Friday, June 22, 2007 Vol. 9 No. 149 In Today's Letter: Comment: Wall Street Wants Your Retirement Plan Wealth: Stay Away from All Bonds…Except Treasuries!  Currencies:   What Separates Stocks from Currencies  Wall Street Wants Your Retirement Plan Today’s comment is by Larry Grossman, a long-time member of our Council of Experts, leading expert on retirement plan management, and Managing Director of Sovereign International. Dear A-Letter Reader, Note to self: Go on vacation for two weeks. Get some perspective on this market, because nothing makes sense anymore.  I have been in this business now since 1984. Since then, I’ve continued to study and research the markets more every year. I even did a “heavy duty” post-graduate program at Wharton, which basically consisted of statistics and Modern Portfolio Theory. But right now, the global markets are still puzzling to a veteran like me. Either I’m missing something or all that training doesn’t apply to what’s happening in the global markets right now.  An Enigma of a Market Let’s take a closer look at this puzzling market. First of all, the valuations are extreme. Interest rates are rising, instead of falling. And signs of inflation are everywhere, no matter what the government PR guys are saying.  I can see signs of inflation in my own hometown, here in Florida. My wife and I counted eight restaurants that have gone out of business in the last six months. A friend of mine used to make US$1 million a year in the mortgage business. That same friend recently was forced to sell his house, and he will probably have to file for bankruptcy. I have another friend who was one of eight construction managers with 12 projects under his belt. Now he’s the only manager left, and he has only a single project. And in the midst of all of this, the global markets keep climbing. The purveyors of investment pornography on T.V. keep saying how great the markets are. They’re claiming that this market will be different this time. “This isn’t a bubble, and there’s no way it can burst.” I get a really sick feeling in my stomach when I hear them say that, mostly because I know better.  So what does this have to do with your retirement plan? In a word: EVERYTHING!! Over the last few years, I’ve met too many individuals who lost 50%, 60% even 70% of their retirement plans when the last bubble burst. These individuals all had the best intentions, but many of them listened to their domestic brokers when it came to picking investments. That was their first mistake.  The Controllers on Wall Street Wall Street always lobbies for your investment assets, and your retirement plan is one of their primary targets.                       They want you to pour your life savings into substandard equities and investment products. Why would Wall Street do this? Quite simply, they want to control your money and make the most they can on it. Think about it, if you buy a piece of property in Panama with your IRA, how much does your stockbroker make on that deal? Not one penny. So he may tell you it’s a bad investment, or you should invest your assets in “safer” investments. He may even tell you it’s illegal to invest your retirement plan in offshore real estate. I have heard them all.  What the Average S&P 500 Return Really Looks Like Last week, I heard one of the bigwigs for Merrill Lynch say “The expected 12 month return on the S&P 500 is 7%.”  My first thought was: “Really – 7%? That’s it?” Not to mention, if you break down that 7%, your “expected 12 month return” isn’t anywhere near that! Let’s break down that average return right now. Say between dividends and capital gains, your total return really is 7%. But you still have to factor in how much you pay to maintain your brokerage account. Say you use 1.30% to manage your account. That’s a 1% annual asset management fee and .30% for all transaction costs. (It’s probably higher but I’m trying to be generous.) Now let’s factor in inflation. Say it’s 3%. (Again, it’s probably higher, but we’re using the government’s numbers here.) Then you need to factor in the decline of the U.S. dollar over the last few years. Can you see where this is going? Once you strip away fees, inflation and the decreased purchasing power of the dollar, you’re left with miserable returns. Possibly even NEGATIVE returns! Plus, you have to consider the incredibly high levels of the market, which translates to additional risk. You probably won’t make a dime in real returns even if the market does go up 7%. And personally I think the market is going down, not up. So this means, once again, you won’t make anything to build your retirement plan. In fact, you might be facing straight losses and ZERO gains.  Refuse to Play by Wall Street’s Rules Here is blunt and harsh truth: Wall Street has its own rules. And in their game they get to control all of your money. They don’t want you to invest freely anywhere in the world. They only want you investing with them. That way they can make fees on an ongoing basis. Wall Street has set up your retirement plan so you can only pick from a basket of predefined mutual funds they offer. Never mind that 80% of all mutual funds and managers under perform the market. That means even if the market does go up 7% odds are you won’t make that. But you do have some options. I’m happy to report that the U.S. government just changed rules for retirement plans. You can now invest even more freely with your retirement plan and you can make dramatically higher contributions. Note to you: Read my article in the July edition of members-only Sovereign Individual to find out how you can use these new retirement regulations to your advantage (and let your broker fend for himself). LARRY GROSSMAN, CFP® , CIMA® Retirement Expert & Managing Director of Sovereign International www.worldwideplanning.com www.sovereignpensionservices.com EDITOR’S NOTE: These revamped retirement strategies are so important that we’re sending you a free preview of Larry Grossman’s lead story from the latest edition of The Sovereign Individual this weekend. Please check your email tomorrow to read about these new retirement rules, and find out how you can use them to your advantage. Advertisement Want to Run Out of Savings By Your 72nd Birthday and Be Forced to Keep Working? If so…then please stop reading here. But if not, know that even if you make a six-figure salary, you can exhaust your retirement plan savings by the time you’re 72…unless you’re careful. A 2007 study by Fidelity Investments confirmed most Americans simply don’t save enough for retirement. According to the study, most Americans were putting away a meager 58% of their salaries instead of the 80% they’ll need to last through retirement. According to another 2007 study, only a third of 40-something Canadians are saving enough for retirement! This leaves the vast majority of Americans and Canadians doomed to rejoin the workforce in their 70s or even later. Don’t be one of these sad statistics. Take action right now to liberate your retirement plan, so you’ll have plenty squirreled away when your much-deserved retirement comes.  