The other day, I spent time talking on the phone with a friend of mine (who also happens to be a client).  He is undergoing treatment for a serious illness and taking some time off work, so I am delighted that we have some time now to catch up.

I have to tell you, I really like this guy.  I have learned (over the years) we have much in common: kids roughly the same age, his wife used to work for the same company I did (but in a completely different capacity).  Also, he is a good athlete — and umm, well, I like sports.  Over time, I've learned there are many common threads where our lives cross paths.

Wait a second…what does this have to do with point and figure analysis?

Everything.

I really believe I would have never met him if it weren't for point and figure analysis.  See, like many folks, he was referred to me — by another client.  If I didn't use the point and figure approach in managing the risk for my clients, I am not sure  he would be my client today!

Time out.

Look, prior to learning point and figure analysis (in 1997), I was just like every other financial adviser out there.  The game plan, as directed by the home office, was "gather assets, place the assets with a money manager — or in mutual funds run by "professionals," then go find more assets."

When I was a financial adviser, there were many of those "episodes" where Toto pulled back the curtain and exposed the "Wizard" of the marketing department.  You know what I mean…new product launches (like new mutual funds) would crash and burn, limited partnerships would blow up, stock recommendations would go straight down.  I got tired of watching people's investment accounts getting blown up — through no fault of their own.

It's a wonder anyone made money.

There wasn't "one defining moment" in my 16 years as a broker that pushed me to change.  It was more like a "body of evidence."  And in 1997, I started looking at alternatives to "fundamental analysis."

Let me put it this way: a company can deliver record revenues, record earnings, record profits, raise the dividend twice and announce three stock buybacks in 2 1/2 years.

Fundamentally — that company was doing everything right…right?
But that stock dropped from $60 per share to $22 per share during that same time.

Sooooo…how would you like to own a stock that was doing everything right, but getting carved by two-thirds all the while?

Funny thing, you probably DID own it!
See, the stock is General Electric (GE) from 2000-2002.

You say you didn't own that stock back then?  Ummm…OK.

Oh, say…did you happen to own any mutual funds back then? Did you know GE was one of the most widely held stocks in ALL mutual funds back then?

Hmmm.  Oh well, onward…

Know this: fundamental analysis does have a purpose.  But fundamental analysis will never tell you when to get out. Which is precisely what people have needed to know — especially over the past two years.

What I was able to show my friend — in screenshots — is how the market has moved from a "negatively trending market" to a "positively trending market."

For the first time in about a year and a half!

That darn chart makes it crystal clear there are times you should be "in the market," and times when you should be "out of the market."

Fundamental analysis will never tell you when to get out.  Never.

My friend and his wife (and many other people) spent a significant portion of 2008 with most of their money out of the market…in a time where the major averages fell 35% to 40%.

With all they have going on, I'm happy they sidestepped a lot of potential damage.

And what about you…what's your story?  Is getting a game plan for your investments important today?

This is precisely why I use point and figure analysis… point and figure simply measures price.  And price IS the ultimate indicator — as it reflects changes in supply and demand.

In my opinion, point and figure is the best indicator of risk… which, incidentally, is what we do at Mullooly Asset — we manage the risk in your investments.

Feel better my friend, you are on my mind.

Why didn't we buy…this or that?

Getting calls from some folks who are asking questions like:

"Why didn't we buy GE at $7?"

"Why didn't we buy Citibank at practically zero?"

"Why didn't we…blah blah blah…"

Many of these same folks were screaming "Make it stop!  Make it STOP!" only a few months (and in some cases, just a few WEEKS) before.

Human behavior is a great source for comedy routines.

Look, many people in my line of work want to over-complicate this stuff.  They want to talk over your head and use jargon to confuse you, and perpetuate their existence.  I know, they send "fan mail" to me all time.

Basics.  Just basics.  Look at pictures.  I would like to acknowledge the use of these charts from Stockcharts.com.  You can check them out here.

Would you buy anything that had a pattern like this?

You know this company.  They "bring good things to light…"

The only time I would think about buying a pattern like this would be if it were incorporating writing (selling) covered calls against the stock.  Otherwise, yecchhh…

That's just way too much risk for me.  Do me a favor.  Read the next line carefully:

The definition of RISK, as a verb, is "to act in spite of the possibility of injury or loss."

I don't know about you, but that first chart looks like risk to me.  Take a look at the next chart.

The picture is heading in a completely different direction than the first picture.  Yes, it is heading up!

