Is the Recession In Its Second Year Now?

The people at "Chart of the Day" yesterday wrote:

Today, the US government reported that gross domestic product (total output of goods and services) contracted at an annualized rate of 0.3% in Q3 2008. The GDP report showed that consumer spending (about 70% of the US economy) declined 3.1% during the quarter which is the biggest decline since 1980. For some perspective on the US economy, today's chart illustrates the ECRI Coincident Index. This index is a composite of several economic indicators (includes measures of production, employment, income and sales) that provide an indication as to the current state of the US economy. Since 1950, the ECRI Coincident Index has (on average) peaked one month before the beginning of a recession (as measured by the NBER – the official arbiter of recessions) and troughed at the same time that a recession ended. Today's chart illustrates that the ECRI Coincident Index peaked back in September 2007. This suggests that the US economy has been in recession since Q4 2007 and that the recession is ongoing.

Courtesy of "Chart of the Day"

Based on data like new jobs, production, income and sales the US economy has been "recession like" for about a year. The chart below clearly shows the surge in GDP from the fiscal stimulus package ($300 to $600 tax rebate to taxpayers) attempted to push the economy out of a recession but it was too little, too late to keep GDP growth from going negative. See:

• January 25, 2008: "ECRI Says There Is A Window of Opportunity for the US Economy"
  
  
• March 28, 2008: ECRI Calls it "A Recession of Choice"

Economists now think Q4 2008 GDP growth will be between negative 5% and negative 0.1%. That would make for two consecutive quarters of negative GDP growth, the layman's definition of a recession. More importantly, it would give us negative GDP growth for three of the last five quarters that all showed a decline in jobs growth and plunging ECRI WLI.

Lets hope the US Stock market rebound since its recent low is acting as a leading indicator . It may be predicting another stimulus package will come after the election and it could go even higher after the uncertainty over the election is gone next Wednesday and the efforts by the US Treasury and Federal Reserve restore liquidity to the credit markets.

ECRI WLI Growth Rate Falls to Lowest in Six Decade History

Today the Economic Cycle Research Institute, or ECRI an independent forecasting group based in New York, said its Weekly Leading Index (WLI) fell to its lowest level in its six decade history. The WLI and its growth rate are designed to predict future turning points in the business cycle (recessions and recoveries.)

• More about ECRI
  

Today ECRI said its WLI fell to 112.9 for the period ending October 24, 2008. Last week WLI was 114.0.

The WLI growth rate fell to -21.9%, down from -19.3% last week.

Commenting on the data, Lakshman Achuthan, managing director at ECRI said

"With WLI growth plummeting to the lowest reading registered in its six-decade history, the outlook for the economy has darkened dramatically."

Date and graph courtesy of Economic Cycle Research Institute

Is the Recession two years old now?

I explore that idea in my upcoming article "Is the Recession In Its Second Year Now?"

More ECRI Articles:

• October 30, 2008: ECRI Warned Us; We Are In A Recession Now
• March 28, 2008: ECRI Calls it "A Recession of Choice"
• January 25, 2008: "ECRI Says There Is A Window of Opportunity for the US Economy"
• January 05, 2008: "ECRI Says Fed Has Room To Cut Rates Despite Fears of Inflation"

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ECRI Warned Us; We Are In A Recession Now

The US Department of Commerce says the US economy contracted at a 0.3% annual rate. A report released today says estimated third quarter (Q3) GDP growth was a negative 0.3% annualized rate. This is subject to revision in the future. Rex Nutting of MarketWatch summarizes:

• The U.S. economy contracted at a 0.3% annualized rate in the third quarter, as consumer spending declined at the fastest pace in 28 years, the Commerce Department estimated Thursday.
  
• Final sales to domestic purchasers fell 1.8%, the largest decline in 17 years.
  
• Consumer spending dropped 3.1%, the first decline in 17 years and the biggest drop in 28 years
• business investment fell 1%.
  
• Investments in homes fell for the 11th straight quarter.
• Inflation-adjusted after-tax incomes fell 8.7%, the largest quarterly decline since the record-keeping began in 1947!!!!

