Clausen Capital Management

CCM Weekly Market Analysis for May 16, 2012

admin — Wed, 16 May 2012 13:37:23 +0000

Overview of the Market Environment for ProActive Investors

Newsletter: Step right up. Take your pick and choose the reason why the markets are declining. Could it be the electoral mess in Greece, the growing reality the Euro Zone may breakup, the deepening recession in Europe or the potential recession here in the U.S? Maybe it is the ‘stupid actions’ inside JP Morgan or commodity prices sliding ever lower or perhaps it is something as innocent as “Sell in May and Go Away” So many choices, so little time before something bad happens.

Are these simply emotional headlines which scare the “little guys”? Is the Fed waiting in the wings with QE3 to bail us out and save the day?

When evaluating the markets, we see the declining trend. In fact, we see technical charts with topping patterns. There is no way to know the markets have topped until after the fact. The current decline has been more like a slow motion train wreck, not the usual rapid plunge. There are a significant number of economic and Geo-political cross-currents pushing and pulling the markets. However, few of the indicators we follow point to a sustained bull or bear move over the short term. The markets remain range bound in a technically negative market environment.

Year to date, market volume has been anemic. Interestingly (at least to us) is the increase in volume the markets have been experiencing since the end of April. Such a strong sell off on increasing volume usually indicates some level of investor capitulation. This often indicates a market bottom. Time will tell if this is correct. The markets are oversold and a rebound would not be unexpected.

If the markets do fall through the current level of support, the next decline could be much more impressive based on heavy selling. Of course the Fed could throw massive amounts of liquidity at the declining markets. Another dose of easy money could lift the markets just like it did the past several times it was initiated. Caution: at some time this easy money will dry up.

Summing It Up: Market risk remains high. The overall market environment remains weak. In spite of negative news the markets have held up as well as could be expected. They remain in a trading range but they are knocking on ‘Support’ and a drop below this line would be ugly. Remain conservatively invested.

Market Risk Environment

The Chart indicates when market risk is in our favor or when market risk is not in our favor over a 12-month period.

Market risk continues to increase. Without a change in this negative sentiment, risk will continue to increase and drive investors further away from the markets. We are only holding onto several positions because the markets are oversold and may rebound. At this point, the markets must move above ‘Support’ and recover.

The Signal Ribbons at the bottom of the Chart2 are green, indicating a Buy and red, indicating a Sell.

The Signal Ribbons Chart indicates 0 of our 10 technical indicators are positive.

Chart Key:

Market Risk Environment

Red Line = daily average of technical market risk environment indicators.
Green Line = 21 day moving average of technical market risk environment indicators.
Blue Line = 50 day moving average of technical market risk environment indicators.

Buy & Sell Signal Ribbons from 10 technical indicators.

Green Signal Ribbons indicate a positive market risk environment.
Red Signal Ribbons indicate a negative market risk environment.

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Market Correction Ahead

admin — Tue, 15 May 2012 18:30:38 +0000

George Clausen’s article, Market Correction Ahead, was published Thursday May 3rd, on Morningstar.com

Market Correction Ahead

Why is that, and what can investors do about it?

Submitted by George Clausen on Mon, 0503/2012 – 3:001pm

The U.S. stock market moved up again last week after two weeks of decline. That sounds like what’s called a trading range – stocks fluctuate a percentage point up or down, but basically build no trend. Don’t be fooled. We are heading into a correction, defined as a slump of at least 10%.

Why is that, and what can investors do about it?

I am a technical analyst, which means I look for price trends. I assess patterns in trading. The major domestic indexes as measured by SPDR S&P 500 Trust (SPY), SPDR S&P MidCap 400 (MDY) and iShares Russell 2000(IWM) have broken their trend lines, established by their market bottoms in October 2011. In Europe, the indexes gained last week after four straight weeks of decline and Canadian stocks, as measured by the TSX, reversed a seven-week slide.

While the domestic markets have had several strong days during the past week, from a technical standpoint, they are weakening as measured by lower highs. The majority of our indicators, which measure the technical underpinnings of the market, are moving toward a negative bias. Best advice is to: Beware of bears emerging from their lair.

