Journal

Fund Liquidations: Another Sure Sign of a Bear Market

2008-11-27T02:49:05Z

The Utopia fund family in a dramatic move registered with the SEC to liquidate all of it's mutual funds as of December 22nd, 2008. With a -47% YTD return and only $30 million in assets, the Utopia Growth Fund is a not large enough to survive the large wave of redemptions I suspect are triggering the liquidation. The ironic thing about the liquidation is that on the Utopia website the goal of the Utopia Growth Fund is described a:

Growth and compounding through consistent absolute total shareholder returns
Strategically limit downside volatility
Serve as vehicle to harness the power of your good intentions

Nice sentiment. Too bad they couldn't execute on limiting the "downside".

This type of news will likely be very common in the mutual fund industry as investors vote with their pocketbooks and pull money out of losing mutual funds. The large mutual funds with billions in assets will weather the withdrawals, but smaller funds will be pressured to liquidate or merge with other funds.

Bear Market Psychology

2008-11-21T19:00:29Z

The most heartbreaking part of this bear market is the untold number of investor's retirement accounts being decimated. By decimated I mean losses of 40-60%. I have spoken with dozens of investors with 401(k) and IRAs, and the universal comment I receive is "I refuse to open my statements or look at my account online". These investors have accepted the ongoing losses because they believe there is no better choice.

The buy and hold mantra again rears it's ugly head again, "Don't worry the market always goes up in the long-term". And investors who are now down 50-60%, and must now make 100-300% to break even, continue to place their faith in the buy and hold fantasy. Unfortunately for these investors once this bear market is over, it will take five to six years of bull market gains just to break even.

If you a reader of this blog please let me know how you are doing in your retirement account by leaving a comment.

Bear Markets Fall Faster than Bull Markets Rise

2008-11-20T21:26:03Z

As more investors come to grips with the fact that there will be no quick rebound from this bear market, it's time to see where we are. The chart below (of the S&P 500) shows that from the October 2007 highs through November 2008, that all the gains from 2003-2007 have been erased.

As I have repeated ad nauseum, this is the problem with buy and hold - your hard earned multi-year gains can be wiped out in brutal bear market.

It's Not Going to Be That Easy

2008-10-15T23:17:01Z

On Monday many of my friends began asking me if the 11% rise in the Dow Jones meant the market had bottomed. Some even suggested now was the time to get back in to the market. I suggested to them that the market was oversold and we were due for a rally. Most importantly I mentioned that the biggest days happen in bear markets. According to this article, nine of the largest point increases for the S&P 500 for example, occurred in the 2000-2002 bear market. As if on cue the market sold off mildly yesterday and tanked today.

The chart shows the market down 9% for the day. The market is not going to go straight up. The financial mess we are in is going to time time to fix. In the meantime the market is focused on the fact that we are in a recession, which means company earnings will slow. Since earnings will slow stock prices have to be taken down to compensate.

The Buy and Hold Myth

2008-10-09T22:48:53Z

As the bear market continues to wipe out mutual fund investors I thought now would be good time to revisit the buy and hold fairy tale. This fairy tale has friends of mine continuing to hold their mutual funds as their retirement savings are devastated. According to the buy and hope crowd, the market goes up in the long term so just hold on. To prove their point they say that over the 80 years the market has gone up and average of 8% annually. This is a meaningless and misleading statistic for most investors and here's why: investors don't invest for 80 years, the long term is maybe 20-25 years for retirement. Given this greatly shortened time horizon losses that take years to recover can prolong the amount of time that must be spent saving for retirement

The reality is that buy and hold is not a strategy; it is based on torturing statistics to show the market in the best light. Take the case of Fidelity Magellan, one of the largest mutual funds in the US. The fund has last 44% year-to-date! The chart below shows what would have happened to a buy and hold investor going to back to 1995.

A buy and hold investor in Fidelity Magellan has less money today then he did in 1995. So much for buy and hold. And as I pointed out in my last entry on the The Real Bear Market, since 2003 Magellan could not even match the high it made in the year 2000.

The Real Bear Market

2008-10-08T22:58:58Z

Contrary to most investor's understanding we have been in a bear market since stock prices peaked in March of 2000. The bear market is still in effect because the S&P 500 did not exceed the high from 2000. As the yearly chart of the S&P 500 shows, from 2003-2007 the market was simply attempting to break even from the dot com bubble. The best the S&P 500 was able to do in 2007 was match it's price peak from established seven years earlier.

