Should You Really Diversify?

Many people have been told for several years that they have to diversify.  While there is a time and place for diversification, time has proven that actually doing your homework and weighting your assets towards certain areas works much better.  Diversification is a great tool for people that sell products.  It enables them to sell products with lots of commissions and fees because they can convince investors they have to own 10 mutual funds instead of 2 or 3; hence, increasing their pay.

Professors have won Nobel prizes pushing for diversification and the efficient frontier, but the last several years have proven that those types of strategies don’t work.  In fact, many investors haven’t made any money in the last 10 years using diversification.  Let’s examine 2008.  A diversified portfolio last year would have included stocks, mutual funds, real estate, bonds, commodities, etc.  All of those lost tremendous value last year, some as much as 50%.  The best investment for last year would have been cash or CDs.  A lack of diversification last year was much safer than any diversified portfolio.  This year, it’s different.  The point is every year is different and instead of blindly putting your money in several different investments, you should do your homework and weight your portfolio towards the best ones.  These decisions are dependent on several factors such as interest rates, the economy, and geo-political risks. 

When you look at your life and average out all the investments you’ve owned in the big picture, it should look diversified.  But, it should not be constantly diversified on a yearly basis the way most advisors recommend.  They will spread out your portfolio to such a degree that some investments are always up while others are down insuring you’ll have subpar returns.

Local Television

Just a quick note to those of you in San Antonio, I’ll be on local television on Kens 5 Sunday morning about 7:30 a.m. CST doing about 5 minute sit down interview.  I’ll be discussing why maybe you shouldn’t diversify.

A Weak Bounce

Many of the indicators I watch are getting to the point where we should (key word should) have a rally over the next few days.  We’ve now had almost a 10% correction and the bulls will come in and start buying some “bargains”.  This rally could take us to Dow 8500 or so before we start heading back down.  You’re hearing a lot about earnings season around the corner and how that will impact the market.  I’m sure it’ll be a mixed bag.  Should companies get rewarded if their earnings were $5.00 per share last year and then last quarter they fell to $2.00 per share but are back to $2.30?  The headline will read earnings are up 15% when really they are down almost 50% from a year ago.  So, comparisons will be good from last quarter for a lot of companies.  But, we’ll really have to dig deep into the books to see how business is really doing for a lot of these companies.  Given the earnings though, that may be the excuse we need to rally a bit.  But, I think that will be the place to sell positions if you haven’t already done so.  Breaking 8000 on the Dow looks to be in the cards. 

The more we fall and the more scared investors get and the more people doubt the economic recovery, the bigger the snapback rally will be late summer into the fall.  Because I’m positioned for a pullback, I welcome it and you should too.  Markets don’t go straight up and if you play your cards right, you can take advantage of these big swings.  Tons of investors are flat on the year because they rode it down in January and February and rode it back up in March & April.  For those of us that were light on stocks in early 2009 and heavier in the 2nd quarter, we’re still enjoying double digit gains. 

Many people keep asking me to give them levels on the indices.  How far can we fall from here?  As I mentioned on my radio show yesterday, I simply lighten up on stocks when the risks rise and I increase my allocation to stocks when the risks fall.  Right now, the demand for stocks has fallen while supply has picked up and the risks are rising to hold stocks.  That certainly doesn’t mean we can’t rally from here.  It simply means I won’t participate until the risks go down.  It’s that simple.

Indonesia

Indonesia’s President, Susilo Bambang Yudhoyono, was re-elected yesterday for a 2nd 5-year term andI’m thrilled he was.  This is a former army general who has turned Indonesia around.  It’s a fast growing economy with a lot of natural resources like palm oil, coal, & nickel.  They have a population very similar in size to the United States but about 10% of them live off of $.70 per day.  So, there are huge opportunities to get these people living a better life similar to what China is going through right now.  Yudhoyono’s VP is a Wharton graduate who is an economist.  This is very different from our politicians who are lifetime politicians.  In addition, Indonesia has seen its fastest growth in over a decade by fighting corruption, reducing regulatory hurdles, & cutting debt.  Sounds like how we’re doing things here doesn’t it?  Oh wait, it’s the complete opposite.  If these trends continue, money will continue to shift away from countries where it’s hard to do business and end up where it’s easy to do business.  Indonesia is one of those countries that is moving in the right direction and I think more and more capital will move there.  I remain bullish. 

Biz Radio Power Trading Strategy Session & Workshop

Just a reminder that I’ll be in San Antonio tonight along with Vince Rowe at the Westin on the Riverwalk going over a lot of the indicators I look at to navigate the markets.  In addition, we’re going to be giving out some various investments we think can double over the next year.  I hope you can make it.  It’s free but you must register at www.bizradio.com

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Fox Business Television 7/8/09

Caution

I’m now the most negative on the markets I’ve been since February.  The “Gap Trade” I’ve been describing is happening exactly as it should.  Everyone lately is now focused on bad economic data that happens to be lagging.  Therefore, profits are being taken from the areas that ran up the most.  That would be financials, emerging markets, technology, commodities, etc.  I’m continuing to see better data when we look through the front windshield instead of the back.  So, why am I not buying?

