Happy Thanksgiving to Everyone!

We're sending this week's newsletter out early as everyone in the US will be on holiday later this week for Thanksgiving. But we hope everyone around the globe has gratitude and thanksgiving to give and receive!

The VTI offices will be closed Thursday-Friday (26-27) for the holiday.

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Feature

A Tale of Two Markets, Part Two

 by 

D.R. Barton, Jr.

“Let them eat cake.”  — Misattributed to Marie Antoinette

Such an interesting quote for today.  Meant to show the total disconnect between the royalty and their subjects, this quote takes us back to a time and place where the working class French literally spent 50% of their household income on bread.  The common attribution is that Marie Antoinette, on hearing that the peasants had no bread, spoke the words, “Let them eat brioche.”  Brioche was a huge step up from common bread, since it was enriched with butter and eggs.  Over the years, the quote has become a more anglicized by changing the “luxury” food item to cake.

To keep this from being a lesson in quote derivation, suffice it to say that Marie Antoinette almost certainly did not utter the words.  She was a champion of the rights of the poor and was a well-reasoned thinker who would not have said something so callous.  Most likely, an earlier French princess did say something similar and did so out of ignorance and/or lack of compassion for the plight of those struck by famine.

I don’t think our “tale of two markets” is about class warfare.  But it is certainly about two different mindsets and two different standards, depending on whether you sit on the retail or the institutional side of the fence.

Last week, we talked about the reactions of the retail public and the institutions during this impressively strong bull market.  We talked about cash on the sidelines and how retail investors have yet to vote with their cash on the soundness and safety of the equities markets.

More and more data floods in to support this point.  A number of analysts very closely watch the flow of money into and out of mutual funds.  Surprisingly, since the March lows, only about 10% of the multi-trillion dollar cash hoard stored up by retail investors has flowed back into the markets via mutual funds (hence, lots of cash is still on the sidelines).   Even more surprisingly, there continues to be an outflow of cash from equity mutual funds into fixed income (or bond) funds. Very interesting, indeed.

This means that either 1) there is much more upside potential because of the money on the sidelines, or 2) another (much milder) pain and gain cycle will be needed for the markets to win the trust of retail investors.  I tend to favor the second view.  If a 65% market rally hasn’t drawn retail investors into equities, what will it take?  Most likely, many think that they’ve missed the boat on this bull run and will look to re-invest when equities go on sale.  Others probably remain simply shell-shocked by the 50% drop in equity markets in a matter of a few short years.

There really is so much to look at with these fascinating market conditions! Next week we’ll take a good look at the huge differences in the credit markets for institutions versus individuals.  We’ll draw some conclusions about where that particular two-market model might be taking us.

In the U.S., this is a week where we take some time out to give thanks.  In addition to my thanks for a God who loves me, and family that is a blessing to me every day, I’d like to say a special thanks to the readers and other associates of the Van Tharp Institute “family” for your kind e-mails, commentary and support (be it constructive criticism or good old fashion praise).  I always welcome your comments at drbarton “at” iitm.com. Thanks to all of you!

Until next week…

Great Trading!

D. R.

About D.R. Barton, Jr.:  A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena.  He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at  "drbarton" at "iitm.com".

 Workshops

2010 First and Second Quarter Workshop Schedule

We have many new workshop offerings this coming year! We have a completely new three-day workshop Great Systems for Bear Markets and two reworked courses that will better serve your needs, Systems That Outperform the Global Markets Long Term and Swing and Day Trading Systems for Equities and ETFs (scheduled in second quarter). 

Also, Van will be bringing three workshops to New Zealand in February!

 Click here to see the Second Quarter Schedule

Trading Tip

Are You Trading in Your IRA?

By 

Jim Crimmins

I have just received a copy of a letter from the U. S. Department of Labor, sent to a friend of mine who, in my estimation, is one of the smartest tax attorneys in America. The letter was in response to his question concerning a client who asked the question “If I use my IRA to trade in, and my broker asks me to agree to a personal guarantee or to grant them the ability to put a lien on my personal account, is it legal?”

The DOL response is a three page letter dated October 27, 2009. Taking a couple of paragraphs out of it we learn: “It is the opinion of the Department that the grant by an IRA owner to the Broker of a security interest in his non-IRA accounts in order to cover indebtedness of, or arising from, his IRA would be a prohibited transaction under Code section 4975(c)(e)(3).” 

They go on to say, “Congress stated in the ERISA Conference Report that, “…a prohibited transaction generally will occur if a loan to a plan is guaranteed by a party-in-interest (disqualified person), unless it comes within the special exemption for employee stock ownership plans. "H. R. Rep. No. 1280, 93d Cong., 2d Sess, at 308(1974). Consequently, a guarantee of a plan's indebtedness by a fiduciary or other disqualified person is an extension of credit to the plan in violation of section 4975(c)(1)(B) prohibits the granting of such a security interest to the broker.” 

In English what they are saying is that if you have moved your IRA to a broker or other financial institution who has asked you to sign any agreement which, in the agreement, has you personally guaranteeing that you will make good for any indebitness that the IRA would have because of its activities, you and the broker have created a “prohibited transaction.”

The language out of one of the agreements that I have reviewed has the following language. 

“14. Payment of Obligations Upon Demand. You will be liable to XXXXXtrade for the payment for all trades, debit balances, margin calls, or other obligation owing in your account.” 

The penalty for a prohibited transaction is the immediate distribution of your IRA to yourself. When that happens, of course, there are taxes to pay, in some cases penalties and/or interest.

If you feel as if you might be in this quandary give us a call.  Please direct any questions on this matter to [email protected]. 

For a copy of the DOL letter, email me at [email protected] with the initials DOL in the subject line and I will send the letter to you via email.

Cheers,

Jim Crimmins

About Jim Crimmins: Jim has become a nationally known speaker on tax strategies, entity structuring, and lifestyle change. He delivers over 30 talks a year throughout America as well as speaking in several chat rooms each month. You can learn more at TradersAccounting.com.

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Mail Bag

Is Graham's number still a valid concept?

Q: On page 114 of your book Safe Strategies... you discuss how to calculate Graham's number. Is Graham's number still a valid concept? Using Yahoo and IBM for a sample calculation.  I get an unrealistically low number. Am I doing something wrong?  Thank you, Walter

A:  The Graham's number system is still realistic and my son Robert has had some highly profitable trades from it in the last year. Based on those trades, he went on to research the method further and will be teaching his system in our new Great Systems for Bear Markets workshop next year. The system's R-Multiples are amazingly high— when the system is traded in the proper market conditions. I have no idea what the numbers are telling you for IBM, although I have trouble believing it would be a good Graham's number candidate at the moment. —Van

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