March 17, 2007

 Our attitude is the primary force that will determine whether we succeed or fail.

--John C. Maxwell

For the returns that our two unique investment strategies have delivered, check out

the chart and tables below.  

A Correction? 

Be Free’s two unique investment strategies both had pullbacks in February. The INCOME strategy was down 1.6% and STOCKS PLUS investors suffered a 2.9% drop in capital. The wild late-month action in the stock market did not play to our favor and was responsible for both strategies pulling back.  Even so, the two strategies combined have had 26 winning months in their last 32.

A few INCOME strategy clients have wondered why when many market observers had been expecting a pullback, Be Free wasn't positioned to capitalize on it.  That is probably most easily answered by pointing to the column I wrote last month. I acknowledged that a correction might be in the offing, but trading and investing are always bedeviling and more difficult than just having an idea; my timing was bad and my estimation that it would be slower and not accompanied by as big and as sudden a spike in implied volatility were also wrong. To keep things in context, though, we remained up for the year at the end of February and with some deft trading in March are now up over 3% year-to-date in the INCOME strategy.

LAST MONTH'S COMMENT...    

Now let me take a few minutes of your time to delve into one of the central questions being pondered by stock market observers. People on Wall Street and heck, since so many of us and are more and more sophisticated about investing, even a lot of us on Main Street are wondering when the correction is coming. Now if you must ask, “The correction of what?” And you’re mind bounces between…”That erroneous charge on my credit card?” and “The way people pronounce my name?” Well then, maybe you are not someone who’s wondering about the correction.

Now since a correction is technically defined as a 10% pullback, which we haven’t had in the Dow or the SP500 since the bull market began in March of 2003, let’s set the bar a bit lower. When are we going to at least get a 5% pullback? It’s been seven months since the Dow has even had a 2% correction--the second longest stretch ever. The SP500, which captures a much broader universe of stocks, has also not had a 2% close-over-close drop since way back on my birthday—July 14^th. And in more evidence of the steady nature of the market’s climb, the SP500 has rallied eight months in a row and (when incorporating dividends) it’s been up 14 of the last 15! WOW!

So, back to the question—when are we going to get at least a mini-correction, something that causes at least someone to panic? My answer: not in the foreseeable future. For a pullback notably more than 2%, we’re going to need a negative set of catalysts. Remember, to get the nearly 8% pullback that the SP500 had last May and June, several storm clouds had to gather. Inflation readings kept coming in hot.  Many more potential rate hikes were on the table. Bernanke was new and untested. Housing was falling off a cliff. And the world’s second largest economy, Japan, was dramatically tightening its monetary base. 

And now…

Inflation has slowed. Oil (although it’s recent pop from around $50 back to almost $60 must be watched) still remains 20% off its ’06 summer highs. And very recently, we received more evidence that one of the frequent sources of inflation in a strong economic cycle that is ageing—wage inflation—is hard to worry to much about. The employment cost index was only up 0.8% in the final quarter of the year and wages only grew 0.2% in January’s employment report. And just this morning, another quarterly number, unit labor costs, came in at only +0.4% in the fourth quarter or +1.7% annualized. With the backdrop of tamer oil prices and in-check wage inflation, the Fed hasn’t raised rates since last June and they are tantilizingly close to telling us that the rate hike cycle is definitively over.

Bernanke has now got his sea legs. Remember how many people thought so little of him back in May and June of last year when stocks were tumbling. “Who is this homely guy with the beard?” “He talks too much!” “Has Greenspan really left the building?” I have a client in whom Bernanke did not engender any confidence. Before his scheduled appearances last spring, this client would remind me to get out a box of Kleenex.  “It’s tissue time with Bernanke”, he’d say. Well, you can throw all of that out the window. He now has as much gravitas or as Larry Kudlow puts it, “monetary manhood”, as any one-year-old Fed head ever had.

When it comes to housing; it seems to have at least stabilized. New home sales have been up notably for two months in a row and are now at their highest level in nine months. Existing home sales aren’t doing as well, but have been stable for the last half-year. And maybe the biggest indicator of the future of housing, the trend in homebuilder stocks, has been to the upside for seven months. And lastly, don’t ignore long-term interest rates. Despite backing up so far in early 2007, they are notably lower than in the spring of 2006.

Lastly, the Japanese have not raised rates or drained liquidity as much as many had forecast they would. Unlike most of the world’s economies, Japan’s growth has been very lumpy in the last half-year and the Central Bank is still keeping rates near historic lows.

Yes, of course, something else could always hurt the market. There’s the chance of another 9-11, but in the realm of developments whose chances can be better handicapped, we could look at, say, the jobs market, which I’ve talked about as being very key. However, it looks fine; we still have steady jobs growth.  Earnings? They remain strong; we’re headed towards a record 14th consecutive quarters of double-digit earnings growth despite forecasts just a few weeks ago that the streak would be broken. Long-term interest rates? They remain well below 5%. The world’s economy outside the US?  Other than Japan, all of the world’s major economies are chugging along if not accelerating. 

You know what, maybe the strength of this bull market is revealed in the fact that a friend of mine just had to really stretch to come up with a reason to sell. He’s getting a sell signal from numerology. He didn’t like the last three digits of yesterday’s close in the Dow…12666.

PAST RETURNS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS AND THE RISK OF LOSS IN TRADING COMMODITIES CAN BE SUBSTANTIAL. YOU SHOULD, THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION.

_____

Year-by-Year Returns

for Be Free Investments

(NOTE: returns are shown assuming no use of leverage...

2X and even 3X leveraged trading is available*)

Past performance is not indicative of future results.

*Leverage or what is also referred to as notional funding can increase returns when returns are positive, but will lead to larger losses when returns are negative. Please review our disclosure documents at www.BeFreeInvestments.com to better understand the risks and rewards associated with leverage and notional funding. 

**These are returns from proprietary accounts that have paid $10.50 in round turn commissions and have been assessed a 20% incentive fee for its lifetime.  The returns achieved in proprietary accounts are higher than those achieved in client accounts in aggregate.  Contact us to discuss what kind of commissions and fees we can offer you.

***The INCOME strategy did not have customers investing in it for the full year of 2002.

  ____

The STOCKS PLUS investment strategy has been around since 1997. I started investing client assets using this strategy five years before I formed Be Free Investments. The STOCKS PLUS strategy and its returns are largely tied to the performance of the U.S. stock market. It has met its objective of outperforming the stock market nearly every year it's been around and is a great way to grow your money in the longer term... 

STOCKS PLUS STRATEGY

client returns without any use of leverage

Past performance is not indicative of future results.

Feel free to call us, so we can talk about what Be Free Investments can do for you.

(800) 627-0449 or (312) 604-2916

*The returns of the INCOME strategy are for proprietary accounts. The commissions and fees charged to proprietary accounts may differ from those charged to customer accounts and may (although will not necessarily) therefore relatively negatively effect the potential returns a customer account could expect to have achieved.  Please review the disclosure documents at www.BeFreeInvestments.com to better understand what a proprietary account is and how your returns will differ from it and what the risks and rewards associated with leverage or what is often called notional funding are.

___________