Readers of this blog should not be surprised by this data as The Economic Cycle Research Institute, a New York-based independent forecasting group also known as ECRI, warned us right here on this blog earlier this year with the following articles as well as their regular "Weekly Leading Index" (WLI) updates that I cover in my newsletter and often report here.

• Saturday, January 05, 2008: "ECRI Says Fed Has Room To Cut Rates Despite Fears of Inflation"
  

  "WLI growth is now at its worst reading since the 2001 recession. However, the WLI's recent decline is not based on pervasive weakness among its components, suggesting that a recession could still be averted"

• Friday, January 25, 2008: "ECRI Says There Is A Window of Opportunity for the US Economy"
  

  The U.S. economy is now in a clear window of vulnerability, given the plunge in ECRI’s Weekly Leading Index (WLI) since last spring. Yet there is a brief window of opportunity within that window of vulnerability to avert a recession. That is why ECRI has not yet forecast a recession.
  

• Friday, March 28, 2008: ECRI Calls it "A Recession of Choice"
  

  The U.S. economy is now on a recession track. Yet this is a recession that could have been averted. In January, given the plunge in the Weekly Leading Index, we declared that the economy had entered a clear window of vulnerability. Yet we emphasized the brief window of opportunity within that window of vulnerability for timely policy stimulus to head off a recession.

Congratulations to ECRI for correctly predicting a recession while the president and many others early this year were clearly saying the American economy was healthy.

Other key sentiment indicators for stock market technical analysis include:

• AAII: American Association of Individual Investors Bull/Bear Index: AAII Charts and Info
• II-BBS: Investors’ Intelligence Bull Bear survey: II Charts and Info
• ISE (International Securities Exchange) Sentiment Index: ISE Charts and Info
• State Street Investor Confidence Index State Street Charts and Info
  
  

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Sy Harding's MACD Seasonal Buy Signal

Yesterday the MACD for the S&P500 turned positive for a Sy Harding Buy Signal. (See Sy Harding: Seasonal Timing Strategy.) The MACD is the "special sauce" that Sy Harding applies to his variation of the "Seasons in the Sun Strategy" which he calls his "Seasonal Timing Strategy" or STS for short.

STS worked great this year getting out of the market in the Spring around 1400 and getting back in now at about 939, 33% lower! If the market recovers to 1400, Harding's STS will have made an incredible 49% more than buy and hold!

Click chart courtesy of stockcharts.com to see full size image

Sy waits for the MACD to turn positive after October 16, the average best day to enter the stock market based on the "Seasons in the Sun Strategy." Harding writes:

The idea is that if a rally is underway when the October 16 calendar date for seasonal entry arrives, as indicated by the MACD indicator, we will enter at that time. However, if the MACD indicator is on a sell signal when the October 16 calendar date arrives, indicating a market decline is underway, it would not make sense to enter before that decline ends, even though the best average calendar entry date has arrived. Instead, our Seasonal Timing Strategy simply waits to enter until MACD gives its next buy signal, indicating that the decline has ended.

Sy will use the same indicator to look for the favorable exit point from the market when the MACD gives a sell signal any time after April 20.

For more, see

• Sy Harding: Seasonal Timing Strategy (STS)
  
  
• Sy Harding's S&P500 MACD Charts

Sy Harding is president of Asset Management Research Corp., DeLand, FL, publisher of The Street Smart Report. This article is my "interpretation" of public information posted by Sy Harding. Harding may have changed his formulas and not written about it while keeping the old info on his web site which you would only know for sure by subscribing to his service.

Other key sentiment indicators for stock market technical analysis include:

• AAII: American Association of Individual Investors Bull/Bear Index: AAII Charts and Info
• II-BBS: Investors’ Intelligence Bull Bear survey: II Charts and Info
• ISE (International Securities Exchange) Sentiment Index: ISE Charts and Info
• State Street Investor Confidence Index State Street Charts and Info

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11/01/08 Update: A reader told me via email that Sy Harding uses weekly MACD signals (not daily) according to some "experts" posting on discussion forums. This is not true if you believe Sy Harding's own web site which says:

What is the formula for MACD?

