Friday, February 20, 2009

February 2009 Newsletter Text

It has been beyond frustrating to watch what we believe to be the raping and pillaging of America by a privileged few who rotate between the executive suite of the largest investment firms and the top tiers of regulatory agencies and the administration. You, our clients, came to Creative Financial Design with dollars, hopes, dreams and fears in hand, asking for help; and we put our lives, experience, and training on the line to help you do well and help you make good decisions about your present and future. Then we get to watch while a select group of (words my mother taught me not to say) destroy institutions and wreak havoc on stocks, options, and the trust and confidence of the American people. On top of that, we watch while politicians use this opportunity to maximize their personal benefit under the guise of a proposed bailout, promising security that is purchased at the price of our grandchildren's future.

I suspect this bailout will benefit those executives. I suspect it may even end up making money for taxpayers. But current sentiment is certainly justifiable, and there is a clear danger that these same executives may do more lasting damage than just the financial crisis they brought down upon us.

But, in the meantime, I think it's fair and natural that all of us look back at the global meltdown, at the lockup of capitalism itself, at a mess that will take perhaps a trillion taxpayer dollars to fix, and recognize that the people who engineered the mess received millions in individual bonuses that will never have to be paid back, and were favored by tax regulatory oversight even as they were arguing that fiduciary planners, like myself, are under-regulated.

I think it's appropriate to vent some of this anger and frustration to you, the press and our elected representatives. It may be time to start making sure we never have to go through something like this again.

This next issue is very interesting and complicated. I greatly regret all the damage that has been caused to the American people by the corporate meltdown; however, some good may come out of it in the end. For the first time I see millions of Americans are waking up to the idea that:
  • It is important to live within your means.
  • Taking on debt makes you vulnerable.
  • Consumer purchases may be less valuable than contributions to savings.
  • Just maybe some of this new found thrift might find its way to the government policymakers as well.
The point is that the trauma of the past year may have shaken the complacency of people who seldom thought about the consequences of their spending habits, who have lived more for the moment and saved less for the future. If the market fully recovers its equilibrium and value, than this new level of financial self-care will be a bonus that may be felt across the financial landscape.

The fact that millions of people have reformed their spending habits is part of what has created this economic downturn. Our economy, after all, is heavily dependent on consumer spending, and every ec9onomic stimulus package is passed in hopes that taxpayers will spend every dime of it rather than pay down their debt.

I don't know what the answer is here, but it seems to me that our economy has to find a solution to this dilemma:
  • The behavior that is good for the consumer is bad for the corporate world.
  • The behavior that is good for the corporate world is bad for the consumer.
This conflict of interest, which is currently built into the fabric of our economy, will need to be resolved.

I want to thank the many clients who have expressed their concern about my mental and physical state during this period of time. I want to especially thank you for the praise for the work that we have done. Many of you have said things like, "Thank you for caring about me," "Thank you for worrying," "I trust you to do the right thing," "I know you have an overall plan for me," "I'm so worried about you and your staff," etc. Absolutely amazing! My very favorite comment from clients (and it has been said by many) is, "Thank you for not letting us lose as much as we might have!"

The thing that strikes me the most throughout this mess is the absolutely essential value of the "financial plan". This is our road map that we have developed with clients, that is supposed to reflect their values, that should take into account emergencies or disasters along the way (whether it is a worldwide financial meltdown, a sudden illness, a catastrophic weather related incident, a job loss, the collapse of a company or industry). So far our financial plan has worked. Our stops on our investments have reduced our losses and worked as advertised.

I will admit that I am tired. It is hard to sleep through the night sometimes with all that is running around in my mind. However, now is going to be the most critical time for us to be sharp. For now we are approaching the time to take action.

How to Survive a Bear Market

It is hard to watch 500 and 1,000 point drops in the Dow; these last few months have been brutal on all of us. It was even harder to watch our portfolios fall with it. The Dow was off 46.36% from its October 11, 2007 high, and the more diversified S&P 500 was off 51.84%. Invested alongside you in the very same investments, we certainly felt your pain. And we feel it even more professionally that we do for our personal portfolios. We did not have a crystal ball to tell us how bad it was going to get, but our sell signals did warn us and help us avoid the majority of the meltdown. The ironical part of all this is that one of our biggest clients fired us last March, because they no longer believed in our signals. I have wondered how much money they lost, but it is more important now that I worry about taking care of all of you.

Other planners are telling their clients, "Going to cash would have been guessing and you did not hire us to 'guess' with your investment portfolio." "You need to ride out the market's ups and downs."

