Market Conditions and Strategy Going Forward
We have been expressing for months that levels of complacency have become too high and the market is vulnerable to a sharp pullback. Other statistics that cause concern for us are the high level of insider sales to insider buys, near record levels of amateur money flows into mutual funds, lower levels of money market funds, overly bullish sentiment and high levels of margin debt. We believe yesterday’s move was just the beginning and we have positioned our assets accordingly months and weeks prior to today’s move. Our actively managed accounts hold over 50% cash and our passively managed accounts hold much higher levels of cash than normal. We have been invested in long-term U.S. Treasuries and Zero coupon bonds that have benefited from the market’s recent fears. In general, in our passively managed accounts we have lessened our exposure to riskier assets and invested in more domestic large cap that have historically held up better in bear markets. In our actively traded accounts we have a small short (inverse ETF) position in international markets (EAFE) that has appreciated as international markets have gone down. Most of our actively traded accounts were flat to up yesterday. After having terrific performance in our actively traded accounts for 2009 we have lagged the markets a bit in 2010. We have purposely been postured for a market correction as we believe the markets are extremely vulnerable for a significant decline. Going forward we plan on staying defensive, at the same time we are looking to take advantage of any hysterical selling by making small purchases in investments we believe will rebound quickly.

Allgen’s Investment Approach
Allgen specializes in active money management. Through technical and fundamental analysis, along with a contrarian mindset, we strive to navigate the markets during periods of prosperity and/or decline. We constantly research and study the markets to find the next emerging area even in asset classes that are typically not used in your “buy and hold” asset allocation portfolios. During the good times we focus on strength, and during the bad times we try to preserve wealth. During periods of stagnation, such as we are experiencing now and potentially years to come, we see ample opportunities to take advantage of this market. If you want to see how active money management may fit into your overall investment portfolio then please email us advisors@allgenfinancial.com or give us a call at 1-888-6ALLGEN (625-5436).

Written By:
Jason Martin, CFP®, CMT
Senior Partner & Chief Investment Officer
Allgen Financial Services, Inc.
martin@allgenfinancial.com
888.6ALLGEN

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com·pla·cent
–adjective
1. pleased, esp. with oneself or one’s merits, advantages, situation, etc., often without awareness of some potential danger or defect;
(dictionary.com)

For the waywardness of the simple will kill them, and the complacency of fools will destroy them;
- Proverbs 1:32

When a great team loses through complacency, it will constantly search for new and more intricate explanations to explain away defeat. - Pat Riley

How Fear and Greed Drive the Market
Many analysts, academics and economists will tell you that markets make moves in certain directions because of “Fundamentals” (earnings growth, economic trends, etc.) and/or “Technicals” (momentum, money flow, breakouts, etc.). To some degree they are correct, but in my opinion the greatest force that moves the markets are the emotions of fear and greed. Both fear and greed are huge motivational factors in the market. In general, fear will cause people to sell and greed will cause them to buy. Extreme fear is usually accompanied by panic and historically that is when market bottoms are formed. This phenomenon occurs because massive amounts of people will capitulate (surrender) and sell regardless of the price, at which point the supply of sellers will virtually dry up leaving very few people left to sell. Wise institutional investors will take advantage of this rare moment and buy shares at extremely low levels. Then, the rest of the market will follow once they see prices rising providing a significant level of demand that will give the market a sustainable amount of buy orders (demand) in order to push the market up for a long period of time. An example of extreme fear would have been in late 2008 and early 2009. It was no coincidence that a significant bottom was formed during that time and a great buying opportunity occurred. On the other hand, extreme greed is usually accompanied by complacency or a lack of fear that the market will fall. Extreme greed and complacency historically mark market tops. Extreme complacency will cause the market to be vulnerable because virtually everyone believes the market will go higher so everybody would already be invested leaving very little potential demand of new buyers. Conversely this leaves an abundance of potential sellers (supply). An example of extreme greed was in late 1999 or early 2000 when the majority felt that they had to buy into stocks and there was little fear of the market falling. A prudent money manager will look for extreme fear to buy and high levels of complacency to sell or go defensive.