OK.  But you say…

"I don't buy stocks.  I only invest in mutual funds."

Or,

"I only have 12 different mutual funds to choose from in my 401k plan at work."

Charts are charts.  Doesn't matter if we are looking at a chart of a mutual fund, a stock, or the price of gasoline.

I look at the charts in your 401k plan on a continuous basis.  If none of the charts are going up, here is our plan: we stay on the sidelines.  Pretty simple.  No need to be a hero.  This is money you will have to LIVE on some day.  (You're not counting on social security, are you?)

Today's Lesson: Buy things that are going up.

That's an important lesson, and a lesson MOST people overlook, or forget.

So, good job.  Now take the rest of the day off.

Probably the toughest part of covered call writing is finding the right idea.

And ideas change all the time — as markets change, prices change and the option prices (premiums) also change.

Let's quickly review what "covered call writing" actually means.

Covered Call Writing (sometimes called "buy writes") involves the simultaneous purchase of stock AND sale of options.  Remember, any time you sell something, you are bringing money into your account.  So you are BUYING a stock (you are spending money) and also SELLING something at the same time (bringing money in).

If you were to buy 500 shares of XYZ at $50, you would SPEND $25,000.  If you were to buy 500 shares of XYZ and also sell 5 calls with a strike price of $55 (sold at a price of $9), you would only SPEND $20,500.  Put another way, your "net" cost would be $41 (buy the stock at $50, sell the calls for $9).

With me so far? 

Great.  Onward.

Now, whenever we examine any stock, there are three possible outcomes:

• Stock moves up
• Stock does nothing
• Stock goes down

In only one of those scenarios will you make money if you simply buy the stock.  Right?

Now what we have done in this example is this:

• We lowered our out-of-pocket cost to buy the stock from $50 to $41.
• We have protected our "downside."  Yes, the stock trades around $50.  But we are at break-even – even if the stock falls to $41. And the charts will clearly define where we should have a stop order to protect us.
• Yes, we have limited "upside" — the stock could be taken away from us at $55, but we were paid $9 for that chance. (By the way, if that happens, what is the gain?  Bought at $50, called away (sold) at $55 for a 10% gain, plus you were paid $9 as well.  Sweet.)

When looking for candidates for call writing, here are a few things I try to keep in mind:

Covered call writing works well when the market is confused.  Like now. We have short periods of time where the market runs straight up, and then reverses quickly.  In the big picture, we are still in a negative trend for most major indices, but getting closer and closer to testing resistance lines.  We still do not have confirmation this is a significant turning point, and no clear signals the market is turned a page.

So covered call writing is also an excellent way to get some money into the market, and still protect your downside exposure, or simply just bring in additional money into the account.  It's a great way to goose the yield on your money as well.

But the main thing to know is that you need individual stocks that are in uptrends.  A few weeks ago, there were only a small handful of stocks in uptrends.  Now there are more.  Here are some stocks that are in uptrends that may make good covered call writing candidates.  These are *NOT* recommendations. Call me and we can walk through what makes sense for your own individual situation.

Again, I am not recommending writing calls for everyone on the following:

IBM, Amazon, Reliance Steel, Imperial Oil, Scotts (Miracle Gro), Apple, EMC, Borg-Warner, AutoNation, Staples, and many more.

We need option papers on file.  And we need to have a thorough discussion so you understand clearly how this works.  I would not write about this if I did not feel comfortable at least discussing the topic with you.

It's worth a look, don't you think?

How to get help with your 401k from Mullooly Asset Management.

This process will also help you with your 457 deferred compensation plan — or your 403(b) annuity at work.

First, if Mullooly Asset Management has never worked with an employee from your company before, we will need to get the list of investment choices available to you in your plan.  You can fax them to us at (732)223-9600, or you can send us the link to the website (if we don't need a password), or you could copy and paste the list into an e-mail or Word document.

We are not looking for your specific investments, or your most recent statement! What we need is an inventory — a list — of all the choices available to you within your plan.

We will need a day or two to review the choices available in your plan, take a look at the charts, and come up with a game plan.

We will then call you back — or set up by convenient time for us to speak — and review the best performing choices available to you in your plan at the present time.  This phone appointment should take no longer than 15 minutes.

Unlike financial planners or others in the investment advisory business (many use asset allocation pie charts), the recommendation you will be given will be based on what is working — right now — and are the best choices available in your plan today.  One of our core beliefs is "when the charts change, we change."

