The challenge as an investor living through the last four weeks is to look forward. It is even harder if you have followed the tune of, don't worry you are in this for the long term. That has been my favorite saying from advisors and money managers like John Boggle. Yes, asset allocation models work over the long term. Yes, the S&P 500 ($SPX) did recover its losses from 2000-02, only to give them back over the last 12 months. In fact the 10 year average rate of return on the S&P 500 index now stands just under 2% per annum. Maybe long term is longer than 10 years. I will have to do some research on that and get back to you.

Sorry for the tangent. My point was to look forward not backwards. See how hard that is. The bounce today off the intraday lows of 840 on the S&P 500 shows some interest in buying stocks. I am not talking about a bottom just interest in picking up stocks at these levels. Will this lead to a rally next week? Good question. The answer lies in the G7 meeting this weekend. If the guarantee comes for banks and depositors. In addition the need to free up the commercial paper market. Plenty of talk around both of these issues. They will be key points heading into next week.

How do we build a portfolio looking forward. Well my assumption first of all is you are primarily in cash at this point giving you plenty of room to ladder into longer term positions. Energy is one of the first sector I would look into with the conditions here extremely oversold. The value will be realized as prices on crude return to normal. Normal being taking out the big swings up and down and some sanity to trading in the sector.

Financials are the second area to dig. The outcome of all this money flying around will lead to finding the winners. The trashing of the regional banks is the first place to dig. The insurance companies are another piece of the financials that have been trashed as well. Balance sheet looking here as well as the credit rating are important along with some patience. This will take some time, but I am looking through the remains.

Basic materials is a sector I have been short for a several weeks, but it is starting to look attractive at this point. There are some very attractive valuations on a forward looking basis. As the negative tone subsides there is value.

Last, but not least is the small cap stocks. The bounce off the lows today and closing higher by 4% gives plenty of reason to think this sector is oversold. I will be watching early next week for some follow through on this move.

VIX ($VIX) could have climaxed today at 75. That will give some indication next week how this plays out short term. From a longer term perspective there is value. Building positions versus trying to time the bottom is the best approach looking forward.

I am not sounding the all clear sign, just saying there are opportunity. Remain patient, focused and most of all disciplined.  Relax and enjoy your weekend, you deserve it.

The response to the bailout has been pretty much in line with my expectations. The Paulson comments yesterday showed what Congress was worried about. No direction. The longer all of this takes the less confidence there is in a near term solution. The timeframe for the turnaround continues to get stretched out. This leaves me as an investor less and less confident of any impact from the move by the government short term. The long term benefits will be nice as the order is restored to the financial markets, but in the short term it makes me want to be short versus long this market.

For more than 20 years I have taught a workshop, “Money Psychology – 101”. The premise behind this workshop is understand the psychology of investing. I cover 7 roadblocks to financial success in the workshop. Number one is dealing with you and your emotions towards money. In fact, we have taken this same workshop and turned it into a newsletter we have published for the last five years. Why am I bringing this up now? No, not to get you to subscribe, but to understand, fear is the primary driver of investment decisions in up markets and down markets. The direction of the market never takes away the emotion of fear. Experience tempers fear and allows you to have confidence in you and your decision making process. Fear never goes away it only becomes tempered by knowledge and experience.

Why is fear in control of the current market cycle? Uncertainty. Investors don’t have enough data to make educated decisions about the future of the economy. When the Federal Reserve is pumping billions of dollars at a time towards liquidity and the Federal Government is spending more than $1.4 trillion of taxpayers’ money on financial rescue plans, FHA mortgage bailouts, and Wall Street bailouts, the future looks very uncertain. This is where the rub for this market lies. The sad truth is, I don’t see it clearing near term. Even with the recent help to “fix” the crisis, short term we are still in crisis mode.

The point I have to make is simple, without a discipline strategy in place, your portfolio and investing will be ruled by emotions. The last thing you want to hear from me is that I am in cash, blah, blah, blah. Me being in cash is based on my strategy, risk tolerance and 31 years of investing experience personally and professionally. If you are still in limbo about what to do with your portfolio or particular investments, I suggest the following analysis:

•  What was the strategy behind each position in your portfolio? 
•  Why did you buy it? Is the reason still valid?
•  What was/is your stop?
•  What was/is your target?
•  If you can’t answer these questions logically and distinctly, exit the position and start over with a defined stratey.

