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Vinny Catalano, President & Global Investment Strategist, BLUE MARBLE RESEARCH

A Father/Son Conversation About Bear Markets
Thursday, August 04 2011 | 05:07 PM
Vinny Catalano CFA
President & Global Investment Strategist, BLUE MARBLE RESEARCH

Son: Hey, dad. How do bear markets get started?

Father: Well, son, after stocks have been going up for a few years they then go sideways for a while. While they go sideways, the price and its moving averages begin to converge. At the same time, markets begin to diverge from one another.

Son: What happens then?

Father: Well, stocks begin to rollover, going down in a rather gentle manner.

Son: Why is that?

Father: You see, son, investors are still big believers in the bull market. So, when the price starts to go down they don’t believe it will go much lower. In other words, they are complacent at the start of a bear market.

Son: Is that what is happening now?

Father: No, not exactly. Yes, stocks did go sideways for a while. So that part of the story is true to form. But the moving averages have not crossed, nor has the longer term moving average, its 200 day, which has yet to roll over and point downward. Also, when the sideways action was occurring, very few divergences emerged between markets, and those that did were very minor.

But that’s not the big thing.

Son: No? What is?

Father: Bear markets are sneaky. They start out with disbelief as they gently rollover. Kind of like a sleepy bear waking up from his long winter nap.

Son: Well, dad, that doesn’t sound like what I see on TV today.

Father: No, son, it isn’t. What you see and hear today is fear. And fear is not how bear markets start out. Fear is a characteristic of bull market corrections and end of bear markets, not at their sneaky, sleepy starts.

Of course, this is way bear markets have happened for more than 50 years. So, maybe this time is different. But you know what they say about that?

Son: No, dad, what?

Father: The four most dangerous words in the investing vocabulary is “this time is different.”

Son: Thanks, dad. You’re the best!

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0 Comment | Add Comment(s) | Bear_Markets, Bull_Markets, Trading, Stocks,

Roger Nusbaum, Chief Investment Officer, YOUR SOURCE FINANCIAL (RIA)

Tuesday, April 26 2011 | 02:41 PM
Roger Nusbaum
Chief Investment Officer, YOUR SOURCE FINANCIAL (RIA)

Yesterday on CNBC I heard a tease for segment (I missed the actual segment) about the fact the domestic financial stocks are not doing well relative to technology. While I am not sure that tech is the best comparison there is a point here about financial stocks that I have been making for a long time that I believe will remain relevant for several more years.

First, some numbers with results of a few different sectors over several time periods;

Financials XLF +0.88%
Technology XLK +4.75%
Energy XLE +14.97%
Staples XLP +5.12%
Discretionary XLY +6.51% (XLY is a client holding)
S&P 500 6.16%

One Year;
XLF -4.11
XLK +9.58%
XLE +26.37
XLP +9.92%
XLY +11.72%
S&P 500 +9.68%

Four Years;
XLF -56.64%
XLK +8.91%
XLE +24.35%
XLP +11.63
XLY +0.71%
S&P 500 -10.05%

The numbers say a lot about the mess that has been made in the domestic financial sector. The events in the market from 2007-2009 were obviously about the financial sector. There were many types of excesses that resulted in a monumental meltdown in the sector--monumental for the number of large companies that failed and the large number of stocks that dropped 90% and are nowhere close to where they traded before the implosion.

The nature of this sort of event is such that it will be years before domestic financials, collectively, are attractive on a fundamental basis and so I think it is likely that they will continue to struggle as stocks. This has been the case with technology from that market event. For ten years the S&P 500 is up 7.41% while XLK is down 12.02% (MSFT is down 25% for ten years and INTC is down 32% for ten years). It looks to me like outperformance of tech over the SPX may have started at the 2009 bottom which is a long time for the ground zero sector to lag and while an exact duplicate in financials is unlikely, if you then consider the fundamental outlook, I think we are a long way from health.