We will then alert you — usually by e-mail — when it is time to add, subtract, move money into, or out of — a particular investment in your 401(k) plan.

There are some years where we might make three or four changes.  There will be other years where we make significantly more changes.  The whole concept is to keep your money invested in the strongest asset classes at the current time.

Since Mullooly Asset Management is a fee only investment advisory firm, we have no product or investment to sell you.  We take a fiduciary obligation to manage your money strictly with your best interests in mind.  Unlike brokers (employees of brokerage firms) and some financial planners (who may work on a commission basis, or a "fee-plus commission" basis), a fee only investment advisor's only income comes from the fees generated by offering advice.

Therefore, it's in everyone's best interest (the Fee-Only advisor and the client) to avoid large risks and losses.

After we have had a chance to review the choices available in your plan, we encourage you to meet with us over the phone and be sitting in front of a computer with Internet access.

We use computer-sharing software.  This will allow you to see the charts of the choices in your 401(k) plan, as we describe the process to you.  This will also give you a visual demonstration of how we manage the risk for our clients.  We can usually accomplish everything on our agenda in less than 15 minutes over the phone with you.

We are not going to judge your prior investment performance.  We are primarily concerned with which investments are working today in the plan — and how to invest your money properly right now.  Since the future is unknown, it is a waste of time to predict what markets will do in the future.

At the conclusion of the call, if you are satisfied with what you've heard, we would be delighted to send you an investment advisory contract for you to review and sign.

Have you seen the ads that Charles Schwab has been running on TV?
You probably have seen them.  They sound like real people, but they're actually cartoon/colorized images.

These may be the best ads for financial services ever created.  Here's why:

You're probably not aware of this, but in the financial services industry, firms and advisors are strictly prohibited from running testimonials of any sort. Think about it… how powerful would an ad be if some firm could get a few of their clients on TV and have them say: "You know, at so-and-so brokerage firm, they told all of us to get out of the stock market last summer!"

Too bad we can't do that.

I would love nothing better than to have one client after another — in print, audio or video — in their actual voices — splattered all over my website.

See, I can expend tons and tons of hot air (or spill a lot of ink) telling you how great I am.  But it becomes much more believable when you see an image of someone who looks like you, or someone who looks like someone you know, or who talks like you, or has the same problems as you, and is seeking a similar solution as you.

Which is why referrals are the strongest kind of recommendation/testimonial I can get.  You told your "story" in person to someone else, and told it in such a compelling way that it moved the other person to pick up the phone and say "I want that too!"   I sincerely appreciate the countless referrals I have received from you.  It tells me you appreciate the work I am doing for you, and also tells me you care enough to refer your friends and co-workers.  How terrific is that?

Testimonials are great — they are real people telling you real things that are important, or, at least matter to them.  Maybe their advisor or brokerage firm didn't get them out of the market, but perhaps they provide a valuable service, like — "he clearly explained everything to me like no one else had ever done before…" or even something like "he's the first advisor I've worked with who actually returns phone calls!"

Can you believe we are not even permitted to run testimonials saying "we were happy just to get a phone call back, that's never happened before!"?

By the way, if you happen to spot a financial advisor or brokerage firm with testimonials on their website, run!

This is why brokerage firms usually resort to running only "branding" advertisements.  Not that there's anything wrong with branding advertisements, in fact, they're usually very effective over time.  It's easier for them to say "we are bullish on America" (what precisely does that mean?), than to get their lawyers to approve an ad that says "well, my broker did not steal my money and basically did an okay job."

This is precisely why these ads from Charles Schwab are excellent.  They are not real people — they're illustrated images of real people.  Their voices are real, their situations are real — the woman on the street, the guy standing over the barbecue, the older couple.  People you and I could know very well.

More than that — Schwab really captures the essence of what's going on.  You know, that conversation going on in the back of your mind.  These stories they tell are dead-on, bull's-eye perfect.  I can tell you that every single one of these analogies they use in their commercials, I have also heard from new clients over the last few months.  Schwab has nailed it.

These are real people that really need help.

Of course, the next time you are with a friend or co-worker, listen.  Listen hard to what they are saying.  The main theme I have heard lately borders somewhere between worry and hopelessness, which is a terrible neighborhood.   The situation today is NOT hopeless, and worry never got anyone, anywhere.  Do THEM a favor, send them over to me.

