Southwest Ranch Financial, LLC
May 2008 Update
The S&P500 is at 1385 on 30-April-2008

This page can be linked to at   ( www.swranch.net/emails/2008-05.htm ).

The Southwest Ranch Financial Market Alert Timing Model is out of the stock market. 

Year to date, the S&P500 index is down 5.07% and the SWR Balanced Portfolio is up 1.40% (with half the stock market risk.)

Here’s the year to date performance of the SWR Balanced Portfolio by asset class.

As of 4/30/08

Market Alert Model
The SWR core model is out of the stock market. In January 2008 I stated that my Market Alert Timing Model had failed because it didn't flag a market decline exceeding 12% from the peak of around 1520. This arbitrary limit was based on my previous buy and sell experiences using the model. I made a commitment when I started this eletter to always be honest about my models and to remain independent. Perhaps I was too strict. Within a few weeks of my email, the stock model did signal a sell but I had already manually intervened. The model's sell signal was in early February and at about the same level as January. I think the sell signal will be viewed in the future as an early call on the broad market despite my disappointment it didn't occur closer to the top.

Year Ahead Timing Model
The YAT model is used to indicate periods of buy opportunities within the Market Alert Model’s timing cycle. The SWR Market Alert Model always trumps the YAT model. The YAT model is neutral.

Interest Rate Model
The SWR Interest Rate model is negative on interest rates and long bonds.  

Gold Model
The SWR Gold Model is positive on gold.

The SWR Balanced Portfolio and all the portfolios discussed in my book are showing positive returns year to date. The lack of volatility relative to the S&P500 has been remarkable for the last six months. This shows the power of holding a balanced and properly correlated asset mix. The Balanced Portfolio asset mix also shows how Small Caps and Reits are diverging from the S&P500. My asset mixes survivied the 2000-2002 market crash and actually made money and are proving themselves once again. If you have no interest in buying individual stocks or moving money around in response to timing signals then simply invest like my book suggests.

Market Timing versus Passive Investing
This eletter expresses my views on the markets and the indicators of my various timing models. Most investors should not time the market. They should use a passive indexing strategy like my Balanced Portfolio above. Historically, passive portfolios perform very well relative to the broad market indexes and provide diversification through asset allocation. Some people may prefer a modified approach which is my personal inclination. My research shows that timing can enhance returns if used along with an indexing approach. For example, shifting some money in or out of bonds when the risk of rising rates appears to be changing. My book takes a strong position in support of indexing because the alternative requires a greater involvement in financial matters than most people are willing to accept. It's up to the individual to decide their own path.

Warning on Bonds
I sent the following Alert on 27 April 2008:
"As you know, my bond model is negative on interest rates. Recent research indicates that a large up spike in long term interest rates is likely. It could start in 6 to 12 months. It could happen much sooner. The culprit is rising world inflation. I believe that it's best to move money allocated to bonds into short term treasuries. A broad bond market index fund like VBMFX is at much less risk than one invested in 20 year bonds. Regardless, all bonds will perform poorly if rates spike. I would also avoid long term foreign bond funds and ETF products like BWX. Dollar hedgers should use short term vehicles like FXF and similar ETFs. I'll provide more information in the May eletter in a few days."

A confluence of factors including an ongoing steep decline in forecasted corporate earnings, the steep decline in the leading economic indicators plus the negative readings of my stock and bond market models indicates a poor investment environment. I think long term interest rates on treasury bonds may begin to rise. This would cause losses on bonds. If rates rise a lot stocks will also be hit. The recent up swell in stocks does not appear sustainable considering the trajectory of business fundamentals.

The Fed controls short term interest rates but has very little control over long term rates unless action is coordinated with other governments. Long rates are generally set by the market. Bear in mind that the Fed's recent short term rate manipulation of the Fed Funds rate is a contrivance to support the banking system at the expense of savers. It's never long lived but is used to rescue the banking system after periods of lending excesses that endanger the financial system.

Once long rates rise, the Fed can begin to raise short term rates. The banks need a large positive spread between short and long rates because they can then borrow at low rates and lend at higher rates. (This assumes there's someone to lend to but that's another matter).

Rising long term rates are negative for bonds because existing bonds will drop in value if new issues pay a higher rate. SWR believes we could see a rapid rise in bond rates. With the 10 year treasury yielding only 3.7% there's not much money to be made holding bonds considering the risk. You don't want to be in the long term bond market at the beginning of a rate up cycle. You want to be in short duration fixed income like money market accounts or short term bonds.

