May 2005

Recession Watch Alert

While not all of my prognostications for the year are doing very well, thanks to the dollar's 10% rise against the Euro already, John Mauldin passed along a very interesting article regarding the Index of Leading Economic Indicators (LEI index) in yesterday's Outside The Box that deals very well with another one of those same prognostications of mine, the possibility of a recession.

For those of you who may have just come across this blog for the first time, John Mauldin is the author of Bull's Eye Investing and publishes 2 articles a week that are on my must read list the moment they hit my inbox. Well, the article in question is no different and is passed along to us via Northern Trust's Weekly Economic Commentary for the week of May 20th. (PDF file)

While I highly recommend reading the entire article, the basic premise that I'd like to highlight is that most economists tend to ignore the very LEI index that was developed to forecast the possibility of impending recessions and that we are currently entering just such a period of denial.

Currently the LEI index, according to this article, is beginning to point to a recession hitting the US sometime in 1Q. Now while the article does point out the possibility of a false positive, or in this case negative, it also points out that that possibility is rather low in this situation, considering the 0.77 correlation between the LEI index's turning negative and an official recession designation.

In fact, according to the LEI index I would say that we are on an official recession designation watch and if the Fed proceeds to raise short term interest rates "too far", as they historically tend to do, we will have the recession by the end of this year, although the official designation would probably not come until 1Q, 2006.

I know a number of people are coming out and stating that the Fed will pause after the July rate hike, but to be 100% honest with you, I'm not so sure.

But even if they do, with the 10 year note dropping the way it is, the yield curve will probably be less than 33 basis points by then no matter what they choose to do.

We shall see.

Investor Education

Back in December, I introduced everyone to an excellent, and free, investor education website, that has some very comprehensive learning materials.

The drawback is that while 21st Century Investor Education has these comprehensive tutorials available online for anyone to access, they are unable to actually present you with any sort of degree upon completion.

Fortunately for someone like myself, who plans on making a more long-term career out of investing and advising, there is an alternative.

The Market Technicians Association (MTA) has a certification process that is referred to as the Chartered Market Technician (CMT) Program and as of today I plan on beginning the process to eventually become a CMT.

After the consultation I had with Robert, the speaker at last week's conference, it is my belief that the CMT designation will assist me in developing the investment club(s) that I've been talking about recently.

My Mom has generously announced her assistance to my further education and eventual receipt of the CMT designation, by proposing to grant me up to 1/3rd of the cost of the first year in the CMT program.

This means that I have until September to come up with the remaining money in order to begin the process and take the first test this year.

An Investment Club

On Wednesday, I attended an all day conference in Irving that mostly dealt with options. I got some good confirmation of the benefits of some of the options strategies that I want to employ in the future, whenever I get more serious about options investing.

Of more immediate benefit however, was a very good conversation I had at the end of the day with one of the speakers regarding money management.

In the last issue of Investing With Mom, I discussed the idea of an investment club that would mirror what I'm doing with my mom's money and that was exactly what this speaker and I discussed.

He gave me a couple of websites to check out and then he suggested that I might start working on some certifications that would help my credibility, since I'm not sponsored by a brokerage house.

While I would like to say that this is going to be put together sometime soon, I must exercise a more patience than that.

I will keep you all informed however and as always, I'm open to any suggestions, even if I don't follow through with each and every one.

Finally, I would like to solicit some referral feedback from my Advisory subscribers. You will find the link below the airline tickets on the current issue page of the Advisory.

I may eventually open this particular request for referral feedback up to everyone else, but for now it's going to a site that is soliciting paid referrals and I feel more comfortable restricting it to those who have paid for my advice. We'll see how it goes.

Early Returns On Investment (ROI)

Saturday morning, at a small town track, just outside of Austin, I got the opportunity to witness some very rapid returns on investment.

A young lady from my track club, whom we shall refer to as AL, was given the opportunity to compete in the javelin and the hammer for the first time in her life.

AL is already an accomplished shot putter and discus thrower for her age, having won a county-wide junior high championships this spring in the discus and placing second in the same meet for the shot put. In fact, she qualified for the USA Youth Track & Field Championships in the discus, before the spring season was even half way over.

We were hoping that AL would be able to utilize the meet in Austin to reach the qualifying standard in shot put and see how well she might do in her first competition in the javelin.

The hammer isn't a priority this summer, as she's still too young to compete in it, but it was another testing opportunity.

The early ROI showed up however, during the very first throw in the javelin. AL had exactly 2 practices prior to Saturday's competition with the javelin and yet, with her first throw she exceeded the qualifying standard for her age group by nearly 2 feet!