The markets are topping, but understand a topping action can last for weeks or months. It can take a long time for investors to reduce their holdings as the result of the markets becoming increasingly risky. This is not the time to panic and move to cash; however, it is also prudent to keep an eye on the exits.

This rally has been technically driven, not driven on business fundamentals. This inherently weakens the foundation of the rally.

With a market in a potential negative transformation, equities have become a more risky proposition. A more conservative bond oriented portfolio would offer some limited gains but without the downside exposure of the equity markets.My firm has taken positions in these exchange-traded funds: iShares Barclays Aggregate Bond (AGG), iShares Barclays 1-3 Year Treasury Bond (SHY) and iShares Barclay TIPS Bond (TIP). Since April 1, the TIPS fund (it stands for Treasury inflation-protected securities) is the best performing of these ETFs.

While these are not exciting positions in a normal market environment, they clearly surpass the gains made in any number of money market funds while the equity markets attempt to find their footing. At this point we are more interested in preserving assets and recent gains than proving our machismo on the trading floor.We are also considering a position in iShares J.P. Morgan USD Emerging Markets Bond Fund Barclay TIPS Bond (EMB). This seeks to correspond generally to the price and yield performance (before fees and expenses) of the JPMorgan EMBI Global Core Index, which purchases emerging market debt.

The markets are going through an overdue correction. Clearly, the markets have come too far, too fast, off the 2011 lows. The benchmark Standard & Poor’s 500 index is up 12% for the year and almost 30% since last autumn’s low point. After the correction, we expect investors to buy on the dip and the markets to retest recent highs. Late April and early May are typically strong months for the markets.We remain conservatively invested because after late May, it becomes statistically relevant that gains are much more difficult to achieve.

George Clausen is president of Clausen Capital Management in Charlotte, N.C.

That Sell in May Adage

admin — Tue, 15 May 2012 18:18:08 +0000

George Clausen’s article,That Sell in May Adage, was published on AdviceIQ.com

That Sell in May Adage

Submitted by George Clausen on Mon, 05/14/2012 – 3:00pm

There is an old trading adage: “Sell in May and go away.” The thinking is that stocks slump in the warm months, and recover in the fall, so why go through the pain? The adage is wrong, though.

Typically, May is a decent month for market gains. But June through September is usually very trying for investors. Maybe the best option is to sell your equity positions the last market day of May.

According to investment newsletter guru Mark Hulbert, May was the second worst month for the Dow Jones Industrial Average from 1896 until 1990 (September was the worst). But that situation has improved since. Ranked by average returns over the last 22 years, Hulbert says, May is third best.

The market is off since early April. Thus far in May, the Dow, as measured by the SPDR Down Jones Industrial Average ETF (DIA), is down 3%. Lately, the Dow is in a trading range. For the next two weeks, it likely will stay there, unless some negative news event occurs. After that, expect it to head further south.

How do we know this? While market volumes have been weak most of 2012, over the past week, selling volumes increased substantially, compared to the past six months. Institutional shares continue to be held by mutual companies, but the general public is starting to sell their holdings.

After a short break in January and February due to the strong markets, the average stock investor continues to move out of equities and back into the safety of the bond market. A recent Bloomberg article suggests equity fund redemptions in April were the largest in 17 years.

We see increasing volumes especially in bond exchange-traded funds: iShares Barclays TIPS Bond Fund TIPS,iShares Barclays Aggregate Bond Fund AGG and iShares Barclays 1-3 Year Treasury Bond Fund, SHY.

Recently, my firm ranked the stocks in the Russell 1000 and found only 11% of them are buys based on our criteria. The remaining 89% of the stocks are either trending sideways or down. Measure the performance of the ETF tracking small stocks, iShares Russell 2000 Index (IWM), since early April compared to AGG, which covers the index for investment-grade bonds. This will help you understand the direction of the current markets: The Russell benchmark is down 5% versus the bond index.