In the short term, stocks will probably do ok. Stocks are at risk if rates rise a lot. Stocks are priced relative to the rates of return on other investments. Right now, PE ratios are not low. If safe treasury bond yields rise rapidly, it tends to draw money out of stocks. The only stocks that tend to hold value during these periods are those that pay a healthy dividend and those with very high rates of growth. The current dividend yield of the S&P500 is now 2% - close to a historic low so there's little safety in stock index funds if rates rise a lot.

Investors should be cautious with bonds at this time and that includes TIPS. I realize that money market accounts pay terrible rates and are below the rate of inflation. It's true that going to cash means you hold dead money but the consequences of staying with bonds may be much worse. Bad investments are always over-priced at market turning points and good investments appear dead.

I'm much more negative on bonds than stocks. However, if long treasury rates exceed 6% the stock market will struggle. If long rates rise over 7%, as I believe is likely, stocks will fall. The S&P500 could go under 900 from the current 1350. The rise in interest rates could occur quickly if history is a guide.

Large Yield Spreads Often Signal Rising Rates
My Bond Model went negative on long bonds in early 2004 at 4.1%. My Market Alert Model went negative on stocks in early February 2008 at 1360. My models change position at cyclical peaks and troughs - they don't time the exact high or low. They do indicate when risk is high and when forward returns are likely to be so low that sitting in cash is a better option. My models have been right on the direction of stocks and bonds.

We may finally be on the cusp of a rise in rates. There is now a rare and extreme spread in the yields between corporate bonds and treasury bonds. Without going into excessive detail, spreads greater than 1.5% are unusual. Over the last 50 years the spread has averaged 1%. The current yield spread between Treasury bonds and AAA Corporate bonds is close to 2% indicating a major flight to the safety of treasuries. Money is fleeing risk perhaps because of concerns that a large wave of corporate bankruptcies and bond defaults are on the horizon or maybe fears of inflation or a dollar crisis. The reason isn't that important. A yield spread of this magnitude has only occurred once before in 2001.

Large spreads have usually preceded a spike in interest rates or a major stock market decline or both. A large spread is a warning but becomes very significant if it is pronounced and prolonged. We are currently in the 4th month of pronounced yield spreads above 1.5%. In the past, this has indicated that interest rates may start rising. A link to a larger version of this chart is now on the web site in the upper left column.

There is little opportunity risk in avoiding bonds at this time. The yield on the 10 year treasury is only about 3.8% - that's below the rate of inflation. You can earn 3% in a money market fund. If my bond model is wrong and the yield spread indicator proves off the mark, we'll have lost very little.

Why Most Stocks Are At Risk When Rates Rise
In a market contraction triggered by rising interest rates or falling earnings or both, most stocks have shaky legs. The only thing supporting their share prices is the hope that someone will pay more than you. In classical finance, the value of a stock is the present value of its income stream from the dividends expected to be disbursed to shareholders. Without a dividend payout the stock is held up by hope that someday it might make a distribution. If the company fails, it's value is based on what its assets could be sold for (book value). Hundreds of years ago people would invest in trading and shipping firms based on the reputation of the captain and hoped they'd strike it rich when a ship brought home a profitable cargo.

Today it's not spices from the East but the building of intellectual property, a trade name, a dominant market share or some other valuable attribute that ensures a long-lived income stream and the potential to pay dividends.

There is merit to looking at value based on both current and future dividends. A conservative investor will more highly value a regular dividend over a future payday. A good example of a big one-time payday is the high buyout price offered for Yahoo by Microsoft. Yahoo has a very popular email system and other services on it's web site. It also has a well known name.

Microsoft seeks to make the acquisition by using cash plus its own stock to exchange for Yahoo's stock. The deal can only be accomplished if investors are willing to place a high value on Microsoft's stock which pays a paltry dividend of 1.4%.

Microsoft has been a stinker stock. It's gone nowhere in 10 years despite making all sorts of money from its operating system monopoly. The company is capable of paying a better dividend but doesn't and investors don't rate the stock highly. Microsoft's share price illustrates the belief system that supports stock prices. It is also what enables the culture of Wall Street where often the only people making money are the management who receive free stock and big salaries. The shareholders get virtually nothing. The belief system remains intact until a trigger causes investors to doubt the big future payday.