I am not a big fan of Comedy Central or Jon Stewart, I've watched the show a few times.  But on Thursday March 13, 2009 Stewart interviewed Jim Cramer on his show.  And for the first time (at least that I can remember), someone actually tried to hold Cramer responsible for some of the advice he has given, and also for the fact that CNBC has "morphed" into an entertainment channel.  The thrust of the conversation was more toward exposing CNBC (and to some extent Cramer) as shills for Wall Street and no investigative work is done on that channel.

Bravo.  It is truly an excellent piece to watch and encourage you to do so now.

I expect Yahoo and Hulu will chop up this video shortly. So, don't delay, see this video as soon as possible.  It's nearly 20 minutes, so take some time and watch this, it will be worth it.  Here is the link: http://tv.yahoo.com/blog/stewart-vs-cramer-winner-take-all–183

Stewart said "CNBC could be this great financial tool…especially for people who believe there are two financial markets…the people who are told to invest in 401ks and just leave it there…invest for the long term…don't worry about it."  And the other market — that occurs in a back room.  Where giant piles of money are going in and out…" "But you go on TV and pretend (that market) isn't happening."

By the way, if you have not checked out Hulu (http://www.hulu.com) you really should.  Full-length TV shows (and even some movies) are shown online.  Free.  Since they have no business plan to make money, I don't expect them to be around very long.  But worth a look.

If you haven't been able to make heads or tails of the credit crisis, read this.

Thursday, March 12, 2009 is the day the House Securities Subcommittee will hold a hearing on mark-to-market.  The chairman of the committee, Paul Kanjorski (from Pennsylvania) seems to agree with us — mark to market standards have proven "problematic" for banks.

Mark to market (also known as fair value rules) has been only one of the contributing factors in the recent credit crunch.

Many mortgage and bond-related assets, many of which had been AAA rated previously, have been experiencing a mandatory write down in value, because of these accounting rules.  Many of these assets needed to be "re-priced" nearly every day.  This is how Citibank could lose $28 billion in the last quarter.  Think about that number.  A quarter is only 90 days long — and not all of them are business days.  And yet, for a bank (or any business) to lose $28 billion is hard to conceive.  That's over $300 million lost on a daily basis during the quarter.

How can that be?

Mark to market accounting rules required that banks write down the value of assets on their books — nearly every day.  Even though these assets were not bought and sold (they couldn't be sold — the trading market for asset backed securities has been frozen for nearly a year), they still needed to be marked down.

What I expect we will hear from these hearings on Thursday is something along the lines of "there should be an exemption from a need to repriced these assets on a daily basis since there is no liquid market for these securities presently."  I also expect we will hear a proposal to improve the situation these banks are facing.  It would not be a big surprise to hear testimony proposing "mark to the model" instead of "mark to market."

Mark To A Model

"Mark-to-a-model" is a proposal that has been gaining speed.  Many have argued it is not realistic to carry these securities at the full face value of the underlying security, nor is it realistic to carry these securities at zero value either (like now).  What might be a better — temporary — solution is a financial "model" that can gauge the average holding period of the securities, the average duration of the portfolio and a model of the credit composition of the portfolio.  At least with a model, minimal (floor) values can be placed on the securities.

What would be the result of a change in mark-to-market, or instituting mark-to-a-model?

The first benefit would be a drastic increase in the book value in market value of the securities on hand at banks.  No one is trying to game the system.  By re-inflating the value of many securities on hand at banks, this will automatically raise the capital ratios at these banks.

So what?

Raising the capital ratios at these banks removes the need for bailout money.

You may have read recently that banks are "hoarding cash."

Why would the banks hoard cash — especially when lending is needed to restart the economy?

Well, the banks have been required to maintain certain capital ratios, or be declared insolvent and run the risk of being taken over by the government, or closed.  So, although the banks have received capital injections, with the purpose of lending, the same banks have been "hamstrung" because they need to maintain a certain amount of cash on their books to meet capital ratios.

These capital ratios will be met if they suspend mark to market accounting, at least on a temporary basis.

It may also help to re-ignite trading in these asset backed securities.  This helps improve liquidity and lending capabilities.  Put another way, you cannot borrow against securities that don't have a liquid market and do not trade.  While the "marginability" of these securities is severely hampered, just re-establishing a market for these securities is a step in the right direction.

Let's hope they don't screw it up.

OK, so your employer announces the following regarding:

Your 401k: No more match.

Should I keep contributing?

In a word, absolutely.

If you can swing it, you ought to continue to contribute.  I have given this same advice out for my entire career, but more and more over the past several months.