Looking at the big picture perspective, the Standard & Poor’s 500 stock index is exhibiting technical behaviors consistent with a developing market top. In other words, it should soon fall. A sell signal could be triggered in the next several weeks (if not sooner) if the markets do not reverse course and trend higher. We moved our client accounts out of two stock index funds, SPDR S&P MidCap 400 ETF (MDY) and SPDR S&P 500 ETF (SPY), several weeks ago.

Speculation and rumors will dominate due to the European elections and the upcoming U.S. elections. Europe’s economic slump and President Barack Obama’s tax-the-rich proposal will have little immediate impact on markets. We want to assess the impact of the recent French and Greek elections, where socialist-leaning candidates ousted the establish governments. In the U.S., presidential election years tend to see more volatile markets. Longer term, however, both Europe’s turmoil and the U.S. elections will hurt stocks because they create a divisive and bearish overtone.

Market risk remains high and risk is beginning to tip the scales to the negative. While the markets remain in a trading range, they are declining to the point they may test support. This does not mean the situation won’t change again, but it certainly means that investors must keep a close watch. Hold your ground for now and remain conservatively invested.

George Clausen is president of Clausen Capital Management in Charlotte, N.C.

AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty. For instance, the rankings this week measure the number of clients that have between $250,000 and $500,000 of investable assets with that advisor. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.

Topic:

Investing

Stocks

Asset Allocation

CCM Weekly Market Analysis for May 9, 2012

admin — Wed, 09 May 2012 13:28:04 +0000

Overview of the Market Environment for ProActive Investors

Newsletter: There is an old trading adage which cautions, “When something is supposed to go up and does not, it is going down.” Since April 5^th, the markets have moved down with much more conviction than they have moved up. They now sit at support albeit they remain within the established trading range. Any significant penetration of support will establish a new trend, a negative trend. Clearly the markets are struggling to regain the momentum from the rally which stated in October 2011.

We read many blogs and articles which express opinions about the markets and a number are indicating this year the “Sell in May and Go Away” adage will not be the operative phrase. We disagree based on what we see technically and we are close to making portfolio changes based on the loss of momentum and lack luster indicators.

Looking at the big picture perspective, the S&P is exhibiting technical behaviors consistent with a developing market top. A sell signal could be triggered in the next several weeks if the markets do not reverse course and trend higher. For now, this week could be a rollercoaster ride or a quiet walk because there are few economic reports being released. Speculation and rumors will dominate due to the European elections and the upcoming U.S. elections. Both are market movers because they create a Bearish overtone.

Market Risk Environment

The Chart indicates when market risk is in our favor or when market risk is not in our favor over a 12-month period.

Market risk remains high. Risk is beginning to increase and we see an systematic decrease in the strength of the markets. This is the time to be cautious. Few indexes are moving higher and a Bearish overtone is enveloping the markets. Be careful with your investments.

The Signal Ribbons at the bottom of the Chart2 are green, indicating a Buy and red, indicating a Sell.

The Signal Ribbons Chart indicates 0 of our 10 technical indicators are positive.

Chart Key:

Market Risk Environment

Buy & Sell Signal Ribbons from 10 technical indicators.

Green Signal Ribbons indicate a positive market risk environment.
Red Signal Ribbons indicate a negative market risk environment.

This report is free to anyone who wants it, so please tell your friends.
They can sign up at: the Clausencapital blog

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CCM Weekly Market Analysis for May 2, 2012

admin — Wed, 02 May 2012 13:57:13 +0000

Overview of the Market Environment for ProActive Investors

Newsletter: In case you have not noticed, the markets remain range bound based on excessive hope on one side and very selective opportunities on the other. Investors hope for a solution to the anemic economic recovery in Europe and the United States and they realize there are few breakout stocks or markets to invest in. With the exception of Apple, these markets are simply “just OK”.

If we do experience a breakout, it would most likely be based on month-end window dressing. Even now, we can see the index oriented funds gaining momentum. However; we see little in the way of a sustained technical liftoff which would imply the markets are resuming the strong rally of 1Q12. In fact, April ended on a low note becoming the first losing month of 2012.

In our opinion, the markets remain stuck between a rock and the hard place. With the recent headline risk, it feels like we are heading to a repeat of 2011. Are the markets heading “Back to the Future”?

