Dollar-cost averaging may make sense

I’m struggling with what to write about this week because everything still seems so uncertain.

The market has shown some signs of resilience recently, but I’m still skeptical.

Some investment firms like Zack’s Research are suggesting a gradual allocation into stocks, even while the jury is still out on when we can expect the market to rebound.

Zack’s gives the example of a person with $30,000 to invest in the market.

That person should incrementally add to his or her positions in $5,000 or $10,000 increments, according to the research firm. The dollar-cost averaging approach makes sense, according to

Zack’s, because no one can accurately predict the bottom.

By dollar-cost averaging, one has a better chance of taking a position that will put one on better footing once the market returns to its full glory, according to the research firm.

I currently dollar-cost average with a Vanguard account that has a total stock market index fund and two international funds.

Each month a certain amount is drawn from my bank account and deposited into Vanguard.

Yes, even though I’m guilty of market timing in the account I typically trade in, I do still believe in making regular contributions to a retirement account.

Granted, that retirement account has been cut in half since the market began its downward spiral more than a year ago. But I’m still picking up shares at cheaper prices and I have no doubt that when the market returns to normal I’ll be sitting pretty.

Credit cards to implode next?

Meredith Whitney, the woman known for predicting the recent banking crisis and the CEO of Meredith Whitney Advisory Group LLC, is now forecasting another looming crisis ahead of us.

In a recent editorial in The Wall Street Journal, Whitney discussed how credit cards will likely be the next credit crunch in the United States.

She predicts that more than $2 trillion of credit-card lines will be cut in 2009 and $2.7 trillion by the end of 2010.

"Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy," Whitney wrote in the Journal.
"Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57 percent contraction in credit-card lines."

Whitney acknowledges in the piece that credit was given away to freely in recent years.

But, "If credit is taken away from what otherwise is an able borrower, that borrower’s financial position weakens considerably," she writes. "With two-thirds of the U.S. economy dependant upon consumer spending, we should tread carefully and act collectively.

Indeed.

Brian

Don’t be fooled by one good week

A couple of really good days in the market this past week brought more speculation that we were finally at the bottom.

Don’t buy it. At least not yet.

True, the Dow did close up nearly 600 points on the week — a 9 percent gain.

But we’ve seen this kind of action before, only to have it followed by the opposite action.

“This is probably a bear-market rally, but we’ll accept it for what it is,” Steven Roge, a portfolio manager with R.W. Roge & Co., told the Wall Street Journal.

Roge said he expects the S&P 500, now at the 750 level, to fall to about 600.

Of course, one never knows what fuels such predictions. Could it be Roge has short positions he wants to continue to take advantage of in a downward moving market? Is he just guessing?

It’s hard to know.

But he’s not alone in his opinion that a couple of decent up days do not necessarily translate to the bottom being reached.

However, it’s probably not a bad time to start eying some stocks that show promise upon recovery.

James B. Stewart, who writes a similar column to this (although for a much bigger paper, The Wall Street Journal), has started accumulating some stocks recently and has, in fact, been nibbling at stocks during much of the downturn that began in December of 2007.

Some of the stocks Stewart likes at their current levels are General Electric (GE), Quality Systems (QSII), a health care stock and retailer Buckle (BKE).

Stewart also bought General Mills (GIS) and Amazon (AMZN).

Summing up his convictions, Stewart wrote: “The market experienced a rare rally Tuesday, which naturally comes as a relief. But even before this, I felt good about buying these stocks. After years of practice, maybe I’m getting my emotions into line with my rational conviction.

“Which is, to echo the president, that this is a great opportunity to buy, no matter where the market goes in the next weeks or months.”

That got me thinking.

Maybe it’s time to quit sitting out after all.

Nah. I think I’ll stay where I am.

I need some more convincing.

But I do hope that maybe last week did bring about a turning point and we can get back to the business of making money again.

Brian

Numbers keep market in a plunge

I knew this past week was going to be bad, but I didn’t know how bad.
The nation’s jobless rate hit 8 percent, the highest level in 26 years, which served to place the Dow in 6,000 territory.

Locally, Manatee County’s jobless rate hit the 10.1 percent level. It was in the 2.9 percent range when I started working here just under three years ago.

And experts say the nation’s unemployment picture is going to get worse before it gets better.

That doesn’t bode well for stocks, and the market as a whole.

Last year, people were predicting the Dow would fall to 5,000. Myself and others thought this was ludicrous and representative of the sky-is-falling mentality.

Now, it doesn’t seem so far-fetched.

According to one market expert, 5,000 in the Dow might be wishful thinking.

Peter Eliades, who runs the Stock Market Cycles investor newsletter, was recently interviewed by MarketWatch about his thoughts on where the market is heading.

Eliades predicted that the Dow may actually fall to the 4,000 level in the near-term, and offered little in the way of optimism for investors.

In fact, he recommended that investors take advantage of any future rallies to lighten up on stock positions. He believes that any rally in the near future will be a bear market rally.

Asked where investors might find opportunity, Eliades told MarketWatch that gold has the potential to be a sound long-term investment and may reach $2,000 an ounce.

"But gold is not a place for the average investor to be, because it’s too volatile," he added.

Fear in the air

As for me, I’m scared to death to invest in anything at the moment. And with the market’s action of late, I’m apparently not alone.

All the experts say this is exactly the time when stocks make sense — essentially, when the fear is palpable and "blood is in the streets."

But this fear has been going on for some time, all the way back to December 2007 when this recession supposedly began.

Since then, 4.4 million jobs have been lost and the headlines in The Wall Street Journal continue to carry descriptors like "worst," "lowest," "bad" and "horrible."

Yes, the best buys are to be had when others have sold everything and are too scared to reenter the market.

But knowing when that time has truly arrived is next than impossible to determine.

So I remain on the sidelines.

Hopefully when the true rally arrives, it doesn’t pass me by.

Brian

Next stop: 6,000 on the Dow?

We came precariously close this past week of edging down below the 7,000 mark in the Dow.

In fact, a mere 64 points separated us from 6,999 in the Dow at the market close Friday.

The government’s announcement that it was taking an even bigger stake in Citigroup (C), General Motors’ (GM) $30.9 billion loss for the year and continued bad news about manufacturing and consumer spending have all served to keep any attempts at gains in full check.

Data on deck for this week may make that plunge into 6,000 territory a certainty.

Economists surveyed by MarketWatch believe that Labor Department data to be reported this Friday is going to show more than 30,000 jobs lost in February than January.

Those economists expect payrolls have fallen by 630,000 in February and the national unemployment rate will increase from 7.6 to 7.9 percent, according to MarketWatch.

"With total revenue declining at its worst pace since the late 1950s, many businesses and governments are in survival mode and have no choice but to cut jobs," Wachovia economists said in the article.

Meanwhile, the market will be watching the outcome of the government’s "stress test" being conducted on the nation’s banks.

Basically, the test involves seeing how the nation’s biggest banks would hold up under the theoretical scenarios of unemployment climbing to 10 percent and home values falling another 25 percent (that may not be so far-fetched).

The government sees this as a way to accurately gauge whether or not nationalizing of certain banks is needed.

Banks that failed the test would have up to six months to address any capitalization or other problems.

But critics are already knocking the test, questioning its ability to actually predict how certain banks will fare if conditions continue to deteriorate.

And investors don’t want to see nationalization, for fear that the government’s ownership of a certain institution will turn into a protracted affair that would dilute shareholder equity.

It should be interesting to watch all of this unfold, but you may want to turn off the financial news on TV this week. It’s probably going to be a bumpy ride.

Brian