Credit Card ’s Talk

Having lived aboard a sailboat for 2 years I was stricken when I saw the movie ?PERFECT STORM?. I know these are things you want to avoid at all costs. Even little storms can play havoc with your life style on a boat.

From a world view it looks like we are headed into a perfect storm of world macroeconomics. That means every one in the world is going to be impacted economically by the developing global economics. The more economically developed the country the worse they will be affected. Those third-world countries just working their way to becoming second-world countries can easily be set back 30 to 50 years.

What am I talking about?

People need food and shelter and after they have the basic necessities they will buy nonessentials such as entertainment and toys (boats, cars, jewelry, bigger houses, second homes, etc.). These are all purchased because the person has extra units of credit called money with which to buy the extras. In order the get that extra money he has to have a steady job. World wide there is excess productive capacity. Approximately 25% of productive machinery is idle; we are working at about 75% of capacity where the normal rate of production is between 87% and 92%. That means that many who were at those machines are now sitting at home wondering not about a new toy to buy, but how to make the next mortgage payment.

Everything looks smooth. The waters are calm and the breeze is at our back. When that perfect storm was forming in the Atlantic Ocean there did not seem to be any danger, but the meteorologists watching their satellites and computers could see that all was not well and a terrible storm was forming. They realized when it hit that ships would be at high risk.

There are meteorologists of the stock market. They are a combination of technical and fundamental analysts and it is their job to predict the stock market weather. Like weathermen the job of prediction is not easy nor is it an exact science, Many get it wrong, Today the news of the stock market and the economy is dominated by the fundamentalists who see excellent weather and tranquil seas. Many technicians see it otherwise. They are predicting that there are formations that could produce a perfect storm that will wipe out many portfolios.

Historically the timing of fundamentalist (those who follow the reports of company profits and government statistics) usually lags while the prediction of technical analysts (those who follow chart patterns and historical data) has been much more accurate.

The key to the stock market is timing. The investor wants to own stocks and mutual funds while the market is advancing and to be in cash while the market is declining.

Today the fundamentalist weathermen say buy while many technician weathermen are recommending cash. In the next few months we will see if the weather is calm or stormy.

Al Thomas’ book, If It Doesn’t Go Up, Don’t Buy It! has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

At some time in your life you have been on a river in a canoe and hopefully you had a paddle. You know about being up the creek without one.

You quickly learned that paddling up stream is much harder than paddling down stream. The lesson of going with the flow can be applied to many aspects of life and especially to the stock market. In the creek it is easy to know which way the current is flowing, but in the market it is much more difficult. At least that is what Wall Street wants you to think.

On the river there are markers and navigations buoys to help you with your passage, but in the money world there are few such true indicators. Actually it is very easy to determine the flow of funds in the market. Standing on the shore are people (brokers) shouting to go to the right and another next to him screaming to go to the left. ?Buy, buy, buy?. Very few of them know which way the current is headed. You have to figure this out yourself.

Fundamental analysis is excellent, but it is very poor to let you know when and where to paddle (put you money). There are many technical tools available, but these can be difficult to master for many people and few brokers know or care to learn them. However, there is one very simple method that does work.

That method is too simple for brokers who want you to think that you need their ?expertise?. They sure don?t want you to find out as you won?t have to pay them commissions any more. The paddle you need to have to propel in the right direction is called the 200-day Moving Average Paddle and you can get it free if you know where to look. You can make this yourself, but if you have a computer just go to the web site www.bigcharts.com and click on their Interactive chart box and they will do all the work for you. You can do this at the library of you don?t have a computer at home.

Using an index such as the SP500 you easily see that when the price (your canoe) is above the 200 line (the current of the river) you should be a buyer of stocks and mutual funds and when the SP500 price is below the 200 line you should be in a money market (even if it only pays 1%). You don?t want to be under water. This is a simple way to see the direction the market is flowing and will keep you from losing money when the market starts down.

No one knows when the current will change. And don?t try to guess. Let the river (market) tell you the direction of flow.

Get yourself one of those good paddles and learn to steer your own canoe.