Earnings Season is about 70% complete and has been surprisingly good. Then again, why shouldn’t it be? Corporate earnings have been largely fueled by near zero percent interest rates. Easy money usually brings easy profits. Most companies are swimming in cash and some are even buying back their own shares to boost share value. But if you look under the covers, the one thing they all want and what they don’t have is strong sales, just strong discipline to keep costs down.

Welcome to May! The question is do we “Sell in May and Go Away” or hold until another day? We don’t know the answer based on the current market trend. While our crystal ball remains in the shop for repairs, given the strong first quarter and the expected summer doldrums, it would not surprise us to see the market hold through May with a sell off centered during the summer months. While statistically relevant, for now, we see no reason to change our portfolio holdings based simply on this old adage. The markets will tell us.

Summing It Up: Market risk remains high. The markets continue in a trading range and the first casualty of this sideways trend was April, being the first month in 2012 to post a loss. Technically, the markets can swing either way based on headlines as much as momentum. This week could be interesting based on economic reporting. If the jobs report is negative on Friday it could be a market mover. For now, we remain cautiously invested.

Market Risk Environment

The Chart indicates when market risk is in our favor or when market risk is not in our favor over a 12-month period.

Market risk continues to increase. Clearly this chart is presenting an increase level of risk and by all measures we should be taking defensive actions. We are holding off these actions because the markets and market risk are out of sync due to the flood of stimulus dollars. This could make Wednesday’s Fed meeting very important.

The Chart indicates when market risk is in our favor or when market risk is not in our favor over a 12-month period.

Market risk has slightly improved. This is due to an improvement in several market indicators but recent gains have been achieved on fairly low volume. The market action which occurred on Tuesday, May 1, was impressive. We will see if this is window dressing or an actual renewal of the rally. Technicals remain weak.

The Signal Ribbons at the bottom of the Chart2 are green, indicating a Buy and red, indicating a Sell.

The Signal Ribbons Chart indicates 0 of our 10 technical indicators are positive.

Chart Key:

Market Risk Environment

Buy & Sell Signal Ribbons from 10 technical indicators.

Green Signal Ribbons indicate a positive market risk environment.
Red Signal Ribbons indicate a negative market risk environment.

This report is free to anyone who wants it, so please tell your friends.
They can sign up at: the Clausencapital blog

Subscribe Visit our website 401k Rollover help

CCM Weekly Market Analysis for April 25, 2012

admin — Wed, 25 Apr 2012 13:02:34 +0000

Overview of the Market Environment for ProActive Investors

Newsletter: The Three Bears are just sitting down to taste the porridge left out on Goldilocks’ table. Papa Bears says, “There is nothing bad enough to cause us grave concern”. Mama Bear says, “But there is nothing good enough to get excited about.” Baby Bear replies, “The technical indicators are trying to stabilize but momentum continues to be lackluster and the dollar has become the preferred currency once again as risk increases in Europe”.

As Yogi Berra use to say, “It is like déjà all over again”. Europe is once again making headlines about poorly performing bond auctions, weak manufacturing reports from Germany and France, and the Euro is sliding backwards as investors seek safety in the Dollar. Once again, the dollar has become the safe haven currency.

Speaking of ‘Da Bears’ (and Berra), maybe the best play right now is to strengthen the defense. With the dollar inversely correlated with our domestic equity markets, a strong dollar tends to depress stock market momentum. In addition, a strengthening dollar tends to drive down the cost of commodities such as gold and oil. While it takes time for oil to move from the ground to the pump, note the recent reversal in the price of a gallon of gasoline.

Earnings Season is now in full swing and beating what were muted expectations. This puts a positive spin on the short term direction of the markets but overall, we continue to see the major indexes moving through a choppy trading range. The Three Bears seem to agree.

By the time you read this newsletter, Apple will have reported and their impact on the markets could be significant on Wednesday. The NASDAQ is a weighted index of stocks and Apple (APPL) makes up over 17% of the index. It also makes up about 5% of the S&P 500. There is considerable weakness in many of the company stocks which make up the NASDAQ and the S&P and without Apple these indexes would look much weaker. The positive report by Apple could be a major market mover.

