Diversification Doesn’t Work Anymore

AND HERE’S WHY

Investors have been told for years that diversification lowers risk. While that may be true in certain instances, it certainly isn't true in the world equity markets.

Let me give you an example: Had you purchased the five ETF's that we track in MarketClub's "Global Strategy Portfolio" on January 2, 2008, you would have seen your equity diminish 29% in the space of 30 months. However, had you followed the "Global Strategy Portfolio" with the same five ETF's, you would have seen your equity grow 23% in the same time-frame. With a 52% difference between the potential for profit and the potential loss, those are numbers that no investor can ignore.

Continue reading "Diversification Doesn’t Work Anymore"

ETF Talk: Is China's Great Wall of Growth Showing Cracks?

As many of us know China is becoming a bigger shareholder in the US then our citizens, which scares some and for good reason! But what does the long term look like for China? Whatever it is, it now directly impacts the US, so I've asked Doug Fabian to come and give us his thoughts on the ETF's that track China and the indexes. If you are interested in ETF's of ANY type, then I HIGHLY recommend you read the article below and check out Doug's newsletter HERE. I'm a member of his Mutual Fund Lemon List as I was a big believe in mutual funds. So enjoy the article and learn more about Doug HERE.

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For the last 30 years, the economy that has achieved the fastest and most consistent growth in the world may well be China’s. Despite the current global recession, the Chinese economy still grew 9.8% in 2008. It marked the first year of single-digit percentage growth for the country since 2003, after notching double-digit percentage growth between 2003 and 2007.

Chinese government officials claim that their nation contributed more than 20% to the world’s economic growth last year. They also optimistically forecast economic growth of at least 8% for this year. However, a number of independent private sector estimates, including those from Economist magazine and the International Monetary Fund, estimate China’s economic growth will fall below 7% and possibly slip to 6%. A fear exists that civil unrest may occur if the growth rate dips below 8%, since economic weakness typically boosts unemployment. With relatively high growth rates, compared to other countries, investors may wonder if China could offer a hedge against recessionary conditions elsewhere.

If 2008 is any indication, investors should tread cautiously before going either long or short in the Chinese market. Despite the country’s growing economy, history shows that the correlation between global stock markets increases during times of recession. As the Dow fell 33% last year, the Shanghai Composite Index plunged 65%. The iShares FTSE/Xinhua China 25 (FXI), an exchange-traded fund (ETF) that follows 25 companies on the Shanghai stock exchange, fell 47.76% last year. If you were shorting the Shanghai stock exchange through UltraShort FTSE/Xinhua China 25 (FXP), you would have lost 53.61%. You might expect a short ETF to turn a profit if the stock index that it tracks plummets but China certainly did not follow that pattern last year.

Despite the positive spin that Chinese government officials are giving to the country’s economic outlook, it is hard for me to belief that its stock market is ready to rebound. But that hasn’t stopped its leaders from expressing renewed confidence in its economy. The Chinese government reported last week that its industrial output last year rose by 5.7%, while its retail industry grew by 17.4%, year-on-year. In addition, China has nearly $2 trillion in reserves and a low debt-to-GDP ratio of 18%, compared to 80% in the United States and 160% in Japan.

On the other hand, other economic signs indicate a significantly slowing economy in China. Its exports fell in February by a whopping 25.7%. Millions of people have been left jobless and thousands of export firms have closed shop. With consumer prices falling, some analysts are discussing the possibility of deflation in China.

Since investors hate uncertainty, China is not looking very enticing right now. Of course, if investors decide stock markets around the world have been pounded enough and the current bear market rally may be a sign that the worst is behind us, China’s beaten down stock market could rally as strongly as any around the globe.

Personally, I am not yet ready to move into China either long or short. If you, however, think that the Chinese market has bottomed out and that its government stimulus spending will give the Chinese economy a boost, you may want to consider going long. For those who expect more fallout in the Chinese market this year, you may be tempted to put a little money into a short ETF. But if you’re like me and you dislike losing money and investing without a clear market direction in sight, you can monitor these ETFs from the sidelines along with the Fabian team.

LONG: iShares FTSE/Xinhua China 25 Index (FXI)

PowerShare Gldn Dragon Halter USX China (PGJ)

SPDR S&P China ETF (GXC)

SHORT: Ultrashort FTSE/Xinhua China 25 Index (FXP)

Doug Fabian

If you want guidance about which ETFs to trade and when, check out my ETF Trader service by clicking here.

