Historically, fighting inflation has been the primary focus of  the Federal Reserve. Its main weapon in the battle against rising prices is the ability to control the flow of money. The Fed has at times been so aggressive in its actions against inflation that it has actually driven the economy into recession by tightening the money supply too much.

So when the Fed cut interest rates by half a percent, that surprised many Fed watchers, who were expecting a less aggressive quarter-percent cut. Don’t forget that the Fed had already unexpectedly cut the discount rate by a half percent. 

Does that mean Fed officials believe inflation is under control? Not necessarily. The same statement that announced the Sept. 18 rate cut said this about inflation: “Readings on core inflation have improved modestly this year.  However, the Committee judges that some inflation risks remain, and it will continue to monitor inflation developments carefully.”  In fact, there are quite a few experts who believe that inflation remains a significant threat.

One of the traditional means of measuring the potential for inflation is the price of gold. Right now, the price of gold is nearing its all-time high.

On the chart below, the gold line is the price of gold, while the black line is the Nasdaq for comparison. The price of gold spiked and peaked in May of 2006. Since then is has mostly drifted sideways. But there has been a renewed surge over the past few weeks.

Here are some comments about the price of gold from U.S. Rep. Ron Paul (R-Texas) made before Congress in April 2006: 

“Buying gold and holding it is somewhat analogous to converting one’s savings into one hundred dollar bills and hiding them under the mattress – yet not exactly the same. Both gold and dollars are considered money, and holding money does not qualify as an investment. There’s a big difference between the two however, since by holding paper money one loses purchasing power. The purchasing power of commodity money, e.g., gold, however, goes up if the government devalues the circulating fiat currency.

“Holding gold is protection or insurance against government’s proclivity to debase its currency. The purchasing power of gold goes up not because it’s a so-called good investment; it goes up in value only because the paper currency goes down in value. In our current situation, that means the dollar.” 

Of course there are also experts who believe that the price of gold is not a good indicator of the likelihood of inflation. I could fill this paper with arguments for both sides. Right now the only important factor is that the price of gold is going up and that could mean higher inflation will follow. But that doesn’t mean you should go out and buy gold. Under the best of circumstances gold can only be considered as a speculative investment.

Have a great weekend.

F.S.
If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group.  This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call me, Flint, at 800-279-3377.

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Now is the time to put hay in the barn, literally and figuratively.

I keep a few horses on my property. They are mostly entertainment for my kids and grandkids, although I certainly enjoy them as well. In Utah we’ve endured a particularly hot and dry summer. Because of the drought conditions, hay production is well below normal years. We’ve probably still got a few weeks of good fall weather left, but inclement conditions usually hit hard sometime in October. In preparation for those nasty days, area livestock owners are taking advantage of these last few good weeks to fill their barns with hay. My loft is full and in the next few weeks, I’ll be adding more to my supply. By the middle of October, I’ve got to have enough to last until a new crop of hay is ready in May 2008.

For investors, this is also traditionally a good time to put hay in the barn. The period from September through the end of the year has historically produced more market gains than any other season. Thanks to the Federal Reserve’s slashing of interest rates, that is likely to be the case again this year.

The cart below shows the price action of the Nasdaq over the past two years. Notice that the market advanced in the fall of 2005 and 2006. The rally in 2006 was the strongest in several years. Now it appears that stocks could be on the verge of another strong run in spite of record oil prices and sub-prime mortgage woes. It would be surprising if this advance were as strong as the one that ended 2006. But it would not be surprising to see stocks end the year several percentage points higher than current levels.

Over the past three months the market sectors with the highest returns have been natural resources (oil and energy), technology, or emerging markets. There is a high probability that these sectors will continue to lead if this rally endures. Below is a list of the top 30 ETFs and their three-month returns. Note that funds with the word “ultra” as part of their name are generally performance enhanced. That means their volatility is increased (and their gains or losses) buy using options, futures, or other types of derivitives.

Have a great weekend.
F.S.

If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group. This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call me, Flint, at 800-279-3377.

You requested this MarketOwl free e-newsletter. Please add support@marketowl.com to your e-mail address book to ensure prompt delivery.

There have been no dramatic changes in market activity over the past week. Wall Street is still trying to sort out what the Federal Reserve is going to do with the economy and until traders and investors have a better idea of what will occur, stocks are likely to continue to fluctuate wildly.

One thing for investors to keep in mind is that Wall Street generally takes a pessimistic view of the economy. Rarely are traders surprised by negative events in the marketplace. Anticipated negative occurrences are priced into the value of stocks well ahead of the actual announcement, in most cases.