The 2000 market crash was caused by excessive valuation and that was evident by the extraordinary PE ratios assigned to most stocks. The current market is much different. Valuations are not cheap but not excessive either. However, we are in a profit slump and declining profits cause individual issues to have excessive valuations as income streams decline. Stocks then start declining one by one. A dividend provides protection in a weak market because it tells everyone that the company will pay you to wait.

Interest rates are a whole different danger. The stock market currently has little competition with short rates under 3% and long rates under 4%. The average stock yield is 2%. If interest rates rise as I predict, then stocks will be pressured by competition from fixed income. Microsoft pays out 27% of its net income to dividends. A 50% payout ratio would take the dividend yield to 3.2% and that would help. Once rates go over 6% or inflation exceeds 5% it won't be enough. Despite it's success, Microsoft has so many shares outstanding that the stock would have to decline quite a bit to be yield competitive. Presently, most stocks don't pay a dividend at all so you can imagine what will happen to their share prices.

During tough times, money moves to safety and the certainty of a regular stream of payments. That's why a high dividend is important in uncertain times. As prices fall the dividend yield rises even higher. It supports the share price during a market downturn.

High interest rates though can overwhelm even a good dividend. If the rates on super safe treasury bonds rise far above the yield offered by a stock, the stock will suffer. Many investors will opt for the safer investment and exit the uncertainty of equities. That's why a cycle of rising interest rates is destructive to the stock market.

Energy
The rising price of oil affects every aspect of the economy. Oil won't be going down for the simple reason that the world has reached the peak of maximum production. It can't be increased because of the rapid oil depletion in major oil fields in most every country across the world. New wells may come into production but large old wells are declining faster than new supply rises.

Don't listen to people who say a slowing US will cause oil prices to drop. That's unlikely. That oil will be consumed by someone else in Asia. Increasing oil prices will change how people travel and what they pay for every product at Wal-Mart. It's already affecting fertilizer prices and food production with punishing shortages and high prices in poor countries. The world is headed into a severe energy crunch. Of particular concern to us is Mexico. The nation receives 40% of its revenue from oil and it's major oil field is in a depletion free fall . If it doesn't find a lot more oil, a social breakdown could occur and cause a flood of immigrants going north.

"Countries like Saudi Arabia and Mexico that sell oil to importing nations like the USA and Japan are using more of their own oil and producing less. Mexico's trajectory is so steep (due to the severe depletion of its giant Cantarell oil field) that it could easily go from being America's Number 3 source of imports to zero in less than five years". - James Kunstler "Ignoring the Obvious" - The Atlantic Free Press Nov 2007

The US is rapidly moving forward with 700 miles of 10 foot high border fence along the Mexico border. Homeland Security is in charge of the project and has been allowed by law to waive any concerns by the courts, border states and environmental issues. In short, the fence is a national security issue.

" ... the Bush administration was waiving compliance with some 30 environmental and land management laws to expedite the completion of a 470-mile-long fence along the U.S./Mexico border to keep illegal immigration in check." - April 2008, Emagazine.com

Major oil consuming nations know there will be no increase in the oil supply.

Shokri Ghanem, head of Libya's national oil corporation, yesterday admitted there was little more oil the Organisation of the Petroleum Exporting Countries could pump in case of a shortfall. "Very little can be done by anyone, there is not enough spare capacity to help," he said. William Ramsay, deputy director of the International Energy Agency, which represents the world's biggest oil consuming countries, agreed, warning: "Potential to expand production within Opec: there is none, except in Saudi Arabia." - April 22, 2008 Ft.com

There is an urgent need to transform energy production within the world economy. The real problem isn't global warming - it's oil depletion and a shortage of liquid fuels. The cost of change will be staggering. Nations need to transition to different types of vehicles to mitigate the shortages and this will take decades. We need modern train systems for transportation and utilities that use more solar and wind power. Creating ethanol from corn is our current energy policy and a form of insanity. High energy prices are feeding into agriculture and causing food shortages. We are no longer in a growth world supported by cheap energy.

CIBC says oil reserves world-wide are overstated and prices are going over $225 a barrel by 2012.

Analyst Jeff Rubin in his report noted accelerating depletion rates in many of the world's largest and most mature oil fields. He estimates oil production will hardly grow at all, with average daily production between now and 2012 rising by barely a million barrels per day. "Whether we have already seen the peak in world oil production remains to be seen, but it is increasingly clear that the outlook for oil supply signals a period of unprecedented scarcity," said Rubin.

