Dangerous Bullishness

By on May 25, 2006

Originally published on:

February 9, 1997

Investment newsletters are for the most part worthless. Who says so? The Duke University Fuqua School of Business and the University of Utah’s Eccles School of Business. According to their five year study, only 16.5 percent of newsletters provide valuable information. Shockingly, the best performing newsletters’ strategies produced a very weak 12.6 percent annual return from December 1990 to December 1995. This was during one of the strongest five year periods of market returns we have ever witnessed. The market went up at an annual rate of about 16 percent over this timeframe.

The chance that you’ll find an investment newsletter worth the price of subscription is very slim indeed, if you’re to believe the results of this study. I’m only a little surprised at these lackluster results. I’ve subscribed to various newsletters in the past, and have seldom found the advice offered to be anything worth cheering. In fact, I truly believe the best route for most people is a mix of index stock funds (domestic and foreign) and cash, with a heavier allocation towards stocks the younger the person. Unfortunately, that’s neither fun nor exciting, but a perfectly logical choice.

Dangerous Bullishness

Caution is warranted at this time. Quick and Reilly recently released the results of their quarterly investor sentiment poll. The poll shows that 58% of investors are bullish; the highest reading since the poll began in 1992. Although the bull market is probably far from over, over the intermediate term (6 months) we could see significant weakness. Now is probably not the best time to be plunging into the market.

Garzarelli Justifies Her Position

Elaine Garzarelli was recently interviewed at length by the Nightly Business Report and CNN Moneyline. She made an attempt to explain her “about face” on the market. If you recall, she’s the famous market “guru” who claimed that her system has never made a bad call on the market at the same time she said “sell all stocks” back in July 1996 when the DJIA was around 5,300. She recently became bullish again, calling for a 10 to 15 percent rise in stocks this year.

Ms. Garzarelli told the Nightly Business Report that the system “they” used was too heavily weighted towards reported cash flows, which were not being properly reported. She blamed her failure on corporate America, instead of herself, where it truly lies. She says they now place more emphasis on operating earnings, which she claims is a better measure of where the market is heading.

I’m the last person who should be persecuting someone for changing their system, but I really have a problem with somebody who claims they can call the top and bottom of the market within eight percent. This is just not possible, and anyone who says they can do it…run…run away from them as fast as you can.

In another case of false prophets (or is it profits?), there is the self-proclaimed “educator” littering the radio airwaves daily claiming he can “teach” people how to generate 100% returns every 2 1/2 to 4 months. Wow….if he could do that, he could turn $10,000 into over $300 million in five years! Then why does he charge thousands of dollars for his seminars? He says you should forget about annual returns. He argues that you should concentrate on “cash flow”, or in other words, turn the stock market into a business. He never fails to mention the letters he receives daily from his “students” claiming how many thousands of dollars they made, thanks to him. He conveniently leaves out the many letters he must get from disappointed investors who discover that his methods don’t work very often, and when they do, they surely don’t result in the spectacular returns he so irresponsibly trumpets. This reckless miscreant should be castigated and shunned for his flagrant misrepresentation of anything ethical. He is misleading the public and somebody in a higher position than me should put a stop to it.

“January Effect” Picks Not Impressive

I am sorry to report that the picks I made for the January effect in the December 29th issue, as a group, virtually broke even. Six of the ten rose, but not enough to offset the losers. As a group the list lost 1/10th of one percent, versus a gain of close to four percent for the S&P 500. If you spent two percent on round trip commissions, you would have ended up two percent poorer. A very depressing thought, indeed. Although January was a strong month for the market overall, the strength was again centered on the large blue chip companies. This was not a typical January effect phenomenon, when the oversold small caps generally make a comeback.

I believe most of the picks will perform well over the long term, especially companies like Carnival, Clayton Homes, Fleetwood Enterprises, Keane, Oakwood Homes, and UST. If anybody bought these stocks, I apologize. Needless to say, I doubt that I’ll make this an annual feature of this publication. I’m still not giving up on becoming one of the 16.5 percent to provide valuable information, though.

Portfolio Updates

On February 3, 1997, the revised Tactical Timing System went into effect. Those stocks with the lowest relative strength over the past 52 weeks were sold to bring the portfolios in line with the new recommended allocations. In the aggressive portfolio, Utah Medical (NYSE: UM; 11 1/2), Ryland Group (NYSE: RYL; 13) and Ultramar Diamond Shamrock (NYSE: UDS; 29 3/8) were sold. This brought the aggressive portfolio to an allocation of 79% stocks; 21% cash.

In the conservative portfolio, Kushner-Locke (OTC: KLOC; 13/32), ASA Limited (NYSE: ASA; 34), and Sports and Recreation (NYSE: WON; 6 3/8) were sold. The allocation in this portfolio is now 55% stocks; 45% cash.

Recommended Allocations

The recommended allocation for aggressive portfolios is 75% equities and 25% cash. The recommended allocation for conservative portfolios is 55% equities, 45% cash.

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