You have to respect the technicals even though the fundamentals are improving.  Therefore, I’ve been selling for a few weeks and locking in some profits.  In addition, I’ve established some short positions.  I do expect some mediocre rallies but I think for the time being those are opportunities to sell into.  The technicals continue to weaken and the sellers are getting restless and now starting to put their orders in.  This is where the flexibility you and I have that I wrote about a few weeks ago comes in handy.  Fund managers right now are getting big inflows of cash as the “return chasers” are piling in.  That means that the fund manager can’t take profits.  He/She actually has to buy at the high prices and come on television and give his “top 5 picks.”  My top 5 picks right now are cash, cash, cash, cash, and oh yeah, cash.

My plan is to let this selloff run its course however long and however deep it will be.  When it’s exhausted, I’ll look to get into the very things I recently sold.  The economy will surprise investors over the next 30-90 days.  That will once again get stock prices headed in a northern direction.

Biz Radio Power Trading Workshop

Vince Rowe & I will be hosting a live event in San Antonio this Thursday, July 9th at 7:00 p.m.  We’re going to be discussing trading techniques, investments we think that could double in the next 12 months, and how you can actually benefit from inflation.  It’s a free event and I’d love to meet you.  You do have to register.  Just click on the link below for information.

http://www.bizradio.com/BizRadioEblastCode.html

CNBC Asia 7/1/09

http://www.cnbc.com/id/15840232?video=1170018171&play=1

http://www.cnbc.com/id/15840232?video=1170018185&play=1

A Lot Of Unemployed People

The non-farm payroll number came out this morning worse than expected.  In fact, it was the first decline we’ve seen in the last 4 months.  The estimate was for a loss of jobs 365,000 but the actual number was 467,000 for June.

Keep in mind this is a rear view looking number and it’s highly volatile and likely to be revised.  But, I thought it would be interesting to show just how big the magnitude is of job losses in this country.  Below is a picture going back to year 2000.

 

This is one of those indicators we’ll have to keep an eye on the moving average.  These numbers are going to start looking better and better going forward but it won’t be in a straight line.

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U, V, W, or L?

What do the letters U,V,W, & L mean to you?  Probably nothing.  But, they are constantly talked about in the media because this is how economic recoveries are described.  These are how analysts describe the shape of the recovery.  Many believe it’ll look like an “L”.  That’s to say we were plummeting facing Armageddon and now that it’s over, we’ll just go sideways for several quarters and possibly years.  Some (few) say it will look like a “V”.  We were falling off a cliff and just like that we’re headed back up.  Everything is hunky dory.  I think it will look like some shape that’s not a letter.  We’ll have a recovery and eventually that recovery will stall.  Maybe the shape should be a backwards check mark that eventually goes sideways.  Is that some hieroglyphics letter?

We can debate how the economy will look like for days and days and I could write about it for days and days.  But, I’m not going to.  I know you care about how to make money whatever letter it resembles.  That’s my goal also.  So, let’s look at the stock market.

The first half of 2009 looked like a “V”.  The Dow Jones started the year around 8750.  We fell all the way to around 6500 and finished around  8500.  That’s a lot of fear and pain to go nowhere.  If you traded around in the first half of the year, then hopefully you severely outperformed the market.  But, the buy and hold crowd is flat.  What the economic recovery looks like is debatable.  But, the stock market price action was shaped like a “V”.  That we know.  So, what will the 2nd half of the year look like?  I think it’ll look very similar to the first half of the year, not in magnitude, but in shape.  I think we’re setting up for a sell off that could put the rally in jeopardy and have the doubters pile on.  Then, I think that sell off will be an excellent buying opportunity.  It could be a choppy rough summer but I believe we’ll have a pretty nice fall rally.  That’s how it’s shaping up right now.

Many people ask me how far down this market could go and that’s a really tough question to answer and one I don’t think we need to know the answer to.  When you start setting targets, etc., you may get distracted and end up losing money.  What I do is monitor what the prices of stocks are doing vs. the risk of owning those stocks.  And right now, the risks are very high for multiple reasons.  First, the technicals have been deteriorating and really look awful.  Secondly, earnings season is coming up and we just don’t know how investors are going to react to those earnings.  So, whether or not the market retraces 1/3 or 1/2, I know the risks are rising to own stocks.  If the market moves up and the risk falls at the same time, then it’ll be safe to re-enter, even at higher prices.  Unless you’re a quick trader though, I’d be patient and keep my powder dry.

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Fox Business Television 7/1/09