The economy needs to reach an equilibrium point dictated by sustainable energy production. The current housing and debt problems get the most news but I think the larger problem is energy. My stock and bond models have detected a cyclical change and clearly indicate that profit potential in stocks and bonds is poor. Investors should be very careful with bonds because a slowing economy will result in bankruptcies and steeper interest rates for many borrowers. Rising inflation will support higher interest rates and gold prices.

Taken all together, we are in an era of instability in the short term due to debt and longer term because of oil depletion.

Control Costs and Act Strategically
A broad and balanced indexing approach can still provide safety and remains the best approach for most investors.

I believe it's likely that a pullback in consumer spending and lower economic growth will limit stock market gains relative to the past. The massive US deficits and the future $60 trillion in entitlement obligations means higher taxes are ahead. We'll also likely see means testing for social security. People who've saved and been responsible will get less than they expected in order to support the legions of wastrels and the unfortunate. I doubt anyone will be happy with the outcome. The government's first concern is always self preservation so expect a more hands-on approach than in the past.

If means testing and higher taxes are likely in the future, what should we do today to prepare? Well, if you decide to own some gold or silver then maybe doing so in physical form is best. Who knows what may happen if America gets a populist president and congressmen intent on punishing the sane and the solvent. Let's hope good governance returns but financial controls are not unusual by historical standards.

It's important to find ways to reduce household operating costs and especially for older Americans who will be victims of the government's incompetence and rising inflation.

Should Boomers Consider Relocation in Retirement?
The huge numbers of baby boomers headed into retirement means the government will get very stingy while looking to snag more tax revenue. We'll likely see means testing for social security. Such a policy might examine income but it could look at total assets. As it is, you have to be almost flat broke for the government to pay for nursing home care under social security. The surviving spouse who hasn't planned for such a possibility is often left impoverished unless their home was deeded to the kids as a life estate and the other assets somehow secured. Old folks shouldn't have to hire lawyers to stay in their own home. It's time to take action before things get too nuts.

America has great advantages but I expect relocation for retirees to become a growth industry. I'm talking about people moving out of America to escape the taxes and high costs. Our medical system only works for people with good insurance and many retirees won't have it. I know a fellow who needed dental implants and had to pay out of pocket. The best estimate he received in the US was $32,000. He went to Algodones Mexico just across the Arizona border from Yuma and had a magnificent job done for $6000. This is the dental center of Mexico and retirees flock there for crowns at $300 versus $700 in the US.

Doctors in America have to load up on insurance and provide unnecessary procedures to avoid lawsuits. Our medical dollars are flowing to Wall Street insurance companies and we have professionals learning how to do rip-offs at revenue enhancement seminars. Medical care along the border will be a growth industry.

After age 75 the average person has three chronic ailments requiring medications. For example, 20% of people over age 50 suffer from acid reflux and buy medicine like Prilosec which costs $0.75 per pill at Wal-Mart. You can buy the generic in Mexico for $0.07 per pill - one tenth the cost. The same goes for many other meds. In Canada, you can buy Tylenol 1 with codeine over the counter. Many countries sell antibiotics and pain killers and other meds over the counter at low cost without prescriptions and, surprise, they don't have drug addiction problems like the US. Some Mexico border towns are rather unsavory but there are legions of gringos living cheaply in the Mexican interior in ex pat communities and doing very well.

Even if a person would never consider moving out of the US it makes sense to consider medical services across the border. Our government doesn't make it easy due to no incentives for insurance companies and intense pressure from drug companies and special interests. It's amazing how crazy things have become with corporate money funding the US political system. A mexican national can drive a truck across the US border loaded with 499 pounds of marijuana and when caught they are simply sent back home with no charges filed. This is US government policy and I confirmed it with a federal official. The truck is confiscated and the offender is placed on a 'can not enter' list which, of course, isn't enforced. But heaven help the US citizen who is caught at the border trying to carry more than two bottles of medication back into the US from Mexico or Canada. That takes profits from the drug industry. Meanwhile, border states in the US are paying mega millions for free drugs and hospitalization for illegals and the feds won't reimburse the states. The hospitals are required to care for the illegals and in many states local police can't arrest and deport them. Meanwhile, old ladies entering the US are subjected to full random searches at airports. Do you see a bit of insanity in all this?

