IT'S A NEW MARKET.

The Market Has Changed. For several weeks now, I have been saying that there is more upside potential in the stock market than downside risk. Now that the market has roared past the 8000 level that may be no longer true. If you will recall, when the market dropped to 6400 and reversed itself back to above 7000, I said that we now have weak support at 6400 and resistance at 8000. Once the market broke above 8000 and remained there for several weeks, 8000 again becomes a support level. This indicates there may be a potential for the market to reach 9000, the next resistance level.

How Valid is This Type of Analysis as a Predictive Tool. Perhaps the main reason for the validity of this analysis is that lots of trader/investors follow it. While I don't believe it is highly accurate, neither do I believe we can afford to ignore it. As I have said about other predictive tools, it is just another data point. What I have now concluded is that the market has reached a new level of stability. There is little reason to believe that fluctuations in the Dow of 500 points a day will return anytime soon. A strong indicator in this area is the VIX, a measure of implied volatility in the marketplace. This is also a measure of investor fear. Now that this indicator is in the low 30's, (As opposed to the 70's of a few months ago) it appears that fear has diminished to a large extent. The bottom line is that there may still be some more upside; however, the upside potential is no longer an order of magnitude higher than the downside risk. There are many hurdles in our economy and full recovery may be a considerable distance down the road. I believe a substantial recovery to prior levels will take several months, perhaps even years.

So Why Should We Be In The Market At All? Because there are few other places to invest. Bank CD's and long-term treasuries pay so little that those of us who need to support our retirement with our investment portfolio have little choice but to invest in the market. We can still get dividends that exceed those of fixed income investments from relatively stable companies like AT&T and Bristol Meyers. We can also speculate a bit in REITs and business development companies, some of which still pay dividends in excess of 8%.

What About Real Estate? There are a lot of reasons for housing prices to increase. Mortgage rates are still quite low, the government is giving $8,000 to first time buyers, and the affordability index is at all time lows. If those economists who predict that massive federal deficits will cause runaway inflation are correct, housing offers one of the best inflation hedges around. A word of caution: Don't expect this to be a passive investment. Even with a good management company like Westmont, there will be some hard decisions and difficult times in coping with with rent collections, maintenance, and vacancies. With all this, I believe real estate investment returns will exceed the stock market in coming years.

Coming Back To Denver At The End of May. I will be spending a couple of weeks in Denver at the end of May. Those I never got around to seeing on my last trip could call Susan (She always knows how to find me) to arrange an appointment.

IS THERE A PONZI SCHEME IN YOUR FUTURE?

How Do You Define A Ponzi Scheme? I would doubt I have many readers who aren’t aware of the definition of a Ponzi scheme; however, I will define it briefly for those who aren’t sure. In recent weeks it seems like each week you hear of an investment advisor who confesses to operating one of these schemes. The modus operandi goes like this: The advisor solicits clients by promoting a long track record of successful investments. This solicitation is usually accompanied by a list of satisfied clients who have benefited by this approach. While these satisfied clients have received excellent returns, the returns do not come from a successful strategy but from subsequent clients who’s funds are not invested but diverted to furnish returns to the previous client. This can last for a long time as long as new clients keep investing their money. Eventually, the system has to come to an end, as the current clientele grows so large that not enough new clients can be located to furnish their returns. When the scheme is finally brought to light, losses to clients can be astronomical.

How Do You Avoid Ponzi Schemes? Practitioners of Ponzi schemes include names like, Donahue, Hoover, Madoff, and Stanford. There are undoubtedly others who haven’t been discovered yet. Here are some of the characteristics they have in common. 1. High lifestyle including things like large boats, airplanes, multiple luxurious houses, and lavishly decorated offices. 2. Claims to have a unique insight into the markets. 3. A list of satisfied clients. 3. Consistent above market returns. 4. An intense sales approach that offers you membership in an exclusive “club” that isn’t open to just anyone. 5. They are prone to anger for those who decline to invest or who need time to think about it. Allen Stanford claimed to be a knight, owned a lavish offshore suite of offices and a bank and went by the title of “Sir Allen.” He tried to turn himself in last week but was turned down because the investigation is still incomplete and no warrant has been issued for his arrest. If you run into a prospective advisor who has two or more of these characteristics, back off in a hurry.