Al Thomas’ book, If It Doesn’t Go Up, Don’t Buy It! has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

I am sure that if you have a brokerage account with a full service broker you have been getting calls about what to buy and sell. If you have big losses in certain stocks you might be hit with that great Wall Street lie to buy more so you can ‘Dollar Cost Average’. It doesn’t work.

In a recent study going back for 5 years a dollar cost averaging program was set up buying the S&P500 Index mutual fund. At the end of 62 months the investor had put in $31,000 and it was now worth $31,162. You would have done better in a savings account at your bank. And that assumes there was no commission or fees of any kind.

Let’s say you owned a stock such as Cisco. This one is held by hundreds of thousands of investors and almost every one of them has a loss. It traded as high as $82 and for more than a year was in a range over $50/share. It was the darling of very broker from here to Timbuktu and when it started down they kept yelling buy more, buy more. Another one in this same category is Lucent going from about $80 to $5. Yuk!

Now Wall Street is trying to get you to buy more of these losers so you can get out even when it goes back up. And pigs can fly. Think about this. The person that currently owns these stocks or any similar ones with big losses is now waiting for them to go back up so they can get out even. Ho boy. It should be extremely obvious that every time one of the monsters sticks its head up it is going to be hit with tremendous selling. There isn’t a chance that any of them will ever get back to their old high prices ? or even close.

What does an investor do? Clean out your garage and have a yard sale. Get rid of this junk and put your money to work where there is a chance to make a profit. And don’t buy any stock that has lost 50% to 80% during the bear market of the last 2 years. Brokers will tell you these are now cheap and are a good buy. Not a chance. There are too many people waiting to sell.

Now is the time to try to find a completely different equity that did not get hammered last year. Look for one that has a nice smooth upward pattern. Buy it and this time know how much loss you will be willing take if it goes down. How do you do that? Very simple. Use a trailing loss limit order called an open stop-loss order about 10% under the lowest price of the previous month - and keep moving it up as the price advances. That way you will not give back profits.

Al Thomas’ book, If It Doesn’t Go Up, Don’t Buy It! has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

Mutual funds by definition are a mixed bag of stocks, bonds and a little cash. Their price per share is the NAV, Net Asset Value of the total amount of money in the mutual fund divided by the number of shares. They seek to be fully invested at all times.

The fund manager determines which stocks and bonds to buy and sell in order to give the greatest return to his shareholders. He is considered to be an expert in choosing stocks for appreciation of value and should be expected to give a better than average return. That’s why he draws down a six-figure income.

You are encouraged to pick a fund that has your goal in mind. Is it considered conservative, speculative, income oriented, growth or some other category? Wouldn’t you say one of the principle reasons was to have the greatest return on your money? Do you want an average return or do you want an above average return?

What is average? There is an index which you hear about on the news every day called the S&P500. Because it is composed of 500 different stocks it is broadly representative of the market as a whole and therefore called a market average or index. You certainly would want a fund that is doing better than average.

You are encouraged to read the prospectus. Did you realize that the day it is printed much of the information in it is over a year old? It is written for the regulators in Washington, not for investors. It is worthless. Throw it away.

There are load funds that charge a commission and no-load funds that do not charge commission. There is no proof that paying a commission will provide you with a better return. Buy your no-load funds direct from the fund or through a discount broker.

You are told to find a good fund manager. Various money magazines list them. Investor’s Business Daily does a feature story on different fund managers several times each week. Check to see if his fund is outperforming the S&P during the last 12 months. There are very few fund managers who have a consistent record and even the best of them gets cold once in a while and has a losing streak. You want your money returning at maximum at all times so you can’t stay with one manager when he is running cold. Change funds.

One of the Wall Street myths is that you should put your money into a good fund and let it stay there for years. This is promoted because mutual fund managers are compensated by the amount of money they have in the fund and not for performance of the fund.

So how do you pick a fund? Very simple. It must outperform the S&P500 Index. Any mutual fund manager who cannot beat a market average should not be holding your money. Check out your funds today.

Al Thomas’ book, If It Doesn’t Go Up, Don’t Buy It! has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

Every day I hear from the ?experts? on CNBC-TV and the radio gurus that the way to buy stocks is find value. One man?s Rembrandt is another man?s connect-the-dots and fill in the spaces. Valuation is like beauty. It is in the mind of the beholder.