MACD as we use it is plotted as follows: Using the daily closing prices of the index or security you want to plot MACD on, subtract the value of a 26 day exponential moving average of the closes, from a 12 day exponential moving average of the closes. That produces the solid indicator line. Then plot a 9 day exponential m.a. of the indicator line, and display it on top of the solid indicator line as a dotted or different color line, so you can tell the two apart. The dotted line is known as the signal line. When the solid line crosses the dotted line to the downside it produces a sell signal. When the solid line crosses the dotted line to the upside it produces a buy signal.

If you use weekly data rather than daily data, or assuming you're doing this via computer, simply compress the daily data by a factor of 5, you will change the short term MACD indicator to an intermediate term MACD indicator. Only the short term version is usable with the Seasonal Timing System.

I back tested my formulas (I have an account at Stockcharts.com) with the charts Sy Harding shows for his STS for 1997 and 1998. The signals my formulas generated match Harding's published buy and sell points exactly.

You can watch the weekly MACD here for free.

Bottom line: Beware what you read on discussion forums. If people can't present the math or formulas to back what they are saying, then proceed with extreme caution!

See Sy Harding: Seasonal Timing Strategy for more information.
.

Jim Rogers Says Massive inflation is Coming

In this Oct. 24, 2008 Bloomberg interview, Jim Rogers predicts massive inflation is coming.

• We are going to have an inflation nightmare.
  
• Whenever people have printed a lot of money, six months to two years later, you have terrible inflation.
  
• People all over the world are printing money like mad.
• Massive inflation is coming and the only way to protect yourself is to be out of paper assets and in hard assets like gold and other commodities. (US Treasury Rates)

Jim says he is currently in short term treasuries but expects to get out soon and go short more government long term bonds.

He also says commodities are still in a bull market, he has used this downturn to add to commodities, especially gold, and he expects to make the most money in agriculture in the years ahead.

YouTub Video: Oct 24 Bloomberg Interview.

Jim is buying commodities and Swiss Francs.

Jim says we should abolish the US Federal Reserve and the guys on Wall Street with the fancy cars need to learn to drive tractors and the farmers in the years ahead will be buying the fancy cars.

Jim also showed two gold coins he bought in Zurich. The woman interviewing him said individual investors are having a hard time getting gold coins to which Jim said that is often the sign of a top.

"There has been a run on gold..... The public, the odd lotters, are sometimes the last ones in.

Jim says Paulson, Bernanke and the "idiot at the NY Fed" are never right and making it worse because they are not letting people/banks fail. Jim thinks they could turn this into another depression. Jim brought up what happened in Japan and blamed it on not letting banks fail in Japan.

Jim, didn't Japan have massive deflation during that period where they let banks mark assets to market to show they failed?

Jim says "propping people up has never worked in the history of the World."

Jim says the competent people should be taking market share from the incompetent, but we are seeing the reverse due to government interaction. Banks that make bad loans are getting more money from the governments to make more bad loans rather than let them fail.

Jim says the inventory of food is the lowest in 50 years. There is a shortage of farmers, tractors, tractor tires, seeds, etc.. Too many stockbrokers, journalists and investment bankers.

Jim says the bottom in equities will come when the market goes up on bad news.

Allan Greenspan's Shocked Disbelief and Denial of Responsibility

During his prepared testimony today before the House Oversight Committee, former Fed chairman Allan Greenspan said

"those of us who have looked to the self-interest of lending institutions to protect shareholder's equity (myself especially) are in a state of shocked disbelief. Such counterparty surveillance is a central pillar of our financial markets’ state of balance. If it fails, as occurred this year, market stability is undermined."

It is hard to believe the Fed chairman was that clueless.

Did Greenspan not learn anything from Enron, WorldCon and the accounting firms that signed off on the books of such good clients?

Did Greenspan not learn anything all the internet IPOs of worthless companies with no profits where insiders kept selling shares all the way up and all the way down while leaving "clueless" 401K type shareholders and index funds who had to buy holding the bag?

