Archive for the ‘mutual funds’ Category
Tuesday, February 23rd, 2010
While we usually discuss investing in stocks, there is another area of investment that needs better understanding. The area I am talking about is the mutual fund space.
Most people invest in them through a 401(k), yet they do not know the ins and outs of how to pick a quality fund. Many investors simply use performance as a decision mechanism, but that is usually very faulty and fraught with danger. Here are some other metrics to consider when picking a quality mutual fund:
* Alpha – This is a measurement that tells an investor whether the past returns are achieved with an acceptable amount of risk. If the alpha is above 0 than the fund is achieving their returns without inappropriate volatility. If the alpha is negative then their historical returns were achieved using excessive risk.
* Category Ranking – Compare funds to their peers in their specific investment category. It is unfair to put an equity fund up against a bond fund. This is on par with comparing apples to oranges. In addition do not compare a domestic equity fund to an international fund, or a small cap to a large cap fund. Compare relative performance to other funds that have the same investing style (Large vs. Small, Growth vs. Value). Once you find a few great performing funds within the category adjust the return by considering some risk metrics.
* Standard Deviation – This is the simplest of statistical measures. It is a straight measure of volatility. The higher the SD, the more volatile the funds price performance will be.
* Expense Ratio – This measures how much the manager charges for their service of managing the mutual fund. Expenses vary between types of mutual funds. A bond mutual fund should not have an expense ratio above 0.75% per year, a domestic fund should not exceed 1.5% and a foreign fund shouldn’t go above 1.75%. If a funds expense ratio is above these levels they are probably over charging. This does not mean you shouldn’t buy those funds, it simply means look for quality options within that space that are cheaper.
As usual however, never buy a mutual fund that charges you a load to buy (front-end loaded) or sell (back-end loaded). There are plenty of no load mutual funds out there with good managers and a solid track record. A load is the word the industry uses for commission.
–Steve Peasley
Posted in Important, mutual funds | No Comments »
Tuesday, February 16th, 2010
With this being a holiday week and with little economic data out this morning the market decided to push stock prices higher. It may be caused by nothing ‘bad’ happening over the long weekend in the world. Maybe traders feel the correction phase of the market is coming to an end though the indexes only fell about 7% which is light for a correction. Of course all we have had are light corrections since the rally began last year.
Greece is still a problem as the rest of the EU talks about a bailout without calling it a bailout. Greece itself seems to be walking around like a zombie telling anyone who will listen that they have no problem.
There are many issues that could upset the worldwide recovery as China deals with a budding inflation problem. So far they have tightened their money supply twice this year to hold down inflation.
Despite these headwinds there is a rather large tail wind for our economy. Only about a third of the stimulus package passed last year has been spent. As a result, this year and next will see massive spending in our country and at a time where economic stats are showing us the beginnings of a recovery already. That spending is a major push and should support continued growth.
Will that push stock prices higher? Earnings and growth are the key. The chances are good that both will do well this year.
Good Trading
Steve Peasley
Posted in Current News, Financial Outlook, GDP, Hope, Uncategorized, inflation, mutual funds, recession, stimulus package | No Comments »
Friday, April 17th, 2009
This week we had a blizzard of economic news and earnings reports for the first quarter. Overall the economic news was poor, but on balance probably better than expected. This trend of poor but slightly improving economic news will likely continue. Earnings as reported so far are not that good, but on balance they are better than anticipated. Three reports in particular from J.P Morgan/Chase, Wells Fargo and Citigroup had surprising earnings considering they are in the banking industry and everyone expects the worst from that sector. Certainly there were companies with worse than expected numbers and some with better, but the banking industry is supposed to be flat on its back.
On the economic front, retail sales reported this week fell 11% from February to March, Industrial production fell to 69.3% down 1% from February, and new construction fell 10%. All bad news, so why didn’t the market fall this week? Obviously, this kind of news was expected. Fear is subsiding. We saw good news this week in the earnings reports for the banks, in inflation which is dead, in mortgage applications for homes which are up 45% for the week compared to a year ago and in mortgage interest rates which are down to 4.8% for a 30 year fixed.
The numbers are still very ugly but the stock market has been so beaten up that it is reacting to news that shows some hints that the worst is over. The stock market is still down for the year even with the strong up move in the last month. There was a stronger move downward for the first two months of the year and so far all the market has done is return to early February levels. Except for the NASDAQ.