After starting 2009 in extreme fear we entered into 2010 with a very high level of complacency. Even after going through the worst bear market since the “Great Depression” you would think that the majority of people would still be recovering from the massive scars that markets left them with in 2008. Although, admittedly not everyone feels like the economy is on sound footing, according to most indicators that measure sentiment the market became very complacent in early January and still has a high level of complacency considering everything that we just went through over the last couple of years. The main way that we measure complacency and fear is by looking at the CBOE Volatility Index (VIX). Historically, when the indicator is high (above 40) it is considered extreme fear and when the indicator is low (below 20) it’s considered a high level of complacency. In (Figure 1) below you will see that when the VIX hits high levels above 40 the market has bottomed and when the VIX goes below 20 the market has topped.

(figure 1) (Click on the graph for larger image)

Our Recent Market Moves
Because the market became overly complacent early this year, we made moves to go defensive and take profits on many of our positions that we bought in late 2008 and early 2009. In our actively traded accounts we now hold about 40-50% of the entire portfolio in cash. Plus we’ve bought into long-term government bonds as a hedge against a falling market. Long-term government bonds are considered a safe haven play. I know that may be hard to believe because of our large government deficits and high amounts of government debt, but it is true still to this day. In fact, in 2008 when the market was down nearly 40%, long-term treasuries were up over 30% for the year. In our strategically allocated accounts I have increased some cash, but mainly we have transitioned a portion of the riskier assets like commodities, emerging markets, international equities and small caps over to more domestic value stocks and other traditionally more stable areas. Similarly we have transitioned our bond portfolios from riskier funds into traditionally safer areas. The moves were made because of the potential market pullback. Certain factors historically point towards a more aggressive investment position, a good example would be early 2009 when stocks were at decade lows and there were extreme levels of fear and other circumstances point towards a defensive posture, like the beginning of this year when some stocks indices had rallied over 70% or more in a matter of 9 months. After the market has moved that much to the upside in that short of time combined with a high level of complacency there is cause for concern which is why we went defensive.

Strategy Going Forward
We plan on remaining in a defensive posture in the attempt to preserve wealth and to be ready for when the market pulls back. We will attempt to wait for high levels of fear in order to purchase equities at lower prices than what they are going for now. If the market pulls back as anticipated, we will be ready to put some of the cash back to work. But for now we believe the potential downside risk is greater than the potential upside gain. So we will remain defensive until that environment changes. A wise money manager will always try to target a greater amount of potential gain than what they are willing to risk and currently those opportunities are not readily available. Once they become available we will try and take advantage of them again.

Allgen’s Investment Approach
Allgen specializes in active money management. Through technical and fundamental analysis, along with a contrarian mindset, we strive to navigate the markets during periods of prosperity and/or decline. We constantly research and study the markets to find the next emerging area even in asset classes that are typically not used in your “buy and hold” asset allocation portfolios. During the good times we focus on strength, and during the bad times we try to preserve wealth. During periods of stagnation, such as we are experiencing now and potentially years to come, we see ample opportunities to take advantage of this market. If you want to see how active money management may fit into your overall investment portfolio then please email us advisors@allgenfinancial.com or give us a call at 1-888-6ALLGEN (625-5436).

Written By:
Jason Martin, CFP®, CMT
Senior Partner & Chief Investment Officer
Allgen Financial Services, Inc.
martin@allgenfinancial.com
888.6ALLGEN

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Figure 1

Figure 2

While we may see a strong run going into the end of the year, there are still various economic pressures that have caught our attention as we move into next year. Further bank and private de-leveraging would lead to tighter credit markets and less consumer spending. Such bank actions are possible as we are witnessing delinquency rates within residential, commercial and credit cards at 15 year highs. Of those three credit card delinquencies are the only one that have started to level off. Both commercial and residential bank loan delinquencies have been consistently rising. Rising loan delinquencies cause banks to tighten lending standards, in turn, taking money out of the economy, which would inhibit expansionary activities such as home purchases and business investments. The September 8th, 2009 consumer credit report showed a drop in consumer credit by an annual rate of 10.4%. In percentage terms, the drop in credit is the biggest since June 1975. And on a year-on-year basis, credit is down 4.3%, the biggest drop since June 1944. This report is clear evidence that consumers are “hunkering down”. Instead of making new purchases they are paying off. Since approximately 70% of the U.S. economy is consumer driven the evidence that private citizens are de-leveraging could have negative effects on the economy. I personally believe that consumer de-leveraging is a good thing long-term for personal balance sheets since Americans are so strapped with debt, but while the de-leveraging process is taking place money that would be used to make purchases is being used to pay off debt and that has a negative effect on consumption.

