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Money Market Fund Warning
Sentinel Management Seeks to Freeze Redemptions (Update1)
By Jenny Strasburg and Katherine Burton
Aug. 14 (Bloomberg) -- Sentinel Management Group Inc., a Northbrook, Illinois-based money manager, has asked regulators for permission to halt investor withdrawals.
The firm contacted the Commodity Futures Trading Commission for approval to halt redemptions ``until we can honor them in an orderly fashion,'' according to an Aug. 13 letter to clients.
The firm managed $1.6 billion as of last month, according to a filing with the U.S. Securities and Exchange Commission. Sentinel's investments include short-term commercial paper, investment-grade bonds and Treasury notes, according to its Web site.
``Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade,'' according to the client letter, which does not specify which funds are affected. ``We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients.''
Eric Bloom, the firm's president and chief executive officer, didn't immediately return a call seeking comment. An assistant who declined to be named said the CFTC hasn't granted the firm's request yet.
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By Jenny Strasburg and Katherine Burton
Aug. 14 (Bloomberg) -- Sentinel Management Group Inc., a Northbrook, Illinois-based money manager, has asked regulators for permission to halt investor withdrawals.
The firm contacted the Commodity Futures Trading Commission for approval to halt redemptions ``until we can honor them in an orderly fashion,'' according to an Aug. 13 letter to clients.
The firm managed $1.6 billion as of last month, according to a filing with the U.S. Securities and Exchange Commission. Sentinel's investments include short-term commercial paper, investment-grade bonds and Treasury notes, according to its Web site.
``Investor fear has overtaken reason and has induced a period in which most securities have simply ceased to trade,'' according to the client letter, which does not specify which funds are affected. ``We are concerned that we cannot meet any significant redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients.''
Eric Bloom, the firm's president and chief executive officer, didn't immediately return a call seeking comment. An assistant who declined to be named said the CFTC hasn't granted the firm's request yet.
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Summer of 2008 crisis
My expectation for a systematic crisis in the summer of 2008 comes from the volume of resetting adjustable rate mortgages (ARM's) which peak next March. There are over $500 Trillion in derivatives world wide. Some of those Trillions directly play off the mortgage backed securities (MBS) that are now worthless since no one will give a bid to buy them when hedge funds and pensions must sell them.
The unfortunate homeowners lose their houses when their mortgage reset to higher monthly payments according to the terms of the adjustable mortgages (ARM's) ending their teaser, introductory, low rate periods. These mortgages have been bundled together when they were first made and sold to investors as bonds labelled MBS's. The MBS's also were accumilated in colateralized debt obligations (CDO's) which function like mutual funds that instead of being full of stocks are full of MBS's and derivatives. Banks, pension funds, insurance companies and other financial institutions bought these MBS's and CDO's because the rating agencies described much of the MBS's and layers of the CDO's as AAA, AA, and A, which are the labels for the very best investment grade bonds and financial instruments. Much of the CDO's and MBS's came from mortgages that defaulted or will default over the next 18 months. The term used for these mortgage related complex financial instruments which no one will buy and thus have little or no value is 'toxic waste'.
Everyday now the main street media is full of TV and print stories about houses being foreclosed. The financial media is full of hedge funds and banks losing vast sums of money from the toxic waste. The worst is still ahead. The first peak in resetting ARM's is in October. It takes at least six months for a house mortgage to go from the first nonpayment of the mortgage to the bank owning the house (REO). This is a downward spiral that lowers that comps that other houses get their prices. Add to this that house sales have declined and more houses are being built, the future for toxic waste can only be worse.
One index that tracks the declining value of toxic waste used for derivatives called the ABX shows in dramatic detail the collapse of derivatives: view link
There you can see how the rating agencies such as Moody's, S&P and Fitch have done horrible jobs of describing MBS's as AAA, AA, A, BBB and BBB- because the prices of these bond bundles and bonds have collapsed reflecting them as toxic waste. Rating agencies are starting to regrade the toxic waste to lower labels, but that is like shooting a dead horse then pronouncing it dead when it was already dead before shooting it.
Now comes the politics of the Democrats promoting a bailout and the politics of the President rejecting a bailout of the unfortunate, stupid people who signed up for the ARM's, the banks that made and sold the MBS's and the world wide investors of MBS's, CDO's or derivatives based on toxic waste. Ms Clinton's proposal will be a campaign issue. But, if my evaluation plays out, then the US and the worldwide investors will be in deep shit by next summer well before the fall 2008 elections.
I have tried to make this simple and readable. The financial instruments involved remain far more complex. It takes days and weeks for experts to place a true price on the financial instruments by pricing them to what real buyers will pay for them. This mark-to-market price remains difficult and the lack of clarity in what they are worth changes moment to moment so they are decribed as having a lack of transparency or opaque. When investors try to get their money from funds having toxic opaque waste, the funds can deny them access to thier money claiming that there is no bid or they don't know what their toxic waste is worth.
Added to this horrible development, the Federal Reserve (Fed) is coming to the rescue of the banks through its primary broker dealers on Thursday, Friday and Monday. The Fed makes temporary loans to its primary broker deals called repurchase agreements (repos). The Fed takes the toxic waste as collateral and gives the banks Treasuries notes to use. The repos must be repaid in 3 days by the banks. World wide Central Banks such as the Fed have added over $300 Billion dollars on Thursday, Friday and Monday.
