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I’m Dan Ascani, Executive Vice President at Weiss Capital Management, Inc., an SEC-registered money-management firm, where I manage three ETF-based investment programs on behalf of our clients.
With virtually all major developed-market indices declining upwards of 15% since the market peaked in October 20071 and volatility at extraordinary levels, I’m writing today to share with you some of my firm’s thoughts on the financial markets and what advice we’re giving our clients to help them preserve and grow their wealth as the markets are buffeted by a deepening credit collapse.
The decisions you make today are vital to your personal wealth tomorrow, as the tumbling U.S. dollar continues to erode purchasing power and the U.S. economy falls deeper into recession. Since the first signs of a credit crunch presented in mid-2007, our investment team at Weiss Capital Management — a separate affiliate of Martin Weiss’ publishing entity, Weiss Research — has been advising our clients and helping them prepare for significant financial and economic difficulties ahead.
As a reader of Money and Markets, you probably have a solid head-start on adding a level of protection and profit opportunity, geared for turbulent market conditions, to your portfolio. You may also prefer to manage your own money, make your own investment decisions and implement those decisions, and that’s fine, too.
On the other hand, as conditions deteriorate you may be ready to consider professional management for your investment portfolio. That’s where we make the decisions based on your needs; and then we implement and monitor them carefully, so you can do what you’d rather be doing, when you want to do it.
Either way, I hope the information I share in the next few pages will be of value to you. And if you decide you want more information about our products and services, I invite you to call me personally (my contact information is at the end of this letter), or you can speak with one of our financial advisors.
Erratic headwinds are blowing
Increased volatility has already created its own kind of pandemonium on Wall Street. Many professional investors — portfolio managers and money managers alike — have been trading more frequently to adjust allocations, in an effort to batten down the hatches. By all measures, the down market cycle, which began last summer and has fully carried over into 2008, shows no signs of abating and rather seems to be worsening.
In fact, for the second time this decade, the equity markets are in the early throes of a bear market.
Nearly every major sector of the economy has spawned a regular cascade of grim predictions:
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- The subprime mortgage and credit crises are deepening into an all-out collapse.2
- The housing sector is facing a new surge in defaults and foreclosures (see chart at right; source: RealtyTrac as of March 13, 2008).3
- The U.S. dollar has plunged to historic lows versus the euro and continues to come under severe pressure against other major world currencies (see charts below; source: BigCharts.com as of March 12, 2008).4
- The manufacturing and service industries are contracting substantially.5
- Employment is slowing dramatically.6
No wonder these signs point to an even slower pace of economic growth in the U.S. and around the world. Worse, we don’t see any reversal of this overall trend any time soon. That’s because while the Federal Reserve is doing what it can, it’s too little, too late to prevent damage to the market and economy.
- When it comes to using its fiscal and monetary tools to stimulate the country out of the great unwinding of the massive debt build-up, the Fed is basically powerless.
- The massive cut in short-term interest rates and the planned injection of hundreds of billions of dollars through long- and short-term loans that the Fed has planned will not avoid the crisis of confidence that’s unfolding across America and that the world is watching closely.
On the other hand, at Weiss Capital Management, we are students of history, and looking back over the last decade or more, we’ve watched the markets endure some pretty grim news and survive and prosper again:
- The Asian “contagion” of 1997 was marked by a meltdown in currencies and stock markets across several Far Eastern countries. Indonesia, Korea, Malaysia and Thailand lost, on average, about 50% of their value.
- In 1998, there was the Russian bond default and failure of Long Term Capital Management.
- In 1999, many feared the Y2K fallout — expecting technology-system failures across the globe.
- In 2000, we witnessed the bursting of the tech bubble and subsequent rout in tech-investors’ portfolios.
- Terrorist attacks in 2001, the collapse of Enron and the ensuing corporate accounting scandals took their toll.
- And today, we have a deepening credit crisis that could very well lead to a credit collapse.
