QQQ? Bob Brinker fielded a call this weekend from a holder of QQQ per his recommendation. Here is a small excerpt from my Interpretation of this weekend's show. If you want to read the rest, you need to e-mail me! (E-mail address at the end)
David K's Stock Market Commentary, Interpretation of Moneytalk, Financial Education, Helpful Links, Guest Editorials and Special Alert E-mail Service. August 11-12, 2001 Edition (Excerpt)
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Caller of the Day!
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(This is a two-part question, so make sure you read the entire question)
This caller noted that interest rates in Japan are basically at zero. That's right the big O%, yet Japan's economy is still in the dumps. His question: how do we know that the Federal Reserve's interest rate cuts won't have the same impact on our economy; that is -- it won't have any impact? Bob pointed out that if you look back at the major economies in the world over the last 100 years, there have been two major failures of monetary policy by central banks. The first one was in Japan which entered a "secular bear market" in December, 1989, when the Japanese Nikkei 225 Index peaked at 38,900. Although there were "cyclical bull" market opportunities since then, the overall long term trend has been down and is now going on its 14th year. During this time, the Japanese central bankers kept lowering interest rates, yet their economy has not responded. We had a similar scenario in our country during the 1930s when the central bank cut interest rates, but our country went into a depression rather than recovering right away.
Based on Bob's response, the caller then told Bob that back in October, 2000, he took a rather "large" position in the QQQ shares and was worried that if the Federal Reserve fails to stimulate our economy, and there is more downside to come in the stock market, "is there anything he can do to protect his QQQ position from further downside risk?" Bob got a little testy and said he didn't know what the caller meant by a "large" position in the QQQs, given that Bob recommended in his Marketimer newsletter that investors who decided to invest in the QQQs, follow strict limits on exposure to that investment. The caller than said he has about 38% to 40% invested in the QQQs, to which Bob quickly interrupted him and said that he "exceeded the [recommended] limits." Bob sternly told the caller that he should "stay within the limits" to which the caller said he made the mistake of exceeding the limits. Bob seemed nonplussed and said he wouldn't criticize him for that, but emphasized that the percentage limits set forth in his newsletter were put their to contain the level of risk to an overall portfolio. Bob then concluded the call by offering one piece of advice: "continue to hold cash reserves in this market until we return to a fully invested position."
EC: Ok, lots to say here. First off, when the caller told Bob that he had 38%-40% invested in the QQQ shares, Bob jumped the gun in my opinion by assuming the caller meant 38%-40% of his total portfolio. An aggressive investor following Bob's recommendation on the QQQ shares could have invested up to 50% of their cash reserves in the QQQ and still stayed within Bob's guideline. This would have meant an investment equal to 32.5% of a total portfolio assuming you followed Bob's recommendation to have 65% of your portfolio in cash reserves. I think that Bob assumed that the caller meant 38%-40% of his total portfolio, but he didn't follow up on that distinction with the caller.
EC: What disturbed me most about Bob's response is that he didn't really help the caller. For example, even if you assume the caller meant 38%-40% of his total portfolio, he is only 6%-8% overweighted in QQQs per Bob's maximum aggressive recommendation. Bob didn't really offer any advice about the QQQs to the caller, and simply said to hold cash reserves. For example, Bob could have advised the caller on how to reallocate his QQQ investment back to the parameters of Bob's recommended asset allocation. I imagine that caller was frustrated with Bob's response. Indeed, I observed many people complaining about Bob's response to that caller on the Internet message boards this weekend.
EC: Don't fret though! I know that many of you are invested in the QQQs, so I decided to hunt down some high quality advice on this issue. To that end, I consulted your friendly neighborhood CPA, Rande Spiegelman, to ask him what investors can you do to take advantage of a tax loss in the QQQs, but still remain invested in that security. Rande had discussing that on Suite101 and gave me permission to include his answer here:
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ASK YOUR FRIENDLY NEIGHBORHOOD CPA!
