Archive for March, 2009
Tuesday, March 31st, 2009Many Energy analysts feel once the world’s economies start to grow again we could see over $100 a barrel of crude again. Their basis for this conclusion is that with oil down near $100 a barrel from its high (and falling), companies and countries will slow or stop their exploration for oil. Less exploration means we will have eventually have a supply shortage. (see Re-flation Trade! Really? for more insight)
This theory is correct, but I believe the timing is too aggressive. There is another theory that does not get as much airtime as the above mentioned which explains how increased commodities prices typically brings increased supply. Basically as commodity prices rise, countries and companies ramp up exploration and extraction of the commodity to cash in on the increased prices. Also with increased prices technology improves and extraction becomes more efficient.
This increase in supply typically overshoots demand. The question is, how long will this process take? The last commodities bubble that popped took place in the early 1980’s. How much supply is really out there? The world for the most part is contracting. The process of rebalancing the supply and demand curve of oil could take some time.
The real threat to this process, in my opinion, is the artificial supply control of OPEC. They have never been successful in their efforts for the long term because their success solely depends on the cooperation of the countries that make up OPEC. If a large percentage of your GDP comes from the sale of oil and your nation is starting to starve because demand has fallen off a cliff, do you sell what you have or hold onto it with hopes that oil prices will be higher tomorrow? I think the answer to that question is, depends on how much cash reserves you have.
Supply and Demand is what sets prices, everything else is just manipulation. Manipulation can only exist in the short term; eventually reality catches up and typically overshoots in the other direction.
Tags: Commodities, demand, futures, manipulation, oil, opec, supply
Posted in Commodities | No Comments »
Monday, March 30th, 2009So it seems like the consensus of Wall Street professionals is that we cannot just buy and hold stocks or mutual funds (for the short term). Apparently stocks are trading more on momentum and less on fundamentals.
So basically we are now being told that this market has very little to do with the fundamentals and everything to do with speculation right now. Now if you have a 5 to 10 or 20 year outlook then this is a cheap market according to Wall Street. Keep in mind if the market goes down another 50% from here, then the market would need to go up 100% just to get back to where you started from.
If fundamentals are really not playing a factor and it is all about speculation then aren’t we really just gambling with our money? At least if I go to a casino the rules are the rules and they can’t change in the middle of the game. Is the real goal of investing in the stock market to roll the dice?
Look at the products that being introduced into this market. I especially have noticed the increased popularity of “ultra” short or long Exchange Traded Funds (ETFs). On any given trading day these products typically show up on the most active securities list. These products promise a multiplier effect on the sector, index or commodity that you are investing (betting?) in. If you are Long Financials with an ETF “ultra” fund 3x, then if the Financials go up 2% the ETF is suppose to go up 6% (vice versa on a down day). Does this product sound like an investment?
Investors make stocks grow for the long term because they typically”buy and hold “stocks. Does this market seem like it is mostly made up of investors or speculators?
Tags: buy, etf, fundamentals, hold, long, mutual funds, short, speculation, Stock Market, trading
Posted in Side Notes, Stock Market Actions | No Comments »
Sunday, March 29th, 2009The following two charts are disturbingly similar side by side:
First is the Dow Industrial Average over the last from 1928 till 2006:
Dow Industrial Average 1928 till 2006
The second chart is total US debt as a percentage of GDP from 1923 till 2006:
Percentage of Total US debt to GDP 1923 till 2006
In 1930 the total percentage of US debt to GDP was 270%. What this means that for every dollar of GDP there was $2.70 of debt. Notice the percentage soared as debt was accelerated and GDP was slowed in the early 30’s. This over expansion of credit was primarily responsible for the financial crisis of the 1930’s. It took many years for the population to forget about the dangers of too much credit.
In 2006 the total percentage of debt to US debt to GDP was 331%. So again this means that for every dollar of GDP there was $3.31 of debt. The overall consensus feels that we are again in process of deleveraging. The questions remains is where we stop.
The real question is what came first the credit or the growth? Was the United Sates at a standstill from the 1940’s till the mid to late 1970’s? If the country was not willing to assume more debt than about 150% (plus or minus say 10%) of GDP for some 30+ years and now we are assuming over 300%, was it that extra assumed risk what launched the economy over the past 30 years ?
I understand that over the past 30 years there has been great innovation, but let us not forget that in the previous 30+ years we went to the moon. It seems to me also that much of the technology over that past 30 years can greatly be attributed to the 30 years prior to that. Was the growth over that past 30 years attributed to Engineers and Scientists or some funny math created by financial institutions spurred by an increased appetite for risk?
