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8 Winners and Losers in a Rising Interest Rate Environment
If the shocking defeat of Obamacare repeal and reform proved anything, it's this: Sometimes, a Magic 8-Ball works better at predicting major outcomes in the nation's capital than, say, a pragmatic pundit. And so it goes with interest rate hikes and the Federal Reserve: Will they? Won't they?
No matter the chances of correctly calling an interest rate increase – and an overwhelming number of observers see more of those coming in 2017 – certain industries and sectors stand to benefit, while others will suffer. Here is a look at eight sectors and investments that could win or lose as rates rise.
Winner: Domestic Banks
Higher interest rates mean more money made on loans and credit cards, but there are other reasons banks should do well no matter what the Fed does.
[See: The Best Energy Stocks to Buy for 2017.]
"Unlike most of the other companies in the S&P 500, they have little or no revenue from outside the U.S.," says Ellen Hazen, senior vice president and portfolio manager at F.L.Putnam Investment Management Co. in Wellesley, Massachusetts. "They benefit from the higher interest rates that are ultimately driving the stronger U.S. dollar without suffering from lower income."
Loser: Debt-Intensive Industries
This rule of thumb applies as rates creep up: "Lenders and savers are winners and borrowers are losers in the broadest sense," says Will Kenton, senior news and markets editor at Investopedia.
One investment tactic is to look at the companies that take on a lot of debt to finance their growing and operations.
Says Kenton: "Capital and debt-intensive industries such as telecoms, manufacturing, shipping and construction will suffer."
3 Takeaways from the March Rate Hike
A quick rundown of the major takeaways from the Fed's most recent rate hike.
John DivineMarch 16, 2017
<p> Federal Reserve Chair Janet Yellen addresses the Executives' Club of Chicago, Friday, March 3, 2017, in Chicago. Yellen signaled that the Fed will likely resume raising interest rates later this month to reflect a strengthening job market and inflation edging toward the central bank's 2 percent target rate. (AP Photo/Charles Rex Arbogast) </p>
Winner: Energy
As co-author of "The Association Between Federal Reserve Policy and Sector Returns," Bob Johnson notes that energy is among the best performers when interest rates move up – finishing ahead of other winners such as consumer goods, utilities and food.
They all have this in common, though.
"People need to eat, brush their teeth and heat their homes whether the economy is strong or weak," says Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania.
Loser: Home Construction
The higher mortgage rates that follow the Fed's actions put a damper on real estate activity, says James Cassel, chairman and co-founder of the investment banking firm Cassel Salpeter in Miami.
If that happens, losers might include "construction-related businesses, like homebuilders," he says.
But with mortgage rates still at historic lows, "I do believe there's still some ways to go with additional rate increases before we see a material effect," Cassel adds.
Winner: Home Improvement
When interest hikes compel would-be homebuyers to hunker down, they take on home improvement as a consolation prize – a good thing for Lowe's Cos. (ticker: L) and Home Depot (HD).
"Remodelers and home-improvement suppliers benefit from a rising-rate scenario," says Sesha Dhanyamraju, CEO of Digital Risk, a provider of outsourced mortgage processing services.
[See: 7 of the Worst Product Flops Ever, Besides the Samsung Galaxy Note 7.]
"Homeowners with a low mortgage rate are far more likely to stay in their homes and spend to improve them than pursue a new house ... with a higher mortgage rate" Dhanyamraju says.
Winner: Technology
No matter how much some consumers may grumble, rising interest rates mean good news on at least one front.
"The technology sector should benefit as rising interest rates usually correlates with an economy that is getting stronger and is expected to grow at a faster pace," says Ronen Schwartzman, founder and chief investment officer of Ten Capital Advisors in New York City.
And a strong economy could bolster the bottom lines of smartphone manufacturers such as Apple (AAPL) and Samsung.
A Rate Hike Won't Matter Much to You
Markets will be looking for signs about what the Federal Reserve intends to do next.
Kira BrechtMarch 14, 2017
Federal Reserve Building
Loser: Government Bonds
If rates rise again soon, there could be some vulnerability for investors overexposed to certain types of bonds.
"A slight increase in rates would erase the coupon return for intermediate and long-term government bonds," says Daniel Kern, chief investment officer of TFC Financial Management in Boston. "Investors concerned about potential rate hikes may want to emphasize shorter-term government bonds until rates stabilize."