As an investor, it is vital to be able to answer these questions at any point about your portfolio and the positions within your portfolio. Recently I went through a series of posts on Bank of America (NYSE: BAC), a position in my portfolio. The reason I purchased the stock changed when they announced their acquisition of Merrill Lynch (NYSE: MER). I wrote five pieces explaining my decision process and management of that position to assist you as investors on how to manage your money. The last piece was posted yesterday explaining the sell process. I was stopped out as Bank of America after they announced earnings early and they were not pretty. Today the stock is trading down nearly $13 or 40% below where my stops executed. That does not make me a good investors, it makes me a disciplined investor. What if I had no stops in place? I would be left with making an emotional decision today. That is the psychology of money management, having a strategy to manage your money logically so that you don’t have to manage your money emotionally.

Fear is in control of the market. Logic is nowhere to be found and if it is, most will ignore it at this stage. Clarity and a dose of certainty/confidence will establish the bottom and create the next opportunity. Until then protect your money. It is never too late to sell and establish a disciplined strategy for moving forward to manage money.

Wow – that took less time than I expected. Ken Lewis proved he was crazy taking such a big risk on Merrill Lynch (NYSE: MER). The announcement by Bank of America (NYSE: BAC) to cut their dividend in half and raise additional capital through a stock offering, shows the lack of concern for shareholders. The cut in dividend as stated by Lewis, “the dividend cut preserves $1.4 billion  per quarter in much needed capital.” What is it needed for? To beef up the balance sheet. Why? Acquisitions that burned capital reserves in excess of what was already on their books.

The $10 billion to be raised through a stock offering will increase the outstanding shares by approximately 312 million. Add to that the dilution of the Merrill Lynch acquisition and you get 2.65 billion new shares to be issued. Let’s see cut the dividend in half to 32 cents and multiply it times the new shares outstanding and you get…$850 million. Now according to my math that is $550 million per quarter in saving and not the $1.4 billion Lewis is quoting. Maybe he could run for President. His numbers are almost as good as the two running.

If you review my previous posts on this topic, I stated the dividend would have to be cut 25-50%. Here we are and we haven’t made it to the acquisition of Merrill yet. I also stated, we didn’t know for sure other underlying issues/risks facing Bank of America. Yesterday we found out a little more. Higher write-offs for bad credit market investments and higher credit card charge-offs. He also stated, “these are the most difficult times for financial institutions that I have experienced in 39 years in banking.” Wow! Has he been living in denial the last 14 months.

To quote the famous General Grant, “if the horse dies, dismount.” For now the horse is dead and I have dismounted. As I stated in my last post on this, due to the rise in price I had raised my stop on half to $34.70 and the other half to $32.90. Both of those executed on the drop Monday. I am no longer a shareholder in Bank of America.

From my view, this mess may all work out over time, but now the risk is to high and the unknown too great. There are plenty of question marks still around the balance sheet and potential earnings of the bank. Credit cards write-offs are up and likely to continue. Mortgage and credit-related toxins on the balance sheet (Countrywide). $8.4 billion to settle the lawsuits over Countrywide selling practices to help 400,000 mortgage holders. Merrill Lynch acquisition and god knows what’s on that balance sheet. These are all factors that will be worked out in the coming months and years. For now I will watch from the sidelines as a analyst versus an investor.

As a side note, I continue to stress the importance of risk management. I continue to have a high cash position for this very reason. Until the uncertainty subsides why take the additional risk of guessing where the bottom is or what could happen next? If you want to gamble go to Vegas – the odds are better.

To borrow a page of doom and gloom from Mr. Pento, the credit crisis the US faces currently, is a result of excess money supply and liquidity in the system. When you have excess money it has to find a home. With the equity markets in disarray from the previous bubble in the dot com debacle of 2000, real estate was a logical choice. Without boring you with the details we know that created the next bubble in housing. The demise of housing has led to the current credit crisis, simply put. The question remains, what will it take to get us out of this situation? The answer isn't quite so simple nor palatable by most in Washington or on Wall Street. I will leave Main Street out of this since the afore mentioned generally do, unless it is a crisis during an election.  

