Muni bonds up nearly 10% seven months after Meredith Whitney predicts catastrophe

On the very day that she sounded the alarm (Meredith Whitney:  Municipal Bonds Could Collapse), municipal bonds (as measured by the MUB ETF) changed course and have since increased nearly 10% on price alone (not including fund distributions).

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"The only function of economic forecasting is to make astrology look respectable."

-- John Kenneth Galbraith

Selling burns 401(k) investors who dumped stocks

According to a study by Fidelity Investments,

"Participants in 401(k) savings plans who dumped stocks from Oct. 1, 2008, to March 31, 2009, when the Standard & Poor’s 500 Index fell 31 percent, and hadn’t returned to equities as of June 30, 2011, had an average account balance increase of 2 percent, according to the study released today. Those who maintained some equity allocation during that period saw their balances rise 50 percent on average."

And this happens consistently as countless studies have shown that investors returns trail fund returns and fund flows confirm investors predisposition to buy high and sell low.  Sigh.

Read the whole story:  Selling burns 401(k) investors who dumped stocks

Time in versus timing

The largest gains often occur when they are least expected.

"Consider the case of an investor who found out that he was overconfident of his ability to stand the stress of the kind of bear market we had in 2008. By November 20 of that year, he realized he had overestimated his willingness to take risk. He sold out of stocks with the S&P 500 closing at 752. His plan was to wait until the market had been up for more than 30 days (or when the green flag would be up).

With the S&P 500 closing at 903 at the end of the year (and having missed out on a rally of 20 percent), he buys again, believing that it was now safe to get back in. Unfortunately, the market dropped another 25 percent by March 9 and he had enough. Do you think this investor will ever be able to buy again? And of course, unless he had, he missed the greatest market rally in 70 years. One of the problems with market timing is you have to be right twice, not just once."

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Read the rest of this article from Larry Swedroe, Lessons from 2009: Unexpected Bursts and Staying Invested

State Pension Funds' Woeful Underperformance

The state of Washington scored the highest marks (3.92%) over the last decade for state pension funds with greater than $20 billion in assets, according to a Bloomberg survey.

Sadly, they all woefully underperformed the Vanguard Balanced Index fund (4.79%) over the same period (lost decade?  really?).  An indexed strategy that included small allocations to the Vanguard REIT index fund (10.99% over the decade) and the Vanguard Small Cap Index fund (7.41%) would have blown the state pension funds away by an even higher margin.

As usual, there's more money to be made "selling the system" than there is in the system itself.

Performance has no persistence... three top managers now competing for last place

Three rock star fund managers, Bruce Berkowitz, Kenneth Heebner, and Bill Miller, are competing for last place as "their bets on an economic expansion backfired."

"Bet" is the operative word.  Heebner's fund was 36% invested in auto stocks at the end of 2010.  Berkowitz's fund had 74% of its holdings in financial stocks as of Feb. 28.
Miller's fund fell 0.5% through June 9, trailing 94% of rivals, according to Bloomberg data.

"Managers don't go from geniuses to idiots overnight" said Russell Kinnel, director of mutual fund research at Morningstar.

True. Gambling has little to do with intelligence and much to do with luck.  And apparently theirs has run out.

Investment News:  Berkowitz, Heebner, and Miller in tight battle -- for last place

John Gay named as Five Star Wealth Manager in August Texas Monthly

John Gay named as Five Star Wealth Manager in August Texas Monthly

Selection process:

Five Star Professional's research team contacted consumers in the Dallas/Fort Worth region and asked if they had experience working with a wealth manager. Consumers who agreed to participate in the survey provided the name of the wealth manager and rated that individual according to key criteria such as integrity, communication and customer service. 

Surveys were sent to one in four high-net-worth households (more than 129,500 consumers) and more than 16,200 registered financial services professionals within the Dallas/Fort Worth region.

The survey data was collected and scored, resulting in the list of 2011 Dallas/Fort Worth Five Star Wealth Managers. The research methodology allows only 7% or fewer wealth managers in a given market to qualify for the Five Star Award. 

Five Star Professional adheres to the five criteria and six representations stated in the DALBAR SEC Staff No-Action Letter and the eight guidelines stated in the Investment Advisor Association SEC Staff No-Action Letter regarding third party recognition.

Five Star Professional follows standard sampling and survey practices used by other professional research organizations. Their research also includes feedback from industry peers and leaders, and a regulatory review to provide necessary checks and balances.

Your investments and the debt ceiling

For the past several weeks, there has been much hand-wringing going on over the continuing "debt ceiling deadline."

Yet the excessive amount of political rhetoric can't conceal two obvious conclusions:

1)  It is highly likely that our politicians will renew their own license to print money.  Whether or not they do it by the August 2nd "deadline" is immaterial.

When push comes to shove (ie, when Social Security checks become threatened), they will act to raise the debt limit.  If interest rates rise or if a ratings downgrade happens, it can be attributed to the sorry state of the country's finances, not to the lawmakers' failure to raise the debt ceiling.

2)  The current and future fiscal expectations in the U.S. are what drive the financial markets, not the debt ceiling squabble nor the "debt rating" handed down by the ratings agencies.

The financial markets and the American people are clearly unhappy with our deficit spending and investors "vote" every day based on their actions in the financial markets.

With all of the political posturing going on in D.C., you might be tempted to make changes to your investment portfolio.

My advice is to fight that urge, stay the course, and do nothing.
(assuming you have a sound, diversified portfolio in place that reflects your goals, timeframe, and risk tolerance)

It is most assuredly a losing proposition to attempt to "outsmart" the consensus of the market with knee-jerk reactionary investment changes. As always, the market consensus is constantly processing new information and acting accordingly.

Any "common knowledge" has long since been reflected in security prices and has no hope of being exploited.

The good news is that the debt ceiling is forcing the politicians to confront the ballooning government spending problem sooner rather than later and we can only hope that meaningful progress will be made.

In the meantime, expect high volatility in the markets during the short-term-- markets hate uncertainty and that seems to be what we will have for the foreseeable future.

Here is a recent commentary on this debate that gives a very thoughtful perspective:

 Hysteria and the debt debate