Meanwhile, "Dividend-paying stocks offer the appeal of income and growth," Kern says.
Tie: Telecoms
Eric Ervin, CEO of Reality Shares, a research firm and exchange-traded-fund provider focused on dividend-growth investing, believes that telecoms, because of their high yields, "will most likely suffer the most when with rising rates."
Yet while this sector is sensitive to interest rate hikes, it isn't necessarily vulnerable. In large part, any potential hurt depends on how much rates rise.
So far, so good: Over the last year, AT&T (T) is up nearly 7 percent – and 13 percent since Election Day, trading at about $24 per share.
The Best And Worst Sectors For Rising Interest Rates
https://static.seekingalpha.com/uploads/2021/3/30/2434051-16171194300724685_origin.png
Industries Most Affected
The graph below shows some of the industries that have unusually extreme LTB betas, either positive or negative.
Source: Graph created by author using data from FactSet
Those on the left side could be described as economic recovery industries. They typically suffered poor returns in 2020 and are only recently seeing their stock prices recover. They are also most often considered value industries as opposed to growth industries.
The industries on the right side are a varied lot. Some are clearly associated with the “winners” in 2020, especially software, medical equipment, and solar. These are all growth industries in which a large portion of the expected cash flows are many years down the road. Consequently, they have been hurt by rising rates through the mechanism of the increased discount rate.
Other industries on the right side are sensitive to changes in interest rates through the economics of how their businesses operate. For example, the demand for real estate and home construction is strongly influenced by mortgage interest rates—when rates move up, demand falls. Similarly, gold miners are affected by the price of gold, which in turn is affected by interest rates because gold does not provide any interest or dividend income, and when interest rates rise, the opportunity cost of owning gold increases, making it a less attractive store of value.
Charts
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TIME CYCLES
This week the DOW broke out to all time new highs in a perfect wave location: Int. iii of Major 3 of Primary III, or 3 of 3 of 3. For comparison purposes we took a look at the last ‘breakout to all time highs’ in 2006. We then adjusted the wave count of that bull market as if it too were a Cycle wave. Under that wave count the previous ‘breakout’ was also at Int. iii of Major 3 of Primary III. A perfect fit, but there is more.
During the 2002-2007 bull market it took exactly 48 months of bull market activity before the breakout occurred. Then the market topped exactly 12 months later. That bull market began in Oct02, broke out in Oct06, and topped in Oct07. This 2009-2013 bull market has also taken exactly 48 months before the ‘breakout’. The bull began in Mar09, broke out Mar13, which now suggests a bull market top in Mar14.
Following this theme: breakout to new highs – then top within twelve months. We checked further back into market history and noticed the following. After the 1998 crisis the DOW made new all time highs in Jan99, then topped in Jan00. After the 1987 crash the DOW made new all time highs in Aug89, then topped in July90. There is definitely a time/price pattern at work here.
Adding to this probability is the potential for an upcoming recession, using the irregular presidental recession cycle. Since 1949 there have been eleven recessions. Three occurred in an election year, at the end of a president’s term. But eight occurred within 18 months after a new/second term president was sworn in. President Obama was sworn in January 2013.
If we now make the assumption that the bull market high will occur in Feb/Mar14 to complete Cycle [1]. This five year bull market will have matched, in time, the five year bull of the previous Cycle wave [1]: 1932-1937. It will have also matched, in time, the previous bull market: 2002-2007. Then, however, the market enters a new treacherous bear market period: Cycle wave [2].
After the last Cycle [1] 1932-1937, Cycle [2] dropped 49% in 12 months into 1938. Cycle [2] should have ended there with that percentage of decline. Cycle waves generate about a 50% market correction. After a big bullish looking rally into 1939, Germany invaded Poland and the market eventually went back to the 1938 lows by 1942. Cycle [2] should have lasted 1 year (12 months). This would have been similar to Cycle [4] which also lasted 1 year, 1973-1974 (21 months). The percentage of decline is important, not the time, as we recently observed in the 2 year, Oct07-Mar09, (17 month), 54% decline.