That's what I call early ROI!

The shot put was a more normal situation, AL came into the meet 12 inches short of the qualifying standard and managed to improve her lifetime best by 2 inches. A very good showing, but still short of the standard by 10 inches.

Occasionally, when investing you get early returns on your investment. Most of the time, the opposite is true and you have to patiently wait until you get the results your looking for.

I could provide numerous examples in both categories from my own personal investing and from the history of the Investing With Mom portfolio, but the main criteria for early ROI is the time frame you invest with.

Here at Investing With Mom, our time frame will vary with each stock we recommend, but I can say with all certainty that usually our time frame will exceed 12 months. The reason for this is the fundamental research we want to be sure and perform, but occasionally even the fundamental research leads to a short term early ROI situation.

In fact, of the recent sell recommendations I have provided my paid subscribers, 2 of those stocks were recommended less than 12 months ago and had provided a level of early ROI.

A final thought regarding AL and her performance in the shot put, don't worry about her, she still has another 2 or 3 opportunities to qualify before the deadline and I have a lot of confidence in her and believe that she will have no problems doing so. In fact, our biggest challenge this summer may end up being that she will only be allowed to compete in 4 events, which could keep her out of an event or two because she'll be unable to compete in all the events she is capable of.

That brings me to another investing principle, limiting yourself to areas of core investing knowledge for maximum returns, but I'll save that for another post.

Sell, Sell, Sell

Just sent 2 more sell alerts to my paid subscribers. Full details will follow this weekend, once I return from the 13th Annual Waterloo Track & Field Championships.

The first of these 2 stocks has been a fantastic gainer for us, but it is the second one that provides the most interesting story going forward and that's why we're only selling part of our position.

We hit our original target for this stock within a couple of days of when I said we would in my original recommendation. However, the stock is highly likely to continue it's upwardly dash throughout the remainder of the year, just as it did last year. That's why we're keeping half of our original position intact.

Now I'm off to race and coach all day today and tomorrow. We'll see if I can run just a little faster than Tuesday night's embarrasment at the Luke's All-Comers Meet.

Yield Curve Flattens

I've been saying for some time now that I believe the yield curve could invert later this year. (Even included that in my outlook for 2005.)

One thing is for sure, no matter what happens with the yield curve going forward, it is definitely flattening out right now. In fact, we'll probably end up with a humped yield curve, whether it inverts eventually or not.

Well, last night I stumbled across a couple of excellent websites that had good information regarding the yield curve.

First off, you should check into Uncle Jack's commentary regarding the Fed, then take a look at the link he provides to the Smart Money website. The annimation they provide is outstanding and if nothing else, will definitely make you pause and think.

Finally, for those of you who know exactly how careless Greenspan has been in allowing bubbles to grow under his watch, there is a definite possibility that he will not be leaving as planned this coming January.

The key to watch will be whether Bush can have a replacement ready to go or not. If not, then Greenspan must stay until such time as a replacement can be found.

He may not like it, but Greenspan could easily still be in charge when the next recession hits!

Just something to think about.

Investing IQ

Occasionally, one of the investment newsletters that I subscribe to provides information that is not only worth knowing, but would make for a great quiz.

Fortunately, in this particular case I didn't even have to write the quiz. Instead, I'll just give you that link and let you test yourself.

Prior knowledge of the Investment University newsletter is not a pre-requisite to doing well on the quiz, but it sure can't hurt.

Oh and by the way, I scored 4 out of a possible 5 points.

The last time Steve tested his readers, I scored a perfect 5 points. All I can say is, have fun with it.

The Purest Form of Venture Capital

Is where clients invest in a company through their purchases, because they support the idea that the  company represents. Although it has taken a while for this to be coherently developed, here is the Investing With Mom take on this form of Venture Capital.

The Reality Equity Analysis & Brokerage Firm is the future for Wall St., the amazing thing is that they don't know it yet, because it doesn't fit in with their preconceived notions of how finance ought to work. It's already in testing, but I won't be able to unveil it until the Venture Capital begins to really flow.

Finally, the most frequent question I receive relates to how people can invest when they don't have time to read any analysis at all, including mine. Fortunately, a solution has been developed, but if you want to know more, you'll have to read the rest in today's issue of Investing With Mom.

Social Security Thoughts

For those who might not have received last weeks issue, I wanted to make sure you've seen it before I publish the next issue of Investing With Mom.

There were some updated thoughts regarding the President's plan, as well as a plan put forth by an economist.

Hopefully they will make you think.