Rally Week Market Update For Week Ending 3/27/2009

We had a pretty good streak going in the markets this week until Friday’s profit taking spoiler. The technology laden NASDAQ index was even in the black year-to-date, if only for one day.  Despite the 20% plus gains over the last few weeks, all indexes remain in negative territory year-to-date and we remain in a treacherous bear market despite this rally.  Continued caution remains the advice on investing.

Are we at a bottom yet? Read on for one theory.

The severity of this bear market is a crisis in confidence more than anything else. What started out as a crisis in subprime mortgage loans quickly spread to leveraged instruments including credit default swaps and subsequently evolved into a more generalized crisis in confidence.

Over the past few months, recession pressures and a gloomy consumer mood have propelled financial markets lower. That’s why consumer expectations, usually considered an indicator of future spending, is an important gauge to watch.  The consumer outlook for the future, as measured by the University of Michigan/Reuters sentiment survey, fell in February before improving in early March.  The Conference Board also releases a monthly consumer survey; in February, expectations fell to a 40-year low.

With massive government stimulus now in place, the consumer mood could brighten in the months ahead.  New data for the University of Michigan/Reuters survey of consumer sentiment released Friday came in at 57.3 for March; that’s up slightly from February’s 56.3.  It was also slightly better than expected, but still near the worst reading in 30 years.

The Conference Board results will follow next Tuesday. If a market bottom is truly in place, we may see an upturn in this measure as well, according to analysts.

I remain skeptical of government estimates of personal spending and income, home sales increases, and unemployment.  First, they are estimates that ultimately get revised unfavorably when the real data becomes available.  Second, the pundits as well as the administration are content to “spin” any good news to suit their current agenda and to take credit for any positive news.  Finally, contrary to CNBC “entertainer” Jim Cramer’s assertions, the fundamentals of the economy still don’t support a solid upturn yet.  First and second quarter 2009 earnings reports will likely bear this out, so I’m pretty sure that we’re not out of the woods just yet; and not for awhile anyway.  Hopefully I’m wrong and this bull market will continue, but I continue to urge caution when investing.

Do you agree or disagree? I’d love to hear what you think.

Market Update For Week Ending 3/27/2009



Net Change

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Russell 2000












10-year bond




30-year T-bond




International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.

Sam H. Fawaz CFP®, CPA is president of Y.D. Financial Services, Inc., a registered investment advisor. All material presented herein is believed to be reliable, but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Opinions expressed in this writing by Sam H. Fawaz are his own, may change without prior notice and should not be relied upon as a basis for making investment or planning decisions. No person can accurately forecast or call a market top or bottom, so forward looking statements should be discounted and not relied upon as a basis for investing or trading decisions.

How Consumers Can Avoid Being “Madoff’ed”

As you are probably aware, Bernard Madoff, former NASDAQ Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC, has recently pled guilty to all charges against him and will be in jail for a very long time.  Incredibly, I’ve recently spoken with several individuals and they seemed to not be aware of Madoff’s most egregious offenses.

What did he do?  Madoff collected money to invest from clients, made up false statements to show that they were doing well, and used new clients’ money to pay interest and withdrawals to existing clients.  This is known as a Ponzi scheme and is estimated to involve more than a $50 billion loss for his investors.

Bernard Madoff’s Ponzi Scheme stands as an example of how the financial services industry has failed to protect the best interests of consumers. It highlights the increased need for consumers to proceed cautiously when working with an advisor and the importance of asking pointed questions before hiring a professional.

His clients didn’t see this coming.  Could they have?  Let’s look at three key safety tips that would have prevented this from happening:

Know what you own.  Stay with traditional investment vehicles such as stocks, bonds, Exchange Traded Funds (ETFs) and mutual funds that are publicly traded and listed on major exchanges like the New York Stock Exchange.  They are valued independently at least daily, if not minute-by-minute, while the exchange is open.  With the exception of common trust funds, you should be able to access pricing and performance of your individual investments in the newspaper or the Internet.

Use an independent custodian.  Madoff held his clients’ assets, managed them, and priced them via internally generated investment statements.  Naturally the investment performance will look better if the prices reported to clients are manipulated, which is allegedly how Madoff showed winning year after winning year despite market turmoil.