Going forward the U.S. administration along with the Federal Reserve Board is going to have some very difficult choices to make. Currently the government is faced with sharply declining corporate and private tax revenues. At the same time the government is spending record amounts to boost the economy and bailout failing companies. Declining revenues and increased expenses has caused record deficits. The administration has projected a $1.58 trillion deficit for 2009 and $9 trillion over next the next ten years. Our current U.S. national debt is over $11.8 trillion (see http://www.usdebtclock.org/ for a jaw-dropping look at these numbers in real-time). These massive deficits will be added to our already astronomical debt. There lies the difficult decision that the administration has to make. The three most likely paths they will take are to: 1) raise taxes to increase tax revenues which would probably cause the economy to slow down and further raise unemployment over the current reading of 9.7%; 2) raise the Federal Reserve rate which would tend to support the dollar thereby fight inflation but this would also slow the economy or 3) not do anything and potentially allow inflation to run out of control. So, as you can see the administration is in a catch-22.

Although the administration has its hands full, we do believe there are opportunities out there that we are currently taking advantage of and we also believe that as we go forward into the next year there are going to be more opportunities created. One clear opportunity that we have capitalized on and we believe still has a further move higher is in the commodity markets in general, but especially in gold, gold miners, oil and natural gas. As stock markets around the world dropped over 50% during their recent decline some commodity sectors fell over 80%, which has provided some irrationally low price levels for us to take advantage of. We believe that these sectors will have longer lasting and higher percentage returns than the general equities market. It has become more apparent in recent years that emerging markets are no longer just a small sub-sector of the world economy. But, instead we believe that the emerging countries around the world like China, India, Brazil, Russia, some African and Middle Eastern countries along with other Asian and South American countries will be major drivers of the world economy. This could be the catalyst over the next couple of decades that could reign in new times of economic prosperity. Although we believe the next few years could be difficult looking forward we will be keeping an eye on the growth and increasing influence of the emerging and frontier economies.

If the market does start to get shaky late this year or sometime next year, we will attempt to rotate assets out of some equities and into certain assets that tend to go up when the general markets go down. Assets such as long-term Treasuries, extended duration U.S. debt and other hedging assets that traditionally do well in a “flight to safety” scenario. In times like these it is very important to be able to go defensive when the time calls and to go aggressive when the opportunities present themselves. Although it may seem like rough roads ahead we believe these type of extreme fear and greed driven markets present the best intermediate term opportunities if you are able to navigate the waters correctly.

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China has recently announced their plan to sell out of their U.S. dollar position, describing our economy as a “black whole”, with concerns of our treasury printing more dollars which would only hurt their position as they continue to carry $1.9 trillion of U.S. debt. This is not the first time Beijing has voiced concern over its massive exposure to the US dollar and it most likely will not be the last. In an effort to hedge their economy Beijing’s plan is to concentrate on building an inventory of copper and other industrial metals in order to grow their infrastructure over the next 50 years. Such little attention is being paid to this story that I’m starting to wonder whether or not American investors realize how significant this shift in Chinese policy is regarding the state of the U.S. economy.

As the world’s main reserve currency, the US dollar is used to set international market prices for oil, gold and other currencies. If Beijing abandons their support for the US dollar and the world embraces a “New World Currency” what will happen to the value of our money in the years to come? It doesn’t take much to figure out the answer to this question but in case you have not been on top of this story you should know that these events could have a devastating effect on our economy. The average citizen could see inflation like we have never seen before and investors will be left searching for answers of their own, wondering what to do with their money.