Key Comments:

• "In 2005, I raised concerns that the protracted period of underpricing of risk, if history was any guide, would have dire consequences. "
  Reminds me of tobacco companies putting labels on their death sticks saying "smoking can kill you."
  
  
• "This crisis, however, has turned out to be much broader than anything I could have imagined."
  No kidding Al....
  
  
• The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer. But subprime mortgages pooled and sold as securities became subject to explosive demand from investors around the world. These mortgage backed securities being “subprime” were originally offered at what appeared to be exceptionally high risk-adjusted market interest rates. But with U.S. home prices still rising, delinquency and foreclosure rates were deceptively modest. Losses were minimal. To the most sophisticated investors in the world, they were wrongly viewed as a “steal.”
  Yes Al. The people we paid and TRUSTED you to REGULATE found a way to sneak their "worthless" or at least "harmful products" by YOU so they could generate high fees and vanish before the stuff hit the fan. Skip the fancy language Al and admit you screwed the pooch.
  

At least I like his conclusion:

"This crisis will pass, and America will reemerge with a far sounder financial system."

Full text of Greenspan's prepared remarks.

During the Q&A, Greenspan said he did not take out an adjustable mortgage because he thought it was too risky. I believe that is a lie or a misrepresentation of facts. I doubt he needed a mortgage with his high net worth AND I remember clearly him on TV recommending adjustable mortgages. Erin Burnett said the same thing on CNBC today.

OPEC says action needed to avoid huge oil glut

Tuesday October 21 2008: OPEC says action needed to avoid huge oil glut
The world faces a huge oversupply of oil next year should production continue at current rates, OPEC's secretary general Abdullah al-Badri said on Tuesday, as his organization prepares for an emergency meeting to discuss output cuts.

• More Charts of Crude Oil Prices
  

"If things stay as they are, there will be a huge excess of supply in 2009," Badri told a news conference a few hours after arriving in the Russian capital.

Our good friend (HA HA) Badri also launched an attack on British Prime Minister Gordon Brown and unnamed officials in the United States for creating the global financial crisis, and said OPEC was powerless to stop its effects around the world.
"We don't have the ability to bail out the financial crisis created by Mr. Brown and others in the United States," he said. "Everybody will feel the heat one way or another of the financial crisis. The Chinese are the least likely to be affected."

Warren Buffett Buy Signal

In a New York Times OpEd article today, Warren Buffett says he is moving from US Treasuries to US Stocks now. I pay attention to what Buffett has to say.

Buffett wrote that his personal portfolio that was not in Berkshire Hathaway stock was in "nothing but United States government bonds" before this decision to buy stocks now.

So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Click chart courtesy of stockcharts.com for full size image

Buffett writes a simple rule dictates his buying:

Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Buffett is also clear he can't predict the stock market, but he sure seems better than most given he has been in safe US Treasury bonds with his cash for many years leading up to today's bargain basement prices:

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

I like what Buffett says about cash.

Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.

I agree. On Monday I moved a good chunk of my core portfolio from Vanguard Money Funds to Vanguard's Treasury Inflation Protected Securities (TIPS) fund (VIPSX Charts) after I sent a chart to my newsletter subscribers showing TIPS were paying the highest base rate in years.

Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”

I completely agree and have been buying this downturn myself. Some things I bought were the S&P500 exchange traded spiders fund (SPY Charts) at $87.54 on 10/10/08 and my very first shares ever of Google (GOOG Charts) at $310 yesterday.

If you want to know what else I have been buying in this period of weakness with my profit taking dollars from selling when the market was higher, Subscribe to Kirk's Investment Newsletter TODAY and get the October 2008 issue FOR FREE!

For full Buffett Article, see "Buy American. I Am"

Inflation Adjusted Oil Prices Fall on Strong US Dollar

Oil prices (charts) have fallen $75.52 or 52% since peaking in early July of this year.

Click chart courtesy of stockcharts.com for full size image

This chart from "Chart of the Day" puts the decline in perspective. When adjusted for inflation, oil prices are now lower than they were during the Iran crisis and just after Hurrican Katrina spikes.

$WTIC = West Texas Intermediate Crude

Some on TV say the spike in the price of oil was driven by speculators, but this chart shows the weak dollar was also responsible.