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Question: What can I do if I want to sell my QQQ shares to take advantage of the tax loss, but still own the QQQs, yet avoid the wash sale rule?
Answer: Assuming you want to maintain your exposure in the QQQs, you could do one of three things:
1) Sell your QQQ shares and wait 31 days to repurchase.
2) Double-up (in other words buy an equivalent number of shares of QQQ that you already own), then wait 31 days to sell the original shares.
3) Sell your QQQ shares and simultaneously purchase the dollar equivalent of a fund like XLK.
If you choose option #1, than you will be out of the position for a month, which could be good or bad. If the QQQs go down big time during that month, you will be happy. On the other hand, if they go up during those 30 days, you may be kicking yourself. Unfortunately, its impossible to know ahead of time what will happen in those 30 days.
If you choose option #2, than you have twice the exposure you have right now for one month. Once again, that can be a good thing (if the shares go up), or a bad thing (if shares go down). Without a crystal ball, you might as well flip a coin in an effort to predict the outcome.
If you choose option #3, which is my preference, (and which assumes you want to maintain an exposure to this area of the stock market), you are able to take advantage of the tax loss, but also able to maintain your exposure to technology stocks and avoid the wash sale rule.
EC: The "XLK" Rande was referring to is the S&P500 Index Technology Sector Select SPDRs (AMEX: XLK) which is an exchange traded fund, just like the QQQ. The difference is XLK represents an index of 90 technology companies within the S&P500 composite index which is sufficiently different from QQQ to help you avoid the wash sale rule. Thanks for your help Rande! You can ask Rande a question yourself on the Ask Rande thread at this link:
suite101.com
EC: Some required reading this week for QQQ lovers everywhere. First off, an article by David Callaway on CBS Marketwatch.com entitled "The Case for the Sleeping QQQs." In this article, Mr. Callaway discusses the trading range the QQQs have been in and quotes several analysts projections on which way the QQQs are going. As you can imagine, the opinions are all over the place:
cbs.marketwatch.com
Some very worthwhile QQQ reading last week came from the king of options, Bernie Schaeffer, who pointed out that the last four times that the QQQ traded on low volume like it did last Monday, it subsequently suffered double-digit percentage declines in the ensuing days. This article is definitely worth the read:
schaeffersresearch.com
**That was just an excerpt of my e-mail this weekend. To read the rest, or find out subscription terms, drop me a line at this e-mail address:
davidk555@earthlink.net
Disclaimer: This e-mail is not a substitute for listening to Moneytalk. It is only my interpretation and commentary of some of what is discussed on Moneytalk, along with additional educational information that I include, editorial comments about the market, helpful financial links, guest contributors and even humorous remarks. I also provide Special Alerts to my subscribers as part of my service to notify them of important events impacting the stock market. If you want to know what was actually said verbatim on Moneytalk, listen to the show live. You can even listen to a re-broadcast of past Moneytalk shows on the Internet via the archives. The web site www.bobbrinker.com has all the links to the ABC Radio Network Stations that broadcast the show live and via the Internet. There are also free summaries of the Moneytalk shows on that web site. There is an additional disclaimer at the end of this e-mail. I am just a listener to Moneytalk and provide this service on my own volition. I am not associated with ABC Radio Networks, Moneytalk or Bob Brinker and this service is neither sanctioned by, nor written under the auspices of ABC Radio Networks, Moneytalk or Bob Brinker. This e-mail is simply my own interpretation and commentary of some of what is discussed on the show, along with educational information I provide that I think is useful to help better understand financial issues. There are also editorial comments, useful financial links and contributing editors and Special Alerts. I am also a frustrated writer and comic and try to weave humor throughout. You should not rely on any statement made in David K's Stock Market Commentary, Interpretation of Moneytalk, Financial Education, Helpful Links, Guest Editorials and Special Alert E-mail Service as constituting financial advice or as a recommendation to buy or sell stocks. Finally, this e-mail is strictly informational and educational and is not to be construed as any kind of financial advice, investment advice or legal advice. |
