Archive for April, 2009

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Support and Resistance – What is really happening?

Thursday, April 30th, 2009

Support and resistance in technical analysis typically refers to a price of stock, commodity, and similar investment tools that becomes a stopping point. The support is the low point of the trading range and the resistance is the top.

What causes a stock or other investment tool to find a support and resistance? Support is the point where buyers exceed sellers. Resistance is the point where sellers exceed buyers. Basically support and resistance is the tug a war between the bulls and bears. Some say that the winner is typically the one who convinces the long term investors to follow them.


Currently the bulls have made a stand at 6500 on the Dow Industrial and the bears have made theirs at about 8000. Over the past two months there have been several reports citing the lack of the individual investor participation. Consumer confidence released Tuesday April 28th, 2009 has shown that Main Street is starting to feel more confident about the future, but their current situation is rather unchanged.

So it would appear we are at a tipping point. I would assume if Main Street starts to see a more measurable improvement in their current financial situation the bulls could win the war. If Main Street current financial situation either stagnates or gets worse than the bears would probably win. So what if the bulls or the bears win this one, who will win the next one?

Support and resistance is all about expectations. If you are a bull and expectation are exceeded, then the market will move your way. If you are a Bear and expectation are missed, then the market will probably move in your direction. High expectations are negative for bulls, since they are harder to exceed. Low expectations are negative for Bears, since they are harder to miss. What are you expectations?

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Consumer Confidence – Propaganda or Main Street Gauge?

Wednesday, April 29th, 2009

Every month the Conference Board releases the results of a poll conducted by TNS of 5000 US Households. This poll is meant to capture the mood of the average US household during the month in question and apply a number to it. If the mood of US households is improving then supposedly this is a sign of improved consumer spending and better conditions on Main Street.

The questions asked during this poll focus on both present conditions and future outlook. This sampling of US households is asked to give their current individual condition and forecast the US economy as it relates to them.


The most recent poll released on April 28, 2009 showed an increase in US Consumer Confidence from 26.0 to 39.2. In this most recent poll the Present Situation Index increased slightly from 21.9 to 23.7. The Expectations Index rose dramatically from 30.2 to 49.5. From this poll it clearly shows currently that expectations outweigh existing conditions. This sampling of US Households has increased its optimism for the future.

Over the past two months Washington and Wall Street have increased their confidence dramatically as well. Washington has made comments hinting that we have possibly seen the worst and Wall Street has rallied to lofty levels in record time.

Both Washington and Wall Street have made extra efforts to remain optimistic. Washington now takes great care in releasing information in not to disrupt the Markets too much. Wall Street seems to have teamed up to shift their majority view from bearish to bullish. In my opinion it also appears that the financial press seems to praise the bulls and shun the bears.

Propaganda is the dissemination of information that is meant to influence the opinions or behaviors of people. Wall Street and Washing are focusing on the glimmers of light at the end of the tunnel. The light could be real or it could be a train coming, but we are still for the most part in the dark.

Wall Street and Washington have something to gain by keeping the US household positive. Wall Street wants US Households to invest their hard earned money into the market so they can make money. Washington wants US households to feel they are succeeding in solving to problems so they can keep “political will” on their side and succeed in their political agenda.

Is Consumer Confidence a gauge of Main Street finances or a measure of success in political and corporate propaganda?

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Who Leads the Economy?

Tuesday, April 28th, 2009

The US economy is made up of two fundamental events which are expanding and contracting credit. While an economy is expanding credit typically it is a time of prosperity. When an economy is contracting usually it is a labeled a recession. The economic cycle of expansion and contraction describes an economy as a whole.

To best visualize this cycle you should imagine a wave. As you go up the wave credit is expanding which typically means more spending; when you go down the wave credit is contracting which leads to less spending. Since US consumer makes up about 70% of GDP, it is logical to imagine the consumer is the water that makes up the wave. As the old saying goes, “Life is full of ups and downs”. People are typically either going up or down the wave.


The world is made up of cycles. The sun comes up and then is goes down and seasons change. Peoples clothing and surroundings may change but history usually repeats itself.
Individuals have short and long cycles. Groups of people also share cycles. These groups could include 2 individuals to millions or even the entire world’s population.

Gustav Le Bon in his book “The Crowd” cited that individuals are smarter than the crowd. With this assumption one could argue that the larger the group included in a cycle the slower the cycles is to repeat itself since it will take the crowd longer to move to the next part of the cycle than an individual.

Individual’s private finances most of the time go through periods of expansion and contraction just like the economy as a whole. Actually if you believe that individuals are smarter than the crowd, then you should also believe that individual’s finances lead the broader economy, since they are more efficient at moving to the next part of the cycle.

With the current economic crisis the price of real estate skyrocketed to a point where more and more individuals no longer saw value and stopped buying. With less buyer and more sellers, real estate prices started to plummet. Once the first domino falls, the rest eventually do. Since the housing bubble was so widespread and included so many people, both in the USA and abroad, the cycle should take that much longer to progress.