The market spent five years (2003 - 2007) attempting to regain the losses from 2000 - 2002. In the last year the bear market has reasserted itself and wiped out gains going back to 2004.

Mutual Funds Dismal YTD Performance

2008-10-02T19:00:09Z

Mutual funds are touted as the ideal investment for the average investor because of professional money management, diversification, and a host of other benefits. I decided to see how the "professionals' are doing in this bear market. I went to the Morningstar page that shows how categories of mutual funds are performing. The results: the managers of some of the largest mutual funds are destroying investor wealth and getting paid handsomely to do it. Example: Large Capitalization Mutual Funds which typically own blue chip stocks are down an average of 21% YTD!

Their lame excuse? The S&P 500, which is the benchmark index for Large Cap mutual funds, is down 19.57 YTD. In other words the average Large Cap mutual fund is doing just slightly worse than the index! From their point of view this is not bad; the market is down, most stocks are down, so just buy and hold, and you will be fine. No matter that a 20% loss requires a 25% gain to break even; no matter that it will likely take 3-4 straight years of a bull market to break even. Just keep giving us your money and we will continue to lose it.

Images of the Subprime Crisis

2008-09-25T18:41:40Z

Having a hard time getting your arms around the subprime crisis, how it started, and what the problems are? The folks at Wikipedia have created a comprehensive diagram that shows the causes and effect of the crisis. The image is very large so click on the thumbnail to see the full size image

Will Wall Street Subprime Bailout Work?

2008-09-25T18:00:22Z

The last time the US economy suffered a calamity anywhere close to the subprime mess was in 1989 with the Savings & Loan Crisis. During that crisis, 747 banks failed with the US consumer paying $124 billion of the $160 billion total bailout cost. As part of the effort to solve the Savings & Loan Crisis, the federal government created the Resolution Trust Corporation (RTC). The RTC was charged with liquidating the assets of the failed banks among it's other responsibilities.

In the current subprime bailout discussions, it appears another Resolution Trust Corporation will be created to address the toxic waste on the balance sheets of banks and wall street investment banks. The government has told the public that if the toxic waste that wall street investment banks and main street banks are holding is not addressed, our entire lending system will be at risk. And by risk they mean bank and other institutions will stop lending to individuals and business which will lead to a global recession or depression.

I was curious about the effect of the 1989 bailout on the stock market and the economy; and Henry Blodget in an article at ClusterStock has provided some very detailed analysis. First up is a look at the S&P 500 after the bailout; the red dot shows the RTC bailout with the market declining and finding a bottom one year after the bailout.

Home prices did not bottom for a year and half after the RTC bailout:

The growth of the economy as measured by the Growth Domestic Product (GDP) continued to decline for a year and a half after the 1989 bailout:

Based on what I have learned about the 1989 RTC and it's effect on the market and the economy during 1989-1990, I will temper my expectations for a quick rebound in the market or the economy.

Even Money Market Funds Are Not Safe

2008-09-23T22:35:16Z

Last week the Reserve Primary Money Market Fund was forced to admit losses of $785 million dollars worth of Lehman Brothers bonds. The admission sparked a massive set of redemptions which lowered the funds assets from $64 billion to $23 billion. Most importantly for investors the Reserve Money Market Fund's Net Asset Value or price fell below the golden $1/share level, specifically the $0.97/share. In the wake of the massive redemptions, Reserve Primary halted redemptions in the fund.

This was just the second instance of a money fund "breaking the buck" — when the value of one share falls below $1 — in the industry's 38-year history, and the first since 1994.

For money market funds, which are marketed as the equivalent of a bank savings account, this is a serious failure that cannot be underestimated. You do not expect to lose money in your savings account (you may not make alot but you do not expect losses) and Money Market Funds have been run and marketed this way since inception.

To add insult, the government guarantee of Money Market Funds does not help Reserve Primary Money Market Fund investors; the guarantee only covers investors as of the close of business on September 19th. The Reserve Money Market Fund's price fell below $1 on September 16th.

The question I have is how could this Money Market Fund allow exposure to Lehman Brothers bonds and notes, when the problems with Lehman have been known for months? The investors in the Reserve Fund deserve answers to these and other questions. Unfortunately they probably will be left with at least a 3 cent/share loss, and the fact that the assets they thought were safe from the market turmoil were tragically mismanaged.