Please remember that the worst is still ahead.
The unfortunate homeowners lose their houses when their mortgage reset to higher monthly payments according to the terms of the adjustable mortgages (ARM's) ending their teaser, introductory, low rate periods. These mortgages have been bundled together when they were first made and sold to investors as bonds labelled MBS's. The MBS's also were accumilated in colateralized debt obligations (CDO's) which function like mutual funds that instead of being full of stocks are full of MBS's and derivatives. Banks, pension funds, insurance companies and other financial institutions bought these MBS's and CDO's because the rating agencies described much of the MBS's and layers of the CDO's as AAA, AA, and A, which are the labels for the very best investment grade bonds and financial instruments. Much of the CDO's and MBS's came from mortgages that defaulted or will default over the next 18 months. The term used for these mortgage related complex financial instruments which no one will buy and thus have little or no value is 'toxic waste'.
Everyday now the main street media is full of TV and print stories about houses being foreclosed. The financial media is full of hedge funds and banks losing vast sums of money from the toxic waste. The worst is still ahead. The first peak in resetting ARM's is in October. It takes at least six months for a house mortgage to go from the first nonpayment of the mortgage to the bank owning the house (REO). This is a downward spiral that lowers that comps that other houses get their prices. Add to this that house sales have declined and more houses are being built, the future for toxic waste can only be worse.
One index that tracks the declining value of toxic waste used for derivatives called the ABX shows in dramatic detail the collapse of derivatives: view link
There you can see how the rating agencies such as Moody's, S&P and Fitch have done horrible jobs of describing MBS's as AAA, AA, A, BBB and BBB- because the prices of these bond bundles and bonds have collapsed reflecting them as toxic waste. Rating agencies are starting to regrade the toxic waste to lower labels, but that is like shooting a dead horse then pronouncing it dead when it was already dead before shooting it.
Now comes the politics of the Democrats promoting a bailout and the politics of the President rejecting a bailout of the unfortunate, stupid people who signed up for the ARM's, the banks that made and sold the MBS's and the world wide investors of MBS's, CDO's or derivatives based on toxic waste. Ms Clinton's proposal will be a campaign issue. But, if my evaluation plays out, then the US and the worldwide investors will be in deep shit by next summer well before the fall 2008 elections.
I have tried to make this simple and readable. The financial instruments involved remain far more complex. It takes days and weeks for experts to place a true price on the financial instruments by pricing them to what real buyers will pay for them. This mark-to-market price remains difficult and the lack of clarity in what they are worth changes moment to moment so they are decribed as having a lack of transparency or opaque. When investors try to get their money from funds having toxic opaque waste, the funds can deny them access to thier money claiming that there is no bid or they don't know what their toxic waste is worth.
Added to this horrible development, the Federal Reserve (Fed) is coming to the rescue of the banks through its primary broker dealers on Thursday, Friday and Monday. The Fed makes temporary loans to its primary broker deals called repurchase agreements (repos). The Fed takes the toxic waste as collateral and gives the banks Treasuries notes to use. The repos must be repaid in 3 days by the banks. World wide Central Banks such as the Fed have added over $300 Billion dollars on Thursday, Friday and Monday.
Please remember that the worst is still ahead.
Overvalued, overbought, and overbullish
Overvalued, overbought, and overbullish conditions have generally resulted in disappointing market returns, regardless of other features of market action. Yet the past several weeks have quietly added a new ingredient: Treasury bill yields are now higher than they were 6 months ago, and Treasury yields of all maturities have popped higher in recent weeks. While this might seem like a trivial and low-magnitude event, it actually contributes to a syndrome that has invariably been negative for near-term market outcomes (not to mention the negative long-term results that overvalued market conditions have historically produced).
We've got overvalued, overbought, overbullish conditions, coupled with upward pressure on yields. I'll just go ahead and give it a name: “Ovoboby.”
To convey some idea of the potential risks, I've assembled a very simple set of conditions that, taken together, have usually been followed by awful near-term returns, not to mention long-term disasters. Importantly, these conditions have been unfavorable even when earnings have been growing, interest rates have been reasonably low, and the prevailing trend of the market has otherwise appeared quite strong. The general results aren't particularly sensitive to alternative criteria. Indeed, stocks tend to produce tepid returns under far broader and more subtle definitions, but my hope is that a simple, specific example will drive the point home:
Hazardous Ovoboby
Overvalued
S&P 500 price/peak earnings greater than 18
Overbought
S&P 500 at a 4-year high, and at least 5% higher than its level 6 months earlier
Overbullish
Investors Intelligence percentage of bullish advisors above 53%
Yield pressure
3-month Treasury yield higher than its level of 6 months earlier
Here is an exhaustive list of the instances where we've observed this set of conditions on a weekly closing basis (I've used Dow Jones Industrials data for easy reference):
April 30, 1965: The Dow advanced less than 2% to its May 14, 1965 peak, 10 trading days later. The Dow then skidded -10.5% lower over the next 30 trading days.