Our nation is a mismanaged mess. To justify its existence, Homeland Security tries to make the public believe enemies are everywhere. Here's an example. How about recreational boaters as floating eyes for Homeland Security.

As boating season approaches, the Bush administration wants to enlist the country's 80 million recreational boaters to help reduce the chances that a small boat could deliver a nuclear or radiological bomb somewhere along the country's 95,000 miles of coastline and inland waterways.

The idea is stupid but harmless enough. No one can seriously believe this will be effective. Planted news stories like this are nothing more than fear mongering. It's how we're convinced to support military campaigns and a huge bureaucracy of expensive and expanding government. We'd be better off closing down Homeland Security and putting our Congressmen on half-time pay.

Our government is in league with Wall Street and their lobbyists and campaign contributors to keep us ignorant and over-charged. They're sucking up our money with lawsuits, high medical costs, high taxes and political payoffs. This corruption works while times are good but will turn on us very soon. Relocation may be an option but massive reform is the better path. Don't hold your breath. As the population ages, you can bet that people will have to move out of America to avoid the costs, the lawyers and the taxes. If I was Raul Castro, I'd be looking past Fidel and in the planning stages for Sun City Cuba.

Leadership
I'm convinced that politicians as a class deserve little respect and that includes the President. Respect only permits politicians to steal from us and continue their practices of selling votes for self-enrichment.

Our current president continues to publicly deny reality. "We're not in a recession, we're in a slowdown," Bush said at a news conference at the end of a two-day summit with Canadian Prime Minister Stephen Harper and Mexican President Felipe Calderon. This guy has worked with congress to double the national debt, caused the dollar to fall by 50% and done incredible damage to America's economy and reputation. Like our previous two presidents, he has big plans after leaving office, according to the Guardian newspaper. Will he make it up to America?

"I can just envision getting in the car, getting bored, going down to the ranch," he says. He also has big plans for making money. "I'll give some speeches, to replenish the ol' coffers," says Mr Bush, who is already estimated to be worth $20m. "I don't know what my dad gets - it's more than 50-75 [thousand dollars a speech], and "Clinton's making a lot of money".

So true.

Bill Clinton made ten million since 2000 from a private firm linked to Arab oil lobbyists and $40 million more for "speeches". Bush Sr. makes millions with the Carlyle group (closely connected to the Saudis) doing the same thing and millions more from "speeches" to politically connected firms. Lil' Bush was bailed out of his failed Harken Energy partly with Saudi money and later given millions for access to his father while the elder Bush was president. Now he'll go on speech tours.

Obama looks like a looter in training. News reports state he requested earmarks of federal money for the hospital where his wife was employed. She received a salary increase from $121k to $316k just before his election to the Senate.

The people who want to run the country are supposedly sworn to be stewards of the public trust. Enormous speech fees and earmarks/funding that benefit family members are simply payoffs to politicians. The last three presidents profited from big oil and the Saudis. This ingrained corruption from special interests is the root of crony capitalism and why we have no energy plan.

Within a year, it will be obvious to everyone that America is in deep trouble. Our only plan is to foolishly making ethanol from corn. When oil hits $200 people will look around and wonder why we didn't plan ahead and act much sooner. None of the presidential candidates discusses the subject other than to suggest a self serving moratorium on gas taxes prior to the election.

The core problem with politics is that people truly dedicated to public service can't get elected to top government posts because they aren't for sale. Sure, things are worse in many other countries. My point is people need to be more demanding of public officials and less trusting. Otherwise, we'll continue to be bankrupted by the medical system, looted by Wall Street and lied to by our presidents.

Untrap Your Money
One of the biggest rip-offs in America is the 401k scam that permeates employer sponsored retirement plans. The Pension Protection Act of 2006 mandated that new employees would automatically be signed up in an employer's retirement plan unless they opted out. Well, opt out may be your best choice. The pension law was touted as a way to help workers build savings. It too often only enriches Wall Street.

Unless you work for a major employer it's likely you're in a 401k plan with minimal employer matching of funds. Many of these plans have funds with high expenses. Check with your employer to see if the load fees have been waived for your retirement plan.