We have to go back to our friend Mr. Greenspan and the policies of what essentially amounts to liquidity bailouts for more than 18 years. We can go back to several liquidity fueled moves in the markets, the most obvious of which was the 1995-2000 move. Through a series of challenges facing the US economy he pumped money into the system to stimulate growth. The challenge with Greenspan was the reticence to take the liquidity back until it the excesses were blatantly obvious. Bernanke has continued to a large degree this standard of dumping liquidity to avert what is a natural course of correction in the US economy. In other words we are trying to stabilize our economy to point of taking out the peaks and valleys. In theory that sounds good, but in reality it creates more potential harm should the strategy fail. Thus, the current credit crisis. The ‘bailout' of each potential hiccup in the economy takes more and more money to resolve without a resulting correction and or recession. Eventually we are going to hit a number that is too big and the result will be, to quote Warren Buffet, "the Pearl Harbor of the financial markets." 

The bailout as many have stated is necessary to stabilize our financial markets. Yes, it is a solution for that objective. It will create liquidity to the system and make worthless assets take on the appearance of value. The question is, at what price. I understand the $700 billion, but there is a bigger price. Government is now more than ever involved in our financial system. Listening to the hearing as Bernanke and Paulson spoke was enough to tell me Congress has no place in directing the financial systems of this country. Government does not, has not, and never will belong in capitalist businesses. Our forefathers understood this when they drafted the Constitution. You can look at other countries and see, this not the way to run a capitalist society. In the end, government intervention, is the destruction of capitalism and the beginning of socialism. The very thing we fought for independence from. 232 years later we are in the midst of being pulled back into that very same government.  

The potential implications of not intervening and letting this take a natural course of correction are not pretty. The potential meltdown is huge. If we don't use a bailout or god forbid, the bailout doesn't work, the Dow potentially falls in the 7000 range. If the economy fails to turn around with a return to growth the number could be near the 4000 mark, which was the level of the Dow in 1994 when Greenspan starting pushing large amounts of liquidity into the system to stimulate the economy and avoid a recession.  

Tax cuts, tax credits and other incentives have worked in the past to stimulate growth. In the process they have increase tax revenue as a result of the growth. The Bush tax cuts worked. They stimulated growth and increased tax receipts. The problem was Congress increased spending more than enough to offset the increase in receivables and created a deficit of $400 billion a year. Is there any wonder they have the lowest approval rating in history along with the President?  

Putting the $700 billion into the hands of businesses and consumer through tax cuts, tax credits and other incentives will do more to fix the economy over the next 3-5 years than the bailout ever will. Yes, there would be a short term price to pay for the sins committed by Wall Street, that is called accepting responsibility. But, adding to the problem with the bailout, Washington isn't going to make it better. As my father always said, two wrongs don't make a right. I hope I am wrong about all of this and the bailout is exactly what we need. But, history has proven the best course of action. And once again we are headed towards fixing a problem with more money to take away the pain of the past liquidity dumps.  

Mr. Obama is right, we need change. Unfortunately, no one is proposing change that will really change anything, but create more of the same. Too much liquidity in the system to cover up what should naturally happen as a result of what happened prior to cause the reaction. I learned is science and physics this is called cause and effect. We will eventually pay the price of this liquidity, the only question is, when?

Treasury Secretary Hank Paulson should have heeded the words of Al Capone who said, "You can get much further with a kind word and a gun than you can with a kind word," when he addressed Congress this week.  How we got here is not going to be debated in this article.  Wanting or not desiring the bailout is not today's topic either.  What is important is what course of action should you take with your investment portfolio should this bill pass in almost any format if it is finalized.

Oil has started to rise leading to plenty of comments concerning supply/demand and the oversold state of the sector. iShare Energy Index (NYSE: IYE) has bounced 6.3% the last two days and the futures are pointing higher today. The chart shows a break of the short term downtrend line and momentum is pointing higher. So is this the proverbial bounce everyone has been looking for? More than likely the answer is yes. However, there may be more at work here than just a bounce. Companies like XTO Energy (NYSE: XTO) are rumored buyout candidates showing some M&A activity could be on tap. It would only make since if the price of such companies have fallen 40% or more in some cases. Taking into account the discoveries in natural gas the values seem cheap looking longer term than next quarter.

While oil is the driving factor in how many of these companies are viewed natural gas, pipelines, etc. are part of the valuations going forward. Fundamentally speaking there is value here for the buyer who is willing to hold longer term. The big question is will the major oil companies like Chevron (NYSE: CVX), Devon (NYSE: DVN), Conoco (NYSE: COP) and Exxon (NYSE: XOM) start acquiring these type companies? Seems like the logical thing would be to acquire on the cheap companies that have proven wells along with new finds without the risk of exploring and drilling. It could be time to dig into the sectors stocks and start looking for value like XTO Energy (NYSE: XTO) and Chesapeake Energy (NYSE: CHK). Something worth watching as this develops further.