Tags: credit, debt, dow, gdp, market, money, recession, risk, stock, stock market history
Posted in Economics, Side Notes, Stock Market Actions | No Comments »
Saturday, March 28th, 2009Is it possible the Dow Industrial Average really could descent to 1529? The answer is absolutely yes.
From 1929-1932 the Dow Industrial Average went from a high of 381 to a low of 41 (closing prices). The index corrected 89.2% in about 3 years. So if the Dow Industrial went down 89.2% from its high of 14,164 that would leave us at 1529.
In December of 1903 the Dow Industrial Average touched 44. On September 3rd, 1929 the Dow Industrial reached 381. In 27 years the Dow Industrial Average grew 865%. On April 21rst 1980 the Dow industrial Average was 759. On October 9th, 2007 the Dow industrial average was 14,164. In 27 years the Dow industrial Average grew 1866%.
From September 3rd, 1929 (Dow 381) till April 21rst, 1980 (Dow 759) the Dow Industrial Average grew 199%. So it took over 50 years to grow a little over 199% but in just the last 30 years the Dow was able to grow nearly 10 times that.
So even if the Dow where to go to 1529, that still would be a 201% gain on the Dow Industrial average over 30 years which is not bad considering the last 80 years.
I am not saying that this will happen, but I definitely feel as though the last 3 decades have been somewhat of an anomaly. Remember price is determined not by Wall Street professions, it is determined by demand. If investors are unwilling to accept the risk of equities (stock), then the perceived value is worthless.
Dow Industrial Average from 1929 till 1980
Tags: average, crisis, demand, dow, economy, index, industrial, market, stock, stock market history, supply, USA
Posted in Economics, Side Notes, Stock Market Actions | No Comments »
Friday, March 27th, 2009Several weeks ago when the US Stock market was selling off with no bottom in sight we heard much of the financial populous using the term “capitulation”. Capitulation is defined by Webster’s dictionary as “surrendering or giving up”, traders characterize it as panic selling typically accompanied by large volume. Many professionals look at capitulation as a way to capitalize on another’s emotional bad decision. If the masses, “mob”, sells out then the market would have nowhere to go but up because all the sellers are gone. The theory is that it pays to contrarian.
Interesting how we really never did get this day of reckoning or “capitulation”. Instead a steady flow of relatively good news has spurred the major average up near 20% in a matter of weeks. With several weeks on a roll we have heard (not from all, but a large majority) from public officials, investment professionals and financial press that we may have seen the worst of this economic crisis.
If it pays to be contrarian then don’t you lose if you are part of the mainstream? Could the market be doing the same as capitulation but on the upside, panic buying for their jobs? Remember Wall Street suffers long term in a bear market.
President Herbert Hoover (31rst President of USA 1929-1933) on May 1, 1930 stated that United States was not through all its difficulties but he believed that United States had been through the worst (taken from The World in Depression 1929-1939 by Charles P. Kindleberger)
Red Circle Indicates End of April Beginning May 1930 Dow Industrial Average
Tags: bear, bull, chart, depression, economy, goverment, market, stock, USA
Posted in Books, Economics, Stock Market Actions | 1 Comment »
Thursday, March 26th, 2009The Federal Reserve and the US Treasury Department have made dramatic moves (at a heavy taxpayer cost) over the past few months to artificially suppress rates to reduce the cost of lending. Unfortunately these actions also reduce money market yields.
Recently large banks have been revealing their surprisingly profitable beginning of the year. I would note that these so-called profits are actually not including further write downs on bad loans they have made.
Are credit card rates at all time lows? Interestingly the other day I received a notice in the mail from a credit card indicating that they were raising their profit margin (prime plus their margin). My credit rating has not changed. Are they raising their profit margins on their good standings customers to help pay for the bad ones? Am I paying for their credit rating being reduced?
So even though prime is at a very low at 3.25% it seems as though credit card rates have managed to stay the same. Could mortgage rates actually be lower than they are now? Are banks gouging us to claw back from the grave?
Consumer spending is down and savings rates are on the rise. It seems to me that the people would rather make more money on their savings than letting banks make more money off of us.
Tags: banks, credit card, federal reserve, money, rates, saving, treasury, write down
Posted in Federal Reserve Actions, Side Notes | No Comments »
Wednesday, March 25th, 2009It is believed by many that the one of the founding fathers of Technical Analysis was Charles Dow with his Dow Theory. Charles Dow never wrote a book on his theory, but Robert Rhea did in 1932 which he respectfully named “The Dow Theory”. In Robert Rheas book he basically quotes much of William Hamilton’s writing from in the Wall Street Journal. William Hamilton wrote for the Wall Street Journal for nearly three decades before his sudden death in 1929. He wrote a column giving his insight to the future of the markets using Charles Dow’s theory (which he learned directly from him) which proved rather accurate. William Hamilton wrote a book on the topic in 1922 titled “The Stock Market Barometer”.