The NASDAQ index, which is full of large tech companies, is flat for the year. Past bull markets have been led by tech and this one is no different. Banking stocks are coming off severe bottoms and no bull market in history has occurred without a rally in banking stocks. It appears that though the economy is still in a severe slump that the stock market, which is itself a leading economic indicator, is telling us that the fix is in. That ‘fix’ may be some months away as we deal with backward looking statistics but it certainly seems that the mood has changed.
As we at KPP Financial have been heavy in cash. We did not pick the bottom of this stock market, nor did anyone else. Because we were heavy in cash we did not go down with the market in January, February and the first part of March. What that means is that we are late in catching the rally as well. As our clients have seen we have been moving into the market for the last six weeks. We are now heavily invested but with some cash on the sidelines that we plan to put to work on any weakness in the market. This is a bear market rally so far, albeit a sharp one, forming a ‘V’ bottom which was unexpected. Any pullback will be an opportunity to buy.
Finally, history tells us that this is the first leg of a rally. If the ultimate bottom is in, which we have stated in previous newsletters that we think it is, then the rally should continue. It should rise at least 50% from the bottom. After the 1973-74 recession, which so far looks very similar to the current recession, the S&P 500 rallied 73% and the DOW 75.7% over 19 months. This kind of rally from a recession low is normal. Don’t think that this is uncommon. Therefore, missing part of the first leg because you were protecting your nest egg, as we were doing, is not a bad thing.
However, it is now time to invest. Do it carefully and in fact hope for some weakness so that you can take advantage of lower prices. Do not fear any correction. Fear is hovering over everything. To the degree it is keeping people out of the market it is a good thing. Stock market rallies climb a wall of worry. Be cautious but be buying.
We will continue to buy slowly. The plan is to take advantage of any weakness to buy more. That doesn’t mean we won’t sell if something is not working but overall we are on the buy side of the market not the sell side. That time is over.
Good Trading,
Steve Peasley
Posted in Current News, Industry Analysis, depression, mutual funds, recession, stimulus package, stock market | No Comments »
Saturday, January 17th, 2009
This week was the start of earnings season as Alcoa posted over a billion dollars in losses on Tuesday. On Monday, anticipating that the report might be worse, the market sold off. It came in at about what was expected, so on Tuesday the market tried to hold up. Selling pressure intensified on Wednesday with 90% of the volume for 90% of the stocks on the down side. That was a very strong sell off as the market appeared to want to retest the lows. A retest is normal though tough to handle if you are the one who is experiencing the fall in your asset value. Still, it is normal and a successful retest is very positive. On Thursday the low was not broken and the market turned around in mid day ending on the up side after an intraday slide of almost 300 points on the DOW, a positive sign that maybe we have seen the low in this mini cycle.
The market this week was dealing with some tough economic reports. Though most of the news was expected, the retail sales report for December showed a fall of 2.7% which was more than expected. However, I think it was the news about the banks this week that pushed the market down. Citigroup is selling assets to try and improve its balance sheet and Bank of America announced that they are in negotiations with the Fed for more money and then got it early this morning. This uncertainty is not what the stock market wants to hear.
Economic news not so well reported as the retail sales this week, was inflation which has fallen off a cliff. On the producer level for December it came in at a -1.9%. No one is talking about ‘deflation’ which is what we have at this time. The reason no one is talking about deflation is because almost every expert expects inflation to come back at some point. That will depend on the FED and when it starts to raise rates again. That is not going to happen for a long time.
Foreclosures are up strongly, especially in California. This recent spike is nothing more than a result of government interference. The government forced banks to postpone notices of foreclosures to try and work out loan defaults and all that did was push back the time line. The good news is not in the foreclosure rate. That is going to continue to be a problem long after the housing market settles down. Any good news will be in mortgage applications which were up last week another 25%. That was on top of the 25% increase the week before. Annually, applications are up 50%. Of course 85% of those applications were for refinancing, but with 30 year fixed rates falling to below 5% this bodes well for future sales of properties. As I have said before, look for a recovery to start in refinancing and sales of homes. Don’t expect prices to rise or foreclosures to fall for a while but sales are the important aspect at this time. Without an increase in sales a recovery is not going to happen.
