Sound As A Dollar

Money market funds can invest only in the highest-quality securities, so they can't buy sub-prime debt. Though some funds have bought commercial paper from issuers that do hold sub-prime mortgages, so holdings can deteriorate. This is according to an article in Business Week magazine. However, the chances your money market fund owns any of these securities is minimal.

The sub-prime crisis has been going on for three months, while a money fund portfolio turns over, on average, every 30 days. The vast majority of securities that held any kind of threat are therefore long gone.

The only time a money market fund's net asset value fell below $1 was in 1994 when a fund was liquidated and investors got 96 cents on the dollar. It was an institutional fund, so no individual investors lost money.

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DJIA Ends the Year at 13,264.82

Well, even though the Dow ended 2007 on a losing note - down 101.05 points - we still wound up with a winner!

I want to thank those AAII members who participated in our "Guess the Closing Number of the Dow for 2007" contest. And while you all were rather optimistic in your expectations for the Dow's final close, our winner - with a guess of 13,500 - is DEAN H., who won our prize of fully paid up dues for 2008!

So once again, congratulations DEAN!


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Something to Think About

"Perhaps the most valuable result of all education is the ability to make yourself do the thing you have to do when it ought to be done, whether you like it or not; it is the first lesson that ought to be learned; and however early a man's training begins, it is probably the last lesson that he learns thoroughly."

- Thomas Huxley


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Bullish On Bullion

Gold has been on a long-term upswing, tripling in value since 2001 to well over $800 an ounce currently - and flirting with its all-time high of $850 an ounce, set in 1980. The surge has ignited a rally in mining stocks as well, with many of them near yearly highs.

Longer term, gold prices will fall if we enter a global recession, depressing personal incomes and industrial uses of gold, or if the dollar rebounds and inflation doesn't.

If the global boom continues, and if inflation ticks up and the dollar ticks down, the long-term rally could keep going. For now, a test of the $850-an-ounce historic high seems inevitable because consumption of gold has been growing almost twice as fast as its production.

NOTE: Gold reached that $850 peak price in 1980 so it would take a move to $1,700 per ounce to restore it to the same purchasing power.

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Is GOOGLE on Steroids?

Barely a year ago a young software programmer at Google, Christophe Bisciglia, came up with an idea: He would teach Google programming at the University of Washington. This would soon hatch a major initiative at the company and a joint venture with IBM.

Now, Google, which has the fastest computing network on earth for sifting through data, will let others tap the power of its machinery.

The other search engines are joining the rush to what is called "cloud computing." It positions Google, along with the other Net powers, at the computing crossroads of science and business.

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The Subprime Fallout Continues

It was dejà vue all over again when Swiss bank UBS on December 10 announced a $10 billion writedown of subprime holdings following a similar $3.4 billion hit in October. The bank cushioned the crunch by unveiling an $11.5 billion capital injection from Government of Singapore Investment Group, plus an unnamed Middle East investor.

UBS wasn't the only one feeling the pinch, as French bank Société Générale also said on December 10 that it would take on $4.3 billion in assets to bail out its only structured investment vehicle. Washington Mutual retrenched, slashing its dividend and more than 3,000 jobs in a bid to shore up capital.

And buyout firm Warburg Pincus announced a $1 billion investment in bond insurer MBIA to calm fears over its ability to pay out claims in the mortgage-backed bond market.

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Investment Insights

As we enter a brand new year, this is the time to take a very close look at your investment portfolio and do your asset allocation in order to see how each one of your stocks - or mutual funds as the case may be - have performed with respect to their particular sector of the market. In the case of mutual funds however, you need only compare a given fund to its peer group, as well as the benchmark index to which it reflects.

Modern Portfolio Theory tells us that there are three (3) types of investors: a) Conservative; (b) Aggressive; and (c) Prudent types. And before you ever begin to make any investment, it is important to your success as an investor that you know with certainty exactly which type of investor you are, because this in turn has everything to do with your tolerance for risk. So let's briefly define each of these three investor types.


a. Conservative investors: these people think that stocks and bonds are really nothing more than other forms of gambling and therefore they seek safety primarily in CDs and in money market funds.

b. Aggressive investors: these people generally have brokerage accounts, usually with full-service brokers. They like double-digit returns, and they are always on the lookout for the next hot stock or mutual fund.

c. Prudent investors: of the three investor types, this group is the largest, and they generally fall in somewhere between the other two types. Prudent investors are rather conservative by nature, and yet they do want to earn a reasonable return on their investments so they are willing to take some risks, but only if the returns appear to justify the risk.


Asset allocation really isn't any more difficult than reading a recipe about how to bake a cake. You would do that with the expectation that by properly combining the various ingredients in the recipe and setting the oven at the recommended temperature, the end result will be the desired finished cake. And so it is as investors that we have faith in the financial markets as we separate our portfolios into clear-cut asset classes that we trust will flourish in the economic arena and thereby increase our bottom line over time.