It is Funny how interpretation can differ from one person to the next. If you read this book with the notion you will learn a system of predicting the US markets, then you will probably come away with that (not necessarily accurately). The Dow Theory does include a method, but it also includes a reason for the method. Charles Dow did not use his theory to predict the market, more to determine where we were in a specific cycle. He used charts to confirm where we were on the economic map. It is widely accepted that we follow a relatively predictable economic path since we maintain a monetary policy (i.e. if A happens then B is our response and C is typically the result).
You should understand that Charles Dow never used his theory nor did he ever represent it as some sort of system to predicting the markets. My interpretation is that William Hamilton was successful with the theory because he used it to plot the economies location, and then used the relatively predictable economic map (cycle) to determine what was next.
I use technical analysis in my investment practices, but more for a “where are we now” purpose and not an eight ball in decision making. It would seem to me that sometimes technical analysis is a self fulfilling prophecy, the more who believe it the more you have a movement (at least in the short term). For that reason alone I feel you cannot disregard it but understand how one of the Fathers of Technical Analysis viewed it.
I would definitely recommend reading an unabridged copy of “The Dow Theory” by Robert Rhea. The book is only about 100 pages with an additional appendix of 100 plus pages of reprinted articles from William Hamilton’s Wall Street Journal column. The Dow Theory to me is definitely one of the best ways to gauge the market sentiment and where we are in the economic cycle.
Tags: chart, Dow Theory, stock, technical analysis
Posted in Books, Stock Market Actions | No Comments »
Tuesday, March 24th, 2009The simple answer is, prices coming down on goods and services. There are two types of deflation, good and bad.
Good Deflation:
Prices of goods and services are improved due to innovation either in manufacturing or in product delivery (i.e. inventory management).
Bad Deflation:
Prices of products and services are pressured by a lack of demand at current price level and demand can only be spurred by a price reduction. Some people actually feel as though bad deflation is a way of deflating an over inflated economy. When prices are forcefully reduced due to economic pressures, this causes increased unemployment, which perpetuates the situation. Companies must let people go to be able sell their products cheaper. This in return pressures the remaining workforce to pick up the slack without increased wages.
Many people may say that my definition of deflation is not descriptive enough to all the moving pieces (i.e. monetary value), but to me it is a simple way to identify and understand this potently destructive force.
Tags: deflation, Economics, economy
Posted in Economics, School | 2 Comments »
Monday, March 23rd, 2009At the beginning of the year I was under the impression that US markets were for the most part “Free Markets”. Recently these free markets have been coming under attack by the United States government. Seems lately like every week our government is formulating a new plan for recovery and forgetting the previous weeks plan. Lately I am likening the US Government to a child with ADD. Every week we are told to have patience, but every week those same preachers are no practicing their own advice.
My personal opinion on the government’s role in coping with an economic crisis is to uphold its current laws and not to create laws out of anger. I would wager that there are many responsible individuals (i.e. fraudulent mortgage practices) who perpetuated and fueled this economic mess illegally that we could prosecute and start on the road of closure. Instead we are focused on issues that stir the social unrest pot and steers a nation down the path of emotional and irrational rule.
I would plead to our leaders to start taking their roles as leaders and not as members of the mob. We are all taught that “fighting solves nothing”, it is just simple wisdom.
Tags: free market, goverment, market, money, stock, USA
Posted in Side Notes | No Comments »
Sunday, March 22nd, 2009We as the people of the United States are at a historic impasse where we can either band together to get through these hard time or fight and create a hostile environment where recovery is more difficult and prolonged.
When viewing an economic crisis over history many economists strictly view the flow of money, whether it is spending, lending or monetary. My view is somewhat more of the psychological viewpoint of the masses. If we strip out the dollars and cents of a crisis what we are left with is the acceptance of a failed endeavor.
We as individuals are able to handle extremely difficult stresses in life by going through stages of acceptance to finally moving on. As pointed out by Gustave Le Bon in The Crowd the individual is typically smarter than the crowd. As an individual we cope much faster with a crisis then the masses. Since this crisis is affecting so many people it makes it harder as an individual to go against the irrational actions of the crowd and move toward the somewhat obvious solution.
So instead of acting out of anger, we need to think as individuals and act rationally. If everyone thinks as an individual rather than part of the mob we would make more progress toward the resolution of this difficult time.
Unfortunately, if history is any indication of the future, people will jump on the bandwagon and the resolution will be prolonged and full of irrational behavior. Interesting that it is not the economic factors that determine the outcome, it is the human action.
Tags: econimics, economy, Gustave Lebon, the crowd, US, USA
Posted in Books, Economics, Side Notes | No Comments »