We are certainly navigating in uncharted waters but before you jump into your financial lifeboat let me say this, even during the great depression there were fortunes made by those who were able to follow the money flow. Understand that crisis will often produce opportunity but you have to be willing to seize the opportunities as they present themselves. Back in the early thirties investors didn’t have the news channels like we have today nor did they have the ability to move money as quickly as you can right now. On top of that, the average person didn’t have history as a guide because when the great depression hit, most people were caught off guard unable to hedge themselves with a plan. If you are willing to accept the fact that our world is rapidly changing then you are in great position to capture new profits as long as you are on top of the money flow. For example; if you knew that China was interested in accumulating a position in copper and other industrial metals, then why not invest in those commodities? Seizing opportunity doesn’t mean “buy and hold” till you die, it means looking ahead with an understanding that new trends are created every time an economic shift takes place. One idea for you is to look into commodity Exchange Traded Fund’s (ETF) these instruments take advantage of higher prices in the commodity markets through different portfolios that can include long positions held in Oil, Natural Gas, Zinc, Copper and Aluminum Futures. You don’t have to concentrate all of your money in such an investment but it may help put your mind at ease knowing you are at least moving with the money.

If you think the dollar is on the verge of a collapse, you might consider certain currency ETF’s that would appreciate when the value of the dollar falls. A falling dollar can lead to inflation so you might want to hedge your cash position. Historically, gold has been one of the best places to be when inflation hits the fan but these days you have a variety of ways to invest in this precious metal without having to worry about insurance or storage costs. There are certain ETF’s that allow you to benefit from higher gold prices without having to take delivery of any gold whatsoever.

Another investment that did very well in the 1970’s, while we were experiencing double digit inflation, was real estate. But let’s face it, the experts are still trying to figure out if this market has hit a bottom yet, so one way you can participate without having to worry about putting too much money in this market, is to look at the Real Estate and REIT ETF’s. No lawyers, real estate agents, or closing costs. It trades like a stock which makes it easier to manage risk. You can use stop loss orders on all these that I have mentioned and each can be easily tracked on a price chart.

The formula is simple. Identify the trend, invest your money in the direction of that trend, then, focus all of your attention on protecting your investments with stop loss orders. Above all, try not to fear this market, but instead seize the opportunities as they present themselves to you. We are no longer in a buy/hold environment, we have entered into the new age of buy and protect.

Written By: AJ Monte CMT
Chief Market Strategist
The Market Guys

If you are a do-it-yourself trader and you want to learn more about the strategies mentioned, feel free to visit: http://www.themarketguys.com

If you agree with the strategies mentioned, but you want a professional to manage your assets using some of the strategies above then contact Allgen Financial Services, Inc at (407) 210-3888 or advisors@allgenfinancial.com.

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Figure 1
Sources: Ned Davis Research (Secular Bear Markets), WSJ Market Data Group (DJIA)

Figure (1) specifically shows that the market grew from the low in 1915 to 1929 leading up to the “Great Depression”, approximately 14 years of prosperity. Then during the “Great Depression” from 1929 to 1942 the market averaged an annualized loss of 10%. Then, spurred on by World War II the Dow went from 100 in 1942 to 1,000 in 1966 increasing tenfold during a time of prosperity. From 1966 to 1982, a 16 year period of no growth, the market averaged -1.5% per year. Jump started by Reaganomics, then propelled higher by the tech bubble the market had one of its greatest bull markets of all time. From 1982 through 2000 the Dow went from 1,000 to over 10,000. Finally, year 2000 until present we have experience a net loss after 9 years.

Stagflation in the 70’s
Let’s take a closer look at the previous period of stagflation from 1966 to 1982. (Figure 2) As you can see during that 16-year period there were some significant falls and some strong rallies. In fact, the market decline from 1973 to 1975 was a loss of almost 50%. The following year from the 1975 low of 577 to the 1976 high of 1,000 the DOW rallied nearly 75%. During that 16-year time period there were other extreme falls followed by impressive rallies. A good active money management strategy will thrive during those times compared to the “buy and hold” allocation. The “buy and hold” portfolio would have lost money during that’s same 16-year time period.

Recent Market Events
If you look at the most recent decade since 2000 through to the present day (Figure 2), you will see similar major swings in the market. The DOW from 2000 to the end of 2002 was down nearly 40%. During that same time period, the tech heavy NASDAQ was down over 75%! During the following 5-years, the market nearly doubled with almost a 100% return. Then, the biggest market decline since the “Great Depression” came. From November 2007 to March 2009, the DOW was down over 54%. And most recently, in the last 2-months alone, the DOW has increased over 30%. The biggest two month rally in the last 70-years.
Over the past nine years, if you had your money invested properly, it would have been possible to be more defensive during the bad times, like the bursting of the tech bubble and also during 2008. At the same time, it would have been possible to to take advantage of the bull market from 2003-2007 and the recent 30% bounce off the bottom.