Summing It Up: Market risk remains high. The markets are mired in a trading range because the market environment is not good enough or bad enough to tip the trend dominantly in any one direction. Europe brings a renewed negative factor to a rally which is long-in-the-tooth as does the move by investors and bankers to hold safe haven dollars while they determine overall market direction. On the other hand, bonds remain in play while the markets seek direction. Remain conservatively invested.

Market Risk Environment

The Chart indicates when market risk is in our favor or when market risk is not in our favor over a 12-month period.

The Signal Ribbons at the bottom of the Chart2 are green, indicating a Buy and red, indicating a Sell.

The Signal Ribbons Chart indicates 0 of our 10 technical indicators are positive.

Chart Key:

Market Risk Environment

Buy & Sell Signal Ribbons from 10 technical indicators.

Green Signal Ribbons indicate a positive market risk environment.
Red Signal Ribbons indicate a negative market risk environment.

This report is free to anyone who wants it, so please tell your friends.
They can sign up at: the Clausencapital blog

Subscribe Visit our website 401k Rollover help

CCM Weekly Market Analysis for April 19, 2012

admin — Thu, 19 Apr 2012 17:18:54 +0000

Overview of the Market Environment for ProActive Investors

Newsletter: For the second week, the major domestic market indexes have declined. In Europe, the indexes have declined for four straight weeks and Canadian stocks have been down for the past seven weeks. While the domestic markets have had several strong days during the past week, from a technical standpoint, they are weakening as measured by lower highs.

The modest decline in the S&P 500 of -1.8% is more indicative of a market moving into a trading range rather than a full fledged correction. That said, the majority of our indicators which measure the technical underpinnings of the market are moving towards a negative bias. Beware of Bears emerging from their lair.

From our perspective, the markets are topping but understand a topping action can last for weeks or months. It can take a long time for investors to reduce their holdings as the result of the markets becoming increasingly risky. Seasonally, we expect to see a mid-April decline but we recommend you continue to remain in the markets. This is not the time to panic and move to cash; however, it is also prudent to keep an eye on the exits.

This rally has been technically driven, not driven on business fundamentals. Inherently, this weakens the foundation of the rally.

The markets are going through nothing more than an overdue correction. Clearly the markets have come too far, too fast off the 2011 market lows. The benchmark S&P Index up 12 percent for the year and 30 percent since last autumn. At this point we expect investors to buy on the dip and the markets will eventually retest recent highs. Late April and early May are strong months for the markets. Bottom line, all this investor drama equates to nothing more than the establishment of a wide trading range.
Summing It Up: Market risk is increasing and moving out of favor even though the domestic markets have seen several days of positive market gains. The majority of the technical underpinnings we follow are declining. In our opinion, the markets have transitioned into a wide trading range. Look at the Market Risk Chart below. The declining red line represents an increase in market risk as well as the solid red signal ribbons on the right side of the chart. Remain conservatively invested because after May, it becomes statistically relevant that gains are more difficult to achieve.

Market Risk Environment

The Chart indicates when market risk is in our favor or when market risk is not in our favor over a 12-month period.

Market risk is rapidly moving out of favor. We are days away from a negative market risk assessment. Note the rapid decline of our Market Risk (Red) line. A declining market risk curve with all red signal ribbons is a negative environment. Be very careful with investing in this environment.

The Chart indicates when market risk is in our favor or when market risk is not in our favor over a 12-month period.

Market risk has increased to an uncomfortable level. Under any other market environment, we would consider this the transformation to a negative market risk environment. The markets have exhibited some positive influences over the past several day so we will remain cautiously invested.

The Signal Ribbons at the bottom of the Chart2 are green, indicating a Buy and red, indicating a Sell.

The Signal Ribbons Chart indicates 0 of our 10 technical indicators are positive.

Chart Key:

Market Risk Environment

Buy & Sell Signal Ribbons from 10 technical indicators.

Green Signal Ribbons indicate a positive market risk environment.
Red Signal Ribbons indicate a negative market risk environment.