My brother-in-law contacted me this week in despair. He's in 11 mutual funds with all sorts of overlap. Look at some of the funds he's allowed to choose from:

No wonder the guy struggles trying to save for retirement. His employer has a 401k plan but it uses high expense funds with unacceptable fees that provide big profits to the fund companies. Employees should be in low cost mix of funds from Vanguard and other firms that treat small investors more fairly. Trouble is, many smaller firms go with these high cost plans to avoid having to manage the program internally. In exchange for doing the paperwork, the plan management channels unsophisticated employees into a hell hole of high costs and under performance. Anyone forced to choose only from stuff like this should seriously consider not contributing much to the company plan. Since many employers do provide some matching of funds, that complicates the decision.

Let's say your employer matches your contribution by 3% of your salary and up to a maximum of $2000 per year in 2008. An employee making $40,000 per year gets a $1200 match from the company and personally invests another $1200. That's $2400 for the year. Let's also say that stocks return 6% annually - a percentage put forth by Greenspan and Buffett as reasonable for the next 20 years.

$2400 minus load fees of $126 (.0525 x 2400) leaves $2274 to invest. The market returns 6% (.06 x 2274 or $136) of which the fund takes away another $34 (1.5% in yearly fees comprised of the expense ratio of 1.25% plus the 12b1 fee of .25% or .015 x 2274). The fund just skimmed off $160 ($126+$34) or 117% of the 2008 total return. The worker's statement says he received $102 in gains ($166 - $34) but he paid $160 in fees because you must include the front end load fee.

In the first year, the fund company earns 6.6% on the workers original $2400 (160/2400) regardless of how the market performs. The worker gets 4.25% (102/2400) and that assumes the market was up for the year. This is a best case scenario. In fact, the average managed mutual fund under performs the market index by 3% yearly due to excessive trading and fees. The worker will never earn as much as the index and will always pay the fees. It gets worse. As workers wise up, they start to move money around within the plan to avoid a fund's poor performance. The fund company loves this. Switching to another fund means they likely get hit with another 5% load fee. Watch out, some funds use back end load fees so ask about both.

The employer match is free money but the lower rate of investment compounding greatly reduces the apparent benefit. The worker gets hit with high first year fees and then under performance due to fixed percentage fees. This is the effect of the swirling hell hole of expenses. Each succeeding year they experience under performance and more fees. Compounding exacerbates the true effect of fees over time. When the worker finally retires, the government will take 25% in taxes on the proceeds. The worker gets nicked first by the fund company and finally by taxes.

If your 401k plan has high fees then you have three choices. 1) See if the plan offers no-load index funds 2) Stay in the plan 3) Opt out of the employer plan and use after tax dollars and invest in a Roth IRA.

I think #1 is the best choice. If Warren Buffett and Alan Greenspan are right about the next 20 years providing low relative returns, then expenses are more important than ever. If the plan only offers high expense funds then talk with your plan administrator to learn if you can transfer the money out to a rollover IRA at Vanguard. The answer will probably be no. Option two is to learn if you can open a brokerage account within the plan and buy low cost Vanguard ETF funds. If neither option is available then talk to a non-commission financial advisor about going solo. Don't put any more money into the plan then required to get the match. Don't waste your time and your future feeding Wall Street.

Vanguard Wellington, for example, has no load fees and only a .27 expense ratio and outperforms most of the swill offered by company plans and with less risk. Check out your fund costs. Go to this link and type in your fund symbols to get the fund profile. http://finance.yahoo.com/q/pr?s=VWELX

Don't go from the frying pan into the fire. Most financial planners at banks and brokerage firms also use high fee funds. What goes on with those branch in-bank investment services is not good for many trusting customers. Never pay anyone a percentage of your assets to manage your money and never pay expenses like the ones above. Hire a fee-paid and non-commission advisor who can look at your financial life and provide unbiased advice. You need to be in low-expense, no-load mutual funds and your money needs to be sensibly allocated among asset classes. This can be accomplished with very few funds. Investing in 11 funds means overlap and does not provide asset allocation or diversification.

For more information on 401k fees, read this article from the US Department of Labor.
CUNA also has an article on how to reduce fees.

The following example uses the SEC Fund Fee Calculator to show the fees and performance of $10,000 invested for 20 years. I'm comparing Vanguard Wellington against a hypothetical ABC fund with a 5.25% load fee and a 1.25% annual expense fee and a 7% total return. I've omitted the 12b1 fee.

Here's the link to the SEC Fee Calculator: SEC Investor Tool

Housing
Don't be a victim. Holding on and hoping for things to improve isn't a good idea. Don't throw away your money into making payments on a house you can't afford. The government is under tremendous pressure to prevent rising foreclosures so maybe they'll concoct another bailout plan. Raise cash and wait for a sweetheart offer from the bank. Talk to a lawyer to see if you live in a "non recourse" state. Consider all options.

