AssetPreserver News

U.S. home prices from 1988 to Oct 2009.

What does this mean to me?

In many areas of the country, housing prices are stabilizing or increasing. Individually, San Francisco and Phoenix led the rise while Las Vegas and Detroit dropped.

More than 2,000 funds were liquidated or merged out of existence in 2009, the biggest downsizing of the fund industry in years. The polyglot of funds were mostly failures but some, although good, just didn’t gather a following. Many of the funds were target funds which are supposed to last until you retire.

Merging and liquidating funds is a way to make poor performers disappear so only the good ones survive. This makes the mutual fund company look better since their average return increases. This act is called survivorship bias.

For example, let’s say that there are three funds (A, B and C) in a given category. Fund A has a five-year annualized total return of 12%; Funds B and C have five-year annualized total returns of 8% and 4%, respectively. The average annual total return for the fund category would be 8%. But, if the loser, Fund C, were to be liquidated or merged into either Funds A or B, it would disappear and make the five-year average annual total return for the fund category 10%.

Regardless of the reason, survival of the fittest still remains the modus operandi.

The Investors Intelligence Advisors Sentiment (IIAS) index, which gauges the stock advice of about 150 newsletters and other paid market-advice outlets, said the portion of positive stock advisers jumped to 51.6% in the past week, the highest since December 2007. That is approaching the 60% reading scored in late 2003 and early 2004.

Bears fell to 19.8%, the first time since October 2007 that the percentage fell below 20%.

A parallel with October 2007 is notable because the S&P 500 hit a peak that month and then tumbled for 17 months, losing nearly two-thirds its value by the time it hit a March low.

Since mid-July, the S&P 500 has jumped 17%. It’s up 54% since hitting March lows.

Analysts frequently use stock sentiment gauges as contrarian indicators. When positive sentiment gets high, a lot of cash has already moved from investors’ savings into the market, leaving less available cash to drive stocks higher.

The IIAS survey is taken once a week, on Friday, and the results published Wednesday.

Typical use of the IIAS indicator is this: if less than 40% of advisors are bullish, then that is often seen as a positive. After all, the trend followers are likely to be incorrect at important reversals. Meanwhile, a reading between 41% and 54% is considered neutral. Survey results of over 55% bulls tend to be bearish and warn of an eventual market top. If the number of bears is below 20% that is a cause for concern that there are too many bulls which is also indicative of an intermediate market top.

“What positive sentiment means is that stock advisers have been recommending people buy stocks, minimizing their cash holdings, presumably,” said John Gray, an editor at the Investors Intelligence stock research service.

The drop in the portion of bearish advisors and a rise in the portion of bulls pushed the gap between them to 31.8. That’s the widest positive margin since late 2007. But it’s still off levels reached above 40 in October 2007.

What’s this mean to me?
According to the IIAS The market is heating up and due for a pullback. Don’t be afraid to take profits. But don’t rely on just one indicator, either.

The investment lists at AssetPreserver.com are now free.

The idea behind these lists is to show the major stocks in an industry, some examples of low-cost funds and ETFs, and the relevant indexes. These are not investment recommendations.

If you own a gold or silver ETF and sell it, the tax consequences may be higher than you think.

Gold and silver are considered collectibles by the IRS which are taxed at a maximum rate of 28% rather than long-term capital gains rate. This includes gold and silver ETFs, bullion, and coins (except certain U.S. issued ones). When the assets are held less than a year, the gains are taxed as ordinary income which can be up to 35%.

Precious metals ETFs are organized as grantor trusts which means the owner has undivided interests in the metal owned by the fund. Check the website of the ETF on how to calculate the gain or loss when the ETF sells metal to pay for expenses.

If the ETF uses futures or derivative contracts to track performance the collectibles tax rule does not apply.

Investors are not allowed to own collectibles in IRA or other self-directed retirement accounts (401Ks included).  When gold and silver are purchased for such accounts, the cost of buying the collectible is treated as an owner distribution which is included in gross income and taxed as ordinary income. There may be a 10% penalty if the owner is under 59 1/2 years old.

Fortunately, and so far, the rules do not apply to gold or silver ETFs in retirement accounts. The only exception would be if the ETF liquidated and distributed the metal to the shareholders.

Ask your tax advisor how these rules fit into your situation.