Wall Street has been aware of the problems in the sub-prime mortgage market for more than a year. The recent problems were not a surprise to traders. So we can expect that Wall Street has already discounted stocks to account for most of the expected damage. So while major indices will still retreat on days when there is negative news, we can also expect significant market gains when the news is positive.  Of course there are many factors that can influence the markets in addition to the mortgage industry. But right now, that is the sector that is garnering the most attention. 

In these weekly commentaries I refer frequently to moving averages. Moving averages (MAs), are one of the simplest and most basic tools of technical analysis. They also happen to be among the best tools. Today I want to give an example of how an investor can use a simple MA to help make investment decisions.

Let’s start with a basic definition of a MA from Wikipedia: “In statistics, a moving average is one of a family of similar techniques used to analyze time series data. It is applied in finance and especially in technical analysis. It can also be used as a generic smoothing operation, in which case the raw data need not be a time series.”

In the case of investments, the time series of data being considered is the price. There are actually many different kinds of MAs: exponential, weighted, central, and prior, for example. But for the purposes of this explanation, we are only going to discuss a simple moving average.

The black line on the chart below shows the daily closing price of one of the funds in our Foundation Strategy, the Fairholme Fund (FAIRX). The blue line is a 200-day MA for that fund. The gold line is the Nasdaq, included for comparison purposes only.

As mentioned in the past, my main consideration in choosing an investment is the direction and duration of its trend. In other words, I like to buy funds or stocks that are going up and have been going up for a long time. For me, a 200-day MA works very well in helping to identify funds that are in long-term trends. In this case you can see that FAIRX reached its 200-day MA in the most recent correction and then rebounded. The same occurred in the correction during the summer of 2006. The last time this fund was below its 200-day MA was in the first quarter of 2003–that’s a long upward trend.

For many investors a 200-day MA is too long for their tastes. They prefer something shorter–sometimes much shorter. I know day traders who spend a lot of time watching three, five and seven-day MAs. The shortest MA I usually utilize is 50 days. A 50-day MA is more practical when investing in volatile funds. For example, if you are using a short fund to hedge a long position a 50-day MA or even a 35-day MA makes much more sense than something longer.

A 50-day MA is also useful when deciding to re-enter a position that you sold to manage risk. For example, if FAIRX had broken down through its 200-day MA on the last correction and I had sold to minimize downside risk, I would have used a 50-day MA to determine when to buy back into the fund. Once a new rally was underway, the 50-day MA would help me capture more of the advance, as long as other indicators confirmed that the rally was genuine.

If you are interested in the mathematics behind moving averages, do an internet search and you can easily find formulas for every kind you could imagine.

Have a great weekend and enjoy the onset of fall. It’s still unseasonably hot here in Utah, but the leaves are changing colors at higher elevations in the mountains.
F.S.

If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group.  This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call me, Flint, at 800-279-3377.

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The market continues to show increased, uncomfortable volatility, but in recent sessions, positive moves by the major indices have outweighed the negative. In fact, most of the damage that occurred during this correction has already been undone. The Nasdaq has climbed back to the level where it was at the beginning of July, which just happened to be a multi-year high. The S&P 500 and the Dow are still lagging as this recovery is being led by the technology sector, but they have also substantially recovered.

The chart below clearly shows that the recovery has been as dramatic as the correction. The black line is the daily closing price of the Nasdaq. The gold line is a 50-day simple moving average. Notice that the index has climbed back above this average. There is also confirmation from other technical indicators that the situation is much better. The middle section of the chart is a moving average convergence divergence (MACD). It shows that momentum is positive and the MACD is on the verge of moving back into the positive area. The bottom portion of the chart is a relative strength index (RSI). It has climbed back above 50, another sign that market momentum is positive and that the Nasdaq has the strength to sustain a rally.

The combination of these and other technical indicators paint a picture of a market that is growing in strength and momentum. For individual investors, that means this is a good time to think about putting assets back into the market. If you bailed out of any positions to reduce your risk exposure, now is a good time to look at getting back in. One word of caution, though. This recovery has been rapid and steep. So it would not be surprising to see stocks retreat slightly or at least move sideways for a few days.
F.S.

If you would like an investment strategy that attempts to minimize risk but still provides the opportunity for solid growth, check out the Foundation Strategy from Strategis Financial Group.  This actively managed strategy is designed to take advantage of the experience and expertise of some of the nation’s best mutual fund managers. To learn more, call me, Flint, at 800-279-3377.

You requested this MarketOwl free e-newsletter. Please add support@marketowl.com to your e-mail address book to ensure prompt delivery.