Videos

Here are two short videos on our managed account programs. They were filmed in mid-November:

http://www.etfportfolios.net/videos11/index.html

David Vomund

Economic Outlook Part II

In our August 17 blog we boldly predicted the economy would grow by at least 3% in the third quarter. Thursday's report showed growth at 3.5%. We also said when that happens stocks would be far higher. Back then the Dow was at 9135. Now it stands at 9700. I expect slower growth in the fourth quarter, but still growth nontheless.

Those who invest in the market based on today's news will once again be on the wrong side. Notice the Dow's crossing of 10,000 was not a new buy signal. It was a time of profit taking. The positive GDP number was not a new buy signal. It will likely be a time to reduce market exposure. We moved client portfolios away from fully invested on October 15.

Video Series

Here are three short videos on the market and our managed account programs:

http://www.etfportfolios.net/videos9/index.html

David Vomund

Bullish S&P 500 Chart

Browsing financial websites it seemed nearly everyone fell into two camps …. the market would test the lows or the market would fall 5 to 10 percent. It was hard to find anyone that thought the market would hit new highs. The public’s skepticism and negative sentiment are hallmarks of a new bull market.

With the S&P 500’s move to a new high, an inverse head-and-shoulders bottoming pattern is complete. This pattern developed over a ten month period and is a further sign of bull market. I’m expecting a great fourth quarter.

David Vomund

www.etfportfolios.net

Economic Outlook

It would be easy to be gloomy on a day like this. The market’s down big and the news headlines site the majority of economists point to a slow recovery (click here).

It is easy to be gloomy until you ask how many of these economists called the Great Recession. They were wrong then and I suggest they are wrong now. The pace of the recovery will be stronger that what most expect (with the exception of job growth).

The economy will bounce back quickly. The market may predict a “W” shaped recovery but it will be in the shape of a “V.” I expect this quarter’s GDP growth to exceed 3 percent (that’s not a misprint). It may even exceed 4 percent.

Never underestimate American’s appetite for spending. The worse recession since the 1930s is creating “pent up” demand. We can see this from the popularity of the Clunker program. Many of the clunkers being traded in could be sold for around $2000 on the open market, so consumers are only saving $2000. They want new cars.

We’ll find out if I’m right around the end of the year. If I’m right, stocks will be far higher.

The Current Investment Climate

Here is a short video on today's investment climate:
http://www.etfportfolios.net/video/

This video refers to a series of videos created in March. To revisit these videos please visit:
http://www.etfportfolios.net/firesidechat/

David Vomund
http://www.etfportfolios.net/

Summer Doldrums

The New York Times is full of stories of lost fortunes. They wrote, “if general insolvency is ahead of us, existing prices cannot be too low…they ought to be even lower.”

Times added, “Indicators of the U.S. economy flashed some of their gloomiest ever…depression in the housing industry…doubt among investors about the Administration’s ability to control the economy has sent the stock market in to a frightening slump…and the high cost of borrowing and the impossibility of selling new stock issues in a collapsing market make it difficult for companies to raise the money needed to expand or in some cases even to stay alive, thus intensifying the threat of recession, or worse.”

The quote from the New York Times is from 1932, just weeks before the Great Depression bear market ended. The quotes from Time Magazine are from the fall of 1974, just days before the bear market bottom was reached. So, don’t count on the media to tell you when things are improving.

The stock market had an exceptionally strong second quarter and is due for a rest or a retracement. As it gives back some of its gains, the media will be especially gloomy with talk about markets hitting new lows. All of this is normal activity.

David Vomund

News Headlines & the Market Video

http://www.etfportfolios.net/videos/bvideo.html

Why Stocks Have Rallied

Investing is part art and part science. Psychology also plays a role and that’s where investors get in trouble. People generally love the stock market when it is high and hate it when it is low. It’s backwards.

Most people remain bearish on stocks. That’s why money market assets are at an unheard-of 43 percent of market cap. Instead of seeing opportunity, they focus on the bad economic news and rationalize that stocks can’t (or shouldn’t) go higher. After all, we are in recession. Unfortunately, it doesn’t work that way.

Going back to 1926 there have been fourteen recessions. Looking at duration, stocks typically hit their low point about mid-way through the recession (after 17 months in our current recession, surely we have hit the mid-point!). That means that most of the time new bull markets start during, not after, a recession.

What about the dismal unemployment figures? Unemployment is bad and unfortunately it will get worse, but that headline-grabbing figure doesn’t mean stocks will fall. On average the market has bottomed and begun to rally seven months before the peak in unemployment.