Now that the global stock markets have melted down, investors around the World are seeking safe haven in short term US Treasury notes which is helping the dollar rally.

It appears the weak dollar pushed oil prices to the low $100s. Then trend followers and clueless speculators pushed it higher, which is normal in a free market.

Now that the speculators have fled and the dollar is stronger, the price of oil has fallen to just below the low end of the range expected by well known oil industry analyst Charlie Maxwell. See:

• Charlie Maxwell Says $300 Oil Inevitable: Charlie predicts oil prices between $75 and $115 for awhile. After that, he sees prices soaring again.
  
  
• More charts of Oil Prices
  

.

ISE Sentiment Turning Up

Charts of the International Securities Exchange (ISE) Sentiment Index plotted versus the Dow Jones Industrial Average (DJIA charts), S&P500 ( S&P500 Charts) and NASDAQ composite index (NASDAQ charts) are key sentiment indicators for stock market technical analysis.

click to view the PDF files

• ISE Sentiment vs DJIA
  
  
• ISE Sentimen vs SnP500

Contrarian theory states the time to buy is when fear and pessimism is at a maximum since this usually occurs near market bottoms.

click chart to view the full-size PDF file

10/11/08 Commentary: The 10 day moving average (DMA) of ISE Sentiment has turned up sharply and the 20 DMA is turning up yet the DOW has plunged, probably as mutual and hedge funds were forced to liquidate to meet redemptions after investors got quarterly statements and panicked.

I was a buyer last week with some stocks going higher and some continuing lower but I believe all were "bargain of a lifetime" values. Warren Buffett is been a buyer also. (See Warren Buffett on Goldman Sachs and Financial Bailout)

The 6-month treasury bill at 0.81% is but a fraction of the 3.05% dividend yield of SPY (Charts.)

• See Current US Treasury Rates

The dividend yield on the S&P500 is currently higher than the 2.76% available with the 5-year Treasury Note.

I graph bond prices vs. the markets vs time. When you see not only stock investors but bond investors flee risky investment for the safety of short term Treasuries, then a loud gong goes off. The gong was very loud last week.

Like Buffett, I have no idea if or when the eventual bottom will happen but I rebalanced when the market was higher to take profits in equities. [See "take profits" pdf.] Now that equities are much lower, I've been rebalancing again by buying equities to get to my target asset allocation. I use a TINY bit of market timing to help me rebalance when the gongs sound and my target "fat pitch" price levels for the securities on my shopping list are reached. I know full well that stock can go lower, but long term, I am betting on the USofA while collecting a nice dividend on the SPY (SPY Charts) I bought Friday at $87.54 for my personal core portfolio rebalance.

Core and Explore Method: I recommend a "core" portfolio for about 80 to 95% of your funds and an "explore" portfolio made of stocks from my newsletter portfolio for the remainder. My newsletter stocks are volatile by design to add to overall returns, but you need a good core portfolio to sleep well at night. I offer several different core portfolios for both aggressive & conservative investors. My newsletter portfolios are ALL significantly ahead of where they started 2000 which I feel is quite an accomplishment given how well I did in 1998 and 1999. As of today, the S&P500 is well below its January 2000 level.

According to the ISE :

The ISE Sentiment Index is a unique put/call value that only uses opening long customer transactions to calculate bullish/bearish market direction. Opening long transactions are thought to best represent market sentiment because investors often buy call and put options to express their actual market view of a particular stock. Market maker and firm trades, which are excluded, are not considered representative of true market sentiment due to their specialized nature. As such, the ISEE calculation method allows for a more accurate measure of true investor sentiment than traditional put/call ratios. web site

For a current reading on what the ISE sentiment index charts mean and many other sentiment indicators mean, subscribe today and get the October 2008 issue of Kirk Lindstrom's Investment Newsletter for FREE!.

October 9 Bear Market Statistics

October 9 has marked several important turning points for the markets.

• October 9, 2002 was the day the S&P500 (more charts) made its low for the 2000 to 2002 bear market.
• October 9, 2007 was the day the S&P500 peaked on a closing basis at 1,565.15.