The next thing of interest is the presidential 4 year cycle, which typically bottoms in the months Mar/Jly/Oct. It has a pretty good record: 1982, 86, 90, 94, 98 and 2002. But occassionally it gets out of sync. In example: 2006, 2010, and soon 2014. When this occurs it eventually realigns, sometimes rather quickly. For example: 1946 made a high then a mini crash followed into the 4-year low, 1962 made a high and a mini crash followed, and 1990 made a high then a mini crash followed.
Finally, with about a 50% market loss expected for Cycle [2], the 4 year low potentially bottoming in 2014, and possibly a Secular cycle low as well. We looked back in market history for huge declines during a short period of time. We found two historical periods of huge declines, bonafide crashes, in just two months: 1929 -48%, and 1987 -35%. The 1929 crash, was a straight down one downtrend event. The 1987 crash was an unusual five wave/trend elongated flat event. Primary wave II, during this bull market, duplicated that pattern during its 19% decline. An omen of things to come?
With high frequency trading, long term rates heading higher, and the USD in a bull market. There is now the potential for a bull market high in Feb/Mar14, then a bonafide market crash during 2014. This is just another example of investor mass psychology patterns in action: past, present and future.
Harry Dent: Stock Market Roller Coasters and Bear Megaphones
http://www.marketoracle.co.uk/Article38805.html
Booms and busts in the economy are based on predictable demographic cycles such as those studied by Harry Dent, founder of HS Dent, chairman of SaveDaily.com and author of "The Great Crash Ahead: Strategies for a World Turned Upside Down." In this Gold Report interview, Dent predicts a global crash between mid-2013 and early 2015, in an ongoing decade of economic coma. For now, gold and gold equities are great investments, but when the crash comes, read on to find out what he suggests will be a good sector until the echo generation enters the workforce and starts buying potato chips and houses.
The Gold Report: Harry, you base your economic predictions largely on demographics and demographic cycles. As the baby boomers enter old age and spend less, will that quash any hope of an upward trend in the overall economy?
Harry Dent: Ultimately, yes. Spending by baby boomers hit its peak in countries like the U.S. in 2007. On average, baby boomers will spend less and less in the years ahead as they move toward retirement. Governments and central banks around the world keep stimulating to keep their economies up and to keep their banks from failing, but they are fighting against the largest generation in history. Stimulus works less well with an older population that does not have kids to raise and put through college. Demographics will make stimulus plans more and more difficult, and at some point they will fail.
TGR: A lot of your thinking is rooted in history. One of your recent articles mapped the trajectory of the 1929, 1968 and 2007 booms and busts, noting that politicians and investors blew those opportunities by focusing on the symptoms rather than the causes. Is there any tactic that can overcome the demographics?
HD: We have two major trends. The first is the baby boom peaking in most wealthy countries. The second is the greatest debt bubble in history, especially in real estate.
Private sector debt has grown 2.7 times the economy since 1983; government debt has grown almost as fast. In a debt bubble, assets rise, people overspend, businesses overexpand and it takes a period—usually a decade or so—to work off those excesses. Today, governments around the world are refusing to countenance a downturn. They are trying to replace every dollar of economic downturn or of bank losses with stimulus money created out of nowhere. Similar to an addict taking more and more of a drug to not come down off of a high, the governments are keeping the bubble going.
Stimulus can avert a crisis in the short term, but not long term. You have to deal with your debt or you will not emerge from the crisis, as Japan has shown clearly after 23 years of a coma economy.
TGR: One of the trends you wrote about recently was what you called the "currency war" among Japan, the U.S. and the Eurozone, in which all are printing money. What does that mean for investors and how should investors react?
HD: After the last great debt bubble, in the 1930s, governments did not step in to prevent the collapse of banks. Governments did increase trade tariffs, which led to trade wars.
Recently, Japan's strategy has been to print enough yen to push down its currency to increase exports, even though its domestic economy is dying due to an aging population, bad demographic trends and super-high debt ratios. By doing this, Japan is starting the next trade war. Other countries will respond by lowering their currencies and doing more stimulus. If you keep doing this, the whole thing will break down at some point.
The question is when. We think the next breakdown will start in late 2013 or early 2014.
Europe tried a $1.3 trillion quantitative easing (QE) stimulus program in late 2011/early 2012, but fell into a recession anyway. The U.S. has had QE3 and now, QE3 Plus. Japan, too. These are signs of desperation, not progress. Countries cannot reinvigorate economies that are comatose, they can only keep them barely alive on life support.