The above brings in two different things to consider; one being how markets tend to work which is more of a top down factor and the other being what I believe is a lack of fundamental health which is of course a bottom up factor. It seems to me that no matter any of this, that the financial sector has been a favorite of many professional market participants. Given my perceptions of the sector I think it makes sense to underweight the risk in whatever financial sector exposure you have (I believe in having exposure to all sectors as zero weight is a big bet). For us this means mostly owning foreign banks as I have discussed many times before.

Think of it this way, in speculating on parts of the financial sector where the fundamentals are not yet healthy, how much do you hope to make? Let's say you think you can double your money. I would say it makes more sense to go to a sector that is healthy on all fronts to pick a stock where you think you could double your money. I realize other people view it differently and clearly there were some great trades off the bottom in the financial sector but speculating on something with weak fundamentals is not a risk I am willing to take.

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0 Comment | Add Comment(s) | Technology, Stocks, Trading, US_Economy,

Bill Carrigan, Founder, GETTINGTECHNICAL.COM

The Red Hot Energy Sector
Monday, March 07 2011 | 02:06 PM
Bill Carrigan

I acquired the shares of Encana, Suncor and Precision Drilling six months ago when the TSX Energy Index was in mid 2010 one of the worst performing sectors. At that time the “hot” sectors were Gold, Heath Care and Telecom. There were no investment sheep in the energy complex last summer and so I helped myself to the all-you-can-eat energy buffet. How the energy sector is enjoying a bullish stampede thanks to the crude risk premium due to the uncertain outlook for the larger crude producing Arab states.

I have always believed that when the sheep are hungry you should feed them. Now so far I see no reason to sell all of my energy positions but, I am reducing and moving the proceeds into another sector that the investment sheep are avoiding – the TSX Financial Sector. The sheep are avoiding the obvious crude risk losers like the airlines, transport companies, non-essential retail stores and travel to include fast food, hotels, theme parks and gaming. I think the Canadian Banks are winners either way if the crude risk trade either ON or OFF. Either way I like the Baa, Baa, Banks.

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0 Comment | Add Comment(s) | Energy, Indexing, Oil_Prices, Trading,

Roger Nusbaum, Chief Investment Officer, YOUR SOURCE FINANCIAL (RIA)

'Safe and Predictable' May Not Be
Friday, February 11 2011 | 10:13 AM
Roger Nusbaum
Chief Investment Officer, YOUR SOURCE FINANCIAL (RIA)

A comment popped up on an old post on Seeking Alpha whereby a retired reader shared he had 40% of his portfolio in ten MLP and he was looking for feedback. I think this is a clear case of not really understanding the risk being taken. Vehicles that are generally high yielding and that generally have a predictable volatility profile make for a good hold—no doubt about it.

However, every so often the “safe and predictable” parts of the market do run into trouble, sometimes serious trouble. The point here is not to try to predict some sort of meltdown in the MLP space because the probability of such a thing is quite low but if it happens then the reader in question will get crushed.

An example I’ve used to make the point involves Amazon (AMZN). If you put 100% of your portfolio into AMZN in May 1997 at $1.50 and then sold it all in April 1999 at $105.00 you obviously would have had one of the greatest trades of all time but it also would have been a wildly risky trade. The word “wildly” would actually understate the risk taken. In this instance there would have been no negative consequence for the risk of putting everything in to AMZN but “no negative consequence” is not the same as not having taken the risk. Taking risk can work out fantastically well sometimes and sometimes not but people get into trouble for not realizing the risk they have taken.

The reader is taking a big risk with his retirement portfolio, this is undeniable. What we don’t know is whether he will ever have to face a negative consequence for taking that risk. Unfortunately this is a behavior that repeats over and over. With every scary event people find out the hard way they had too much exposure to the wrong part of the market.

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0 Comment | Add Comment(s) | Trading, Risk, Retirement, Volatility,

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