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What Happens if the Economy Gets the Flu?

Monday, April 27th, 2009

Every couple of years the term “Flu Pandemic” makes headlines. The term refers to a global medical disaster where a large part of the world population gets the fast spreading flu. Every year the flu kills thousands; during a flu pandemic it could kill millions. A side effect of this type of crisis is felt in the world economies. Fear of illness keeps people in their homes and out of the malls. Sick people miss work that leads to less productivity.

Several agencies have done research for the USA into the potential economic impact of a flu pandemic. Their research has estimated that the US GDP could contract from 4% to 6% in a severe flu pandemic. They also estimated that if there is a mild flu pandemic it could shrink GDP by 1%. The report also noted that the effect in other countries could be much worse. The real impact is the loss of life the side effect is the contraction of economic growth. The report does indicate that economies should snap back after the crisis from pent up consumer demand.


A global flu pandemic would make a time of prosperity difficult let alone its effect during a time of crisis, as we are in right now. The economy is at such a fragile point that even a pandemic scare could have a measureable effect.

With Wall Street and Washington citing glimmers of hope, a flu pandemic, or even a scare, could sidetrack their hopes for the near future. At this point, the health of the people who make up the world economies should be the concern then worry about the economic side effects.

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Earnings Expectations

Sunday, April 26th, 2009

So the long awaited earnings season is upon us and overall the market is holding up rather well. Earning either miss, meet or exceed expectations. Surprisingly many companies are exceeding expectations, even though the last quarter had been extremely challenging. But does missing, meeting or exceeding earnings expectation constitute good earnings?

On Thursday April 23rd, 2009 Microsoft released earnings that met expectations. Expectations were for 39 cents (excluding 6 cents in charges) a share which they met. Year over year earnings fell 32% from the same period last year. 60 days ago earnings estimates were for 40 cents a share.

On Thursday April 23rd, 2009 American Express released earning which exceeded expectations. Expectations were for 12 cents a share and they reported 31 cents a share. Year or year earnings fell 56% from the same period last year. 60 days ago earnings estimates were for 28 cents a share.


On Thursday April 23rd, 2009 Amgen reported earnings which missed expectations. Expectations were for $1.15 a share and they reported $1.08 a share. Year over year earnings fell 4% from the same period last year. 60 days ago earnings estimates were for $1.16 a share.

All three companies’ earnings are down year of year. The company who exceeded expectations actually saw the largest decrease in earnings year over year. The company who missed expectations saw the smallest decline in earnings year over year.

What are more important, expectations or actual earnings? Earnings are the product of companies; expectations are the product of Wall Street. In the above examples the expectations seemed to give the assumption that the company whose earnings are down the most year over year is doing better than the other two examples. What do you think?

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When being Positive can be Dangerous

Saturday, April 25th, 2009

The mood on Wall Street and in Washington went from a very negative outlook to a relatively positive one in a matter of months. Whether they are trying to stay upbeat or believe that the economy has made a turn, the dangers of being positive might outweigh the benefits.

When President Obama took office nearly every speech he or one of his appointees (Treasury Secretary) made was followed by a negative day on Wall Street. Outlook was grim and reality was settling in with Americans. Now the exact opposite is true, speeches appear to be carefully calculated and responses on Wall Street are more positive.

Wall Street for the most part believes the “bottom” is in. Washington believes the worst is over but we could still have some tough times ahead.

Most of the economic data that spurred the month and a half record breaking rally has started to retrench (retail sales and existing home sale). There are still more down economic data months than up which points to a negative trend.

Wall Street points out to investors that the market historically rallies over 50% after a large correction “bottoms”. The Dow Industrial average touched 6440 in February 2009, if it were to rally 50% then the Dow would be 9660. The Dow Industrial Average was closed at 9034 on January 2, 2009. This “rebound” would leave the Dow Industrial up 6.9% from the beginning of the year.

If the economic data continues to slide and the Market starts another correction, what percentage does it historically go down? It seems mostly the positive view is more statistically backed than the negative view. Being negative could save you money while the positive could make you money, what can you afford?

We are taught it is better to think of the glass as half full; but when you only have half left being negative may be the only way to keep it half full.

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Innovation in Banking

Friday, April 24th, 2009

While the real estate market was roaring, banks where feverishly competing to provide mortgages to the anxious American homebuyer. During the peak of bubble new “innovative” products were released regularly requiring less information from buyers and or more payment flexibility. Institutions that did not offer these “innovative” products fell quickly behind their competitors who did.

In every industry leaders are chased by lagers. In a top 10 list of an industry, 2 through 10 are always trying to take number ones spot. This competitiveness is what typically spurs “innovation” in an industry.