Could October 9, 2008 be another major turning point?

The average bear market decline is about 30%. We are currently down 38%, 37% and 40% in the S&P500, DJIA (more DOW charts) and NASDAQ (more NASDAQ charts) composite since the peak. The odds favor buying now if you have a long-term perspective and confidence like I have that the US will somehow muddle its way through this mess as it has in the past.

Click chart courtesy of stockcharts.com for full size image

2007-2008 Bear Market Statistics 10/09/08

S&P500 Chart

Last Market High 10/11/07 at 1,576.09
Last Market low 10/08/08 at 970.97
Current S&P500 Price 984.94
Decline in Points = 591.15
Decline in percent = 37.5%
Max Decline = 38.4%

=>This means the decline from intraday high to intraday low is 38.4% and we are currently 37.5% off the peak.
=>The decline in the S&P500 from the closing high to the closing low was 37.1%

DJIA Charts

Last Market High 10/11/07 at 14,279.96
Last Market Low 10/08/08 at 9,042.97
Current DJIA Price 9,258.10
Decline in Points = 5,021.86
Decline in percent = 35.2%
Max Decline = 36.7%

=>This means the decline from high to low has been 36.7% and we are currently 35.2% off the peak.
=>The decline in the DOW off the closing high to the closing low was 34.6%

NASDAQ Charts

Last Market High 10/31/07 at 2,861.51
Last Market Low 10/08/08 at 1,706.86
Current NASDAQ Price 1,740.33
Decline in Points = 1,121.18
Decline in percent = 39.2%
Max Decline = 40.4%

=>This means the decline from intraday high to intraday low is 40.4% and we are currently 0.391814112 39.2% off the peak.
=>The decline in the NASDAQ off the closing high to the closing low was 39.1%

If you want to know what I have been buying in this period of weakness with my profit taking dollars from selling when the market was higher, Subscribe to Kirk's Investment Newsletter TODAY and get the October 2008 Issue for FREE!

Could October 9, 2008 be another major turning point?

Given the average bear market decline is about 30% and we're down 38%, 37% and 40% in the S&P500, DJIA and NASDAQ composite, the odds favor buying now if you have a long-term perspective.

We could go lower or the bottom may be in. Major market turns have occurred in early Octobers of the past. I like the odds and have been buying.

Chart of market price since the peak

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John Bogle on CNBC

John (Jack) Bogle, founder of the Vanguard Group, was just on CNBC. He is famous for saying "stay the course" and don't try to time the stock markets which he repeated. When asked if people should sell equities if they are close to retirement and are worried about future losses he said yes if it is to raise cash to get to a target bond (fixed income) allocation. Jack said he likes "something like your age in bonds" and said he is 80 and has about 80% in bonds.

I've read that many investors are either out of the market or have stopped their regular 401K contributions. I wish someone would have asked Bogle what a person who is 100% in cash should do now with the S&P500 (S&P500 Charts) under 1,000 and paying a dividend over three times larger than the 3-month Treasury bill (0.81%) and higher than the 5-Year Treasury bond now paying 2.44% (See US Treasury Rates.) (Note, I've been buying equities with buys on Monday and Tuesday this week.)

When asked what he thought about the markets, Bogle said he can't predict the future but he thinks we are more than half way through this bad period. He pointed out that eventually speculators will all get out and investors will come in when they like the value. He said in 2000 (at 1500) the S&P500 (S&P500 Charts) had a dividend yield of about 1.0% and today at 996.23 it is about 2.7%


In his 2007 book “The Little Book of Common Sense Investing” Vanguard founder John Bogle says your "serious money account" should be 50% to 100% in index funds. He says 5% of your assets can be in a "Funny Money" account. Here is some more advice from pages 202 & 203.

Individual Stocks? Yes, Pick a few. Listen to the promoters. Listen to your broker or adviser. Listen to your neighbors. Heck, even listen to your brother-in-law.

Actively managed mutual funds? Yes. But only if they are run by managers who own their own firms, who follow distinctive philosophies, and who invest for the long term, without benchmark hugging. (Don't be disappointed if the managed fund loses to the index fund in at least one year of every three!)