Figure 2
Source: StockCharts.com

Advantages of Active Money Management
During the non-growth periods, the reputable active money managers would have most-likely outperformed the “buy and hold” group because of their ability to go cash during the bad times. In turn, being able to get back in the market as the market turned around. To be fair, not all active money managers would have done better than the “buy and hold” managers during those time periods. It is not easy to time when to get in and when to get out of the market. But, reputable active money managers with a solid understanding of technical and fundamental analysis combined with a contrarian mind set, will increase your chances of outperforming the market significantly during times of stagnation and stagflation.

Another major advantage an active money manager has is their ability to spot emerging areas of growth outside of the typical asset allocation, and focus a portion of the portfolio to take advantage of strength in specific sectors. The most recent example of this would be the growth of commodities during 2003-2008. Asset classes like steel, oil, natural gas, coal, fertilizers, etc. outperformed the stock market by over 300% during that same time period. Other examples would be REITs (Real Estate Investment Trusts) from 2000-2005. Real Estate related stocks outperformed the stock market significantly, experiencing positive moves even during the bear market from 2000-2002. Emerging markets from 2003-2008 far outperformed your typical asset allocation during the same time period. Good technicians (chartists) are able to spot and take advantage of new emerging sectors coming off of bottoms.

What’s Next?
I believe we are 9-years into a cyclical 15-year period of stagnation that began in the year 2000. I also believe there is a very good chance over the next year we will see inflation increase because of the amount of money the U.S. government and other governments around the world are spending. If history repeats itself, we will experience extreme volatility. This means we will have powerful moves upward followed by powerful moves downward. If you are in the “buy and hold” camp during this time period, you will be at a serious disadvantage to some active money managers. These money managers will take advantage of powerful upward moves and honing in on the sectors that will outperform during inflationary times. Also, being able to go defensive if the market falls and experiences a prolonged bear trend.

Allgen’s Investment Approach
Allgen specializes in active money management. Through technical and fundamental analysis, along with a contrarian mindset, we strive to navigate the markets during periods of prosperity and/or decline. We constantly research and study the markets to find the next emerging area even in asset classes that are typically not used in your “buy and hold” asset allocation portfolios. During the good times we focus on strength, and during the bad times we try to preserve wealth. During periods of stagnation, such as we are experiencing now and potentially years to come, we see ample opportunities to take advantage of this market. If you want to see how active money management may fit into your overall investment portfolio then please email us advisors@allgenfinancial.com or give us a call at 1-888-6ALLGEN (625-5436).

Written By:
Jason Martin, CFP®, CMT
Senior Partner & Chief Investment Officer
Allgen Financial Services, Inc.
martin@allgenfinancial.com

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If anyone has watched the news in the last six months, things would appear to be apocalyptic.  Some of the main headlines you would have witnessed would be ”Credit Crisis”, “Record Foreclosures”,  “Bernie Madoff – Biggest Ponzi Scheme of all Time”, “Greatest Stock Market fall since the Great Depression”, “25 Year Highs in Unemployment”, “Massive Bank Failures”, “401k’s Down 50%+” and the latest…”Swine-Flu Pandemic”.  That’s enough to make a person feel like the world is coming to an end.  In fact, many people are convinced we are approaching the “end of times” - there are close to 1 billion searches on Google for some variation of an “end of times” scenario.  I won’t try to sugar coat what has occurred over the last year or so as the world has gone through some difficult times, but I will highlight some positives that you rarely hear in the main stream media.  For starters, did you know the over the last month there was a 15 day period where the S&P 500 had it’s biggest rally since the Great Depression?  In fact, since the recent low in the market the S&P 500 is up over 25% and the NASDAQ is up over 32%.