Well, we called this market and got you out of it long before the real meltdown. Now, unfortunately, these same advisors may be right if we are not careful. They are also telling their clients that, "These 'experts', who get you out of the market during bad times, usually remain too fearful to get back into the market, at their clients' expense."

As I have always said, the time to get back into investments is at the point of maximum fear, when there is blood in the streets, and that time is coming.

Waiting out a bear market in cash sounds like a great idea but, without a crystal ball, it is among the worst possible investment advice. Investment gains are made in just a few days out of the year. Yet another study (this one by consulting firm SEI in 2002) showed that investors who cashed-out during a bear market and waited until the market "recovered" before getting back in, jumped in too late and lost out on double digit gains. Investors who held on through the last 12 bear markets gained an average of 32.5% in the first year following the market's recovery. Investors, who jumped back into the market just 3 months late, gave up over 17% of the market's gains and it took them an additional 1 1/2 years to recoup their losses.

Investors Who Gain----------------------------After 1 Year-----------Broke Even
Rode the Markets Down & Back Up------------32.50%---------------1.5 Years
Jumped back in 1 week too late-----------------24.30%---------------2.5 Years
Jumped back in 3 months too late-------------14.80%---------------3.0 Years

This bear market will end, and it will do so when we least expect it. Remember, recoveries are only labeled thus in hindsight. By the time the headlines scream 'recovery,' it's too late -- investors who do not reinvest will have missed out. Worse yet, they will have made the classic investing mistake of "sell low and buy high." Well not so low, but almost all of us have to make up some ground.

You hired us to develop a thoughtful investment strategy and keep you out of the FOG. We did that and got you out of the markets for the majority of the 2008 economic meltdown. We did this by looking at our buy sell signals. Our clients who took our advice in 2007 and 2008, who had accounts containing only ETFs, were down between -3.42% to -17.38%.

Today's market is the same market, but the flip side of the coin. We are now getting buy signals. Oil has been giving us a buy signal since the market bottomed in November. We have waited for a confirming signal and expect to get it soon. Fear has gripped most of us and it is going to take courage, but it is about time to buy back into the markets before we lose out on the gains.

You're In or Out!

There are really only two ways to invest in the market...position yourself for when it goes up, or for when it goes down. The market goes down roughly 30-40% of the time (depending on the time periods). Why bet against it? Remember: For investment portfolio growth, it is more important to be IN the market when it rises and OUT of the market when it falls. Keep in mind that the huge markets' swings during 2008 were due to leverage. If an investment bank had to unwind a position that was leveraged 30 or 50 to 1, it had to sell an awful low of securities to do so, resulting in the point tumbles. Now that leverage appears to be about out of the markets and the government appears to have done all the damage it can do. So now the markets should get back to what they do best.

What Should You Do?

There is no question that we are in a recession. Even after the credit markets start to recover, we still have several quarters of negative growth ahead of us. Recovery from this bear market will likely take years, not months, and we have to retest our bottoms. Common sense needs to replace fear. This is a time to spend less and save more. It is a time to focus on family and friends and less on material things. Make sure your cash reserve is adequate. Reduce debt if you have any. Turn off the 'fear mongers' on television and remember that you are in this for the long haul.

"Markets are capable only of creating temporary declines. Only people can create permanent losses."

Now it is time for us, Creative Financial Design, to do our thing for you. There are no guarantees; but it is time to rely on the buy and sell signals that took care of us in 2008 and got us out of the markets to tell us when to get back in. That time is not today, but I think it is getting closer. For now we sit in cash and bonds, but soon it will be time to get back into the markets.

Finally, for those of you who had accounts under $50,000, with annuities, variable life insurance, 401(k) accounts or chose not to take our advice, I am sorry you did not do better. You lost between -15.78% to -40.17% in 2008. In August of 2006 when our first sell signal showed up, I suggested, in many cases, you cash in your annuities or combine accounts you had with other advisors to raise the value of your accounts with us, so they were large enough that you could use our ETF and stop formula. If you had done this, your losses would have been much less. I do not say this now to make you mad at me. I bring it up because I believe the recovery that is coming will work much better within our system than with your current investments. Plus, market meltdowns seem to be happening more often than in the past and, because of the increasing speed of computers, these meltdowns appear to be going much deeper than in the past. The markets are going to recover. They always do but, they are also going to have another meltdown and, I want you to fare better in future meltdowns than you did in this one.

Thank you for your courage and patience during these difficult times. We take nothing for granted, and are honored by your trust in us. When you are done with this newsletter, please pass it on to someone you think would benefit from it. If you know of someone who might benefit from our counsel, please give them a copy of this newsletter and have them contact us; for, as all businesses during this time, we are looking for new business.