Import prices fell in December by 4.2% and that is on top of a 7% drop in November. I wonder what this means when you consider the retail sales report? Net of auto and gas, retail sales fell 1.5% not 2.7%, but what have lower prices on everything done to the sales report? Maybe it is not as bad as we all think. Still it is not good.
It appears the market is marking time. It has established a range and is testing the low of that range. There is no great urgency to buy stocks at these very low levels as fear makes investors worry about going lower while at the same time everyone is waiting for the new president to take office and see what his stimulus package is going to look like. A huge amount of money is sitting on the sidelines paying zero to 1% interest rates. Traders are waiting for something. They just don’t know what that something is.
Maybe they are waiting for more clarity in the economy. We shall have to wait and see. Meanwhile, stock prices are at historic low prices. The market will rally but maybe it’s one to sell not buy as we struggle in this trading range.
Posted in Currency, Current News, Financial Outlook, Foreclosures, Industry Analysis, commodities, jobs, mutual funds, stock market | 1 Comment »
Saturday, January 10th, 2009
At a final look at 2008, Fidelity Magellan, the largest and long established bellwhether mutual fund, lost 49% for the year. The CGM Focus Fund which was the best performing mutual fund in 2007 lost 48% in 2008. The average mutual fund loss for last year came in at 39%. There are a couple lessons to be learned. One is don’t blindly buy the largest mutual fund thinking it is safe and secondly don’t chase performance. Last year’s winner does not mean it is going to be this year’s winner.
But we have to look forward. What will 2009 bring us, both in the economy and the stock market? The big economic news this week was the jobs report out this morning which showed a loss of 524,000 jobs with an unemployment rate reaching 7.2% in December. Earlier in the week we had the ISM report, factory orders, construction spending and pending home sales. Most of these reports were for November and across the board they were weak. That was and is expected. It was October when the financial system collapsed and we are going to see several months or more of follow through of weakness before all the efforts to re-inflate the system start to show any result. Expect bad reports for a while.
However, the stock market has already priced in a very weak economy. It has started to rally from its depths and though many do not believe this is a sustainable rally, only a bear market rally that will weaken and roll over, a bottom has been put in. Of course it is a possibility that we could go lower. However, since very dire predictions for the economy have been built into the prices of most stocks it is normal to have at least a strong bounce in stock prices. A return to normalcy would suggest that a rally might last for several months before losing steam and give us some kind of retest of the lows. In October of 2002, in our last recession, the market bottomed and retested that bottom in March 2003. This market will not be the same as this economic slump is much deeper but so was the speed and depth of the market collapse. So the scale is sharply different in the two recessions but the pattern of the stock market lows and recovery so far is very similar.
The question that the experts are all asking themselves is will the Paulson and Bernanke efforts coupled with the Obama stimulus plan work? Will our politicians get it right? I have some serious doubts, but at the same time there is great hope.
I like the infrastructure improvement spending; the U.S. needs that and has needed it for some time. Also, tax breaks for individuals and small business are a good idea. These things will help as will cheaper gas and food prices. But then again- will it be enough?
No one can tell us. There are some hopeful signs that the economy is working its way through the problem; cheaper mortgage rates and interbank lending is starting to improve, but those are baby steps and the new rules the lenders are implementing appear to be very Draconian. Banks at some point are going to have to begin lending. That is the only way they can make money. Right now they are frightened thus they have tightened up standards to such a degree that loans are difficult to come by.
Looking past the current economic recession, inflation will likely return. It is a lot more familiar to deal with than the current deflation we are facing today. Inflation is an old friend, one which we know well, but if inflation gets out of control because of the liquidity we want and need today, then that excess liquidity can destroy the economy a year or two from now. I am referring to all the spending that is going on by our government. Printing money is inflationary and it could be ‘very’ inflationary if the government does not remove the excess liquidity at some point. As in all things it is the timing that is difficult.
Therefore, it is time to be invested not frightened. It will be a bumpy road but as the year unfolds it should be a good one. Keep your stops and be ready to exit at any time but on balance be in the market for 2009.
Posted in Currency, Current News, Financial Outlook, Industry Analysis, commodities, jobs, mutual funds, stock market | No Comments »