The Dollar
The dollar has gained strength lately. Realistically, the odds aren't good for the dollar. The Fed needs to raise rates 2% over the rate of inflation to kill gold and boost the buck. Trouble is, that would kill the economy. The US debt is financed with short term treasury bills whereas years ago they used 20-30 year bonds. Any rise in short rates would increase US debt servicing costs enormously and most is now held by foreigners so that's more money going overseas. It's a bad situation for savers in the US because you can't make money on your savings. With money market rates below the rate of inflation, bailing out the banks has become outright theft from the US public. The government wants long rates to rise to provide a profit spread for the banks but that would make home and business loans very expensive and harm the stock market. I'm telling you, there is no easy way out of this mess.

Passive Investors
Many investors should hold their assets in a balanced asset mix of index funds like those described in my book. These portfolios are designed to hold assets that move in different directions during times of stress. Continue to hold stocks. If the 10 year treasury bond moves quickly to over 6% (now at 3.7%) consider reducing stock holdings. Do not hold liquid cash in money market funds invested in commercial paper or short term corporate notes. Avoid all speculative investments or things you don't understand. There's nothing shameful about going more to cash if you sleep better. Consult a non-commission financial advisor and show them my portfolio results. Find someone who can think beyond a cookie cutter financial plan.

Active Investors
I believe it's prudent to reduce exposure to the more risky segments of the US and European stocks market until conditions stabilize. Do not hold any US bonds with a duration greater than 3 years. Cash reserves should be held in a treasury money market fund. Some cash can also be dispersed among foreign currencies using popular ETF products. Gold is a good asset to hold as long as real interest rates remain negative. I explained the gold strategy in last month's eletter and recommend holding coins in a taxable account. Enterprising investors may wish to investigate a Rydex reverse interest rate fund.

Uncertain Investors
If in doubt, take a conservative position and expect to hunker down with low returns for a year or longer. The Permanent Portfolio fund (PRPFX) is a good option and provides balance and currency diversification. This is not a bear market fund but more of an all-season investment for the risk adverse. Consider the recent run up in stock prices as a gift. Lower your stock allocations and exit bonds.

Summary
It's hard to tell how severe this recession will be but I believe it is likely to be protracted due to high oil prices. The housing collapse is just phase one. I expect a long, slow grind on corporate profits. My stock model indicates there's little sustainable upside to the market at this time although some buy points may occur after severe dips. My bond model is negative. Early data I've received shows major economies in Europe may be entering into recession. Small investors need to play it smart and cautious.

I've been warning about the economy for six months and advising investors to lower stock allocations. This past week, Warren Buffett weighed in.
NEW YORK (Reuters) - Warren Buffett, the world's richest person, said on Monday the U.S. economy is in a recession that will be more severe than most people expect. "This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think," Buffett said. "This will not be short and shallow".

The Fed is bailing out banks and allowing corporations to apply current losses back against prior year profits. This is done by printing money and running up the deficit and reducing tax revenue. They'll probably have a homeowner bailout plan. The Treasury may be actively involved in the financial markets trying to prevent severe price swings.

A steep rise in interest rates would result in large bond market losses. It could also precipitate a steep stock market decline if the 10 year bond rises dramatically like in 1987 and 2000. Oil and gasoline prices are going higher and will permanently change the American lifestyle. Expect rising unemployment.

The politicians will manipulate the markets to whatever extent needed to ensure their re-election in November 2008. I expect the greatest damage to the economy to manifest after November and into 2009. Investors who successfully keep their assets intact will be poised to buy dividend stocks at better values and bonds at attractive yields. My research shows that bonds can provide returns that exceed stocks if one can avoid periods of steep rate spikes. Interest rate peaks are a good time to buy strip bonds and lock in annuity contracts. In a low rate period like the present, investors must avoid long dated bonds.

Clearly, we're in a very tough investment environment and volatility is settling in for a long stay. Since we can't predict the future, most investors should hold a balanced mix of asset classes, increase the percentage in cash reserves, and wait for opportunity.

Best Regards,
Southwest Ranch Financial, LLC    (www.swranch.net)
Tom Gleason, Manager & Researcher

Author of: How To Invest If You Can't Afford To Lose

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