For example, as a registered investment advisor, we have selected TD Ameritrade Institutional as the custodian for our client accounts.  TD Ameritrade Institutional, as an independent third party, prices the investments owned and provides monthly statements to clients.  We have no control or input on investment pricing.

Each money management client of ours signs a Limited Power of Attorney on their TD Ameritrade accounts.  This limited power of attorney only allows us to:

  • Place trades in the account on clients’ behalf;
  • Receive copies of monthly statements, tax documents and trade confirmations;
  • Deduct our investment management and financial planning fees directly from the account.

While we can request a distribution on a client’s behalf (which must be mailed to their home address or transferred to another account in their name), our ability to withdraw funds from client accounts is limited to the payment of our financial planning and investment management fees.  Clients are always free to pay their fees by check and are never obligated to use direct deduction from their accounts.

Inquire about insurance.  Our clients benefit from fraud insurance.  Each client is insured with the Securities Investor Protection Corporation (SIPC) with coverage of $500,000 per account.  Keep in mind that fraud insurance does not protect against market declines; but it does protect against theft of securities or related fraudulent transactions.

Now as the post-Madoff era begins and the federal government and industry regulators decide the best course of action to protect consumers, people need to ask the right questions of an existing or potential advisor.

As a member of the National Association of Personal Financial Advisors (NAPFA), the country’s leading association of Fee-Only financial advisors, I encourage consumers to take the time to get to know an advisor and gauge his or her commitment to placing clients’ interests first.

Find out how the advisor and his or her firm are compensated.  Fee-Only compensation has the fewest conflicts of interest, but there are other acceptable methods as long as full disclosure takes place up front.  It’s important to know if an advisor will make additional money if you follow certain recommendations.

You should always know where your money and securities are actually held. As discussed above, most reputable advisors will use an unaffiliated custodian for the safe keeping of your assets.  This simple check and balance could have saved the Madoff investors millions by bringing the problem to the forefront earlier.

Legally, all clients are entitled to a copy of the firm’s Form ADV Part II or brochure.  It’s a compliance document that can be pretty dry reading, but it contains a lot of important information and ultimately shows that the firm is registered with the SEC or the state(s).  For an example, see our Form ADV Part II.

NAPFA and the Fee-Only advisor community are hopeful that the new administration, the SEC and other regulatory bodies will enact thoughtful regulations to protect consumers.

Consumers can access a Financial Advisor Checklist and Financial Advisor Diagnostic on the NAPFA website by visiting www.NAPFA.org and clicking on the Tips and Tools button in the Consumer Information section.  The Diagnostic tool includes an answer key to help consumers understand NAPFA’s recommendations for the most appropriate answers to the questions.

One final thought. One of the statements most widely used in basic investment course work is “if an investment sounds too good to be true, it probably is.”  Reportedly, Madoff claimed consistent annual returns of 10-12% with little volatility and no quarterly or annual losses.  I am not aware of any legitimate and reputable portfolio manager that can make that claim.  There simply is no investment available that doesn’t carry risk; certainly, any investment that pays those levels of return have inherently high risk.

Have you or anyone you know been a victim of Madoff? Please share your story and comments below.

Roller Coaster Market Ride for the Week Ended March 20, 2009

It was a roller-coaster ride on the markets this week. First we were down, then we were up, then we were down again. As I wrote earlier this week, volatility is here for a while in the markets and, although we were up overall for the week, the fundamentals just aren’t there to push things in a consistent upward direction.

Congress’ distraction with the AIG bonus debacle meant that they were focusing on that instead of moving along the plan for dealing with the financial crisis. As a result, companies are equally distracted by concerns of whether accepting further government help means more meddling in their business affairs. So instead of lending money, for example, financial institutions become more concerned about paying back the government and operating independently, thereby negating the whole benefit of the bailout. In addition, much needed talented employees may consider joining firms with no government restrictions on compensation or potential exorbitant taxes on their bonuses.  I’d be interested in your opinion here-please feel free to leave comments below.

I predict that we will continue to see some up days, some down days and generally sideways movement in the markets for some time. In the short-term, although we may see some net positive gains, there seems to be more risk than reward out there. Caution is still the approach we encourage.

