Investing Wisely -- Sunday Update

By: Steve Bauer | Sun, Mar 13, 2011
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For Short / Intermediate & Long-Term (most important! - SERIOUS) Investors

A weekly flow of information and data devoted to increasing the financial understanding of those of you who are either retired, or will be, planning for retirement. I especially want to share my work with a sincere interest and concern for your special financial needs and wants...


Sunday -- Update

Bull and Bear

For Over 55 years, I have fought with the Bulls & wrestled with the Bears!


Good Morning,

It's Sunday Morning - March 13, 2011

Volume: One - "BEAR MARKET" -- Issue: 175 -- that's 54 + years of successfully Managing - My Own and Other People's Money


Current Investment / Portfolio Status:

Alert:

Believe it or not - a General Market Bearish Inflection Point looks like it will happen this coming week. No Promises!

A Second Bearish Inflection Point is poised to occur. This is a "rare" situation! However, one that should be taken advantage of by all -- by "Investing Wisely."

Same Old - Same Old ! -- Stuff now for nearly 6 Months and that is even more "RARE!"


Expected - Near-Term -- Recommendations:

I'm still alive and well -- so my "Recommendations" are coming ...


General Market -- Near-Term: -- (1 - 6 weeks)

Introducing yet another dimension -- Note the word "Near" and it's definition.

In a Volatile Market - it has become necessary to add a focus of my Analytics for the Near-Term and therefore manage money with even greater flexibility and nimbleness.

My Methodology has taken on this task with great ease.

This Means -- A Few Trading Recommendations per Year !


General Market -- Short-Term: -- (1 - 3 months)

General Market:

For This Coming Week - My Thoughts In Brief -- My Best Mini-Forecast:

I can see a very strong possibility that my long awaited and anticipated General Market Bearish Inflection Point will be made this coming week.

My "tightened Conformation criteria" was necessary because of the dynamics of the entire stock market. In the old days, we only paid attention to the "Big Gun" Traders, and that was just another aspect of the process of identifying inflection points. More recently, (the last couple of years) the "Little People - Crazy's" Traders have added a notable dimension that also needs to be addressed when identifying inflection points. I have accomplished that task, within my conformation criteria and feel quite comfortable.

I always remind everyone that a general market inflection point DOES NOT mean that everything is going to shoot the moon, if bullish or tank, if bearish. More specifically, I spend a great deal of time talking about "Selectivity" and that too has changed dramatically in the recent (two year) time frame. I cannot stress the importance of using tools like my "Bell Curve" to identify those companies that have the highest probability of being profitable and screen out those that will most likely be disappointments. This is applicable in both bull and bear market cyclical conditions.

My very near-term forecast is that the marketplace will likely rally for a short time. If my anticipated General Market Bearish Inflection Point is to take place this mini-rally will top out and trigger that event.

I hope you maintaining your necessary - patience and discipline. Few will be able to make it through this "rare" time period in the history of the stock market and therefore will not profit.


What's Next? For me, that's a simple question, I let my Daily/Weekly Research / Analytics - tell me! - that means, I LISTEN very carefully to the Daily flow of data and information, but even more carefully to the Weekly flow of data and information for the answer to questions like this - and I definitely do not to anticipate or work with pre-conceived opinions about the General Market, Sectors, Industry Groups and Individual Securities. It's simple - I Listen (except - to all the BS - and I'm Grateful that I have developed a wonderful Filter System for all the on going BS). Otherwise it becomes easy to fall out of Sync. with my wonderfully profitable Methodology.


Some Economic / Fundamental Analysis Stuff (My Analytic Weighting 40%)

(Applicable to Current / Short-Term Conditions)

For Your Information: March 13th:

#1 - Modern Portfolio Theory

Introduced by Nobel Prize winner Harry Markowitz in the 1950s, modern portfolio theory proposes that investors may minimize market risk for an expected level of return by constructing a diversified portfolio.

Modern portfolio theory emphasizes portfolio diversification over the selection of individual securities. A simplified version of modern portfolio theory is "Don't put your eggs in one basket". Modern portfolio theory established the concept of the "efficient frontier."

An efficient portfolio, according to modern portfolio theory, is one that has the lowest risk for a given level of expected return. An underlying concept of modern portfolio theory is that greater risk is associated with higher expected returns.

To construct a portfolio consistent with modern portfolio theory, investors must evaluate the correlation between asset classes as well as the risk/return characteristics of each asset. Modern portfolio theory offers a disciplined approach to investing that is still widely used today.

I still call this "Asset Allocation Model" or "Diversification." The 'theories' that are used by financial advisors and securities analysts is way too far out for me.

#2 - IPO - Initial Public Offering

IPO is an acronym for Initial Public Offering. An IPO is the first sale of shares in a company to the public. Once an IPO occurs, a company will be listed on a major stock exchange, and shares will begin to trade immediately.

The IPO market goes in cycles depending upon the appetite of investors for new issues. Often the share price will increase quickly after an IPO, so purchasing shares at the IPO price may be a coveted investment opportunity.

When management says it plans to take a company public, it means that an eventual IPO is planned. A successful IPO can raise a large amount of capital for the newly public company and create substantial wealth for insiders who owned shares prior to the IPO.