December 18, 1972 and January 5, 1973: The Dow advanced less than 2% from the first instance, and a fraction of a percent from the second instance, to its bull market peak on January 11, 1973. The Dow then toppled -12.3% over the next 50 trading days, and collapsed to half its value over the following 22 months.
August 14, 1987 and August 21, 1987: No remark is really necessary, but for the record, the Dow advanced less than 2% from the first instance, and a fraction of a percent from the second instance, to its bull market peak on August 25, 1987. The Dow then crashed -36.1% over the following 38 trading days.
April 3, 1998: The Dow advanced another 2.5% over the following 6 weeks to a preliminary high on May 13, 1998, and quickly dropped -6.3% over the following 22 trading days. The market then enjoyed a short-lived 8.1% rebound over the next 22 trading days to a fresh high on July 16, 1998, before suddenly plunging -19.1% to its August 31, 1998 low, 32 trading days later (overall, a -16.1% loss from its April 3 level).
April 23, 1999: From a longer-term perspective, the market was already floating on the suds of the late-1990's bubble. Indeed, despite the recent high in the S&P 500, its total return has underperformed Treasury bills in the years since then. Still, from a short-term perspective, this was the most benign instance on the list. The Dow advanced less than 3% to a peak on May 10, 1999, followed by a selloff of -4.9% over the next 13 trading days. The lack of a deep correction, however, left subsequent gains open to repeated selloffs, erasing them even before the bear market began in earnest.
July 2, 1999 and July 16, 1999: The Dow advanced less than 2% from the first instance and about 1% from the second instance, to a peak a few weeks later on August 25, 1999. The Dow then fell -11.5% over the next 36 trading days.
December 23, 1999 and December 31, 1999: The Dow advanced less than 3% from the first instance and less that 2% from the second instance to the final peak of the market bubble a few weeks later, on January 14, 2000. The Dow then plunged -16.4% over the next 35 trading days.
March 24, 2000: The actual bull market high already behind it, the Dow had enjoyed a bounce off of an early-March low. It advanced less than 2% further, to a short-term peak 12 trading days later. The Dow then dropped -8.8% over the following 32 trading days. Over the following 30 months, the stock market would lose half its value.
November 17, 2006, December 8, 2006 and January 12, 2007: We'll find out shortly...
view link
We've got overvalued, overbought, overbullish conditions, coupled with upward pressure on yields. I'll just go ahead and give it a name: “Ovoboby.”
To convey some idea of the potential risks, I've assembled a very simple set of conditions that, taken together, have usually been followed by awful near-term returns, not to mention long-term disasters. Importantly, these conditions have been unfavorable even when earnings have been growing, interest rates have been reasonably low, and the prevailing trend of the market has otherwise appeared quite strong. The general results aren't particularly sensitive to alternative criteria. Indeed, stocks tend to produce tepid returns under far broader and more subtle definitions, but my hope is that a simple, specific example will drive the point home:
Hazardous Ovoboby
Overvalued
S&P 500 price/peak earnings greater than 18
Overbought
S&P 500 at a 4-year high, and at least 5% higher than its level 6 months earlier
Overbullish
Investors Intelligence percentage of bullish advisors above 53%
Yield pressure
3-month Treasury yield higher than its level of 6 months earlier
Here is an exhaustive list of the instances where we've observed this set of conditions on a weekly closing basis (I've used Dow Jones Industrials data for easy reference):
April 30, 1965: The Dow advanced less than 2% to its May 14, 1965 peak, 10 trading days later. The Dow then skidded -10.5% lower over the next 30 trading days.
December 18, 1972 and January 5, 1973: The Dow advanced less than 2% from the first instance, and a fraction of a percent from the second instance, to its bull market peak on January 11, 1973. The Dow then toppled -12.3% over the next 50 trading days, and collapsed to half its value over the following 22 months.
August 14, 1987 and August 21, 1987: No remark is really necessary, but for the record, the Dow advanced less than 2% from the first instance, and a fraction of a percent from the second instance, to its bull market peak on August 25, 1987. The Dow then crashed -36.1% over the following 38 trading days.
April 3, 1998: The Dow advanced another 2.5% over the following 6 weeks to a preliminary high on May 13, 1998, and quickly dropped -6.3% over the following 22 trading days. The market then enjoyed a short-lived 8.1% rebound over the next 22 trading days to a fresh high on July 16, 1998, before suddenly plunging -19.1% to its August 31, 1998 low, 32 trading days later (overall, a -16.1% loss from its April 3 level).
April 23, 1999: From a longer-term perspective, the market was already floating on the suds of the late-1990's bubble. Indeed, despite the recent high in the S&P 500, its total return has underperformed Treasury bills in the years since then. Still, from a short-term perspective, this was the most benign instance on the list. The Dow advanced less than 3% to a peak on May 10, 1999, followed by a selloff of -4.9% over the next 13 trading days. The lack of a deep correction, however, left subsequent gains open to repeated selloffs, erasing them even before the bear market began in earnest.
July 2, 1999 and July 16, 1999: The Dow advanced less than 2% from the first instance and about 1% from the second instance, to a peak a few weeks later on August 25, 1999. The Dow then fell -11.5% over the next 36 trading days.