This report is free to anyone who wants it, so please tell your friends.
They can sign up at: the Clausencapital blog

Subscribe Visit our website 401k Rollover help

Weaklings: Small Caps, Junk

admin — Thu, 12 Apr 2012 13:05:30 +0000

George Clausen’s article, Weaklings: Small Caps, Junk, was published on AdviceIQ.com

Weaklings: Small Caps, Junk

Submitted by George Clausen,Clausen Capital Management, on Tue, 04/10/2012 – 3:00pm

We’ve enjoyed a market rally since October, culminating in a very strong first quarter, the best since 1998. Still, there are a couple of popular asset classes that show signs of weakness: small capitalization stocks and junk bonds.

I suspect that the first quarter will prove to be 2012’s best. The past week has seen a downdraft. The broader picture is that we remain in a secular bear market, which has lasted for 12 years. Secular bear markets are long-term trends, and can be punctuated by rallies.

On average, secular bull or bear markets run between 18 to 20 years. So ordinarily we can expect another six to eight years of downturns ahead.

This secular bear started with the tech bust and continued with the 2008 financial crisis. Last year, except for the pick-up in the fall, featured a nasty slump and ended up flat overall.

This year, despite last week’s sell-off, NASDAQ has gained an amazing 17% and is in a parabolic uptrend. NASDAQ is a weighted index, meaning it is a weighted average of the returns of each security in the index, where the weights are proportional to the value of the listed company. No surprise that Apple (AAPL) makes up about 17% of the NASDAQ and is now the most valuable company in the United States. But even Apple has to beware of gravity. Apples have been known to fall in the past.

Looking ahead, we have the seasonal weakness of the summer months and likely a nasty general election raging until November. This upcoming market environment is about as conducive to creating great rallies as arctic water is to generating hurricanes.

We see a divergence between prices, which continue to climb (higher highs), and the underlying technical indicators such as relative strength (the performance of individual stocks versus the broader market) that trend below their recent high water marks (lower highs). While the rally remains intact, its underlying foundation is beginning to weaken. Markets are forward-looking so this suggests we may be seeing the early warning signs of a pullback.

There is a decaying of some technical indicators that become the proverbial canary in a coalmine. Early coalmines did not have sophisticated ventilation systems so miners would carry canaries inside cages down into the coalmines. Canaries are sensitive to methane and carbon monoxide. If the canaries stopped singing, the miners knew their air was noxious and evacuated.

In the markets, the canary is the small-cap index. Small stocks are the first to suffer as a market slumps. Since the market low last fall, the small-cap indexes surged ahead of the Standard & Poor’s 500 (large caps) and Nasdaq (heavy on tech stocks). But lately their advances are blunted, which we technical analysts call resistance. Look at a well-known exchange-traded fund that tracks the chief small-cap index: The iShares Russell 2000 (IWM) is up around 30% since the October low, but last week lost 1.8% while the S&P fell 0.7%. If you hold this ETF, consider lightening your position. Otherwise, avoid it.

The same goes for ETFs focused on junk bonds. The SPDR Barclays Capital High Yield Bond (HYG) has outpaced the fixed-income benchmark, the Barclays Capital Aggregate Bond Index, which covers U.S. investment grade issues. Last week, the junk ETF was down 1.3% and the Barclays AGG gained 0.6%.

If we see a turnaround, and the canary starts to sing again, we will increase our invested position in junk. If not, we will exit our positions. After all, asphyxiated canaries and market consolidations can occur very quickly.

George Clausen is president of Clausen Capital Management in Charlotte, N.C.

AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty. For instance, the rankings this week measure the number of clients that have between $250,000 and $500,000 of investable assets with that advisor. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.
Topic: Investing, Bonds, Stocks

The 401(k): Americans ‘just not prepared’ to manage their own retirement funds – WashingtonPost article

admin — Wed, 11 Apr 2012 14:46:41 +0000

This interesting article can help our clients understand retirement acounts The article appearing in the WashingtonPost By Jia Lynn Yang, was Published: April 4 | Updated: Friday, April 6, 8:47 AM

We at Clausen Capital have included content because we agree with the author’s message and to ensure the author’s important message is available to our readers- even if thlink to the original article no longer works in the future.