How Do Ponzi Schemes Get Started? I have often been amazed that advisors start these schemes despite an almost certainty of eventually getting caught. In a recent article posted on CObizmag.com,, Stephen Mauzy, Chartered Financial Analyst, offered some insight into how seemingly intelligent advisors end up in these quagmires. In the beginning many of them have an idea for a strategy that seems likely to work. It usually does work for a period of time. Unfortunately, virtually any strategy will eventually fail for a period of time, no matter how well it is thought out. When this happens some advisors, driven by ego, greed, or pride, resort to Ponzi schemes with the intent of making the clients whole again. Some may even be successful but the majority end up on an irreversible downhill slide. I recall, one Denver advisor pleaded with the judge for a lenient sentence so he could earn the money to repay all those who were cheated. The judge didn’t fall for this and responded with a 100-year sentence.

Investing Mistakes Are Unavoidable. In the late 90’s, I came to the conclusion that high dividend stocks provided lower volatility and cash flow for reinvestment or use in funding retirement expenses. This approach worked well throughout the late 90’s and early 2000’s. Using this approach, I was able to avoid the “tech wreck” of the early 2000’s and produce relatively consistent above market returns. While I never claimed that this strategy would always be successful, I was surprised when this sector was among the hardest hit in the recent debacle. Although, I still believe this strategy will ultimately outperform the others for clients who must draw income from their portfolio and I have never been tempted to try to placate clients by lying to them, I can certainly see how some might be short sighted enough to resort to these schemes. I will use this humbling experience to strive for more refined strategies that minimize the effects of the inevitable mistakes of the future.

ARE YOU READY FOR SKYROCKETING ENERGY?

Did You Think You Would Benefit From Lower Prices For Fossil Fuels? Think again. In the absence of an uproar from voters, pending legislation will raise the cost of everything from utility bills to driving your automobile. Congress and the President want you to limit your use of fossil fuels and they plan to force you to do it by a variety of ways. One of these is a new ruling recently passed by the EPA stating that emissions from the combustion of fossil fuels represents a hazard to our health. This opens the door for the government to impose restrictions on the burning of fossil fuels in order to protect your health. Pollution from burning fossil fuels can indeed be hazardous. The problem is that, even if these fuels are burned as cleanly as possible, they will still produce CO2, an odorless, colorless gas with out which life on earth would cease. CO2 is now considered to be a "greenhouse gas" and the major cause of global climate change. The only way to severely limit CO2 emissions is to drastically reduce the combustion of fossil fuels. Since every land dwelling animal that breathes produces CO2 with each exhale, it is obvious that life on earth will always produce CO2. When we discovered fire, we began to add CO2 to the atmosphere.

What About Plants? While I am no expert in this arena, I am aware that plants absorb CO2 and produce oxygen. Does this simplify everything? Could we just plant a lot of trees and other green stuff which would remove all the CO2 we produce? I have heard just that as a potential solution; however, this ignores one issue. When plants die, their decay absorbs oxygen and eliminates CO2. Even trees which live for hundreds of years, carry out this process through their leaves which means that every autumn, all those leaves that hit the ground become producers of greenhouse gasses. Granted, there are some trees that don't lose their leaves in the fall but you can tell by all those pine needles on the ground by your pine trees that the process of shedding old needles and growing new ones is continuous. I don't claim to know what the balance is but I do know that the whole process is beyond my comprehension. The bottom line is that I believe controlling global climate change is "above my pay grade" and I suspect it is beyond the pay grade of many of those who think they have the answers.

You Can't Ignore Economics. The old Lone Prairie song that says "the wind blows free" sounds right but it costs 9 cents a kilowatt hour to produce electricity from wind as opposed to 8 cents from coal. You also have to consider that, even in the most windy spot on earth the wind doesn't blow all the time which means that you have to use another form of energy to turn the turbines when the wind is insufficient. I won't say that wind energy will never replace fossil fuels but it appears to be premature to place too much emphasis on this while coal and petroleum are so plentiful.

Lets Just Grow Our Energy. We've demonstrated that you can't depend on growing corn for energy. Looking at recent trends in using vegetable oils as a diesel substitute, this doesn't look highly promising either. Since these oils now cost around $2.70 per gallon, as opposed to diesel at $1.50 wholesale, bio diesel doesn't appear at all competitive without government subsidies. If you don't believe this, look at the $88 million plant in Grays Harbor Washington, currently sitting idle. It's not just economics either. A recent study published in Science concludes that bio diesel is an environmental disaster if you include the effects of plowing under vast amounts of grasslands and forests to free up land for production of crops.

What's My Conclusion. I can't help but conclude that its a bit arrogant for us to hope to control the Earth's climate. While I would like to find renewable energy sources to replace fossil fuel and, although I think it will be possible some day, the technology isn't here yet. Let us not, try to legislate fossil fuels out of existance until we find economically viable substitutes.