December 23, 1999 and December 31, 1999: The Dow advanced less than 3% from the first instance and less that 2% from the second instance to the final peak of the market bubble a few weeks later, on January 14, 2000. The Dow then plunged -16.4% over the next 35 trading days.
March 24, 2000: The actual bull market high already behind it, the Dow had enjoyed a bounce off of an early-March low. It advanced less than 2% further, to a short-term peak 12 trading days later. The Dow then dropped -8.8% over the following 32 trading days. Over the following 30 months, the stock market would lose half its value.
November 17, 2006, December 8, 2006 and January 12, 2007: We'll find out shortly...
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Seniors and Debt
SENIORS IN DEBT
by Tim Iacono
January 18, 2007
Recent stories about the plight of seniors bring to light the growing problem of money not stretching as far as it once did. Today, the elderly are in the unfortunate situation where they benefit very little from cheap imported goods manufactured in Asia - the key to what some call an "era of low inflation".
Their money is increasingly spent on life's essentials - food, utilities, and medical costs - all of which have risen at a brisk pace in recent years. In many cases, the combination of a pension and a paid off home has been replaced by a meager retirement income, high bills, and a reverse mortgage.
A decade ago, homes were routinely passed on free and clear to surviving children, ten years from now heirs may be surprised to find out how little is left after years of borrowing by their parents to make ends meet.
According to this report from the U.K., inflation is now running at almost 10 percent for pensioners. With interest rates rising, those on fixed incomes who must access credit to square the books each month find themselves getting further and further behind.
Stateside, an increasing number of senior citizens are turning to reverse mortgages and credit cards to make ends meet. It didn't used to be this way and it flies in the face of government pronouncements that inflation is under control.
For decades, social security and pensions provided a stable income in retirement. That is still mostly true today, the problem is that living expenses are rising much more quickly than income as demonstrated a year ago when the average monthly social security increase was about $35 while Medicare premiums increased $28.
In this report from Texas, we learn first hand what it is like for some:
When Miss Daisy, 65, totals her monthly bills they amount to usually $200 more than her income. She relies on credit cards to bridge the difference. 'I have no savings, so I have no choice,' she said.
When she adds up her monthly bills for her mortgage, car loan, electricity, gas, water and phone, they exceed her income from Social Security and a part-time job by almost $200.
"I rely on my credit cards to make ends meet," said the 65-year-old Dallas woman, who asked that her last name not be used. "I have no savings, so I have no choice."
She owes more than $7,000 on three cards.
Seniors who grew up in frugal times and have usually been reluctant to go too far into debt are turning increasingly to credit cards to make do in retirement, says a study by the National Consumer Law Center.
"Older people have generally held less credit card debt than younger consumers, but their generation is catching up," said Deanne Loonin, the principal author of the report by the Boston-based consumer advocacy group.
The study quantifies a trend that credit counselors have seen recently. It found that the average credit card debt for consumers 65 to 69 skyrocketed 217 percent over the last decade to $5,844. Researchers calculated the inflation-adjusted increase by examining Federal Reserve data on the assets and liabilities of American families.
The consumer advocacy group's report blames the trend on a combination of seniors' shrinking or stagnating incomes, higher expenses for housing, medical care and utilities, and creditor practices that push seniors to borrow.
"It's not just that elders have more debt than before, but that many are buried in unaffordable debt," Ms. Loonin said.
It's a sort of long, slow squeeze for most seniors and it must be particularly hard for those who have eschewed credit and debt for most of their lives to be forced to rely on it now.
Ask retirees what they think of lower prices for iPods and PCs and the low inflation rate of only two percent - you are likely to get an earful.
Unfortunately, things are probably going to get worse as baby boomers enter their golden years - an entire generation has been conditioned to accept high debt loads in exchange for rising asset prices. In the end, this may not prove to be a very good long term plan.
A 2004 study by Demos, a New York-based research institute, found that consumers within 10 years of retirement are spending an average of one-third of their income on debt payments.
That's partly because some had children later in life and are paying for their youngsters' college education into their late 50s and early 60s. Others have become caretakers for frail parents. Still others have simply spent too much.
"For a variety of reasons, boomers won't have the nest eggs they'd like, and they won't have the pensions and health care benefits that many of today's retirees enjoy," Ms. Cobb said. "Things will only get worse."
It looks like the baby boomers are going to get a retirement wake-up call in coming years.
It didn't have to be this way.
view link
by Tim Iacono
January 18, 2007
Recent stories about the plight of seniors bring to light the growing problem of money not stretching as far as it once did. Today, the elderly are in the unfortunate situation where they benefit very little from cheap imported goods manufactured in Asia - the key to what some call an "era of low inflation".
Their money is increasingly spent on life's essentials - food, utilities, and medical costs - all of which have risen at a brisk pace in recent years. In many cases, the combination of a pension and a paid off home has been replaced by a meager retirement income, high bills, and a reverse mortgage.
A decade ago, homes were routinely passed on free and clear to surviving children, ten years from now heirs may be surprised to find out how little is left after years of borrowing by their parents to make ends meet.
According to this report from the U.K., inflation is now running at almost 10 percent for pensioners. With interest rates rising, those on fixed incomes who must access credit to square the books each month find themselves getting further and further behind.