The 401(k): Americans ‘just not prepared’ to manage their own retirement funds

Illustration by Dadu Shin for The Washington Post

By Jia Lynn Yang, Published: April 4 | Updated: Friday, April 6, 8:47 AM

When lawmakers added a subsection to the tax code called the 401(k) more than three decades ago, they could not have imagined that this string of three numbers and a letter would become a fixture in the financial lexicon.Nor could they imagine the stress it would unleash.

A poll by Gallup last year showed that for two-thirds of Americans, not having enough money for retirement topped seven other financial worries, including medical bills, mortgage payments and their children’s college tuitions.

Worrying about having enough money for retirement is not a new phenomenon. But the rise of the 401(k), dating to the early 1980s, has steadily shifted more financial responsibility onto the shoulders of many Americans who are — let’s face it — clueless.

The number of people who are unprepared is growing. In 1983, researchers now at the Center for Retirement Research at Boston College calculated that 31 percent of working-age households were “at risk” of not being able to maintain their standard of living after they retired. By 2009, it was 51 percent.

“I don’t know how you feel, but managing your own money is just horrible,” said Alicia Munnell, director of the center. “We just don’t know how to do it.”

Consider the hurdles between every American with a 401(k) and a decent retirement: First, wade through your HR department’s paperwork to enroll in a plan at your company. Second, save enough. (Imagine what you think is enough. Then save more.) Next, manage your investments intelligently through stock market highs and lows, tending to your portfolio every year to make sure you have the right balance of stocks and bonds, and avoid withdrawing any money early. And not least, when you retire, ration your money at just the right rate: not so little that you live uncomfortably but not so much that you run out.

The result has been a system that works well for people who know how to use it. For many others, it’s better than nothing, but it still may not be enough.

“Does the system work or not? It’s really a ‘compared to what’ question,” said Eric Toder of the Urban Institute. “One side emphasizes the glass is half-full and the other emphasizes the glass is half-empty. The real question is, how do we make the system work better for the people for whom it’s not working while not destroying the benefits?”

As company pension plans peter out, Munnell estimates that it will be another decade before people rely almost entirely on their 401(k)s.

That means 10 more years before a system — once imagined to be only supplementary to Social Security and pension plans — is fully tested. That’s 10 years in which bigger waves of workers sign up for a savings vehicle that they expect will see them through old age.

For the past several years, there’s been a movement to fix the 401(k), or at least make it work better for average people — that is to say, almost all of us — who are bound to make some mistakes along the way.

Reformers want the 401(k) of the future to look very different. But even the program’s biggest critics concede that the system that was unwittingly launched in 1978 is here to stay.

Retirement plans, defined

Broadly speaking, companies help workers plan for retirement in two ways.

Defined benefits, often called pension plans, guarantee workers a certain amount annually when they retire based on earnings in their final years and how long they’ve worked at the company. The employer must set aside the money, invest the funds and pay employees, regardless of what happens in the market.In a defined-contribution plan, which includes 401(k)s, the employer diverts money from the employee’s paycheck — while perhaps chipping in some to an account owned by the employee, effectively creating a savings account. There are restrictions on when the money can be drawn. The employee owns the account, though, and can move the money from employer to employer.The 401(k) was created by the Revenue Act of 1978, which also reduced individual income tax rates and the corporate tax rate and created flexible spending accounts.

But years before the law, companies had defined-contribution plans that were precursors to the 401(k). Firms — banks in particular — created accounts in which employees could put their bonuses rather than collect the money in cash. The accounts allowed employees to defer the taxes they would owe immediately with a cash payout.

The IRS was wary of this setup, but Congress gave it the rubber stamp. In the 1978 law, Congress added 401(k)s to the tax code, formally allowing employees to put a portion of their salary in these tax-deferred accounts. Three years later, the government issued official regulations, and companies including Johnson & Johnson and PepsiCo were among the first to adopt the new 401(k).

The number of companies offering the plan exploded in the 1980s and 1990s.