If valuation is the key to buying stocks then there should be some kind of a formula to determine what is undervalued and over-valued. In every industry there are formulas for standards of performance. For cars we want to know the zero to 60 miles per hour in how many seconds. For soap we want it to be 99 and 44/100 percent pure. For alcoholic beverages it could be how long it has been aged. And on and on.

Yet in the stock market we have no hard and fast set of rules by which to judge a company performance. Ah, and there?s the rub! No matter how good a company performance might be it may have no bearing on the price performance of the stock. You can find good companies that are within a sector that is doing poorly and yet one company can be making huge profits and sales, but the stock price is going nowhere. There need not be any correlation.

When you are in a bull market almost every stock goes up ? even the dogs. When you are in a bear market almost every stock goes down ? even the best ones. We ended an 18 year bull market in 2000 and almost without exception every stock headed for the exit.

Bull and bear markets follow relatively standard patterns of about 16 to 18 years up and 16 to 18 years down and the valuations go right along with them. If you own stocks or especially index funds during the bear periods you will be lucky to have broken even at the end of the 16-year cycle. Cash in your mattress will outperform market returns while the bear is in charge.

During these bear times there will be periods when the market will have a nice advance such as the one we saw start in 2003. These intermediate rises can ultimately bring many investors back into the market only to lose it when the rally is over and true valuation returns.

One valuation measurement for the overall market is the Price/Earnings ratio of the S&P500 Index. The median number for the historic purposes has been around 14. Today it is running about 21 which is considered high. When bear markets end the P/E can be about 6 or 8. There are other factors to be considered when buying any stock or fund, but the one thing that is most important is to have an exit strategy. Without one you will give back your profits.

No one knows exactly where the top or bottom of a market move will be. Knowing conventional valuations is one tool to help your buying and selling decisions.

Al Thomas’ book, If It Doesn’t Go Up, Don’t Buy It! has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

The big bad bear is stirring again. So far he has stretched, yawned and peaked out of his cave. After his almost year-long nap he is hungry. A nice big steak would hit the spot.

That steak comes from cattle and not too far from his den there is a fat complacent bull munching in the pasture. He has his tail towards the bear and Mr. Bear remembers that 3 years ago he walked up to another bull and bit him in the backside. It looks like he can do it again.

We know who bull and bear really are. It seems that almost everyone is bullish and thinks we are in another bull market like the one in 1999 where all investors thought they were geniuses. History has taught (for those who wish to listen and learn) that major bull markets are followed by bear markets of equal length. The major bull came to an end after 18 years in 2000. Can we expect an 18-year bear market? If history repeats its cycle the answer is yes.

The recent return of the upward movement of stock prices from last year is very typical of rallies in bear markets. Many have a 50% retracement of the first down leg (as happened after the big break in 1929) that tops out with the resumption of the downward path.

Today our bull is feeding on the lowest interest rates in 40 years, a tax cut that puts extra money in the hands of consumers (where it belongs) and a strong housing market plus the belief that the market always does well in an election year. Let?s hope all these things will come to pass.

The worst problem for investors is their complacency. They start making money and forget to protect their profits. These slip away when the market starts down and their broker says, ?Don?t worry. The market always comes back?.If the investor did not learn to protect his assets from the 2000 debacle he is doomed to lose again. What should he do?

He should protect his investment account with stop-loss orders on all stocks and mental stops for all mutual funds. Brokers hate this and will try to talk their clients out of doing it. Why? Because he makes a commission as long as you are invested and nothing if you have cash in your money market.

It is better to make 1% in a money market than lose 20% or more of the principle as the market heads south. You don?t have to be a market ?expert? to place a stop. Decide how much risk you are will to take 5%, 10%, 15%? And place your stop accordingly.

When this bear comes out of his cave don?t let him bite you ? you know where.

Al Thomas’ book, If It Doesn’t Go Up, Don’t Buy It! has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

If you haven?t heard of the technical indicator with the stock market symbol VIX it is now time to pay some attention to it. When the number is running low, as it is now, around 15 to 18 it means everyone is happy and thinks the stock market is going to continue up or at least continue on its current path and there is no need to sell anything. This is a measure of complacency. When the number goes above 35 it means everyone is very nervous and thinks the market is going to fall. It is considered a contrarian indicator.