But your employer has stopped making matching contributions.  Now what?

There have not been too many employers who have made "full-blown" matching contributions in recent times.  Many employers downshifted to making a minimal match, like matching the first $2000 that you contribute.  In that sense, it really was free money.

Now that has ended in many cases.

The match often arrived as shares in the company.  The "good news" is that you will no longer be getting those shares of your employer's stock added to your plan.   They usually came with restrictions regarding sales.

You can still contribute up to $16,500 in 2009.  If you are over 50 years old, there are other provisions.  The main thing to remember about making 401k contributions is they reduce your overall taxable income (contributions come out on a pretax basis), and the money compunds without taxes until you withdraw the funds.

Even though there may not have been earnings lately (and many people have significant losses), over a long period of time, not paying taxes on gains can really be significant.

Keep contributing.

I received a phone call this afternoon from someone who found my firm online.  The gentlemen has received no guidance regarding his 401k at work.  Last July, he had $286,000 in his plan.

Today he has $166,000.

I asked him what he had been doing lately.  He had moved his money in recent months from a "Growth and Income" fund.  Now he had 20% each in five different funds:

1. Growth and Income
2. Equity Growth
3. Blue Chip Growth
4. S&P 500
5. Large Cap Value

He also made changes to his new contributions.  So, 20% of each dollar went into each of these five funds listed above.  His primary concern was…

"should I keep contributing to my 401k?"

Sometimes it's a bit stunning when faced with an obvious question.   To his point, he felt he was throwing good money after bad.  But unless you need cash now, you should continue contributing.  This is your money that you will need to LIVE on when you retire.  And every dollar you contribute lowers your overall taxable income.

However, do you need to contribute new money into these same lousy funds?  NO! You can elect to have new contributions deposited into the money market fund, short term Treasury fund, stable value fund, stable income fund, etc.

Now.  How much was actually accomplished by moving the money from a "growth and income" to these other funds he chose?  Not really.  If you take a look at the top 25 positions in each fund, you will find these funds hold many similar names.   So it's really "rearranging the deck chairs on the Titanic."   In fact, it's been written that 70% of all money in equity mutual funds sit in the same 500 stocks…the names in the S&P 500.

To really avoid risk in a declining market, you have to move some money out of the market entirely…not just to another fund in the plan, and consider (if you have a self-directed brokerage option in your plan) using inverse funds and commodity choices (gold, other metals, grains and currencies).  Also, putting assets into long term bonds also invites risk of principal should interest rates move sharply higher.

One flaw that is "baked in" to many 401k plans is a recent change.  Many plans prohibit the amount — or restricting the number — of changes you can make in your account.  Getting "hamstrung" by limiting the amount of moves a participant can make is simply wrong.  Do not misunderstand — I don't condone active trading.  But being limited in the number of transactions you can make in your plan is simply bad policy.

If you would like a free look at your 401k account at work — or your 403b annuity, or section 457 deferred compensation plan at work — call us at 877-223-7300, or email us at support (at) mullooly (dot) net.

What limitations do you have in your plan at work?  Do you have a self-directed option in your plan?

Throwing good money after bad into these banks is not the answer.

Now, I don't like changing the rules in the middle of the game.  But I still believe the almost-immediate fix for this entire mess is suspending "mark to the market" regulations.

Read this statement from news sources today: Citigroup declined to comment on talks with the government, but in an email said its capital base is very strong, despite $28.5 billion of losses in the last five quarters.

How could Citigroup lose $28 billion — and say they are very strong?
Believe it or not, it is TRUE.

They HAVE to book these losses due to "mark to the market."  This is really important!  When a competitor has to mark down the value of bonds, mark-to-the-market means you must do the same thing on your books…whether you sell or not!

OK, true, these same banks made profits hand-over-fist when real estate was going up and they leveraged like crazy off it.  So, if you run your business that way, it's going to be painful…no…near suicidal…when things are bad.

And that's precisely whats happening now.

Now, a capitalist society says the weak will be extinguished.  OK.

So weak auto stocks should be wiped out.

Weak homebuilders have to go.

Weak retailers, see ya.

But banks provide the grease for the entire economy.  They should NOT be bailed out with cash.

Suspend mark-to-the-market.   Now.

Steve Forbes wrote an article back in October for his magazine.

And you should read it.  I speak to so many people each week who tell me "I don't understand what/how this all happened!"

Forbes does an excellent job explaining how (and why) the economy ground to a halt over the past year.  It will be well worth a few minutes of your time to read this article, as it clearly lays out why things happened as they did.