In 1990, about $384 billion worth of assets had been saved in 401(k) plans. By 1996, the number surpassed $1 trillion. The mutual fund industry flourished with all the new business.

In the meantime, companies rolled back their pension plans.

‘If you want to drive a car . . .’

Let’s say a worker making $50,000 contributes 6 percent of her annual salary with a 3 percent employer match. By the time that person retires, she should have about $320,000 saved up, according to calculations by Munnell. But reality rarely plays out that way. People forget to enroll, or they don’t save enough, or they wind up withdrawing money to cover a financial emergency. The result: Individuals nearing retirement have closer to $78,000 saved, according to the Federal Reserve’s Survey of Consumer Finances. (And that number is rosy; the last regular survey was done in 2007, just before the financial crisis.)

“The old-style 401(k) before automatic enrollment came along was basically telling people, ‘If you want to drive a car, you have to be able to repair it and maintain it yourself,’ ” said William Gale, director of the Retirement Security Project at the Brookings Institution. “If the 401(k) is supposed to be the primary retirement vehicle for the average American worker, then it needs to be consistent with the information and financial ability of the average American worker, who is just not prepared to manage funds like that over the course of a lifetime.”

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original article link: http://www.washingtonpost.com/business/economy/the-401k-americans-just-not-prepared-to-manage-their-own-retirement-funds/2012/04/03/gIQAnQV1uS_story.html

CCM Weekly Market Analysis for April 11, 2012

admin — Wed, 11 Apr 2012 12:38:06 +0000

Overview of the Market Environment for ProActive Investors

Newsletter: Lately, most of the market news has been negative. Maybe it’s time for the markets to take off for “Spring Break”! A little sun and time on the beach have been known to make a world of difference.

On April 5, 2012, Egan Jones Rating Company downgraded the U.S. government debt from AA+ to AA. Egan Jones first downgraded the U.S. government debt in 2011 from AAA+ to AA+ which was quickly followed by Standard and Poor’s with a similar downgrade. Could this second downgrade by Egan Jones force the S&P to follow in line again? Any downgrade has a profound effect on U.S. Government debt and increases borrowing costs, i.e. more risk equals higher carry costs.

Couple this credit downgrade with Friday’s monthly unemployment report and we have the making of a potential market selloff. Investors were disappointed with this unemployment report which stated there were fewer new jobs created than estimated by the Labor Department. Clearly, the unemployment recovery remains out of sync with the slowly improving economic situation. Bottom line, the economic recovery remains fragile at best.

These events should heighten your awareness about the increasing level of market risk. At this point, looking forward, the best we should expect is for the markets to trend sideways. We have seen about 50% of our technical indicators turn negative. We are not that optimistic.

After a spectacular start in 2012, it should come as no surprise that the markets will correct as investors harvest their profits. This occurs on a regular basis as a result of strong first quarter performance as they did in 2010 and 2011. This year, after such a strong start, the decline will be more pronounced and could add extra meaning to the old stock market adage “Sell in May and Go Away”.

Chairman Bernanke has been vocal about not implementing QE3 unless we have a serious issue maintaining the stability of our economy. We all know the markets are forward looking. Sensing the withdrawal of the current stimulus (Operation Twist) as well as the seasonal weakness of the summer months, investors could be lining up to quietly walk to the exit doors.

Summing It Up: Bottom line, Market Risk is increasing because investors are beginning to take profits after such a stellar first quarter, the best since 1998. The equity markets have softened considerably over the past two weeks and if unchecked, the markets could experience a painful “Go Away in May” as a result. We remain conservatively invested and understand profits will be tougher to achieve from here on out.

Market Risk Environment

The Chart indicates when market risk is in our favor or when market risk is not in our favor over a 12-month period.

The Signal Ribbons at the bottom of the Chart2 are green, indicating a Buy and red, indicating a Sell.

The Signal Ribbons Chart indicates 0 of our 10 technical indicators are positive.

Chart Key:

Market Risk Environment

Buy & Sell Signal Ribbons from 10 technical indicators.

Green Signal Ribbons indicate a positive market risk environment.
Red Signal Ribbons indicate a negative market risk environment.

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