My advice remains the same: consistent saving is your best defense against volatile markets. Keep contributing to that 401(k), IRA and your “dream” accounts. Pay down your debt as much as possible and make sure that you have a liquid emergency fund of at least 3-9 months of salary. And, as financial guru Dave Ramsey says, “refuse to participate in this recession” by enjoying every day, taking those vacations, and keeping in touch and sharing time with your loved ones.

Enjoy this first weekend of spring 2009. And remember, if the first robin of spring sees its shadow, you can expect at least twelve more weeks of crabgrass (at least according to “Magic” Matt Alan of Sirius-XM 70’s on 7.)

I’ve provided a weekly summary of the markets below:

Market Update For Week Ending 3/20/2009



Net Change

% Change





















Russell 2000












10-year bond




30-year T-bond




International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.

Sam H. Fawaz CFP®, CPA is president of YDream Financial Services, Inc., a registered investment advisor. All material presented herein is believed to be reliable, but we cannot attest to its accuracy.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Opinions expressed in this writing may change without prior notice.

Pre-Spring Rally: Short-term or Long-term?

Last week’s continued rally on Wall Street was welcome news for weary investors.  The 10%+ rise in the stock market was not sufficient to erase year-to-date losses, but any upside is welcome. The catalysts for the rally included positive reports from the financial institutions taking government help, talk about changing trading rules for short sellers, and the possibility of an accounting change in how assets are valued on company balance sheets.  Also, the markets were heavily compressed on the downside, so just like a spring, they had to give a little to the upside.

Unfortunately, the fundamentals of the economy still do not support a long term rally, so this secular bear market is not over.  What we’ve seen this past week is likely not the bottom and we are therefore approaching the markets very carefully.  There is more bad news to come from 1st and 2nd quarter poor earnings reports as the weak economy hits more and more companies.  From exporting companies to the big international firms, the global slowdown is hitting almost everyone.  Even hospitals are being challenged, and unemployment is sure to rise.  We’ve seen the effects of the sub-prime mortgage mess, and I don’t think we’re nearly done as more of the next tier of (higher quality) adjustable rate mortgages adjust upward.  Add to that the lagging commercial real estate markets which are no doubt feeling the effects of lower property prices and lower occupancy.

A lot of you have stayed in the market the whole time it has been falling and are wondering what to do.  If you have a ten-year time horizon, you can probably buy now and not worry.  But I wouldn’t make any big moves right now based on this short-term upturn.  If you are making regular contributions to your IRA or 401(k), you should continue to do so to help offset some of the past losses and buy companies at ½ off (or 2 for 1 depending on your favorite shopping term).  As I’ve said before, there is just no substitute for regular and big savings.  We could see this real bear market rally lure investors back in, just to crush their hopes soon thereafter.  As always, each person’s individual situation and goals are different, so you should talk with your own financial planner about what makes the most sense for you.

I believe that we have awhile to go in the current secular bear cycle. While we will see a “bottom” in stock prices at some point, maybe even this year, many believe that stocks are still overpriced relative to their future earnings potential.  No doubt, there is another bull market in our future  But I would rather be patient and rely on a cautious style of investing for now.  If I see opportunities to make short-term profits with some tactical moves for my clients, I will make them while limiting our downside risk.  But if I miss the first part of this run-up, so be it.  I see more risk than reward in this latest run-up.

And if you thought this posting was all bad news, then I’ll remind you that (my favorite season) spring officially arrives this Friday at 7:44 AM Eastern Time.  I know that most of you have had enough of the snow and cold and welcome the anticipated change in weather.  Me too.

Sam H. Fawaz CFP®, CPA  is president of YDream Financial Services, Inc., a registered investment advisor. All material presented herein is believed to be reliable, but we cannot attest to its accuracy. All material represents the opinions of Sam H. Fawaz.  Investment recommendations may change and readers are urged to check with their investment advisors before making any investment decisions. Opinions expressed in this writing may change without prior notice.  You can find out more information about YDream Financial Services at http://ydfs.com.

Some comments in this article were based on author John Mauldin’s recent and fine “Thoughts from the Frontline” newsletter. You can subcribe to it by clicking on the above link.

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