God bless!

Ted Feight

Tuesday, February 03, 2009

January 2009 Newsletter Text

I think it is about time you get a little good news. No, I cannot guarantee that the 2008 markets meltdown is over. I can't even tell you when it will be over. No one can tell you that. In fact, I am not sure if we have seen the worst of it yet. That is why we need to look at a few things before we get to the good news.

The Ugly
Last week the Wall Street Journal ran an article titled "Banks Die Too Fast for the Regulators." It said, "Banking regulators across the country are struggling with a new phenomenon: Banks are failing with accelerating speed, exposing holes in the regulatory infrastructure designed to catch collapsing institutions. The two small banks that failed a week ago, National Bank of Commerce in Berkeley, Ill., and Bank of Clark County, in Vancouver, Wash., both fell before regulators hit either one with public enforcement actions that would have alerted the public to their condition and allowed regulators to demand changes. National Bank of Commerce, for one, was reeling from losses related to its investments in mortgage giants Fannie Mae and Freddie Mac. Of the 25 banks that failed in 2008, nine toppled before regulators publicly cracked down." Later in the article it said, "Meantime, federal regulators are bracing for more than 20 bank failures in the first quarter of this year. Regulators typically crack down on weak institutions following periodic exams. But banks are falling into trouble faster than in previous downturns. By the time problems are discovered, many of those banks are beyond repair, regulators have found. For the most part, I think it was a tidal wave," says Rob Braswell, the top bank regulator in Georgia, where five banks failed last year. Only one was under a public enforcement action at the time. "We've seen banks die within a matter of days and weeks. You go from having a cold to buried."

That was just to give you a taste of what is coming.
  • This week over 52,000 people were laid off. By March of this year, 2 of my 4 sons will be unemployed. If that is what is happening to big business, think about what is happening to small business.
  • They say the Lansing Mall will have to file bankruptcy and the Meridian Mall, in Okemos, Michigan, has 13% of its stores empty.
  • Small businesses that have been paying all of their bills and have no problems have had their credit lines cut off.
  • Auto dealers have been forced to pay extra money to the banks that floor plan their cars and/or forced to order new cars even though they cannot sell the ones they have.
  • Many stores have gone from having 25% off sales to 75% off sales, just to raise money to pay their bills.
Didn't I say something about good news?

Well, the good news is that it has to get worse before it gets better. There has to be blood in the streets so we can fix the problems that got us here. We can't expect the government to be the only ones who do the fixing. Some of the fixing has to come from us, each and every American, but that is for another newsletter.

The Good
So where is the good news? Well, every 20 or 30 years some of us humans get greedy and screw things up. What we are going through right now is Mother Nature's way of straightening us out. Oh, yes, this is usually about as bad as it gets. We just don't know how long it will take for some of the people to have had enough.

My guess, and that is all it is, is sometime around April or May will be a very good time to start investing again. We won't realize it was until November or December. The markets should end the year with single digit losses, but investments made during that period of time should work like magic for some time to come.

This is where I have to say past returns do not guarantee future returns and there are no guarantees.

During 2008:

  • Clients with accounts we managed that were under $50,000 or contained 401(k)s, variable annuities, variable life insurance, untouchable stocks and mutual funds were down between -15.78% to -40.17%.
  • Clients who took our advice and had accounts only containing ETFs were down between -3.42% to -17.38%.

During 2008 the markets were:
DJIA -33.80%
Nasdaq -40.50%
S&P 500 -38.50%
EAFE -45.10%

The good news is that when the markets start to come back (and they always have come back -- we just do not know how long it will take) they will have to make the following just to get back where they were on January 1, 2008:
DJIA +51.06%
Nasdaq +68.07%
S&P 500 +62.60%
EAFE +82.15%

We do not even have to get in at the bottom to get extraordinary returns. We are about to live through possibly the best period of time to make money in your lifetime. There are no guarantees, but out of a grass fire comes a fertile field and out of the ashes of the Phoenix comes new life. We just have to be patient, not spend our money foolishly, not be in a hurry and have faith.

Thank you in advance for your courage and patience during one of the most difficult bear markets of our lifetime. We take nothing for granted, and are honored by your decision to retain us as your tgrusted financial counsel. When you are done with this newsletter, please pass it on to someone you tnink would benefit from it. If you know of someone who might benefit from our counsel, please give them a copy of this newsletter and have them contact us; for, as all small business during this time, we are looking for new business.
Ted Feight