Stateside, an increasing number of senior citizens are turning to reverse mortgages and credit cards to make ends meet. It didn't used to be this way and it flies in the face of government pronouncements that inflation is under control.
For decades, social security and pensions provided a stable income in retirement. That is still mostly true today, the problem is that living expenses are rising much more quickly than income as demonstrated a year ago when the average monthly social security increase was about $35 while Medicare premiums increased $28.
In this report from Texas, we learn first hand what it is like for some:
When Miss Daisy, 65, totals her monthly bills they amount to usually $200 more than her income. She relies on credit cards to bridge the difference. 'I have no savings, so I have no choice,' she said.
When she adds up her monthly bills for her mortgage, car loan, electricity, gas, water and phone, they exceed her income from Social Security and a part-time job by almost $200.
"I rely on my credit cards to make ends meet," said the 65-year-old Dallas woman, who asked that her last name not be used. "I have no savings, so I have no choice."
She owes more than $7,000 on three cards.
Seniors who grew up in frugal times and have usually been reluctant to go too far into debt are turning increasingly to credit cards to make do in retirement, says a study by the National Consumer Law Center.
"Older people have generally held less credit card debt than younger consumers, but their generation is catching up," said Deanne Loonin, the principal author of the report by the Boston-based consumer advocacy group.
The study quantifies a trend that credit counselors have seen recently. It found that the average credit card debt for consumers 65 to 69 skyrocketed 217 percent over the last decade to $5,844. Researchers calculated the inflation-adjusted increase by examining Federal Reserve data on the assets and liabilities of American families.
The consumer advocacy group's report blames the trend on a combination of seniors' shrinking or stagnating incomes, higher expenses for housing, medical care and utilities, and creditor practices that push seniors to borrow.
"It's not just that elders have more debt than before, but that many are buried in unaffordable debt," Ms. Loonin said.
It's a sort of long, slow squeeze for most seniors and it must be particularly hard for those who have eschewed credit and debt for most of their lives to be forced to rely on it now.
Ask retirees what they think of lower prices for iPods and PCs and the low inflation rate of only two percent - you are likely to get an earful.
Unfortunately, things are probably going to get worse as baby boomers enter their golden years - an entire generation has been conditioned to accept high debt loads in exchange for rising asset prices. In the end, this may not prove to be a very good long term plan.
A 2004 study by Demos, a New York-based research institute, found that consumers within 10 years of retirement are spending an average of one-third of their income on debt payments.
That's partly because some had children later in life and are paying for their youngsters' college education into their late 50s and early 60s. Others have become caretakers for frail parents. Still others have simply spent too much.
"For a variety of reasons, boomers won't have the nest eggs they'd like, and they won't have the pensions and health care benefits that many of today's retirees enjoy," Ms. Cobb said. "Things will only get worse."
It looks like the baby boomers are going to get a retirement wake-up call in coming years.
It didn't have to be this way.
view link
7 Reasons To Sell
January 16, 2007
7 Reasons To Sell
by Paul Lamont
We have pinpointed the seven reasons why investors should be currently selling their stock and mutual fund portfolio. As Marc Faber has been saying recently: "In a selling panic you should buy, but in the buying mania that we have now the wisest course of action is to liquidate." After discussing reasons to sell, we will recommend what steps you should take with your cash to protect value. But first, the 7 reasons:
1. Sentiment
Sentiment surveys allow an investor to gauge the emotional enthusiasm of the market. The Daily Sentiment Index from MBH Commodities has been tracking the percentage of bulls and bears for 19 years. In mid-December, this survey recorded its highest long-term bullish reading ever. We called Jake Bernstein, President of MBH Commodities, to personally confirm these numbers. More traders are bullish towards the S&P 500 (91%) than at the peak of the NASDAQ in 2000 (83%). Remember delusional investors were buying tech "ideas" in 2000. Now there is even more consensus that markets can only go higher (see below). This suggests a major correction.
In addition, all 14 "Strategists" at the largest Wall Street Firms are calling for a higher market in 2007. The last time this bullish consensus occurred was at the start of 2001. The DJIA subsequently fell ~40% over the next 2 years.
"A pack of lemmings looks like a group of rugged individualists compared with Wall Street when it gets a concept in its teeth." - Warren Buffet
2. Insider Selling
Corporate insiders (see chart below) are selling shares in their companies at the highest rate in over 10 years. In fact according to Elliotwave.com, it"s the highest rate since right before the crash of 1987. Executives are the most knowledgeable people about the future prospects of their companies. If they are selling, then why should you be holding shares of their companies?
3. Mutual Fund Cash
Mutual fund managers are not immune from the emotions of the market. Due to the long term record of their positions, we can inspect their behavior at significant market turns. Looking at the chart above, mutual fund managers hold little cash in their funds at market tops and large amounts at bottoms. This of course is the opposite of what a wise investor should be doing, but fortunately it gives us a reliable contrarian indicator. Notice that mutual fund managers are presently holding the least amount of cash in 33 years.