Banking is one business where “innovation” is more difficult to develop. Banks can and do develop”innovative” ways to service their customers more conveniently and efficiently without increasing risk. When banks develop “innovative” lending or insurance products, it is typically at the expense of increased risk.

Risk in banking during good times typically leads to increased profits. So during the good times typically banks look to increased product risk makes you more competitive. When times are tough, risk typically leads to losses. Then during bad times you could say reduced product risk typically makes you more competitive.

Innovation in banking is now more focused on reducing risk, since this improves their competitiveness during tough times. They are doing this by increasing lending requirements and raising fees. The US government has also attempted to reduce banks risk by artificially suppressing rates to keep the cost of lending down, therefore improving profit margins for banks.

Banks “innovation” on increased risk nearly put them out of business. Will their “innovation” on reducing risk finish them off?

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A Good Leading Indicator – Oil

Thursday, April 23rd, 2009

Crude oil prices over the past few months have show strong resilience to the ever building inventories. Week after week crude oil inventories have built to now a 19 year high reserve in the USA. The stock market seems to be speculating a relatively strong recovery and it seems like oil is attempting to price in the same by shrugging off the overall bearish reports.

Since the stock markets appear to be more speculative than realistic these days, crude oil supplies look to be a better indicator to economic activity in the United States. As the old saying goes “America runs on oil”, so it stands to say that if oil demand is retrenching than probably US production is doing the same.

Here is a chart of crude inventory supplies in the USA:

crude-oil-inventories-4-22-09

Crude oil supplies have continued to build at a relatively quick pace since October 2008. You will also notice that crude oil supplies broke above the June 2007 highs in February 2009 after a brief stabilization of the inventories in January till mid February.

The stock market started its most dramatic decent in October 2008. The stock market over the past month and a half has been rallying off data showing stabilization in the economy from January and February.

Every week a report is released by the Energy Information Administration tracking crude inventory supplies in the United States. Because oil is measured by barrel, coming up with this report is not open to interpretation or future adjustments.

If you believe America truly does run on oil, then this should be a good leading indicator to how fast America really is running.

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Snow Ball Effect

Tuesday, April 21st, 2009

Last week the CEO of NYSE Euronext, Duncan Niederauer, told CNBC that the rally over the last month and a half was not spurred by Investors, but by traders. In the interview he cites the rather low volume considering the movement and that the investor still lacks confidence to venture back into the markets. (Read the Article here)

The rally over the past month and a half is the largest move up in a short period of time since the 1930’s. Without “Investors” buying stocks this might end up being the largest bear market rally on record. The market needs investors to buy and hold stocks to build on this already remarkable short term bull move.

Wall Street has burned bridges before and was able to regain the trust of investors rather quickly in the past. Wall Street needs a bull market to survive so obviously they will rally the glimmers of hope while discounting the vast darkness as “already baked in”. Will Investors buy into Wall Street’s “snow ball effect” attempt or have they finally crossed the line?

Wall Street has led you to believe that the market leads the economy by about 6 months. Wall Street leading the market assumes that the Investor will follow. Recent polls have shown that the majority of Americans do not currently trust Wall Street. Investors have already lost so much over the past year, have they had enough? Americans are spending less and saving more. Will they sacrifice more so they can risk more?

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Turning Ordinary Metal into Gold – The Modern Day Alchemists on Wall Street

Monday, April 20th, 2009

File:HermesTrismegistusCauc.jpgHundreds of years ago Kings and Queens where captivated by Alchemists who claimed to be able to turn ordinary metal into gold. Alchemist preyed on the wealthy to pay for their lifestyle and experimentation into this so called science of the time. By all accounts some alchemists where true believers, but more were just looking to dupe the wealthy out of their riches.

Today most of us view Alchemy as ridiculous and wonder how so many people in such great power could believe in it. Although today most of us think that the so called science of Alchemy is ludicrous, for some reason we still seem to believe that it is possible to turn ordinary metal into gold, figuratively.

This association was never more obvious than during the technology bubble 10 years ago. A person or group with just an idea was able to solicit millions from investors, before there was even a product. Most of Wall Street made speculations of wealth on the notion of near limitless growth which we now view as absurd. Even after those failed speculations we continue to put faith in Wall Street.

Looking at today it is understandable how the practice of Alchemy had captured the minds of yesterday for so long. As yesterday, on Wall Street there seems to be true believers and frauds (i.e. Bernie Madoff) in the art of turning ordinary metal into gold.

I do not believe all investment advice is the practice of alchemy. I will say though that the use of speculation in investment advice does seem to prey on mans’ fascination of turning ordinary metal into gold.

The mystery and lure of Alchemy was spread by stories from witnesses to this incredible act of turning ordinary metal into gold. It was not until the late 1700’s that this art of deception was revealed. A book was published on how these alchemists deceived witnesses. How many stories have you heard of someone who invested in a stock that made them extremely wealthy (i.e. Microsoft)?

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