The principal asset classes of choice for most investors are common stocks, bonds, and cash. And each class differs in risk, with stocks being the most variable, bonds less so, while cash generally maintains insignificant value due to the effects of inflation.

In setting up your portfolio, when choosing its long-term allocation to stocks and bonds, you need to consider the real return that you can expect to earn as well as the amount of risk to which that portfolio will be exposed in the course of achieving the desired return. Also, you must take into account the cost of investing because every dollar spent in management fees, broker commissions and the like, will serve to reduce your return, while at the same time increasing the risks that you must take.

Asset allocation comes with three different strategies: the fixed ratio strategy, the variable ratio strategy, and the tactical strategy.

Using the fixed ratio strategy, you would rebalance your portfolio to the desired stock/bond mix and do so approximately every year. This would involve selling off a portion of whatever class provided the highest return and then reinvesting the proceeds into the asset class with the lower return, thus maintaining the target balance.

The second strategy, the variable ratio, amounts to nothing more than simply letting the profits run without doing any rebalancing whatsoever. By doing that however, you would be exposing yourself to suffer the gyrations of the market, and the end result very probably would be a severely unbalanced portfolio that is much different in terms of risk and reward than the asset allocation you had initially.

The third strategy, tactical asset allocation, is very much like the variable ratio type except that it allows for a correction somewhere along the way should storm clouds appear on the investing horizon. This policy may actually produce somewhat better returns over the long run than either the fixed-ratio or the variable ratio strategies.

Summing it all up then, it should be clear that if your goal as an investor is to seek maximum returns with a minimum of risk, then you can become more comfortable with your investments if you will take the time to understand how the markets work, and by performing your asset allocation periodically, this will help you to better balance those factors that can influence your portfolio either for better or for worse.

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Words to the Wise - and Otherwise

"Outside of a dog, a book is a man's best friend. Inside of a dog, it's too dark to read."

-Groucho Marx


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About Closed-End Funds

Many closed-end funds trade at a discount in December, only to immediately bounce back to fair value in January. That's because investors looking to claim investment losses to ease their tax burden prompt a slew of selling.

However, as soon as the clock strikes midnight on New Year's Eve, the sellers pick up the funds they've ditched and the discount disappears. The deals are especially attractive this year.

About 75% of closed-end funds use leverage. Panicky investors have been bailing out of anything related to credit. Therefore, this is a good time to buy closed-end funds trading at a discount to their net asset value.

At www.etfconnect.com, you can see which closed-end funds are trading at a discount, as well as the size of these discounts. And the "rule" to keep in mind when buying any closed-end fund is to purchase the fund only when it is selling at a discount.

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Words of Wisdom

"An unfortunate thing about this world is that the good habits are much easier to give up than the bad ones."

-William Somerset Maugham


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An Interesting Balancing Act

For the past several years, cash on the balance sheet has seemed like a liability: a sign that management had no clear vision for growth.

Shares of highly-rated companies have underperformed those with low credit ratings by an average of seven percentage points a year over the past four years. Now, with the collapse of the sub-prime debt market plus the end of the easy-money era on Wall Street, healthy balance sheets are coming back in style.

In August, top-rate companies were up 2.3% while low-rated companies lost 1.8%. As credit markets tighten, strong companies will be able to boost market share by taking advantage of their strained competitors.

And even though interest rates have come down, investors are likely to be better off with companies that have low debt-to-equity ratios, for their industry, as well as substantial free cash flow.

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Where Petrodollars are Flowing

If there were any doubts about where the real financial action can be found these days, Abu Dhabi Investment Authority's $7.5 billion foray into Citigroup should end them.

With oil prices dancing in the $90s, the Gulf states are flush with cash. And beaten-up Western banks look cheap, which is why Abu Dhabi put aside worries about the tumbling dollar and on November 26 came up with what will eventually convert into a 4.9% stake in Citigroup.

Gulf bargain hunters aren't confining themselves to banks. Dubai International Capital, a government vehicle, announced on November 26 that it had acquired a stake in Sony, believed to be less than 5%. And to give Gulf investors something to buy, Dubai listed 23% of DP World, the big port operator, on its own bourse for a staggering $5 billion.

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Bad-Mouthing The Dollar

Two America-haters took turns bashing our currency at a special OPEC meeting in Saudi Arabia on November 17-18. Iranian fascist Mahmoud Ahmadinejad said: "The U.S. dollar has no economic value." And Venezuelan dictator Hugo Chavez stated: "The dollar is in free fall, everyone should be worried about it."

Indeed, the greenback fell to a new low against the euro on November 20. But oil producers are putting pressure on it as well. Iran and venezuela would both like to see oil priced in other currencies, a process that has begun in Iran.

Kuwait has switched from a dollar peg to a basket of currencies, while the United Arab Emirates is considering such a move. Saudi Arabia argues that such shifts put OPEC's billions of dollars of reserves at risk, but it may be forced to at least revalue the riyal.

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