Wall Street calls this the Volatility Index which disguises its real underlying meaning. What it really should be called is the FEAR and GREED Index.

The average investor buys with a greed motive when the VIX is low and sells only after fear sets in when the number is high because he is afraid of further loss. These are emotional moments and the market is an emotional animal. The truly smart investor has a planned exit strategy before he buys anything; he knows when to sell even before he buys.

Notice that the higher and smoother the movement of the market the more complacent the investors become. The investor becomes overconfident that his stocks will always go up. It is a truism that investors buy with only thoughts of how much they will make and never consider that it is possible to lose. When I was a broker and a member of the exchange I would only keep customers who would place stop-loss orders as soon as they bought something. I always stressed protection of capital.

When you are a serious and reasoning investor you must always think about loss first. If what you buy goes up you don?t have to worry. Winning takes care of itself. Losses don?t.

As of March 26, 2004 the VIX can now be traded like a stock. If the VIX is currently 18.5 the value of the contract is $18,500 and trades in $10 increments. It can be very volatile; a move from 18 to 38 can make (or lose if you are short) $20,000. This is not for the feint of heart and should be left to the professional speculators.

When you look at the historical charts and run a comparison of both the VIX and the S&P500 Index you will see the inverse correlation. As the S&P goes up the VIX goes down and visa versa.

There are many technical indicators that are used to determine market direction and this is just one of the many. It can be part of your analysis if you are a technician along with moving averages, various ratios and other stratagems.

Whatever you do do NOT become complacent about the money you have invested in your 401K or any other stock market investment. Protection of your capital is always your first consideration.

Al Thomas’ book, If It Doesn’t Go Up, Don’t Buy It! has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005

During the month of January the Dow Jones Industrial Average, usually referred to as the DOW, had an almost 1,000 point range, most of it down and the average investor has yawned and said ’so what, this has happened many times before’.

Is there any reason to worry now?

The terrible event of September 11 shocked investors who sold heavily and then watched the market climb back to where it was on September 10. The investing public as well as many professional money managers now believe that soon this year we will see the DOW move back up for another bull market like we had in 1999. Let’s hope they are right, BUT suppose they are wrong. What will happen to the stocks and mutual funds you own now?

What will be the valuation of those equities if the DOW smashes through the 8,000 level and goes even lower? Do you have anything in place that can protect you from such a catastrophe? Is there a solution to that potential disaster?

Yes, there is. And it is very simple.

If you believe that the market is going lower you could sell every stock you own and buy some bonds, but no one knows for sure. If the stocks and mutual funds you own go up you will kick yourself. Here is a sure-fire way to protect your money. Place an open stop-loss order of about 10% under its most recent low price. That way if it goes up you will be able to move the stop up to lock in additional profit and if it goes down you will not take a bigger loss. This is how every professional trader makes money. You allow yourself to take big winners and only small losses.

The biggest problem with doing this is YOU. Huh? Yes, it is the fact that few people want to sell even with a small loss. They prefer to sell with a big loss. I’m not joking.

I know the story all too well. Investors say, When it goes back up, I’ll sell and get out even Or It can’t go any lower. I’ll hold on. How about this one, How can I sell it now when it has dropped this far? Folks, things aren’t going to get any better. If you had had that stop-loss order in you would have been out at a much higher price. With mutual funds you cannot put in a stop order so you must call in your order when it breaks the price barrier you have set. Do not rely on your broker to do it for you and do NOT let the broker talk you out of it unless, of course, he wants to guarantee in writing that it won’t go any lower. And pigs can fly.

You cannot become complacent and believe the great Wall Street lie that the market always comes back. It may, but it might not be before you retire. Only you can protect your money.

Al Thomas’ book, If It Doesn’t Go Up, Don’t Buy It! has helped thousands of people make money and keep their profits with his simple 2-step method. Read the first chapter at http://www.mutualfundmagic.com and discover why he’s the man that Wall Street does not want you to know.

Copyright 2005