It's also interesting to note that Forbes also calls for a quick end to the problem, and a speedy recovery — not only in the market, but in the economy too, as I have also been saying these past few months.  I am significantly more optimistic now — than I have been in the past 12 months.

Here is the link:
http://www.forbes.com/forbes/2008/1110/018.html

Take a walk with me down Memory Lane:

1973: S&P down over 17%  (ouch)
1974: S&P down over 29%. (ouch again)
The bottom for the S&P was reached in October 1974.
And the bottom was reached — yet again — in December 1974.

There was no advantage to jumping 100% back in, immediately.
October 19, 1987: S&P 500 drops 20% in a single day.
October 20, 1987: S&P 500 rises 5%.  And on October 21, 1987: S&P 500 rises 10.2% (a single-day record, until 2008!)
But if you jumped in then, guessing the "market was OK"…it wasn't until the following January that you got back to even.  In fact, you were sweating — in December 1987, the market was back to where it was on October 19th.

There was no advantage to jumping 100% back in, immediately.

The S&P fell 20% throughout mid 1998.  And, again, after a "bounce rally," the market slipped back and re-tested the low.  It took many more weeks and months to get back to the same levels after the bounce.

There was no advantage to jumping 100% back in, immediately.

Summer 2002: The S&P 500 dropped 22%, falling to 785 in late July, 2002.  So…was that the bottom?
After rising 21% over the next furious few weeks (to 950), the S&P 500 again fell all the way back to 785 again in October 2002.
However — in December 2002, the S&P 500 was back at 950.
But — wait!  In March 2003, it was back at 785 — again!

There was no advantage to jumping 100% back in, immediately.

Don't misunderstand, we are facing one the single BEST buying opportunities right here.

But "right here" doesn't mean "this week" or maybe even "this month."  This "opportunity" may be here for several months.

Like crossing the equator on a ship — should buy and hold investors get some kind of recognition (or have some celebration) for crossing the line?  The S&P 500 crossed 1100 in 1998 (twice), 2001 (3X!), 2002, 2004 and 2008.  Look, when I drive around the same block twice, even I ask for directions!  Oh, and today the S&P 500 is at 940.  Ready for 9 passes in ten years?

So, "Buy and Hold" investors have passed the same intersection now 8 times in the last ten years.  Ten YEARS!  Essentially, if you've followed "buy & hold" you have not made money this decade.  And don't forget: Warren Buffet has been stockpiling mountains of cash for the better part of the last ten years.  Think he's been riding the S&P 500 merry-go-round?  Buffet has a 20 to 30 year-plus time horizon.  Do you?

See. we Americans examine our self-worth every month at the mailbox. And Buffet's strategy isn't really "buy and hold," it's "own the business."    We don't have the capital to do that.   But I think his letter to the NY Times last week was right.

Don't misunderstand, we are facing one the single BEST buying opportunities right here.  But "right here" doesn't mean "this week" — or maybe even "this month."  This "opportunity" may be here for several months.

If we learn anything from history of bad markets, the next few months will NOT be easy.  There will be great opportunities, but there will also be stress.  Without knowing — with certainty — that "this is the bottom" it's imperative that all investments come with an "exit strategy."

What this means is anything that is purchased at this point in time needs to have the exit points clearly marked, in case of trouble.

The Treasury announced they will begin to inject capital (money) into banks, under terms created under the bailout bill.  This article will try to walk through, in English, what this all means.

As part of the bailout bill (or TARP: troubled asset recovery plan), one provision that was mostly overlooked during the congressional hearings and rollout was the feature that permitted the Treasury to inject capital directly into selected banks.

A general understanding that most people had of the bailout bill, was that "troubled assets" would, essentially be "traded" to the Treasury for treasury bills.  That feature still is in the bailout package, but is mired in the developmental stages.  Working out the details of which assets (and from which banks) to trade may take a long time to figure out.

And time is the one precious commodity that no one has.

So the Treasury is proposing to take an "ownership stake" in some banks.  They will "buy" part of some banks in return for preferred stock.  They will receive dividend income and be able to make money by selling those shares in the future.  Probably right back to the banks themselves.

What do the banks get?  Well, when you sell stock, you get cash.

