 5% and the sector was higher as well. IGV, iShares Software ETF pushed through resistance last week and remains in a uptrend off the July low.

Balance of the market saw modest selling. The global markets were the leaders today relative to the downside risk. Comments concerning the validity of the stress test challenged investors. The amount of risky debt on the balance sheets is higher than originally thought and that didn’t help confidence. The euro declined against the dollar as well. Does this put the investors back on the defensive? How much will this mushroom or will it be a one day impact? Watch the details as they arise and mind your stops relative to the risk in the market currently.

Money management is difficult enough without adding complex trading strategies. For example, in a recent newsletter the following was posted, “I expect the market to decline today and therefore recommend October 40 calls on XYZ (changed for example purpose). I prefer this contract to gain liquidity for exiting the trade. This trade takes advantage of the two times leverage on the ETF plus the ten times leverage on the option, exactly what I want.”  Even if these comments sound simple and innocent enough,  the challenge is with the complexity of the strategy, not to mention the level of risk!

Whatever happened to simple money management? How did we get to the point where mainstream investment advice took on this level of risk and expertise? I know professional traders on Wall Street that don’t even manage money with this level of risk. Yet, there are more and more people attempting to put money to work based on this type of strategy. To make things worse,  the above article goes on to discuss putting 20% of the portfolio to work in this trade and then boasts the success of doing so intraday. I am not refuting the truth of this boast. I am addressing the sanity of such a trading strategy!

For most investors simple is better. The more you understand and trust your ability to manage money, the better you will be over time. Remember the story of the tortoise and the hare? If the tortoise could manage his money and earn 10% per year without losing money, in any given year,  then he is better off than hitting a home run on a twenty times leverage option play.  He’d also be less stressed. Leave that type of investing to the hare and keep your eye on the goal.

Why are investors interested in these types of trading strategies? The get rich quick mentality for one.  I believe investors have lost money over the last ten years and are looking for a way to catch up quickly. Taking more risk doesn’t help that situation, in fact, it only exacerbates the problem. Let me make a suggestion. KEEP IT SIMPLE!

I am going to focus this weeks’ comments on Simple Money Management for building a manageable portfolio. There are plenty of strategies available to manage money and the key is to keep it within your personality and goals. If you are a hare type investor, learn before you start running off with complex trading systems. For the rest of us, we will look at some simple strategies for managing money.

When I say simple that does not mean easy. Unfortunately, easy is not a word I associate with the process of managing your money. That is why simple works. As an example, setting a defined goal for your money is the starting point, and yet so few people spend enough time on the process. We are too excited about making money and we run right to the investment process. After all, the goal is to make money. Right? In its purest form the goal of investing is to make a return on the investment. However, without taking the time to determine the true goal of investing your money, you may go down the wrong path and not arrive at the appropriate destination.

One of the most common investment vehicles today is a 401k or IRA for retirement. Taking time to determine the goal is one of the least examined parts of putting money into one of these vehicles. I hear investors talk about the deferred taxation of the asset as the reason for investing, or because the company will match 50 cents on the dollar contributed. Those are benefits, not goals. The goal of a 401k or IRA is to accumulate a sum of money which will provide an income when you retire. If that matches your goal then you are on the right path. However, there are many other variables that go into the planning process and without them you may not accomplish all of your goals.

We will break this process down over the coming week or weeks to learn how to implement the process of simple money management. No one said the process would be easy, but we will learn how to keep it simple enough to implement. If you can implement it with confidence you will follow through and achieve your goals.

The test of 1040 support on the S&P 500 index holds again. The catalyst was the economic data globally and domestically. It wasn’t stellar news, but then it wasn’t falling of the cliff news either. Each piece of data gave some hope of survival for the recovery. It was enough to bring buyers back to the table and push stock prices higher. We are not out of the woods yet by a long shot and there is plenty to digest and work through on the horizon, but for now we can take a deep breath and enjoy the long weekend.

Last week I discussed the economic data coming into the week being the catalyst to short term direction and it has been just that. However, it has gone the opposite direction of many projections to the downside. This is why I am constantly saying to take this market one day at a time and one data point at a time. Even with the bounce this week the same approach needs to be taken heading into next week. Growth is still not accelerating, in fact it is contracting and that continues to put pressure on stocks.