4. Dow Theory Sell Signal
Dow Theory is used by market technicians to study the health of the overall trend by comparing the Dow Industrial, Utility, and Transportation indexes. To summarize, if the historical Dow indexes are rallying together, then the trend is healthy. If an index is left behind, such as is occurring now, then it is described as a "broken" market and warns of future weakness. The chart below from Tim Wood, one of the most studied on the subject of Dow Theory, shows that the indexes have been diverging for the last 6 months. The chart also shows the successful forecast for weakness in 2000.
5. Inverted Yield Curve
The chart above, from Agora Financial's Survival Report, shows an inverted yield curve (short term rates are higher than long term rates) implying that investors expect a slowdown in growth in the future. According to the Federal Reserve, the inverted yield curve "has borne a consistent negative relationship with subsequent real economic activity in the United States, with a lead time of about four to six quarters....The yield curve has predicted essentially every U.S. recession since 1950 with only one "false" signal, which proceeded the credit crunch and slowdown in production in 1967." Recently, the inverted yield curve warned investors in mid-2000 of the coming market decline. It has now been constantly inverted since mid-2006.
6. 20 Year Cycle Stretches the 4 Year Cycle
The emotional investing herd fluctuates from greed to fear, creating cycles through time. The most correlative rhythm to the Dow Jones Industrial Average is the 4 year cycle. The chart above shows the reoccurrence of this notable low every 4 years. Notice the overdue sell-off expected in late 2006. Only one other year in this fifty year stretch has the cycle extended past schedule: 1987. It seems history is repeating. A sensible explanation would be that a larger cycle was coming to conclusion, influencing the market to extend past this 4 year rhythm. Our recent research of the 20 year crash cycle lends evidence to this theory.
Below, we have expanded the list of financial panics compiled by Ldcr. David Williams in 1984. He observed a 56 year cycle in which he noted a reoccurrence of a crash every 20, 20, and 16 years. Notice the pattern (1761 + 20 = 1781 + 20 = 1801 + 16) then repeat. After three crashes, the cycle resets:
1761 1781 1801
1817 1837 1857
1873 1893 1913
1929 1949 1969
1987 2007? 2027?
After 1969, an odd thing occurred. There was no crash in 1985, as predicted by this cycle: 1969 + 16. Analysts would also have expected the smaller 4 year cycle to appear in 1986. Instead the market rose into 1987, crashing that autumn almost 40%. We are now coming upon the 20 year anniversary of the 1987 crash. We believe the 4 year cycle is again extending to align with the larger 20 year cycle much like it did in 1987, to produce a significant downdraft this year.
The year 2007 also marks the 10th anniversary (1/2 cycle of 20yr) of the 1997 Asian Crisis. As another example, the Japanese market topped in 1990, ten years before the U.S. markets in 2000. The Nikkei 225 Index is still below half of its peak value.
7. Low Volatility
Over the last few years, there has been a complete collapse in volatility in the stock market. Generally, volatility drops when markets rise and increases when investors nervously sell shares. Low volatility warns investors of an environment rife with complacency and lack of fear (which is needed for markets to rise). As you can see from the chart above from Tim Wood, the Volatility Index or "fear index" is at 13 year lows. We believe that volatility will return to the market this year with the downward pull of the 4 and 20 year cycles.
Why Selling Is The Hardest Part?
In "Hard-wired to Fail: Why We Need Contrarian Managers" Doug Wakefield, President of Best Minds Inc., explains the influence of emotion in investing;
"In short, the basal ganglia and limbic system are the parts of the brain that guide the behaviors that are required for self-preservation, and since money is something we need to survive, these emotional and instinctual forces exert a very strong influence on our investment decisions. To make matters worse, research shows that these two parts of the brain do not learn from experience. Also, since flocking or herding is part of the self-preservation dynamic in mammals, going against the crowd is completely unnatural. This is why it is easy to intellectually agree with Buffet's or Templeton's admonitions to invest oppositely of the crowd, and so extremely difficult to actually do it."
"Capitalism demands the best of every man- his rationality -and rewards him accordingly." - Ayn Rand
Investors have been emotionally conditioned (and rewarded) during their entire investing careers by buying and holding stocks. Unfortunately, market trends and valuations change. "Buy and Hold" was also the mantra in the late 1920"s. Therefore we hope you are able to shrug off the need to follow the crowd, look at the evidence rationally, and protect your assets.
What To Do
In a credit crunch, optimism turns to fear, risk is re-priced, and the rush to liquidate assets begins. Prices fall and cash is the only haven of value. This is what happened from 2000 to 2002. The same will happen soon and will surely happen again in the future. With the cash you have raised from selling assets, we recommend a portfolio of 3 month U.S. Treasury Bills, which protect principal. We do provide this service, but we want to stress that you can call your financial consultant tomorrow to allocate everything into a U.S. Government-only money market fund. While this is not ideal, it will initially protect investors, until more evidence demands further preservation and our services. History shows that most investors will not take action, but those that do, will be able to eventually buy assets at bargain prices.
At Lamont Trading Advisors, Inc. we specialize in the management of risk and preservation of wealth. Visit our Current Strategy section for information on our asset allocation recommendations or Contact Us if you would also like to be notified when our investment analysis reports are published.