Like Beijing, Capital Gains Can Be Confusing

With all the recent market action I decided to contact Ryan Gibson, from Traders Accounting, Inc., to help explain a bit about how the IRS taxes capital gains. Ryan has always been my "go to" guy when it comes to explaining and UNDERSTANDING the world of accounting and taxes for trading. Please be sure and visit his site for more helpful information, Traders Accounting, Inc.

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It’s a good thing China made its debut on the world stage by hosting the 2008 Summer Olympics and not, say, a spelling bee. After all, athletes speak a universal language: run faster, jump higher, throw farther or score more points than your opponents and you’ll bring home the gold, and possibly a Wheaties contract.

But try to order dinner in Beijing? Now that’s tricky. Centuries of cultural isolation have limited China’s exposure to the rest of the world until now, which is all part of the excitement of this year’s momentous Summer Games.

Tricky also might best describe how the IRS taxes capital gains. While it may not be as indecipherable as a Beijing Chinese menu, tax treatment of capital gains and losses are far from a one-size-fits-all proposition, but depends instead on how those capital gains or losses were realized.

Not-so-simple Capital Gains/Losses

First, a short primer on capital gains. For tax purposes, all assets fall into two categories: capital and non-capital. Generally speaking, capital assets are things we acquire for personal use or investment: our home, furnishings, vehicles and other valuables such as jewelry and collectables. By contrast, non-capital assets, as the term implies, tend to be impersonal: sales to customers, accounts receivable, business supplies, hedging transactions and property used for business.

The distinction becomes clear at tax time, when capital assets are subject to capital gains and loss rules. Sales of non-capital assets, however, are taxed as ordinary income, and so fall outside this discussion. A Traders Accounting professional can be invaluable in clarifying your capital gains position and minimizing your tax exposure.

When a capital asset is sold, it either makes money (gain) or loses it (loss), based on what is called adjusted basis. Basis is the price you paid for the asset. Adjusted basis is your basis plus such additions as selling expenses or home improvements, and minus deductions for such things as depreciation or casualty loss.

If you held the asset for a year or less, it is considered a short-term capital gain or loss; if you held it for longer, it is considered a long-term capital gain or loss.

Here’s where it gets trickier. Losses you incur on the sale of some capital assets, including personal items such as your home, furnishings and vehicles, cannot be deducted on your tax return. Similarly, gains from the sale of personal capital assets may be taxable.

Capital Gains Scenarios

Let’s look at three typical gain/loss scenarios to see how they would be taxed under the capital gains/loss rules:

1. Short-term gains and losses: In this situation, you would combine your short-term gains and losses to produce a net short-term total. A total gain is taxed as ordinary income, but a loss can be deducted up to $3,000 on your return. If your loss exceeds $3,000, it can be carried over to the following year as a short-term loss.

2. Long-term gains and losses: Combine long-term gains and losses to arrive at a net long-term total. A total gain is taxed at the 15% maximum capital gains rate. A long-term loss is deductible up to the $3,000 cap and can be carried over to the following year as a long-term loss.

3. Short- and long-term gains and losses: First, combine short-term gains and losses to produce a net short-term total. Next, combine long-term gains and losses to produce a net long-term total. Now combine the two net totals. If the result is a gain, each type of gain is taxed at its applicable rate (see above). If it’s a loss, it is deductible up to the $3,000 cap. If your loss exceeds $3,000, deduct your short-term loss first and carry over the long-term portion.

Mixed Doubles: Short- and Long-Term Gains/Losses

So what happens when you end the year with a mix of short- and long-term gains and losses? Here’s how the IRS taxes the four possible scenarios:

·Short-term gain exceeds long-term loss: The short-term gain is taxed as ordinary income.

·Short-term loss exceeds long-term gain: Deduct the short-term loss to the $3,000 cap and carry over the balance.

·Long-term gain exceeds short-term loss: Deduct the long-term loss to $3,000 and carry over the balance. The net gain is taxed at the long-term rate.

·Long-term loss exceeds short-term gain: Deduct the long-term loss to $3,000 and carry over the balance.

If your broker charges you to conduct trades, don’t forget to subtract his or her fees from your gain. And be sure to read carefully the Form 1099 you receive from your broker. Some brokers record gross gains and losses, meaning they haven’t subtracted their expenses, while others record net gains and losses, meaning they’ve already done the adjustment for you. Always use net gains and losses when preparing your tax return.

If you have any questions or need some advice please visit my site Traders Accounting, Inc.

Ryan Gibson, AZCLDP
Traders Accounting, Inc.