As we head towards the fourth quarter the markets could be creating a value proposition for investors. It could materialize into a fall rally if the data starts to shift moving towards the October-November timeline. Finding value when the sentiment is negative takes focused money management. Has anything changed in our outlook for stocks? Not really, they remain challenged and the outlook remains uncertain. Scanning across the sectors we find some leadership and it got somewhat better after this week, but heading into the infamous week after the Labor Day Holiday, be patient and let this pan out before putting too much money to work. We see more trading opportunities than longer term investments. theETFexchange.com is where the majority of the trades will be posted. SectorExchange.com will have the longer and broader plays posted. Watch and Play according to your risk tolerance.  

What to watch:

• Quantitative easing from the Fed? This was a topic relative to the FOMC minutes. Is the Fed going to offer more help to the economy. The answer short term is no. As we move into the fourth quarter if the job picture doesn’t improve it is more likely. Watch this topic looking forward as the action would be a negative for the equity markets.
• Volatility. VIX versus the day-to-day version. When looking at the VIX the volatility is under control, but the day-to-day veriety has been very active. I would look for this to subside if the a trend starts to establish in the broader market. For now it is alive and well.
• Risk assets will remain under pressure. What is perceived as risky assets would be the better statement, but stocks will remain under pressure based on data relevant to future growth. No growth in the data points, equals not growth in these stocks.
• August started with a 3% rally? Remember this when everyone is talking about the 5% move over the first three days of September.
• Banks – value or bear trap? The sector sold below key support and bounced back with the current rally. This is not a healthy sector fundamentally. The pressure on banks continues to grow. The lack of lending and the zero percent interest rates are taking a toll on the balance sheet relative to revenue. Watch – take what it gives but be very patient on adding positions.
• Homebuilders – opportunity or hope. This is opportunity despite the housing sector being under pressure. The new home market is a supply and demand issue. If the builders keep inventory under control and prices in check they can and will compete against the existing home market. I like the outlook for the builders.
• Made in China? Can we make money there? Yes, longer term growth of China remains in play and is well worth tracking and investing. We added a play in FXI on Wednesday and we continue to look for the next wave of growth in Asia.
• Is Retail for Real? Is the consumer spending or is it just the year over year comps are bad? Some of both. The key will be margins. If the retailers can maintain margins and the bottom line pays off the sector will perform. I think they gave away plenty during the back-to-school sales period and the top line will not be reflected in the bottom line. Watch take the short term trade, but not much more near term.
• Are bonds heading lower? The bounce in yield is correspondent to the rise in equities this week. I have been warning about this for awhile. That said the demise of bonds is over stated. TLT which is the ETF for the 30 year Treasury bond fell to support this morning at $102.60 and bounced. I would expect to hold near this level short term. The outlook for growth in the economy is not convincing at this point manage the risk accordingly, but look for opportunities in the oversold swing to the downside on the rally in stocks.
• The broad market indexes found support. The next issue on tap is resistance. Watch next week to run into resistance and what catalyst will break the indexes higher. S&P 500 index is 1100 which was hit on Friday. The next would be 1130.
• Global markets led the bounce this week and they continue to look solid. Take the opportunities as they arise and maintain stops relative to the risk.

Next week I would expect the broad markets to pullback and digest this move higher. We will look for the opportunities in the move.  It is important to remain patient and let this all play out. Take what the market gives one day at a time.

The broad market indexes move to resistance as the jobs report was better than expected. Most  of the economic data was better than expected this week putting investors in a better mood. The focus moving forward is hold the move and establish a new uptrend short term. The long weekend will give everyone a chance to regroup and make key decision relative to putting money to work in the broad markets.

The watch list has produced some plays this week and we continue to be cautious about the deployment of capital in this market currently. Today we hit the entry on PST as the yield on Treasuries rise in response to the rally in stocks.

Oil pulled back on the day in contrast to the rally. The supply/demand issue remains an issue short term for the commodity.

Plenty to filter and scan over the weekend. Watch for an updated list on Monday as a result of the move this week. I am scanning both the reversal at resistance and the break through resistance as opportunities. We will post and update the watch page on Monday for next weeks trading.