With every crisis, opportunities exist somewhere and astute investors find a way to take defensive action and seek out opportunities along the way. So, from our own perspective, there is a silver lining in this cloud — it’s our job to distinguish the hysteria from the facts and position our clients for success on their investment road.
To us, that means “smart-money” portfolios will be adjusted to weather an uncertain storm in the short term and be positioned for capital appreciation over the longer term.
Weiss Capital Management:
What we’re telling our clients
First and foremost, to our most risk-averse clients, we’re advising increasing overall cash levels by jettisoning high-risk investments. Granted, yields are substantially lower now than even two months ago and may likely go lower, but preservation of capital is crucial if your time horizon is short.
Next, we’re deploying short-term strategies among all of our investment programs, designed to help weather the storm and manage risk should the market encounter greater extremes and dislocations than anyone expects.
Last, we are investing in key assets and markets where we believe new opportunities for growth are still attractive. These include investments in inverse-index mutual funds and ETFs, currency investments that profit from a declining dollar, and commodity funds that offer capital-appreciation potential in gold, oil and energy, agricultural goods and more.
We recommend that you do the same, whether you do it on your own or seek the help of a firm like Weiss Capital Management to do it for you. We offer a number of investment strategies — either alone or combined — that can help you accomplish each one of these recommendations. Which strategy is right for you will depend on your individual circumstances …
Strategy #1: Keeping or increasing your cash on the sidelines for safety and liquidity has become one of the primary objectives for many investors. A cash-type vehicle you may want to consider: the Weiss Treasury Only Money Market Fund (Weiss Capital Management, Inc., or its affiliates, provides advisory, administrative, distribution and other services, and receives compensation). Invested in U.S. Treasury securities and equivalents, it offers a foundation to a portfolio made up of stocks and bonds while you wait for more favorable opportunities on the long side of the market; or …
Strategy #2: Investing in inverse-index mutual funds or ETFs that are intended to go up when the overall market or specific sectors, regions of the world or countries are going down; or …
Strategy #3: Implementing a hedging strategy on your current portfolio like our Weiss Bear Strategy; or …
Strategy #4: Investing in one or more of the three separate ETF-based managed programs I direct for Weiss Capital Management. Two of these programs are designed to go into defensive mode when the equity markets decline. The third is more aggressive, in that it seeks to make money on inverse-index ETFs when the program’s methodology points to a sustained decline in stocks. The bottom line is that all three programs are designed to participate whether markets are going up or down.
Diversifying with ETFs
As a reader of Money and Markets, you’re likely very well-informed about investments. So I’m confident that you’re also familiar with exchange traded funds (ETFs) and how they work, and that you may even own a few. Such a large number of ETFs have been launched in the last two years or so — many pegged to virtually identical indices or tied to niche indices — that finding your way through the maze can be daunting for even the best of us.
ETFs are easy to use to diversify your portfolio and manage risk for a number of reasons:
- ETFs span many sectors, industries, regions and countries of the world.
- ETFs are about more than just stocks — they also hold fixed-income securities and alternatives such as gold, commodities and real estate.
- ETFs are well-situated for sector rotation — a strategy that changes the portfolio weighting of various sectors as market cycles change.
- ETFs can be sold short* — a strategy that attempts to capitalize on market or sector weakness.
- ETFs, in particular inverse-index exchange traded funds, can be used to hedge against market or sector declines.
What you may not know is that of the 629 exchange traded funds currently trading on U.S. stock exchanges7, 35 are considered “short” or “ultra short” ETFs8 that are designed to move in the opposite direction of the overall market or a specific sector, country or region of the world. Given the current market environment, this is, perhaps, the most important development in the growth of the ETF universe since the first ETF was launched in the U.S. in 1993.9
So depending on your outlook for the market, you can buy inverse-index ETFs that are intended to increase in value when indices such as the Dow Jones Industrial Average (inverse ETF symbol: DOG), the S&P 500 Index (inverse ETF symbol: SH), the Russell 2000 Growth (inverse ETF symbol: SKK) or Value (inverse ETF symbol: SJH) indices go down.