I have never figured out how to work with or invest with IPOs and therefore do not invest in them.

#3 - Earnings and Valuation

This chart illustrates how the recent rise in earnings has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio).

Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line).

Notice how investors were willing to pay much more for one dollar of earnings during the dot-com boom, the dot-com bust and financial crisis. Currently, with 94% of US corporations having reported for Q4 2010, the PE ratio stands at 17 which is a relatively low level when compared to the past two decades.

This work is primary in my overall methodology of Investing Wisely.

S&P500 PE Ratios: 1900-2011
ChartofTheDay.com


Some Consensus Analysis Stuff (My Analytic Weighting 25%)

(Applicable to Current / Short-Term Conditions)

For Your Information: March 13th:

Consensus Analysis (a Quantitative Measure of Bullish vs. Bearing Sentiment) turned NEGATIVE the week of November 8th. It has been getting worse, almost each and every week - since.

When I called the TOP of the Market in 2007 the Consensus Analysis was below where it is today and while the Market was falling -- it simple continued to increase - just like is has done for several months.


Some Technical Analysis Stuff (My Analytic Weighting 35%)

For Your Information: March 13th:

Nothing for this Week


General Market -- Intermediate-Term: -- (3 - 6 months)

It will be a long time before we will see an Intermediate-Term investment opportunity!

This Market is Volatile, Selective and Bifurcated ...


General Market -- Long-Term: -- (9 months and beyond)

We are in a Secular BEAR MARKET since October 2007 and immersed in an on going PATHETIC ECONOMIC ENVIRONMENT !


The Record:

I Began all of this (after retiring in 2001) in Late September of 2007: I clearly identified the TOP of the Market with repeated advisories of being BEARISH and to take your entire portfolio to CASH. I was the only advisor to make this recommendation at the time and it took months for others to follow.

In Late February 2009, I Shared: Change for the Intermediate-Term from my Commentaries in February: It now looks much more BULLISH. Now - its some base building for a very solid (meaningful) Bear Market Rally. In addition, the Volatility that I have been concerned with over the past several months has moderated!

I called that Bullish move -- right on the button - but did not participate (see below).

In Late May 2009, I Shared: Change to a BEARISH investment posture.

In Mid October 2009, I Shared: In May (see above) I was focused on the Fundamentals and Consensus of the General Market / Economy and advised a BEARISH investment posture. Now, in hind-sight, it was the Technical picture - that is and has been for several months - quite clearly positive.

Historically, that is VERY un-usual.

In the past 50 years of managing assets as a financial analyst, this condition has now occurred just twice (the first time was in the 1970s and NOW). (An extremely negative Fundamental and Consensus Market / Economic Condition and an extremely positive Technical Condition) The first time, back in the 1970s, I advised the same investment posture as I did this past May.

The reason was it (the Bear Market Rally) was off a General Market Extreme Low and I - Flat Out -- Will not participate in that kind of risk for myself or my Clients.

Was I wrong then? No! Was I wrong this time? No! (you may disagree, but I would remind you that my Clients are profitable since September / October 2007 and my peers, mutual funds and the General Market -- ARE NOT!)

With regard to the second and following Bear Market Rally, back in the 1970s I participated in that rally and did very well! I expect to do so again.

So, I am finally revising my - Intermediate-Term -- May - Bearish investment posture to BULLISH.

Just so you know -- I do not expect this Bullish / General Market condition to last very much longer!

In Mid November 2009, I Shared: Change back to a BEARISH investment posture.

In December 2009, I have Shared: Look for an Upside move for the U. S. Dollar. There is much improvement, but will it continue?

The above is considered by my peers to be - VERY ACCURATE - thanks to you guys for your input.

In Early April 2010, I Shared my First Recommendation in many Months: All Short Recommendations of April 8th were Covered on May 6th and were profitable. Average profitability 12.95%.

Stay tuned ... the above produces very profitable investment opportunities and they will flow in a conservative - yet - proactive manner.


Just for your information, I maintained a very large International Website for 12 years - through the 1990s. When I retired, in 2001 I closed the site but when I felt the market was peaking in 2007 - I began this - Investing Wisely - Sunday Update just for locals here in San Miguel de Allende. I am pleased to say -- this has now expanded to a mini-international following. I expect to continue for many years.

More recently and in addition:

For those of you who would like to follow my new (public) Blog -- bookmark or set as a favorite the following: http://twitter.com/InvestRotation I expect to update this Blog 2 -3 times per week - sometimes less.


Keep Smiling, have Fun - "Investing Wisely",

 


 

Steve Bauer

Author: Steve Bauer

Steven H. Bauer, Ph.D.

Steve Bauer

Steve has several degrees, i.e. post graduate degrees and doctorate and a great deal of (too much) continued education. For seven years, he did a stent as a University Professor of Finance and Economics.

Dr. Bauer also writes for SeekingAlpha.com. His articles can be viewed at: http://seekingalpha.com/author/steven-bauer?source=search_general&s=steven-bauer

He owned a privately held asset management firm and managed individual investor and corporate accounts as a Registered Investment Advisor - for over 40 years.

Professionally he is a financial analyst and private asset manager / consultant / mentor.

Steve can be reached at senorstevedrmx@yahoo.com

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