Get Ready For an Avalanche of Blog Entries

The stock market has somewhat resembled a seesaw this past week, which has lead me to “burn the midnight oil” regarding the rigorous review of all portfolio holdings at WFG. I have also conducted an in depth analysis of what the real facts are regarding the strengths and weaknesses of the U.S. and world stock markets.

Studies of stock market history reveal that based upon the 40-50% stock market bounce, that there is a 71% probability that a 10% “correction” will take place⁽¹⁾
. The correction in July of 5-6% did not meet the 10% threshold.

As we have learned (which too many have forgotten) from past cycles, the longer and higher the stock market climbs without the “needed” correction(s), the more brutal and large the correction when it comes. Historically, there is a bear market (at least a -20% decline) every THREE years. When is the last time that happened?????

The 1980’s were essentially straight up like a rocket! Reagan and Clinton were very good for the stock market.

Then came the 2000-2002 tech bubble implosion of -48% on the S&P 500. This made up for the lack of normal market behavior.

Then came the five up years of 2003-2007. Beginning in late 2007, we began the worst (and fastest) stock market decline since the Great Depression!

Investing lessons:

1. Markets DO NOT go straight up, especially after increasing 40-70%.
2. The longer and higher the gain, the deeper and longer the potential pain (owe!)
3. Greedy investors make money and then often lose it and possibly more.
4. “Risk Measured” investors have more money ten years later than they started with.

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(1) Srategas Investment Strategy Report, 5/18/09

History Reveals Caution Is In Order

Studies of past economic cycles reveal that no secular bear market in history has ended with a V bottom reversal⁽¹⁾. That said, there is a first time for everything.

While WFG portfolios have fully participated in the tremendous recent rebound from the March 2009 market lows, it is important to recognize that the “worm can turn” at any moment.

We will continue to observe the rules of good security selection: restrict purchase considerations to securities that represent historic good value; and, diversify, diversify, diversify. More about how we will be approaching diversification coming soon to this blog.

(1) Source: Investment Quality Trends

Investing lesson:

Markets can go down as quickly as they go up!

To view my blog in its original glory and formatting, visit http://jerry-b-wade.blogspot.com.

Quote Of The Day

"The favorable stock market expectations and even more favorable personal portfolio expectations don’t seem to line up well with views of the economy, interest rates, taxes and government stimulus plans.

Confidence improvements may warrant a better market, but improvement within negative parameters does not warrant persistently strong markets.

We have gone from a brush with near death to very sick, but are not yet healthy".

Richard Shaw

Investing lesson:

This is no time to become giddy, over committed or complacent. Stay alert.

To view my blog in its original glory and formatting, visit http://jerry-b-wade.blogspot.com.

Time to Take "Some" Chips Off The Table

After a difficult 2008, the model portfolios we manage at Wade Financial Group, Inc. (WFG) thus far have had an exceptional 2009. Across our various strategies, we are on average significantly ahead of our benchmarks. Below you will find a sampling of results as of 7/24/09:

Portfolio	2009 Results as of 7/24/09
Benchmarks
Schwab Money Market	0.2%
Barclays Cap. Agg. Bond Index	2.6%
S&P 500 Index	10.0%
50/50 Mix Barclays C.A. Bond/S&P 500	6.7%
Wade Investments Portfolios
WI CA Bond	16.1%
WI AA/TRA	14.3%
WI DCS Balanced	15.5%
WADEX Fund	8.7%
WI AP-AIA	14.9%
WI CA U.S. Stock	10.0%
WI CA Global Stock	16.5%

From its March low, the S&P 500 index has jumped a whopping 44.7% as of 7/24/09. Over the past month, world stock markets experienced an approximate 10% correction, just to battle back to 2009 highs as of last Friday.

Despite the growing consensus view that the U.S. is coming out of the recession, I am suspicious of the “glow” that too many prognosticators are placing on the potential pending economic recovery. There is only so much cost cutting and layoffs that corporations can do to improve their earnings. With more layoffs coming, a real estate/liquidity market that has yet to fully unthaw, a still tapped out consumer, trillion dollar budget deficits and probable tax increases, it is hard to buy into the “recovery glow” forecast.

Contrarian Investing

It was in March of this year that all of the above numbers in the table (except money markets and bonds) were seriously in the negative. Many investors got scared, sold their stock investments and parked the proceeds in a money market account. Please notice the return of 0.2% thus far in 2009 for the Schwab Money Market account. We stuck to our guns and remained invested for what we felt would be an explosive recovery that did indeed happen (44.7%). After these attractive returns that we have achieved for our clients thus far in 2009, prudence dictates that it is now time to “take some chips” off the table. The following moves have taken place this week:

Portfolio	Prior Stock Exposure	New Stock Exposure
WI AA/TRA	65%	56%
WI DCS Balanced	54%	51%
WADEX Fund	55%	49%
WI AP-AIA	50%	40%
WI CA U.S. Stock	88%	88%
WI CA Global Stock	91%	91%

The sale proceeds from the reduction in stock exposure have gone to three areas:

1. Cash
2. Managed Commodity Futures
3. Managed Foreign Currency Futures

You may recall that in 2008, the Managed Futures asset class was one of the few that actually made money, other than Cash and U.S. Treasury bonds. We like Managed Futures because of the low historic correlation to stocks. To speak in plain English, low correlation means that when one asset category “zigs” the other “zags”. True to form, while Managed Futures did well in 2008, the category has lost approximately 5-10% thus far in 2009. We think that it now makes sense to sell stocks that have gone up 44% (or 60% for Emerging Markets) and reallocate the proceeds to a category that we feel can do well if the stock market experiences another significant downturn, of which, can happen at any time!

Preview of Coming Attractions

I have spent the past two weeks performing an exhaustive analysis of the “low correlation” investment thesis. The challenge to the strategy is that history does not always repeat itself.

• In 2008, the benefits of diversification into asset classes that had historically offered the “reduced correlation effect” all but evaporated.
• The challenge is ongoing in regards to how to mix the “investment soup” so that it results in the desired pleasing taste (avoidance of steep losses).
• The soup tasted bad in 2008 and we are applying significant resources to reorient our portfolios moving forward so that the severity of 2008 it not on the menu in the future.

Within the next month we will unveil a “reengineered” approach to portfolio management that will place the focus sternly on what we believe will be an improved approach to the preservation of capital across future economic storms.

Investing lesson:

Moving to an “all cash” position, as many self-directed investors did at the beginning of 2009, ruined any chance these investors had of recouping losses experienced in 2008. It never makes sense to make all or nothing bets on the direction of the stock market. Congratulations to all readers of this blog that did not fall prey to the temptation of “selling at the bottom”.

To view my blog in its original glory and formatting, visit http://jerry-b-wade.blogspot.com.

I Am Back!

After starting my blog a number of months back, I have played hooky for two months. The time out is over and I will be bloviating on a more regular basis moving forward!