And the opportunities aren’t limited just to the U.S. market. You can buy inverse-index ETFs that track international indices such as the MSCI EAFE® Index (inverse ETF symbol: EFZ), the MSCI Emerging Market Index (inverse ETF symbol: EUM) and even the FTSE/Xinhua China 25 (inverse ETF symbol: FXP).
I only mention these exchange traded funds as examples to show you how broad the universe of inverse-index ETFs is, and not as a recommendation to buy or sell. That will depend on your personal investing needs.
That’s what I do in managing Weiss Capital Management’s three ETF programs: I invest in ETFs designed to go up when my ETF model indicates that the equity market is in a sustained uptrend, and in inverse-index ETFs that are intended to go up when my ETF model indicates that the markets are likely to trend lower.
What is sector rotation and why is it important?
Sector rotation is simply the overweighting of some sectors while underweighting others to take advantage of money flows moving in and out of the market.
This is important because, over time, sectors go in and out of favor. Sectors that are the best performers today won’t necessarily be the best performers tomorrow, next week, next month or next year. Rotating in and out of sectors as they gain and subsequently lose momentum is a strategy intended to outperform the market over the long term.
After all, the strategy of overweighting some sectors and underweighting others is precisely what many big institutions do. And it’s the billions of dollars in money flows they control that move these sectors up and down.
I utilize a sector-rotation strategy in managing two of Weiss Capital Management’s ETF-based programs — the WCM Sector Series ETF Sector Rotation: Concentrated and ETF Sector Rotation: Diversified programs.
When my ETF model says the markets are trending higher, both programs:
- target the strongest ETFs that have the potential to outperform on the upside — the ones with the strongest inflows of money.
When my model says the markets are trending lower, both programs can:
- hedge against market or sector declines by investing in inverse-index ETFs that are designed to go up in value when the overall market or specific sectors decline, or …
- move up to 100% in cash.
Of course, there are certain risks associated with investing in ETFs or in trying to benefit from the downside of the equity markets with inverse-index ETFs. And there are no guarantees that these investment programs will achieve their objectives. However, you’re an investor, and I feel that it is important in this difficult market environment to be proactive in pursuing your goal of preserving and building your wealth.
To me, that means adding a strategy that is designed to take advantage of short-term trends in the market without abandoning your overall longer-term investment focus. This is what many investors failed to do during the bear market that began in 2000 and lasted until October 2002. They stayed only on the long side of the market and watched their investments go down in value rather than employing a strategy that may have enabled them to take advantage of declining stock prices.
The WCM Sector Series ETF Sector Rotation: Concentrated Program is suitable for investors with an aggressive risk tolerance or for those investors who wish to add an aggressive strategy to their existing investment portfolio mix. The WCM Sector Series ETF Sector Rotation: Diversified Program is more moderate. To find out if these two programs are right for you, please be sure to talk with a Weiss Capital Management Financial Advisor. If you have any questions I can answer, or would like to know more about how a sector-rotation strategy can fit into your overall wealth-building efforts, be sure to ask for me.
What is asset allocation and why is it important?
Asset allocation is the distribution of investments among different asset categories such as equities, fixed income and alternatives (such as gold, commodities and real estate).
It’s important because, over time, market leadership changes. Depending on market and economic conditions, as well as other factors, sometimes it’s more beneficial to have more money invested in equities and less in fixed-income or alternative investments. And other times it’s advisable to rebalance a portfolio and decrease your holdings in equities in favor of fixed-income securities, alternative investments or even cash.
This is important because history shows that by rebalancing a portfolio to include various classes of investments, it’s possible to achieve more consistent returns, over time, with managed risk.
