Monday, August 31, 2009

Why Investors Must Become Traders; Cash for Clunkers Is a Clunker

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August 31, 2009  

The economic number to keep an eye on this week is the Index of Manufacturing Activity, published by the Institute of Supply Management. The number comes out on Tuesday.

The index is expected to rise to from 48.9 in July to 50.5 for August. Any number over 50 indicates that the factory sector is expanding. The index hasn't been over 50 since December of 2008. The Wall Street Journal reports that this would be an "unambiguous" indication that the recession is behind us.

And that's not the only positive in the ISM numbers. According to Steve McDonald, the gap between the New Order Index and the Inventory Index is at its highest level since April of 2004. This indicates that factory orders are piling up faster than they can be filled from inventory. The gap has been this high only five times in the past 30 years. And every time it has preceded a significant expansion in manufacturing.

The market and the economy do not move in lock-step. While we are still cautious about the market, the ISM numbers should be a positive sign for the economy.

If you're expecting a full market recovery, you're probably going to have to wait…

On "The Big Picture" blog, Barry Ritholtz shows a chart produced by Morgan Stanley Europe. The chart represents a composite average of the last 19 global bear markets.


The average bear market begins with a drop of 56% over the course of 29 months. This is followed by a rebound rally of 70%, lasting 17 months on average. After that comes another serious, but smaller correction. And then for nearly six years, the market trades within a range. The whole process lasts an average of 10.5 years.

So how does the current bear market match up? Are we on our way to a long and sustainable recovery?

The market peaked in October of 2007. From there, the S&P 500 fell 56% in 18 months. The rebound rally has risen 51% in about five months. So, historically speaking, the current rally could continue to run higher. And it could last another year. But another sharp correction is highly likely. Then the market could zigzag sideways for five or six years.

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Have you changed the way you invest in the last two years?

For decades, we have been led to believe that "investing" is safe and "trading" is risky. But the way most people "invest" is about the riskiest way to manage your money.

"Buy-and-hold" works great when earnings multiples are expanding, like they were in the 1980s and 90s. But it can spell disaster when multiples are contracting.

Michael Covel, the author of Trend Following: Learn to Make Millions in Up or Down Markets, points out the pitfalls of the "investing" mindset. Investors put their money into a market "under the assumption that the value will always increase over time," he writes. "Investors typically do not have a plan for when their investment value decreases."

He goes on to show that investors typically succeed in a bull market and lose in a bear market.

Finance professor Walt Woerheide, Ph.D. thinks "buy and hold" is still the best option…

In a recent interview with, Woerheide was asked about buy and hold. Bankrate pointed out that "anyone who has followed a buy-and-hold strategy over the last year and a half saw 30 to 40 percent of their portfolio value knocked out. So that leads people to say, 'This is a dumb strategy.'"

"Then what are you going to do?" Woerheide asks. "The alternative has to be simply that you start trying to anticipate the market and start dynamically moving your money around the various categories."

That's wrong. The solution is not to try to time the market. The solution is to determine your exit strategy before you enter a trade. The problem with "buy and hold" is that there is no exit strategy.

Who cares if this technology changes the world? I don't. I only care that this stock, which is trading for just pennies, hits $0.50 in the next three months!

Right now, you can buy 10,000 shares for just $250… and when it hits 50 cents, those shares will be worth a cool Five-Grand! For just $500, you can pick up 20,000 shares that could be worth an amazing $10,000 by the end of the summer.

Sounds too easy? Well it is. Once you read my Free report (by clicking here) you'll see exactly why… heck, you may want to pick up a hundred thousand shares right now!

Even if you consider yourself a "long-term investor," you should manage your investments like a "trader"…

That doesn't mean you need to adopt a short-term outlook. And it doesn't mean you should be buying and selling your positions every day or even every month. It does mean two things:

  1. Before you enter an investment, you should have a clearly defined sell strategy. If that line is crossed, you sell. On the other hand, when a stock moves in your favor, you should employ a trailing stop. That will give your winner room to run. And it will get you out if the uptrend reverses.

  2. You should be prepared to profit when the markets rise AND when they fall. We have recently experienced the sharpest rally since the Great Depression. But the overall trend in the markets is still down.

How has your investment outlook changed over the last two years? Drop us a line and let us know:

Cash for Clunkers is a real clunker…

If you pay any attention to the mainstream media, you might have heard that the government's Cash for Clunkers program has been a success. After all, it has spurred auto demand and given a kick start to the industry.

But not so fast, says Andrew Gordon. Andy digs deeper and has a few choice words for the bureaucrats in the following open letter to Uncle Sam.

Dear Uncle Sam:

I didn't trade my clunker in for a new shiny car. But I still want my cash back. You know what I'm talking about. The money you'll be taxing me to pay for your "cash for clunkers" program. I wouldn't mind nearly as much if it were just me that didn't benefit from the program.

But the U.S. auto industry didn't see any ounce of benefit either.

American auto makers usually supply 63% of the cars we buy. While the program was going on, they only supplied 52%. Tell me how a loss of market share benefits American auto companies?

And the 690,000 cars sold under the program? C'mon. This is the oldest sales trick in the auto business.

At the end of every year, dealerships offer cars at irresistible prices. But this is just a way luring future buyers into the present. And it usually results in disappointing sales the following quarter.

How is your "cash for clunkers" sale any different? Oh yes. Customers were forced to get rid of their old cars while they still had some life left.

Great! I was planning to buy my daughter a really cheap used car – the kind of car I had at her age. But you've just made it much more difficult for me to find one. Nice job, Uncle Sam. But I still want you to send what you owe me.

Andrew Gordon

You're likely to hear "good" news from the car companies. They will talk about the spike in sales and increasing production. Don't fall for it. It's just window dressing.

The auto industry is going to post atrocious numbers in the 4th quarter. The American automakers lost market share during this program. Buyers wanted cheap, fuel-efficient cars. And this usually means a foreign name plate.

And the spike in car sales won't help the bottom line. The car companies don't make a lot on cars. Their big moneymakers for the last decade have been trucks and SUVs. And they weren't selling any of these under "Cash for Clunkers."

It all adds up to more trouble on the horizon for the American automakers.

Good Investing,

Bob Irish
Investment Director
Investor's Daily Edge

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Bob Irish - Investment Director
Andy Gordon - Editorial Contributor
Jon Herring - Editorial Director
Ted Peroulakis - Editorial Contributor
Christian Hill - Managing Editor
Dr. Russell McDougal - Editorial Contributor
Steve McDonald - Editorial Contributor
Michael Masterson - Consulting Editor


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