We’ve seen a lot of bad stories that say “this hasn’t happened since xxxx,” usually pointing to the 1930s, 1974, or 1982. While the stories are negative, one should note that the year they point to was typically a great time to buy stocks.

When the market factors in the worst case scenario (it did), the news doesn’t need to be good for stocks to rally. It just needs to be less bad. That’s what is happening now, especially in emerging market securities, where they are hitting new seven month highs. Opportunistic investors are looking past the current headlines and are anticipating better days ahead.

Magazine Cover Stories

Magazine covers have been used as a contrary indicator. It’s not that the magazine editor’s have poor timing. Instead, the editors choose a cover that reflects public sentiment and will sell well.

One of the most well known magazine covers is from an August 1979 issue of Business Week. The headline: “The Death of Equities.” Well, not quite.

Coinciding with the 2002 stock market low, the July 29 issue of Business Week ran the headline, “The Angry Market.” That marked the beginning of a five-year bull market.

How about the March 2009 low? Business Week ran “When Will the Bull Be Back? Most signs point to more stock market pain. But opportunities are emerging for very, very long-term investors.”

It is a bit unfair to point to magazine covers at important market lows because it ignores some other covers that didn’t coincide with the low. Nevertheless, the magazine covers reveal the public mindset at important lows.

David Vomund

www.etfportfolios.net

Mark to Market

No single policy or event ever destroyed as much wealth so quickly as the mark-to-market accounting rules that depleted capital and destroyed earnings.

The infamous mark-to-market rules that were activated in the fall of 2007 (coincidentally as the market topped) are being relaxed to give banks and insurance companies leeway to use common sense and cash flow estimates to value mortgages and other loans, not merely a price set months before by a distressed seller in an illiquid market. Now banks are allowed to value assets as they would in an “orderly” market.

When a House committee held hearings March 5 on the impact of mark to market, members were aghast by the needless chaos and wealth destruction the rules were creating. Finally, politicians have gotten something right. The Financial Accounting Standards Board (FASB) heard them loud and clear. On March 9 the FASB said they would soon have changes to announce. As investors knew any change could only be positive for banks, stocks began to rally, and rally.

On April 2 the FASB released their new rules for valuing some assets. Banks and insurance companies have a lot more discretion now to be realistic, not reactionary. That will help earnings and boost capital, effective April 1. Now that mark-to-market rules have been relaxed, banks can spread losses over several years as they occur, not take them immediately in anticipation of losses that may or may not appear. This is progress.

Equities and Recessions

During the second half of March I made many phone calls to those that had previously expressed an interest in our managed account program. After making these calls I overwhelmingly found that people did not want to get back into the stock market (a contrary indicator ???). As for reason, they cited the poor economy and bad news.

At this late stage in the bear market it is a mistake to be gloomy on stocks because of the bad economy. To see why, let’s look at equity price behavior during the past recessions dating back to 1926.

Going back to 1926 there have been fourteen recessions. Looking at duration, stocks hit their low point about mid-way through the recession (after 16 months in our current recession, surely we have hit the mid-point!). That means that most of the time new bull markets start during, not after, a recession.

On average stocks increase in value during the second half of a recession. That’s right, in the second half of a recession stocks typically increase in value despite the bad news headlines. That’s because stocks get cheap during bear markets and they are forward looking.

I am much more optimistic on equities and firmly believe that investors will look back at this time and wonder why they were sellers instead of buyers.

David Vomund

As always, past performance does not guarantee future results.

Fireside Chat Video Series

One key to investing is to be more aggressively invested on the way up compared to on the way down. Unfortunately people do just the opposite. People loved stocks when they were high, but now that stocks have lost half of their value few have interest in placing new money in the stock market. That’s human nature, and it’s devastating to stock portfolios.

In order to help potential clients realize that this bear market should represent an opportunity, I’ve created a short video series highlighting the economic problems, what is being done about these problems, and how it relates to the stock market. Enjoy:

http://www.etfportfolios.net/firesidechat/

Please call me if you have any questions on the video or would like to receive a PowerPoint file showing the slides.

David Vomund
775-832-8555

Best ETFs for 2009

The investing website, TheStreet.com, asked me late last year to give my picks for the best performing ETFs in 2009. Of course this is guesswork as things can change fast (remember 2008?), and when the road turns we have to turn with it. Nevertheless, predicting the winners is a fun exercise and I'm comfortable holding my selections. Here is the article:

http://www.thestreet.com/story/10455806/1/money-managers-top-picks-for-2009.html

David Vomund