Closet index funds? No

Exchange Traded Funds (ETFs)? Maybe. Buy the ones that hold the classic index portfolio with your serious money account. Invest but don't speculate.

Commodity Funds? No. They don't have fundamentals like dividends or earnings to support them.

Hedge Funds? No. "Too much hype... Too much cost and too little tax efficiency."

Hedge funds-of-funds? "No. Really no." They are even more expensive than hedge funds! See my article "Insana Capital Partners Hedge Fund to Close."

Asset Allocation: On pg 208 Bogle recommends "your age in bonds" or even "your age minus 10% in bonds." Thus someone 65 years old would have 55 to 65% of their investment assets in bonds. He admits this is conservative and below what most experts advise but he is a conservative person.

Kirk's Asset Allocation Advice: I like the rule-of-thumb "120 less your age in equities." That puts someone at age 65 with 45% in bonds, 10% to 20% less than what Bogle recommends. Your equities should be a globally diversified basket of low-cost index funds such as the "core portfolios" I recommend in "Kirk Lindstrom's Investment Newsletter." For example, if you are 40 years old and don't plan to retire for 20 or more years (unless you get lucky with some of my "explore portfolio" stock picks) then you would have 80% in equities and 20% in fixed income. If you are well into critical mass, then put even less into equities and get inflation protection from TIPS since you don't need the extra "expected" return from equities at the much higher volatility (risk.)

Bogle vs. Kirk's Advice: I believe my advice is little different from Bogles advice.

• Bogle says you can have up to 50% of your portfolio in managed funds, up to 5% in a "Funny Money account" and the rest should be in index funds. He is clear he thinks the index funds will do the best overall and would be happy with 100% in index funds for both equities and bonds.
  
• I believe my "explore portfolio," if followed exactly, is no different than investing in a managed mutual fund but I only recommend it for 5 to 20% of your investment assets. My recommended core portfolios are 100% globally diversified index funds. I recommend my core portfolios for 80% to 95% of your investment assets.
  

If you want to know what I have been buying in this period of weakness with my profit taking dollars from selling when the market was higher, Subscribe to Kirk's Investment Newsletter TODAY and get the October 2008 Issue for FREE!

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Terry Savage on CNN

Appearing on CNN this AM, Terry Savage (Terry Savage Fan Club) was asked some investment questions.

Rhonda wanted to know if she should leave her 401K alone or move her money and/or her percentage contributions to more stable bonds.

Terry said if Ronda is still working and has 20 or more years to retirement, then she needs to keep contributing. Terry said 30% in company stock is a little too much so she should look to diversify. She also said bonds are risky if somewhere down the road inflation returns. Her allocation advice was to "stay balanced" with "more in stocks."

I agree 100% with those good answers.

Kirk's Asset Allocation Advice: I like the rule-of-thumb "120 less your age in equities." The equities should be a globally diversified basket of index funds such as the "core portfolios" I recommend in "Kirk Lindstrom's Investment Newsletter." For example, if you are 40 years old and don't plan to retire for 20 or more years (unless you get lucky with some of my "explore portfolio" stock picks) then you would have 80% in equities and 20% in fixed income. If you are well into critical mass, then put even less into equities and get inflation protection from TIPS since you don't need the extra "expected" return from equities at the much higher volatility (risk.)

Liz asked "I have an annuity with AIG.... is it safe? Should I take action?"

Terry said the government put $85 billion behind AIG to prevent it from failing so she says you should not lose sleep over it but you should understand what you own and the risks associated with the investments in your annuity. You can get that information from your agent.

Jane, a 19 year old college student, said she put a couple thousand dollars into the market last week. She wants to know if she should continue to do this if she doesn't need it for three years.

Terry said three years may be too short a time period for money you need to be invested in stocks. A repeat of the 1970s could see the markets lower in three years even after the huge recent decline. Terry recommended a money market fund for money you know you will need in three years or less.

Kirk Comment: This note came in an email from Terry Savage this AM.

