Trovena Weblog

Bear markets favor active management, right?

Following every major bear market, it seems that the active managers and market timers come out in full force.

"We got out of the market before the crash."
"Our sector rotation strategies allow us to remain nimble enough to avoid big losses."
"Buy and Hold is dead.  Active trading is the only way to make money in this market."

It sure sounds attractive.  After all, the markets have likely just delivered a major blow to your portfolio.  Surely, someone out there must have been able to help me avoid the losses.  And, of course, they will also be the same firm that will get me the upside of the market.

Well, I have good news.  There are, indeed, funds that outperform the market averages.  But here comes the bad news.  Odds are likely that you won't pick the right ones.  Or at least not at the right time.

Why do I say this?  Two reasons:

1. The study by Dalbar, Inc. that found that mutual fund investors typically experienced returns worse than the funds in which they invested due to poor timing of their investment dollars.  The right time, by the way, is before they go on a run that beats the market, not after.
2. The study by Standard & Poors (of S&P 500 fame) which compares the performance of actively managed mutual funds to the passive S&P indices.

It is the results of the second reason that I explore below.

First Quarter Market Commentary

March Madness

It is the time of year when half court buzzer beaters turn unknown players from small schools into instant, if momentary, heroes.  The NCAA Men's Basketball Tournament, also known as March Madness, is legendary for great upsets, heart stopping finishes, and underdog "bracket busters."  This year, pre-season favorite, North Carolina, advanced through the field, winning every game by 12 points or more en route to the championship.
 
This March, the madness was not on the road to the "final four," it was on a road called Wall Street.

Kicking Cramer While He's Down

I'm taking a page out of Jon Stewart's playbook here.  I was Googling financial news and blogs from around March 9, 2009, aka The Bear Market Bottom (at least for now).  The point was to find some sucker who put themselves and their opinion out there for the public to scrutinize and, well, rip apart.  Basically, cherry pick some quote that turned out to be wrong or just sounds crazy with the perspective of time.

Well, as luck would have it, the highest profile of suckers with no shortage of opinions has a gem of a quote.  This is from his Mad Money Blog:

The potential for a second Great Depression is real, Cramer said, so long as Obama pushes forward with his plans. Nonbelievers should just look to the stock averages, which have plummeted since Jan. 20 and are now forecasting the worst economic decline since the first Great Depression.

This quote appeared on March 9, 2009.  Now, I will agree that the stock market is forward looking relative to the economy.  But let's be realistic about short term movements.  He was using a 6 1/2 week market drop as a forcast a second Great Depression.  Let's at least hope the second Great Depression won't be referred to in caps.

Tax Day Freebies

Happy Tax Day folks!  April 15 has become, for better or worse (probably worse) as recognizable a day as any in the U.S.  It's the day when procrastinators can tell you which post office is open until midnight in their area. 

Even more exciting, it's a day when businesses scream for attention in the form of freebies and discounts.  We, at Trovena, applaud merchants providing discounts or giveaways, whatever the reason.  Often, the problem is that you only hear about the freebies after you have missed out (like free Krispy Kreme on Inauguration day).  Fortunately for you, we have taken the time to find all the good deals.  Or more accurately, USA Today and Yahoo Finance have found all the deals.

Check it out:

Yahoo Finance Tax Day Freebies

USA Today Good Stuff

Some favorites include free Cinnabon between 5pm-8pm and discounts at McCormick & Schmick and P.F. Chang's China Bistro.  Enjoy!

Here's how silly the Dow Jones is...

On November 20, 2008, the Dow Jones Industrial Average (DJIA) closed at 7,552.29.  To date, that remains that closing low in the market through this current bear market.

 

During the past two days, the market has made serious threats at setting a new closing low.  The DJIA closed at 7,552.60 yesterday, less than a half a point above the previous low!  And today, the index spent most of the day trading negative, before somehow finishing the day in positive territory.

 

It was a MAJOR test of the lows, as the technical analysts would say.  It is a major resistance level, which, if breached… look out below!

There’s one small problem with this. 

Reading charts... same chart, different story

Technical analysis continues to fascinate me.  In case you don't know, technical analysis is the practice of studying stock price data, generally through historical charts, to make a prediction about the future direction of stock prices.  I'm sure the technical "analysts" will say that there's more to it than that, but that's my take.

Most of the respected members of the financial industry reject technical analysis as "reading the tea leaves".  In other words, it is a false practice in which success is more a matter of luck than any sort of learned skill.  The academic community, in particular, derides technical analysis as more of a pseudoscience than a legitimate discipline.