IndexUniverse is reporting the offering of a new frontier markets ETF on the Nasdaq: the PowerShares MENA Frontier Countries Portfolio (NSDQ: PMNA). The PMNA will track the Nasdaq OMX Middle East North Africa Index, which includes the countries of Bahrain, Egypt, Jordan, Kuwait, Lebanon, Morocco, Nigeria, Oman, Qatar, and the United Arab Emirates. Claymore recently offered the Claymore/BNY Mellon Frontier Markets ETF (NYSE: FRN) which is more global given that in also includes countries in Asia, Europe, and Latin America, along with the Middle East and Africa. As a result of its focus, the PMNA is a little more concentrated on oil-rich countries. In a recent article we discussed the new Gulf States index launched by S&P, called the GCC 40, covering 40 stocks from the Gulf Cooperation Council. Of interest is that this index covers some of the same region as as the PMNA, but is focused more on financial companies, and less on crude oil and industrial companies.

The PMNA ETF may be of interest to those investors looking to participate in the growth of the oil-rich gulf states that are themselves in the process of reinvesting capital. Furthermore, some analysts have recently discussed how Africa could be one of the next regions for growth. If this is the case, then Northern Africa would be a good place to start investment in this continent.

Also, for those who are interested, there is a distinction between emerging and frontier markets. The term emerging market was first introduced by the World Bank and is often used to describe a country with an economy that is in the process of rapid industrialization, and one that usually finds itself between developing and developed status. The term frontier market is often used to describe equity markets of smaller and less accessible countries of the developing world, yet still investable. Frontier markets are essentially "pre-emerging" markets that are expected to be classified as emerging markets once capital and liquidity increase. Frontier markets could have a high level of development, but still be too small to be considered emerging (for instance, the Baltic States, such as Estonia and Lithuania). They could also be countries where investment restrictions have started to loosen, allowing companies to be investable (such as countries in the Gulf States), or be countries with lower levels of development than similar regional emerging markets (such as Vietnam and Pakistan). As to be expected, frontier markets in general may offer higher return and longer-term growth, but will also carry more risk.

REITs have been lost in the crowd as financials and real estate both have been out of favor. The reality is the index pulled back more than 30% from the highs, but has spent the last six months attempting to find a bottom. The daily chart shows the downtrend in play since the October high. This sector has been under fire since hitting the high in January 2007 near the 150 mark. The decline would account for a third of the value evaporating. The challenge in the real estate market is no secret, but the REITs have fared much better than the hard asset itself. One reason for this is the dividend distribution leading to stable money flow. In addition the majority of REITs are in commercial versus residential real estate which has held up better during the correction. Commercial never realized the same levels of being overbuilt creating more stable environment. Part of the rise off the July lows has been thanks to the apartment REITs showing better occupancy rates and cash flow. This brings us to the breakout potential on the chart of first the 200 day moving average and second the down trendline.

Dow Jones Wilshire REIT index was built into the ETF – RWR. The charts are similar with $72 as the breakout point from the current consolidation. The pullback from yesterday’s selling shows some of the current volatility, but the uptrend is still intact. The current dividend is 87 cents per share which is close to 5%. While there are individual REITs with higher dividend payments they bring with them the risk of owning one versus the index basket. Be patient in developing positions in (NYSE: RWR). Laddering in may be the best approach or strategy to implement in building a position over time.

In this week’s podcast, I reviewed all 10 sectors of the S&P 500 Index. There are two remaining up trends in play. Consumer Discretionary and consumer staples are holding their short term up trends. The uniqueness of that is the number of comments pronouncing the consumer as dead. A look at both indexes show the uptrend still in play and some solid support under each. A break above $29 on (NYSE: XLP) would be bullish for the sector and a break above $31.90 would be bullish for (NYSE: XLY). Today’s news on Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) helped erase the drop from last week and both are worth watching short term.

The retail sector has sales data for August due Friday, with the expectations of 0.3% growth, anything less would be seen as a negative. The same store sales data from Friday was positive for the discounters and negative for the apparel and higher end retailers. This could play into the numbers on Friday as the consumer, once again, is seen to be spent out. The rebates are believed to be spent out and the drop in gasoline prices will not likely factor into the August data. This leaves us in a wait and see mode for the consumer discretionary sector. The consumer staples on the other hand is likely to do better if the economy is slowing off the second quarter data. Both are worth keeping on your watch list for now.