Few of today's investors remember the seventies.  At the start of that decade, in 1972-74, the Dow fell from over 1,000 to below 600 in 18 months. Then the DJIA stayed below 800 until this bull market started in summer of 1982.

In Japan in the 90's their stock market dropped similarly, and took a decade to rebound -- because their government refused to confront the problems in its financial system.

The markets NEVER repeat exactly, but it's wise to learn from history.  And history tells us that -- unlike recent experiences of quick declines and major rebounds -- it IS possible that the market could go down, and STAY down for a significant period of time.

It's not about the markets -- it's about YOUR financial situation!  It's about your age, risk tolerance,and ability to withstand a market decline, both in financial and emotional terms.  It's time to think about your investments in a larger perspective, not just what the market will do in the next few hours.
That's the Savage Truth!

Kirk Comment: I remember the 1970s well. I entered UC Berkeley's college of engineering in 1975 about the same time my grandfather retired. He bought a lot of dividend paying stocks to fund his retirement. Sure the market went nowhere during that time but he and my grandmother lived well off those dividends including many trips all over the World. I've learned from this. My "explore portfolio" has a mixture of hopefully undiscovered explosive growth stocks and safer stocks paying good dividends. This diversification between growth and value gives me opportunities to rebalance for added return. (See Using Asset Allocation to make money in a Flat Market for how this works.) I buy both when out of favor with the idea both will continue to give me long term results that crush the market averages.

Joe in Georgia asked if the DOW went up 777 points after going down 777 points does it mean he is back to even.

Terry said this is true only if you own the DOW index. Other indexes with greater diversity may do better or worse. Terry added there has never been a 20 year period where stocks have not made money in a diversified portfolio of large company stocks so Joe should keep investing for the long-term.

If you want to know what I have been buying in this period of weakness with my profit taking dollars from selling when the market was higher, Subscribe to Kirk's Investment Newsletter TODAY and get the October 2008 Issue for FREE!

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Kirk Lindstrom's Investment Newsletter
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DOW Priced in Ounces of GOLD: A Secular Bear Market!

When measured in ounces of Gold, the DOW has been in a secular bear market since peaking in late 1999.

Click chart courtesy of stockcharts.com for full size image

A chart of the DOW Jones Industrial Average (DJIA Charts) priced in gold shows the markets are not as healthy as one might think due to the decline of the US dollar.

• Back in 1999, it took 45 ounces of gold to buy the DJIA.
  
  
• Today it only takes 12.21 ounces of gold to buy the DOW!

The good news is the DOW priced in gold just bounced off support with gold falling faster than stocks. The news about the markets could not get much worse so perhaps we'll get lucky and have a triple bottom for the DOW:Gold chart and see the market rally in anticipation of better times in 2009.

Cutting the Fed Funds target rate from 6.50% in January 2001 to 1.0% in June 2003 may have inflated the US stock market out of its bear market when priced in dollars but it had consequences that we are feeling today.

CDs have been a "safe haven" for those wishing to preserve assets and get a small inflation adjusted return. See "Very Best CD Rates with FDIC" for a list of the best rates and terms. You can get 5% CDs with 12 and 13-month terms at Washington Mutual - WaMu (now owned by JP Morgan Chase) with an online CD . You can also get a one year CD paying 4.25% at Wachovia Bank (now owned by Citibank.)

Cutting interest rates to get the US out of the 2001 recession may have worked but the inflation in commodities and devaluation of the US dollar it caused has caused pain for the US consumer. This pain is often blamed on president Bush who took office just as the DOW/Gold ratio broke out of the "symmetrical triangle" pattern , shown above in blue and explained below.

More on "Symetrical Triangle" chart patterns: The Bible for technical analysis, Technical Analysis of Stock Trends, by Robert Edwards and John Magee, says about 75% of symmetrical triangles are continuation patterns and the rest mark reversals. This book makes a great Gift!

The "return to the apex" of the Gold/DOW ratio in late 2001, early 2002 confirmed the technical breakdown of this chart pattern.

For more information, read chapter eight "Important Reversal Patterns - The Triangles."

Click the flag pictures to see



Major World Market Graphs At A Glance: Daily 5 Days 1 Yr