Nonetheless, I like to hear what the chart readers have to say.  Much of technical analysis centers around the idea that markets are highly cyclical, and the charts give you insight as to when we have reached a top or bottom of any cycle.  Knowing this, of course, means you simply plow your money in when a bottom has been identified, and the opposite at a top.  There are two forms of cycles, the normal 3-5 year business cycle, and another longer cycle, commonly referred to a secular market cycle.

It is this last type of cycle that I want to discuss.  I recently found a site that posted two charts that attempted to analyze the secular market cycle, and provide some insight as to where in the cycle we currently are.  The charts are below.

Eric Toya Quoted in Money Magazine

It's funny, I have been a fan of the Money Magazine Millionaire in the Making series since they started it several years ago.  Now, they're quoting me in it!  How cool.  Here's the link.

This was an interesting case, that I wish I had more time to really understand the whole picture.  Ultimately, what happened was the writer, Paul Keegan, needed my input and a fairly large amount of numbers crunched, and was under a tight deadline.  I was happy to provide the information that he was looking for, and at the end of the day, I'm comfortable with the numbers based on the information that I was given.

If I was given more time, there are a bunch of things that I would have done differently.  I suppose I should now find the time to really do it right.  Okay, I'll make no promises, but look for a new post on this article in a few weeks.

Stock Quote Overload

I finally joined the ranks of people living in the 21st Century.  Yep, I bought a big ol' plasma TV.  Hey, it was on sale at Fry's.  Besides, these things have really come down in price.  So, I was shocked to turn on my TV, and find that CNBC broadcasts in high definition, and now looks like this:

As if we didn't have information overload to begin with.  Now, there's an extended ticker on the bottom, more index updates on the top, and random stock quotes and charts on the side!  Against my better judgment, I spent some time watching the new crystal clear CNBC HD.  The quotes on the side generally have nothing to do with what the reporters are talking about!

Does anyone remember when this is how you used to get your financial information:

Of course, even more egregious on the information overload front, The Internet:

This raises three questions:

1. Which was better, the old newspaper quotes, or the modern, "all you can eat" information at your fingertips?
2. Do we really need CNBC in High Definition?
3. How much is too much?

I'm actually going to attempt to answer these questions...

The Great Safety Net of 2008 (aka Housing Bill) Signed Into Law

There's a phrase that has grown in popularity and use over the last year or so, "privatize profits and socialize losses."  It's not used in a positive manner.  The thinking is something like this.  Everyone is happy to let markets roam free when they are going up and many are making a killing, but when prices drop and losses mount, government intervention appears.  Recently, the phrase has been applied to Bear Stearns, Fannie Mae, Freddie Mac, and now Homeowners facing foreclosure.

After reversing course on his promise to veto earlier proposed housing bailout bills, President Bush made good on his vow made last week to sign the latest version passed by Congress.  With unusual expediency, the bill flew through both the House and Senate and was signed into law today.

Americans seem split on their support for a government sponsored housing bailout.  According to a Gallup Poll in March, as reported in the USA Today, 56% supported government aid to borrowers; 42% opposed it.  In another poll, 53% oppose government intervention, 29% favor federal aid, and 17% were not sure.  Either way, it appears to be a hot button issue for many.  The media remain focused on the sad stories of people losing their houses, while those opposing a bailout have been highly vocal, even starting a web site specifically for this issue.

My personal belief is that markets will run their course in a more efficient manner than government intervention.  But if price volatility is a concern, then upside volatility is just as concerning as downside volatility.

One of the rules of business is that you shouldn't talk politics in the office.  Since this is a company blog, it's pretty much the same thing.  So, I'll refrain from further politicizing.  Actually, the reason for this post is to bring to everyone's attention what is actually in this bill and how it may affect our clients and other interested parties.

FDIC, SIPC and the safety of your money

Not surprisingly, with the endless news coverage of the failure of IndyMac Bank (sensationalism at its finest!), a question on everyone's mind is, "just how safe is my money?"  Let's face it, the last thing any of us want is to find ourselves standing in line for hours outside our bank or brokerage office hoping to get our money back.  For our clients, and any other interested parties, we wanted to address the issue of safety of funds.

The majority of our clients' assets are custodied at Charles Schwab & Co., so most of this will address the safety of assets at Schwab.  Some of our clients' assets are custodied at TD Ameritrade, and the protections that they offer are effectively the same.

Principle among concerns that clients have expressed to our office are:

1. I have more than $100,000 at a bank, should I go take some of it out?
2. How safe is the money market (cash) portion of my brokerage account in the event of a Schwab bankruptcy?
3. How safe are the investments (mutual funds, stocks, bonds, CDs, etc.) in my account if there was trouble at Schwab?
4. How safe are the underlying investments, not in terms of investment loss, but loss due to insolvency by the investment manager (DFA, MLM, Payden Funds, etc.)?