Wealth/Investments   Stay Away from All Bonds…Except Treasuries! There’s no doubt in my mind that ALL bonds continue to offer the poorest values in history. And if “past is prologue,” (as my colleague Bob Bauman said yesterday) the next financial crisis will slaughter bond investors. Risk premiums continue to point to a major disaster ahead. Bonds, especially the non-Treasury market, which includes corporate bonds, high-yield (junk bonds), mortgage-backed and emerging market debt all trade at, or near, their lowest premiums in history versus Treasury bonds. This has been the case for the last 18 months or so for most high-risk instruments where investors have lunged for capital gains, not yield. And that’s exactly the problem with credit risk today. Investors aren’t chasing yield. Instead, they’re relying on capital growth as coupon yields continue to shrink to historical lows. Worse, some of these investments are actually dizzy speculations backed by leveraged capital in the credit markets. I don’t have to tell you what can go wrong when credit cycles draw to an end. So just how expensive are high-risk bonds right now? Emerging market bond spreads now trade at just 1.58% or 158 basis points above Treasury bonds. That’s an amazing statistic, considering countries like Turkey and Colombia used to pay almost 10% more just five years ago. Emerging markets, of course, have been a major recipient of the commodity bull market this decade. These red hot markets have garnered record capital inflows, and booming budget and trade surpluses since 2002. Investors want a big piece of this action and are willing to throw more money at these risky markets like there’s no tomorrow. But they’re not compensating for yield risk at these nosebleed levels. What about junk bonds? The average yield on junk bonds now stands at 2.75% above benchmark 10-year Treasury bonds. That’s very close to an historic low. It’s pretty low compared to their historical average spread of 4.5% above T-bonds. The last time risky bonds traded at such low premiums above Treasury debt was back in 1997 – just before the massive near-collapse of hedge fund Long Term Capital Management. Prior to that seminal event, 1993 marked the next low point following a flood of money created by the Greenspan Fed from 1991 to 1994. By March 1994, the bottom started to fall out from under the high-yield and emerging market bond sectors as interest rates climbed. And before that, 1988 marked another low point ahead of Fed tightening. Then the bond market got slaughtered in 1989 as junk bonds got mauled. Of course, history always repeats itself. But don’t tell that to Wall Street or London’s finest in the City. The only place to park some money in the bond market lies in longer term Treasury bonds. This segment of the yield curve has been smashed hard this month as the market comes to grips with a suddenly booming economy this quarter after skirting with recession in Q1. I highly doubt bond yields have much higher to go. I also think the Fed will not tighten interest rates during an election year in 2008. High quality bonds have probably seen the worst of the selling, but that’s definitely not the case with high-yield and emerging market debt. Whatever you do, avoid non-Treasury debt like the plague! ERIC ROSEMAN, Investment Director Currencies  What Separates Stocks from Currencies Trading currencies is different from trading stocks. Largely because trading currencies is a zero-sum game – when one currency goes up, another must go down. Correctly identifying key turning points between currency pairs is vital to making money in this market. So being bearish in the currency markets is no great transformation. That’s just the way it is and the way it will always be. Something both asset classes do have in common, however, is an extensive futures market – covering individual currencies and major stock indices. Whether you’re trading currencies on the spot market or shares of individual companies on exchanges, there is valuable information to be gleaned from the futures markets. I particularly like to look at open interest. It signals sentiment extremes which can sound the alarm on new trade set-ups. That’s because sentiment extremes tend to reflect levels at which a trend may have reached its end – the most profitable point at which to enter a trade in the opposite direction. Open interest is simply defined as the number of open futures contracts on an underlying currency or index. When the number of open contracts becomes lopsided toward either the long side or short side of a trade, it’s likely that an extreme in sentiment has been reached. That’s when you should prepare for a shift in the other direction. And since open interest is measured historically, today’s levels can be compared with the level at another point in the past. Additionally, day-to-day swings in open interest could be near-term tip-offs.   JACK CROOKS, Currency Director P.S. Above is an excerpt from Jack Crooks’ E-Letter, My Two Cents . Twice a week, Jack sends his E-Letter subscribers helpful advice and useful knowledge on how to protect the value of your wealth, by navigating the TRILLION dollar currency markets. Click here to receive all his insights absolutely FREE twice a week.   Advertisement RETIRE OVERSEAS! Learn about the world's 9 best places to live and retire! ...Live well on $19 a Day... Own an exotic beachfront getaway for $35,000... Or romantic pied-a-terre for under $60,000... Enjoy fine restaurant dining for $7 per person... Employ a maid or gardener for $6 a day... Buy comprehensive health insurance for $20 per month. Details in these FREE reports!