7 Reasons To Sell
by Paul Lamont
We have pinpointed the seven reasons why investors should be currently selling their stock and mutual fund portfolio. As Marc Faber has been saying recently: "In a selling panic you should buy, but in the buying mania that we have now the wisest course of action is to liquidate." After discussing reasons to sell, we will recommend what steps you should take with your cash to protect value. But first, the 7 reasons:
1. Sentiment
Sentiment surveys allow an investor to gauge the emotional enthusiasm of the market. The Daily Sentiment Index from MBH Commodities has been tracking the percentage of bulls and bears for 19 years. In mid-December, this survey recorded its highest long-term bullish reading ever. We called Jake Bernstein, President of MBH Commodities, to personally confirm these numbers. More traders are bullish towards the S&P 500 (91%) than at the peak of the NASDAQ in 2000 (83%). Remember delusional investors were buying tech "ideas" in 2000. Now there is even more consensus that markets can only go higher (see below). This suggests a major correction.
In addition, all 14 "Strategists" at the largest Wall Street Firms are calling for a higher market in 2007. The last time this bullish consensus occurred was at the start of 2001. The DJIA subsequently fell ~40% over the next 2 years.
"A pack of lemmings looks like a group of rugged individualists compared with Wall Street when it gets a concept in its teeth." - Warren Buffet
2. Insider Selling
Corporate insiders (see chart below) are selling shares in their companies at the highest rate in over 10 years. In fact according to Elliotwave.com, it"s the highest rate since right before the crash of 1987. Executives are the most knowledgeable people about the future prospects of their companies. If they are selling, then why should you be holding shares of their companies?
3. Mutual Fund Cash
Mutual fund managers are not immune from the emotions of the market. Due to the long term record of their positions, we can inspect their behavior at significant market turns. Looking at the chart above, mutual fund managers hold little cash in their funds at market tops and large amounts at bottoms. This of course is the opposite of what a wise investor should be doing, but fortunately it gives us a reliable contrarian indicator. Notice that mutual fund managers are presently holding the least amount of cash in 33 years.
4. Dow Theory Sell Signal
Dow Theory is used by market technicians to study the health of the overall trend by comparing the Dow Industrial, Utility, and Transportation indexes. To summarize, if the historical Dow indexes are rallying together, then the trend is healthy. If an index is left behind, such as is occurring now, then it is described as a "broken" market and warns of future weakness. The chart below from Tim Wood, one of the most studied on the subject of Dow Theory, shows that the indexes have been diverging for the last 6 months. The chart also shows the successful forecast for weakness in 2000.
5. Inverted Yield Curve
The chart above, from Agora Financial's Survival Report, shows an inverted yield curve (short term rates are higher than long term rates) implying that investors expect a slowdown in growth in the future. According to the Federal Reserve, the inverted yield curve "has borne a consistent negative relationship with subsequent real economic activity in the United States, with a lead time of about four to six quarters....The yield curve has predicted essentially every U.S. recession since 1950 with only one "false" signal, which proceeded the credit crunch and slowdown in production in 1967." Recently, the inverted yield curve warned investors in mid-2000 of the coming market decline. It has now been constantly inverted since mid-2006.
6. 20 Year Cycle Stretches the 4 Year Cycle
The emotional investing herd fluctuates from greed to fear, creating cycles through time. The most correlative rhythm to the Dow Jones Industrial Average is the 4 year cycle. The chart above shows the reoccurrence of this notable low every 4 years. Notice the overdue sell-off expected in late 2006. Only one other year in this fifty year stretch has the cycle extended past schedule: 1987. It seems history is repeating. A sensible explanation would be that a larger cycle was coming to conclusion, influencing the market to extend past this 4 year rhythm. Our recent research of the 20 year crash cycle lends evidence to this theory.
Below, we have expanded the list of financial panics compiled by Ldcr. David Williams in 1984. He observed a 56 year cycle in which he noted a reoccurrence of a crash every 20, 20, and 16 years. Notice the pattern (1761 + 20 = 1781 + 20 = 1801 + 16) then repeat. After three crashes, the cycle resets:
1761 1781 1801
1817 1837 1857
1873 1893 1913
1929 1949 1969
1987 2007? 2027?
After 1969, an odd thing occurred. There was no crash in 1985, as predicted by this cycle: 1969 + 16. Analysts would also have expected the smaller 4 year cycle to appear in 1986. Instead the market rose into 1987, crashing that autumn almost 40%. We are now coming upon the 20 year anniversary of the 1987 crash. We believe the 4 year cycle is again extending to align with the larger 20 year cycle much like it did in 1987, to produce a significant downdraft this year.
The year 2007 also marks the 10th anniversary (1/2 cycle of 20yr) of the 1997 Asian Crisis. As another example, the Japanese market topped in 1990, ten years before the U.S. markets in 2000. The Nikkei 225 Index is still below half of its peak value.
7. Low Volatility
Over the last few years, there has been a complete collapse in volatility in the stock market. Generally, volatility drops when markets rise and increases when investors nervously sell shares. Low volatility warns investors of an environment rife with complacency and lack of fear (which is needed for markets to rise). As you can see from the chart above from Tim Wood, the Volatility Index or "fear index" is at 13 year lows. We believe that volatility will return to the market this year with the downward pull of the 4 and 20 year cycles.
