April 25, 2009

Market Insights 25-Apr-2009

Weekly Snapshot
• U.S. new home sales fell 0.6 percent in March but beat expectations
• U.S. durable goods orders dropped 0.8 percent last month, better than the 1.5% decline expected by economists
• Ford posts $1.4 billion 1Q loss - better than expected - will restructure without government aid
• Fiat considering a bid for Chrysler and/or Opel
• Apple reported second-quarter EPS of $1.33, vs. $1.16, on an 8.7% rise in revenues
• Microsoft announced quarterly revenue fell from the previous year for the first time in its 23-year history
• US jobless claims rose 27,000 to 640,000 last week
• US existing home sales fell 3% in March
• IMF forecast world economy to contract by 1.3% in 2009
• Germany's economic institutes forecast a fall of 6% this year the biggest decline since 1949
• The new UK budget is largest peacetime fiscal expansion ever; fiscal deficit of 12% and a debt ratio of 80%

Recommended Read - Getting Started With ETFs
Charles Schwab recently published a good primer on investing in Exchange Traded Funds (ETFs). http://www.schwabtradinginsights.com/2009_04/trading.html

I have frequently made the case for investments in ETFs as opposed to Mutual Funds or trading individual stocks. There is ample evidence that low cost index funds, particularly the traditional low cost ETFs such as the low cost Vanguard ETFs and other index trackers like SPY outperform the majority of mutual funds. Just this week, Standard & Poor's released the results of a study comparing the S&P Index versus actively managed mutual funds: http://www2.standardandpoors.com/spf/pdf/index/042009_SPIVA-PR.pdf

"Over the five year market cycle from 2004 to 2008, the SPIVA scorecard shows that the S&P 500 outperformed 71.9% of actively managed large cap funds, the S&P MidCap 400 outperformed 75.9% of mid cap funds, and the S&P SmallCap 600 outperformed 85.5% of small cap funds. These results are similar to that of the previous five year cycle from 1999 to 2003."

This data is particularly interesting since conventional wisdom would suggest that an actively managed portfolio would do better in a bear market. One would think that the highly paid professionals would have an edge and pick better performing stocks. And yet, professional managers, by a vast majority, underperformed the respective indices. Again, I question the notion of higher fees for these illusive higher returns.

Going back to ETFs, their growing popularity has led to the development of all types of ETFs including leveraged and inverse ETFs. We shall look at some of the more obscure ETFs in the coming newsletter. In the meantime, please email for a free list of the lowest cost ETFs. As always, you should carefully read the ETF disclosures and also understand the underlying holdings. Not all ETFs are suitable for the average investor.

Simple Math concepts - often misunderstood
Numbers are part of our daily lives and even though most of us (should) have a pretty good grip on basic math, one does forget the sometimes deceiving nature of some numerical concepts. Percentages for instance - an illusive concept to some and the daily bread to others. One very deceiving aspect of percentages arises from the fact that a 50% loss requires a 100% gain to break-even.

Here's why: If you bought XYZ company at $10 per share and the stock is now trading at only $5. To get back to your original purchase price you now have to achieve a 100% return. Each time, the nominal value is a $5 gain or loss but in terms of percentages those are vastly different returns. The concept is most stunning when looking at individual stocks that have shown strong recoveries recently but are still down significantly from their highs.

Example: As of Friday, Citigroup is up 228% from this year's low. However, the share price is still down over 93% from the highs in 2007. A good illustration of the break-even curve is seen at the chart below.

Source: http://dshort.com/articles/2009/break-even-curve.html

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Good luck & good trading!

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