That’s what I do in managing the Weiss ETF Strategic Allocation Portfolio. This core ETF-based investment program is suitable for investors with a moderate risk tolerance and employs an asset-allocation strategy that offers the potential for capital appreciation by:
- Allocating ETFs among three primary asset classes: equities, fixed income and alternatives (gold, commodities, real estate);**
- Increasing the program’s allocation to equity ETFs during uptrending markets, according to my ETF model;
- Decreasing its allocation to equity ETFs when my model points to downtrending markets;
- Spanning both domestic and international markets;
- Rebalancing periodically to maintain or change allocations between asset classes;
- Investing a portion of the portfolio in inverse-index ETFs when the market environment is particularly poor; and …
- Raising cash during market declines to help manage risk and preserve capital for future investment.
So how have we done during periods when the market was trending higher and then reversed course and trended lower? Take a look:
*Net returns: After management fees — please see section on “Performance” on Disclaimer and Disclosure page for more information.
Here’s something to think about: The returns you’re looking at include commission costs that investors in these ETF programs had to pay through the end of 2007. That’s because the brokerage clearing firm processing the trades charged a commission, which was passed on to investors. However, effective January 1, 2008, investors in our three ETF programs no longer have to pay commission costs. We’ve worked out a better deal with our custodian and broker, Fidelity Investments, so that you pay only a slightly higher annual management fee to Weiss Capital Management no matter how many ETF trades we transact on your behalf in these programs.
So regardless of which program may be suitable for you — our Concentrated, Diversified, or Strategic Allocation ETF program — we strongly recommend, as we do with our own clients, that you consider implementing a strategy to help you navigate through these choppy waters, with the goal of preserving and even growing your capital during these difficult economic times.
Strategies for all investment climates
Weiss Capital Management has been managing money for individual investors and institutions for 28 years. We are registered with the SEC as an investment adviser. When you work with one of our Financial Advisors, we will match your personal investment goals with our various investment programs.
We can offer you investment programs with varying objectives and degrees of risk that are suitable for all investment climates — up markets, down markets and markets like we’re experiencing today, which are extremely volatile and unpredictable — that other advisers or brokers may not be able to offer you.
And if you invest in any of these programs before May 31, you will permanently lock in our $100,000 household minimum for establishing an advisory relationship with our firm. (Beginning June 1, 2008, our household minimum for new investors will be going up to $250,000.)
So pick up the phone and call us today at 800.814.3045 or even easier, click here, give us your contact information and we’ll call you. Or visit our website at www.WeissCapitalManagement.net
We’re looking forward to hearing from you.
Regards,
Dan Ascani
Executive Vice President and Portfolio Manager
Weiss Capital Management, Inc.
P.S. For our important disclaimers, please click here.
* Short selling requires the use of margin, which involves greater risk.
** No more than 60% of the program will be invested in equities, 40% in fixed-income securities and 20% in alternative investments.
1 Bloomberg data, October 9, 2007 through March 10, 2008
2 www.nytimes.com, Mortgage Crisis Spreads Past Subprime Loans, Vikas Bajaj and Louise Story [February 12, 2008]
3 CNNmoney.com, Foreclosures up 60% in February, Ben Rooney [March 13, 2008]
4 MarketWatch.com, Dollar breaches 100-yen level, William L. Watts and Polya Lesova [March 13, 2008]
5 CNNmoney.com, Factory orders see largest fall since August [March 5, 2008]
6 CNNmoney.com, Job losses: Worst in 5 years, Chris Isidore [March 7, 2008]
7 ICI.org
8 ProShares.com
9 Wikipedia.org/wiki/exchange_traded_funds
About Money and Markets
For more information and archived issues, visit http://legacy.weissinc.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Sean Brodrick, Larry Edelson, Michael Larson, Nilus Mattive, Tony Sagami, and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include John Burke, Amber Dakar, Adam Shafer, Andrea Baumwald, Kristen Adams, Maryellen Murphy, Red Morgan, Jennifer Newman-Amos, Julie Trudeau, and Dinesh Kalera.
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