Now…here's where the plan works: When a bank receives equity (cash) it can turn around and lend that money, practically overnight.  However, banks don't lend money on a dollar for dollar basis, it's always leveraged.  Not that 30:1 or 40:1 leverage like what sunk the fat cats. So, for illustrative purposes only, think in these terms: $700 billion could turn into $7 trillion worth of loans and financing.  If that doesn't get banks moving again, we are all dead.  For perspective, consider that the entire mortgage market in the United States is approximately $14 trillion.

This feature was widely overlooked by most folks when the bill was introduced and signed into legislation by President Bush.  But this feature may indeed be the "master stroke" (or "magic bullet") that gets the wheels turning again.  It's a dangerous precedent, and it IS risky (if it doesn't work, it is game OVER).

But understand THIS as well: getting the banks to lend money again, is not the end of a recession.  But it will certainly re-ignite the flame, and can very likely accelerate the economy.  So, while I'm not an economist by profession (but I am an optimist), in my humble opinion I feel this will be a short, but very severe recession… followed by recovery.

You truly are living in interesting times.  I don't believe we will see this kind of action again for years and years.  Maybe generations.  And this is a "magic bullet" (or atom bomb) that we need to insure we will never need to employ again.  Seriously…never again.

I've read many different reports about the mortgage mess.  No one really seems to have accurate data.  But if 80 or 90% of all mortgages are current, I have to believe the federal government has made a good investment with this bailout bill.  I believe the government will make money on these mortgages.  And now that they are injecting capital into selected banks, they will have "preferred stock" in these banks.  Meaning, as the banks get back on their feet, the government will make money on these investments as well.  They are negotiating great terms and getting in near the ground floor.

The immediate impact will be the re-opening of the banks, and the credit markets.   We'll see that right away in our local economy.  But the entire process may take several years to completely unwind.  But the Treasury has the deepest pockets in town.  Whoever is President of the United States in five or six years will certainly try to take credit for the "economic miracle" that occurred on "their watch."

You can count on that.

Quick history lesson: Mark-to-the-Market was a practice originally begun by futures and commodity traders in the 19th century.  Essentially, mark-to-the-market means your holdings must be "priced" every night…at the price they can be sold at.

For years, many bank and investment companies carried investments at cost, or even sometimes at the face value.  This never gave an accurate picture of gain or loss.

Today, many balance sheets are filled with untraditional investments, like derivatives (for example, interest-rate swaps).  Harder to price, since these derivatives don't trade every day or carried listed prices (like stocks).  So, most companies that own derivatives would come up values on a monthly or quarterly basis…not daily.  What happened was companies would come up with a "model" and these assets were "marked to the model" instead of marked to the market.

Fast forward to November 2007.

Financial Accounting Standards Board (FASB) Statement #157 "Fair Value Measurements" became effective in November 2007.  This statement was created, partly in response to the Enron scandal.

The bottom line: firms had to value the assets at the price you could sell them for — if you sold them right now on the open market.  That's what something is worth.

And within six months, Bear Stearns checked out.  Within one year, Lehman, AIG, Washington Mutual, Wachovia had all succumbed.  Merrill Lynch cut a deal.

There is no market for investments like subprime loans.  Where there is no information available, the SEC has declared companies can make their own assumption.  Which is why may banks and firms may have been extremely slow to write down these assets.

Understand these bank and brokers are not falling apart because your neighbor is in foreclosure.   Do you realize that there is good cash flow from mortgage-backed securities…even subprime mortgages?

Under FAS 157, many companies had been forced to deeply mark down (reduce) the value of mortgage-backed securities due to their inability to sell them.  This resulted in margin calls everywhere.

In margin-call scenarios, better valued assets get sold, leaving the lousy assets behind.  So the lousy equity remains…not fixing the problem.

The SEC is now acknowledging the market for mortgage-backed securities is simply "not orderly" and fair value standards (FAS 157) should be more liberally applied to reflect the expected value.

Suspending mark-to the-market (FAS 157) doesn't "suspend reality" for the financial sector.  The Paulson proposal would replace mark-to-the-market with net operating losses, which would be a very powerful way to help get banks back on their feet…quickly.

Lost in the bailout mess comes this bit of interesting news for the automakers.

The Wall Street bailout has taken most of the headlines, so you may have missed this: a bill set to be passed by Congress includes $25 billion in loans for General Motors, Ford and Chrysler, as well as several of their suppliers.  And keep in mind, these are loans — loans that will be repaid.  But this is money that is available now at low interest rates, and they'll have five years before they need to start repaying.

