Don't be Fooled by The DOW, or The S & P

 

When the Media and the Snake Oil Salesmen get excited about the same thing, it's time to run for cover!

 

Although these indices have risen sharply since the end of 2005, The Mighty Dow has gained only about 2% per year since it's last sustained rise late in 1999, while the S & P 500 has just barely broken even! What have your portfolios done during this classic Peak-to-Peak analysis period, and what has sparked the recent surge in these two averages? You just have to take a look at the charts... today's picture could be a photocopy of the 1999 scenario. There's even a new, and much more dangerous gimmick inside that's just itching to come undone a la the dot.coms of 1999.

 

What's pushing the averages? Hundreds of the best companies in the world, profitable, dividend paying, and highly regarded even by Standard & Poor's Corporation are down significantly from their recent highs. Here's what's been goin' on:

 

If I go out and buy stocks because of their quality, their potential quality, or even because of take-over speculation and technical triggering mechanisms, I'm making a company specific investment decision. The potential of the company itself is pulling me in. The recent success of a new breed of index funds has lessened this "Primary Demand" for many of these high quality companies... along with normal economic, interest rate, and market cycle forces.

 

The new index funds have been given a life of their own, producing a new greed machine of mammoth proportions. Index fund buyers are creating an artificial demand for stocks within the popular indices... the more funds a Company's stock is in, the more artificial demand there is. The most popular stocks, those in the DOW and the S& P, are over-priced as a result. At the same time, we have had some major financial industry/interest rate problems that have negatively impacted broad market sectors and all Interest Rate Sensitive Securities.

 

These are the forces at work today, and a quick look at the Most Active List, and the New Daily Highs will open your eyes. The Index Fund problem will be fixed eventually, just like it's Dot.Com cousin was nearly eight years ago. But this scenario causes a perceptual problem for more conservative, value-orientated, growth and income portfolios. Historically, as evidenced in late 1999, people who change course toward the end of a speculative rise in some form of derivative product are the ones who get burned the most. Those who stick with the basic fundamental values of investing outside the Wall Street Product Box generally come through unscathed.

 

The similarities between the dot.com bubble and the Index Fund Illusion are compelling. Then, and now, there was weakness in Value Stocks. Not as much now perhaps, but its there for sure. Then and now interest rates had advanced rapidly hurting the Market Values of rate sensitive securities. Just as the hyper-inflated Specialty Mutual Funds of the dot.com era were vulnerable, the ETFs of today are ready for a fall. Even though the DOW and the S & P are up, there have been more stocks going down than going up over the past 5 months… sound familiar? Just look at the charts.

 

Once again, it's time to repeat some do's and don'ts:

 

1. Take comfort in the fact that there has never been a correction that has not succumbed to another rally.

2. The "Quality" of a stock does not and should not change just because the price of the shares has declined. Similarly, falling fixed income security prices have no qualitative significance.

3. All things being equal, the "Income" you have been receiving will either remain the same or increase.

4. Your "Working Capital Value" should be growing every day, regardless of what your portfolio Market Value is doing. (http://www.sancoservices.com/workingcapitalmodel.htm)

5. Corrections provide investors with the opportunity to add to their positions at lower prices and to increase their overall yield from fixed income securities by purchasing additional shares at lower prices. 

6. You cannot do anything about changes in Market Value in either direction, and selling high quality securities at a loss is almost never either an acceptable or a necessary option. The market is just too big and the hysteria generated by slight changes in expectations is just too pervasive, and this produces changes that are more emotional than they are economic.

7. So long as everything is down, there is nothing to worry about. Downgraded (or simply lazy) portfolio holdings should not be discarded during general or group specific weakness.

8. Call your Investment Advisor if any of this is unclear.

 

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The 2nd Edition of "Brainwashing" is coming! The 2nd Edition of "Brainwashing" is coming!

Place your order now through The Publisher, or at Amazon.com

 

 

 

Steve Selengut

http://www.sancoservices.com

http://www.valuestockbuylistprogram.com

Professional Portfolio Management since 1979

Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"