Why Selling Is The Hardest Part?
In "Hard-wired to Fail: Why We Need Contrarian Managers" Doug Wakefield, President of Best Minds Inc., explains the influence of emotion in investing;
"In short, the basal ganglia and limbic system are the parts of the brain that guide the behaviors that are required for self-preservation, and since money is something we need to survive, these emotional and instinctual forces exert a very strong influence on our investment decisions. To make matters worse, research shows that these two parts of the brain do not learn from experience. Also, since flocking or herding is part of the self-preservation dynamic in mammals, going against the crowd is completely unnatural. This is why it is easy to intellectually agree with Buffet's or Templeton's admonitions to invest oppositely of the crowd, and so extremely difficult to actually do it."
"Capitalism demands the best of every man- his rationality -and rewards him accordingly." - Ayn Rand
Investors have been emotionally conditioned (and rewarded) during their entire investing careers by buying and holding stocks. Unfortunately, market trends and valuations change. "Buy and Hold" was also the mantra in the late 1920"s. Therefore we hope you are able to shrug off the need to follow the crowd, look at the evidence rationally, and protect your assets.
What To Do
In a credit crunch, optimism turns to fear, risk is re-priced, and the rush to liquidate assets begins. Prices fall and cash is the only haven of value. This is what happened from 2000 to 2002. The same will happen soon and will surely happen again in the future. With the cash you have raised from selling assets, we recommend a portfolio of 3 month U.S. Treasury Bills, which protect principal. We do provide this service, but we want to stress that you can call your financial consultant tomorrow to allocate everything into a U.S. Government-only money market fund. While this is not ideal, it will initially protect investors, until more evidence demands further preservation and our services. History shows that most investors will not take action, but those that do, will be able to eventually buy assets at bargain prices.
At Lamont Trading Advisors, Inc. we specialize in the management of risk and preservation of wealth. Visit our Current Strategy section for information on our asset allocation recommendations or Contact Us if you would also like to be notified when our investment analysis reports are published.
Bear market
I expect 2007 to be a bear market. The market will decline into August. The top will be from now or upto March.
My darkest scenario would be for this to be the start of a deflationary depression.
I favor deflation first before hyperinflation.
My fear is that the financial system will deflate because complex financial instruments such as derivatives will become an unmangable tangled series of defaults. There are over $400 Trillion in such instruments. This will overwhelm all the central banks effort to rescue a financial collapse.
What will cause this hairball? The initial impetus will be defaulting mortgage securities. The reason I post so many threads about collapsing subprime lenders is because these lenders are the cutting edge on mortgage defaults.
Without a doubt the central banks will flood the world will money supply and lower rates once the hairball is undeniable. Japan did this but it did not stop 18 years of deflation. If the mass psychology replicates that in Japan, then the consumer will back off and start to save.
My position is that the Fed will not allow even rapid inflation, let alone hyperinflation. The stupid Fed states that its first priority is avoiding inflation and it will wait for the core rate to decline before lowering rates. The Fed will wait too long and the financial hairball of complex financial instruments defaulting will be upon the world before it or other central banks can fix the hairball with liquidity.
How long will the hairball and deflation last? I did not know how long the mass psychology will take to change. If the past is proloque, deflation will last from 2 to 20 years.
The best argument in my opinion for hyperinflation is a collapse of the dollar. If China and Japan dump each's $1 Trillion in reserves ( note how small $2 Trillion in reserves is compared to the $400 Trillion in complex financial instruments), then the dollar would be in trouble. The Fed may respond by raising real interest rate but that would certainty destroy the US's economy with a deflation AFTER the inflation.
My darkest scenario would be for this to be the start of a deflationary depression.
I favor deflation first before hyperinflation.
My fear is that the financial system will deflate because complex financial instruments such as derivatives will become an unmangable tangled series of defaults. There are over $400 Trillion in such instruments. This will overwhelm all the central banks effort to rescue a financial collapse.
What will cause this hairball? The initial impetus will be defaulting mortgage securities. The reason I post so many threads about collapsing subprime lenders is because these lenders are the cutting edge on mortgage defaults.
Without a doubt the central banks will flood the world will money supply and lower rates once the hairball is undeniable. Japan did this but it did not stop 18 years of deflation. If the mass psychology replicates that in Japan, then the consumer will back off and start to save.
My position is that the Fed will not allow even rapid inflation, let alone hyperinflation. The stupid Fed states that its first priority is avoiding inflation and it will wait for the core rate to decline before lowering rates. The Fed will wait too long and the financial hairball of complex financial instruments defaulting will be upon the world before it or other central banks can fix the hairball with liquidity.
How long will the hairball and deflation last? I did not know how long the mass psychology will take to change. If the past is proloque, deflation will last from 2 to 20 years.
The best argument in my opinion for hyperinflation is a collapse of the dollar. If China and Japan dump each's $1 Trillion in reserves ( note how small $2 Trillion in reserves is compared to the $400 Trillion in complex financial instruments), then the dollar would be in trouble. The Fed may respond by raising real interest rate but that would certainty destroy the US's economy with a deflation AFTER the inflation.
