6.29.07

6.29.07

            This week closed out the first half of 2007 on a weak footing due mainly to the sub-prime mortgage loans in several Hedge-funds at Bear Sterns. This weakness started in the financial sector, then spread to the brokers, and finally to all sectors of the market. Wall Street has a history of “inventing” new investment vehicles to sell to the general public. We shy away from any and all of them. So often they end up looking like their sole purpose was to separate investors from their money. Stay with the tried and true investments and in the long run you will be much better off.

            While all the major Indices had a good first half, all of them lost in the month of June except the NDX which managed a very small gain for the month. We decided

to be ultra- conservative back on May 31^st and went to cash when the PPP was issued. The lack of leadership was an important part of that decision. The June results are as follows: S&P500 -1.78%, DOW -1.61%, R2K -1.59%, COMP -5bps, and NDX +31bps.  Being in cash for the entire month turned out to be the right call.  We should have made about 30bps in money market interest for the month.

            The Federal Reserve announced Thursday that it was leaving interest rates unchanged. The funds rate therefore remains at 5.25%, where it has been for over a year now. While the Fed noted that inflationary pressures have persisted, it also dropped the term "elevated" to qualify the current level of inflation and acknowledged the fact that core inflation has come down in recent months.

            Friday was a volatile session, not unusual for the last trading day in a quarter. Window dressing by fund managers, higher oil prices, and a bomb scare in London all added to the volatility.

            We are starting out the second half of the year in cash, even though the market indicates that the momentum is still up. Some people wanted a better understanding of this stance. I hope this will clarify things for you. On May 31^st a PPP was put into effect. This means that “caution” should be used going forward. An aggressive investor may look at it and say something totally different than a conservative one would. What it means is that there could be danger ahead. We may react differently at different times depending upon the existing circumstances in the market at that time. On May 31^st we made an appraisal of these circumstances and decided to be ultra-conservative and moved to cash. On Feb12th we issued a PPP  and in reaction to that PPP, we cut our market exposure to 50%. On Feb 28^th, two weeks later, we moved to cash due to deteriorating indicators. As our indicators improved we again went long the market at a 50% exposure (we were still inside a PPP at that time). We removed the PPP on April 3 and added the other 50% to the market making us fully invested again.  We stayed fully invested until May 31^st when we again got a PPP but this time we decided to go to cash instead of only cutting back to 50%. The market conditions were different this time. The market had had a good run, but a lack of leadership had developed, and we were entering that time of the year when it gets harder to book profits. In addition we were just starting to get some of the news of the sub-prime mortgage troubles. So even though our timing signal said “BUY” our money management signal said “caution.” We will always keep you updated on where our money is positioned. We generally stay toward the conservative side, but not always.

 The use of the PPP (potential pivot point) is the basis of our Money Management System. When the market trend changes, the change many times is quite dramatic and can cost an investor a lot of points if they happen to be on the wrong side at the wrong time. Kenny Rogers, a famous country singer had a popular song that said; “you got to know when to hold ‘em know when to fold ‘em, know when to walk away and know when to run”. The same holds true here. A good Money Management System will allow you to control much of the risk inherent in the market, and by so doing, improve your returns.  You can find many web sites that sell market signals but most of them are “mechanical” and therefore are lacking a money management system to control risk.

Till next week

The MTA staff