Posts Tagged ‘invest’
The Greatest Complacency of the 21st Century
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Many of our readers know intuitively that their neighbors and friends have become complacent about the world around them, but they don’t know how to prove it.
Today, I’ll show you two ways to do just that.
The key is that rising equity prices usually lead to an increase in stock market optimism, while falling prices generate stock market pessimism.
That alone is no justification for bearish or bullish strategies — until it reaches an extreme.
So the questions are: How do you measure this optimism or pessimism? And how do you know when it’s at an extreme level?
Right now, I’d like to focus on two measures in particular …
Mutual Fund Cash Levels
The average cash allocation of mutual fund managers is one of the most important sentiment indicators available — and for good reason: Forty percent of all U.S. stocks are held by mutual funds. So their buying and selling can easily move the market.
What’s especially remarkable is that fund managers are as prone to the herding instinct as any other group, which leads to an interesting pattern in their investment behavior:
Mutual fund managers almost invariably hold relatively high cash levels near market bottoms, and relatively low cash levels in the vicinity of important market tops.
Go back to March 2000, for example, near the top of the tech stock bubble. Precisely when they should have been taking profits off the table, mutual fund managers loaded up with stocks and ran their average cash levels down to 3.7 percent. For them and their shareholders, it was a disaster. For astute investors, however, it was a blatant and very TIMELY sell signal!
But now look:
Mutual fund cash levels are even lower than they were in March of 2000!
In fact, according to the Investment Company Institute, mutual fund cash levels are currently at an extremely low 3.5 percent. They have been that low just twice before:
- First, in the summer of 2007, at the climax of the 2003-2007 cyclical bull market.
- Second, in March/April 2010 right before the flash crash of May 6, which marked the beginning of a 17 percent market correction.
What’s most remarkable is that, as you can see in the chart below, cash levels have been very low for more than a year. This tells us that the only thing driving the market higher is the Fed, and we don’t doubt their ability to continue their money pumping. But the history of this indicator suggests that the next vicious bear market may be lurking around the corner.
Another indicator I closely follow is …
Investors Intelligence Advisor Sentiment
Investment newsletter editors play an important role in influencing and driving investor sentiment; and Investors Intelligence has developed a relatively reliable sentiment indicator to track them.
Here, too, a pattern is clear:
Compared to mutual fund editors, newsletter writers seem to be more flexible, adapting more rapidly to changing market conditions. So when they’re overly bullish as a group, it often has only short- to medium-term bearish implications.
But still, long stretches of extreme bullish sentiment as measured by this indicator has often marked major tops.
As you can see in the second panel on the chart below a high degree of bullishness has been persistent for nearly four months. And the trigger line for a bearish signal — more than 55 percent bulls — has been broken.
This is another clear warning sign that a larger correction is overdue. Moreover, despite the stock market correction of the past few weeks, bullish sentiment has prevailed. That’s very unusual, and I think it’s another confirmation of the bearish signal!
Indeed, we see little or no angst even in the wake of ominous news coming out of Japan, North Africa, and the Middle East!
That’s complacency par excellence — historically a sign of an imminent stock market top.
If you are looking to profit from falling stock markets, I’d say that a decline in the Nasdaq 100 is the most probable. So you might consider ProShares Short QQQ ETF (PSQ) in the $33-$34 range. This inverse ETF is designed to rise 1 percent for every 1 percent drop in the NASDAQ-100 Index.
Best wishes,
Claus
This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com
Add Energy Income with an MLP ETN
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You’re probably having a tough time these days if you live off the interest from your investment portfolio. For example, according to Bankrate.com, money market accounts are now yielding a paltry 0.76 percent (nationally).
There is no big mystery why this is happening …
Ever since the banking system started blowing up back in 2008, Ben Bernanke and his Federal Reserve have kept short-term interest rates at historic lows. That’s great for bankers, terrible for savers.
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| Many investors are watching their income slide. |
These low rates have income-investors looking for new sources of steady interest and dividends. The alternatives are few. And I’m concerned that some people are so desperate that they’re risking their principal in ways they don’t even realize!
The truth is that there is usually a direct relationship between risk and reward …
- If near-absolute safety is what you want, you can get it from Treasury bills and bank savings accounts, but the interest rate will be very low.
- If you must have more yield, it’s possible — as long as you’re willing to take on more risk.
In other words, there are no free lunches. The best you can do is find a happy medium somewhere on the risk-reward scale.
Today I’m going to tell you about an income investment that I think is a good balance — especially right now in this low-interest rate environment.
Master Limited Partnerships:
Energy Income
You might have heard about master limited partnerships (MLPs). They throw off nice income and have growth potential, too.
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| MLPs own energy pipelines and storage facilities. |
MLPs do this by concentrating on the storage and transportation of energy products. After all, no matter how cheap or expensive oil may be, it still needs to get to you. And the tank farms and pipeline companies are paid well for their services.
My Money and Markets colleague, Nilus Mattive, wrote a terrific column back in 2008 about the MLP market. It’s a good introduction to the topic.
You can, as Nilus says, invest directly in individual MLP issues. I know many people do this very successfully. There are some drawbacks, though …
For one, the tax advantages of MLPs can create some paperwork headaches. You’ll receive “K-1″ forms from each partnership. Many people find the IRS requirements aggravating when it comes time to do their tax returns.
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| Owning MLPs can complicate your tax return. |
You can also face potential tax problems if you hold these partnerships inside an IRA or other retirement accounts. So be sure to consult a tax advisor before you put a MLP in one of these accounts.
As with individual stocks, it’s often better to diversify by holding a broad portfolio of MLPs. Of course this also multiplies the paperwork problem. So wouldn’t it be nice if you could get a whole package of MLP issues in one convenient package?
Well, now you can!
MLP ETNs:
Good Things in Nice Packages
Several exchange-traded notes, or ETNs, now track major MLP sector indexes. They give you exposure to MLP investments in a convenient package with just one trade. They also greatly streamline the income tax reporting.
Sounds great but there are some drawbacks. As I’ve written before, the ETN structure is riskier than it looks. That’s because you don’t really own the MLPs that make up the index your ETN tries to follow. What you own is a bond, issued by a bank, whose return is tied to the index.
This is called “counterparty risk.”
If your ETN sponsor should go belly-up, you could lose part or even all of your investment. Is this a big danger? No, but the possibility is real. Think about Bear Stearns and Lehman Brothers.
Whether the risk is worth taking is a personal decision for you. If you are prudently diversified and pay attention to your investments, then the counterparty risk might be acceptable.
Currently there are three ETNs to choose from that specialize in the MLP sector. You may want to consider these for the income-generating part of your portfolio.
- JPMorgan Alerian MLP Index ETN (AMJ)
- UBS E-TRACS Alerian MLP Infrastructure Index ETN (MLPI)
- Credit Suisse Cushing 30 MLP Index ETN (MLPN)
All three of these ETNs have an attractive yield and good assortment of MLP issues. One big difference among them is that MLPN uses an equal-weighting methodology while the other two are weighted by market capitalization. This means MLPN is somewhat more diversified.
Best wishes,