This is a pretty interesting development.  Chrysler was taken private last year (by Cerberus Capital Management), so this essentially becomes government loans to a private company.  And, because Chrysler is now privately held, they no longer report sales figures or earnings.  But it's estimated that Chrysler is taking a bigger hit than Ford and General Motors.  These companies are so far behind the curve, it's hard to see how they will catch up.  General Motors CEO Rick Wagoner believes the automakers should be able to put its portion of the loan package toward new technology.

One area that may holds significant promise are the extended-range electric vehicles (you know, electric cars).  These are cars that are produced with lithium ion automotive battery packs.  And when it comes to recharging the battery, it will be designed to use a common household plug.  The first car engineered in this fashion is the Chevy Volt, which will likely be available starting in 2010.

Recently, oil and commodities dropped 20 to 25% in four very fast weeks, catching nearly everyone off guard. But as fast as the drop took place, we start to see signs of a reversal back up. These sharp violent corrections often take place in long sustained bullish advances.

What do you do if you are still holding commodities like oil, natural gas, heating oil, grains and agriculture? I'd encourage you to read on. If you don't have a longer-term view, then simply understand this: everything reverts to the mean.

Let me ask you a question…have you ever seen a bell curve?

Here's an example of a bell curve: suppose there are 20 students in a class.
When test-time rolls around, here were the scores in the class:

1 student scored 100
3 students scored in the 90s
12 students scored between 75 and 85.
3 students scored in the low 70s
1 student scored 60


Roughly 60% of the class scored between 75 and 85.
One student of the 20 (5%) scored extremely well (she got 100%).
One student of the 20 (5%) scored very poorly (she got 60%).

Statistically, there's a very good chance that the one student who scored extremely well may not get 100% the next time around. Additionally, the one student who scored very poorly stands a good chance of improving her score in the future. This brings these two extreme results back to the middle of the pack.

The reason why I went through this exercise was to show you that frequently results "gravitate toward the mean." In this case, the mean test score was somewhere between 75 and 85. In fact, 60% of the class fell in that range.

Let's apply this towards your investments.

Two thirds of the time (67%), investments will hang around the midpoint of the range — the middle of the 10 week moving average.

There will be times when your investment scores in the top 5% — this is a situation where your investment is clearly "over-bought." There are also times when your investment will score in the bottom 5%. This is when we say your investment is "over-sold."

The reason why I frequently mention the term "weekly momentum" is because you will see (in a chart) certain times when your investment may get extremely over-bought, or extremely over-sold. This period is usually followed by a time where your investment will revert to the mean.

Knowing these types of patterns and behaviors exist, prevent us from panicking and getting out at the bottom — and likewise, making a rash decision and buying something at the very top. It doesn't always work perfectly, but we do our best to "stack the odds" in our favor.

Maybe it's me, but it just seemed like a funny coincidence that as soon as the media started to talk about oil going to $100 per barrel, we saw a bounce (in two days) from $111 a barrel…up to $122 a barrel.

Exxon reported nearly $12 billion in profits for the previous quarter recently. $12 billion! More net profits in one quarter, than ever recorded in the history of mankind.

And what did the stock do?

It went down.

Numbers like $12 billion generate emotional responses: anger, jealousy, envy, and even pride. The media does a good job of stirring the pot. Once the emotion subsides, a lot of people start to realize that Exxon is one of the largest employers in the United States, along with being one of the biggest taxpayers in the United States as well.

But there was something in the earnings report that really got my attention — maybe you saw it, too.

In addition to reporting record earnings, Exxon also reported their total production declined. Companies like Exxon simply don't have the tools in place — or even available — to do more drilling or exploration. They simply don't have the infrastructure to increase production.

Now let's talk about their stock. And a short lesson in relative strength!

When compared to other oil stocks (Exxon's peer group), Exxon stock has been on a relative strength sell signal since 2001. While this member of the Dow Jones has done well compared to the S&P 500 and the other Dow Jones stocks, Exxon appears to be a weak-kneed Willie getting sand kicked on it by some of the other bruisers in the sector.

And now that Exxon has broken the support line, and the sector is falling out of favor…well, it's really starting to lead the parade out of town.

I suppose $12 billion just doesn't get you what it used to anymore, does it? This company is posting record earnings, record revenues, record profits… and the stock goes down.

Oh…one more thing. Can you guess what stock you will find listed as the first or second largest position (investments) in most large-cap growth mutual funds? Here's a hint…it used to be called Standard Oil.

Go ahead and read the headlines — just don't base your entire investment decision on headlines… like most people do.