Here are some things to keep in mind as you listen to some of your family, friends and most importantly the main stream media.  Media outlets gain higher ratings over panic-type news so it is only logical for them to exaggerate any story.  This causes a chain reaction that develops into a negative feed-back loop.  As people hear the story’s from the media of mass losses in the stock market, rising unemployment, bank failures, etc. combined with actual experiences of losses or hearing from a friend or family member of losses or hardships that they’ve experienced this will cause people to believe things are worse than they actually are.  Remember that this happens on a massive scale and will create what’s called herd-like behavior.  Then, after the “herd” processes all the information they will tend to do the opposite of what the “bigger”, “smarter” money does – they sell their stocks and go defensive.  Unfortunately the herd is usually wrong and almost always wrong at extreme points in the history of the stock market (I would consider recent times as an extreme point).  When fear is at its highest point the market usually bottoms. This phenomenon occurs because the herd acts on the present and the past and the “smart” money acts on the perceived future.  The “smart” money takes advantage of the panic and of the herd by buying stocks after the panic selling, which gives the smart money the chance to buy low.  The same mentality happens at market peaks, as well.  When everything seems to be going great and the media continues to highlight how great the market is doing (like the tech bubble in the late 90’s), that is when the “smart” money is selling and becoming defensive and unfortunately that is when the herd is buying into stocks.

Some measurements of fear that we track have recently hit 21 year highs and even after the markets recent sharp rally fear indicators are still measuring at extremely high levels.  Most would think this is a bad thing, but I’m telling you that this is a positive and a reason to believe the market could go much higher from here.  On top of that the pundits in the main-stream media doubt this rally and most are saying that the market will come back down.  This too, is a positive, as the herd is usually wrong at extreme points throughout history.  As most of the herd has recently gone defensive, Allgen has been aggressively buying over the last month to take advantage of the recent rally and the high potential for future gains.  History has shown that the biggest market rallies follow the biggest market drops; unfortunately the herd is usually late to the party and won’t participate in the majority of the gains.

Going forward our advice is to be skeptical of what the media is saying and what the herd is doing especially at extreme points in time.  History shows that you’re usually better off doing the opposite of what the herd does.

Written By:
Jason Martin, CMT & CFP
Chief Investment Officer
Allgen Financial Services, Inc.

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We realize the news about economy is extremely weak, but it should be noted there are a few bullish characteristics visible if you do some sector and style analysis. For example, year-to-date two of the best performing sectors are information technology and biotechnology.  Also, growth stocks as a whole are outperforming value stocks handily.  Additionally, the NASDAQ considered more of a growth-type index has been much more resilient than the S&P 500, and is significantly above its November lows. These three examples are bullish characteristics, and are usually apparent as you enter an expansionary cycle of the economy.  It’s is also important to note the market is forward-looking so even though we are currently in a contracting economy, the very next stage of the economic cycle is expansion.  So, if expansionary stocks are doing better than the rest of the market, this is usually a sign of good things to come.  However, to reiterate, this is only one up day and we are taking it one day at a time.

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The NASDAQ (pictured below) was the clear leader today.  It posted the highest volume day in nearly 2 months which adds validity to today’s move.  From a longer-term point of view the NASDAQ along with the other major U.S. indices have formed a potential upside-down Head & Shoulders pattern.  The significance of this pattern is if the NASDAQ is able to close above the blue downward sloping trend-line that is drawn in this picture at around the level of 1600 that would significantly improve the NASDAQ and the other markets probability of a reversal in the current down trend.  Some individual sectors like the Bio-Techs, Semi-Conductors and Software indices have already broken above this reversal pattern.  These sectors are providing something the market has lacked for a long time…Leadership!  Today’s action does not eliminate the possibility for further downside moves; it simply means that it was one positive day and a step in the right direction.

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Treasuries declining are one sign that fear has been subsiding another sign is found a sentiment indicator called the Volatility Indicator VIX (aka fear indicator).  As the market hit the lows back in November of last year the VIX got as high as 89.53, which by the way was the highest reading since the 21-year old indicator has been in existence.  In the markets most recent decline last week which took the market down close to the November lows of last year the VIX only got as high as 57.36, far less than the November highs of last year.  Going forward this doesn’t mean that the market is going to go into a bull market, but these signs are encouraging and could eventually lead to greater confidence in the stock market which could lead to a rise in stock prices.

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Allgen Financial Services’ Investment Strategy:
We picked up a small amount of a REIT today and added to a technology stock that broke out.

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