These latest stimulus plans will create very little incremental growth and even decline. Stimulus only works so long because it is artificial. It is not real.
TGR: Do you expect the result to be inflation or deflation?
HD: We had deflation for several months in late 2008 and early 2009, when the financial system actually melted down from the debt bubble bursting. Then the government stepped in and started stimulating like crazy to create inflation. If we had seen this level of money printing and stimulus anytime in the past, inflation would have gone through the roof. But it has not; inflation is at a modest level.
With governments fighting deflation with inflation, we will get more inflation in the near term from all the stimulus. But if the system melts down again, which we expect between late 2013 to early 2015, deflation will set back in. There is also likely to be another crisis and deflationary period between 2018 and 2019. These are the two danger periods we see ahead for investors.
The pattern is inflation, deflation, then another government stimulus plan, followed by minor inflation and then deflation again. Until governments eliminate their restructured debt, they cannot come out of their debt crises. No government is doing this, which is not a good sign for the future.
TGR: How can investors protect themselves in such an unsettled economy?
HD: Investors must realize that there is a new normal. Stocks will not be growing at 12%/year. Bonds will not yield 5–6%. The new normal is not even the expectation of 4% on stocks and 2% on bonds that people like Bill Gross from PIMCO suggest. The new normal is a roller coaster of one bubble bursting after another.
Investors have to get away from the traditional concepts of diversification and asset allocation for the next decade or so. When bubbles burst, everything goes down. In 2008, real estate, oil, commodities, gold and silver crashed. The U.S., European and emerging markets crashed.
With each bubble, the market has gone to a slightly new high and to a slightly new low when the bubble bursts. We call it a megaphone pattern.
Megaphone
We are likely to see new highs in a lot of stock indexes in the first half of 2013. Our target for the Dow is 6,000 in the next two or three years, when we see the next burst coming.
You need to think like a long-term trader. Get more defensive. When stocks crash, get back into them. This will not be a decade where investments will only go down. It will be a roller coaster of boom, bust, boom, bust.
TGR: Roller coasters can be scary things. Unless you are looking in the rearview mirror, how do you know when is the high and when is the low?
HD: It is not easy. We predict that the Dow could go as high as 15,000 this year before dropping to 6,000 in early 2015. Nobody can predict the exact top or the exact date.
You can only guess by seeing when investors are overly bullish or bearish and when patterns are stretching on. And if governments are able to contain the next crash and crisis to, say, 1,100 on the S&P 500, then we will see a bigger crisis between 2018 and 2019.
The megaphone pattern is the best single pattern we have right now. The next top in this megaphone pattern in the S&P 500 is around 1,600; only 6% from now. Stocks do not have a lot of upside despite all the good news about fiscal cliffs being averted, QE3 Plus and stimulus from Japan and China.
I do not see a lot of good news coming. Baby boomers will keep aging and spending less. Stock earnings are decelerating, although still growing for now.
Gold is the one thing we see going up more than anything else in the near term. The more money governments print, the better it is for gold. But when that government strategy fails and economies melt down, gold will go down.
Gold and silver may be the best investments in the next several months. The gold and bond bubbles will be the last to peak as even the bond bubble seems to be starting to unravel. Everybody has been rushing into gold, silver and bonds as safe havens, but the truth is investors keep rushing into every bubble until it bursts and, at some point, all the bubbles burst.
TGR: How high do you think gold could go before it bursts?
HD: For two years, gold has been trading between $1,520/ounce (oz) and $1,800/oz. If gold breaks above $1,800/oz, the next target is $1,934/oz (the past high), and then a new all-time high is likely between $2,030–2,080/oz. If it gets that high, we would advise people to take their gains in gold.
However, I think gold is likely to fall to $750/oz in the next two to three years, maybe even lower.
TGR: What about gold equities, particularly the juniors, are they on a downtrend or have they hit bottom and are ready to come back up?
HD: I think gold stocks are near a bottom and, like gold, are likely to rally in the first half of 2013. The equities are much oversold. Traders are very bearish on them, which is a good sign.
In general, we see stocks in the U.S. and Europe as having 4–6% on the upside. However, silver and gold stocks could go up anywhere from 10–25%. Gold and silver equities are very good plays right now.
TGR: You have called this an opportunity for once-in-a-lifetime investment success and have suggested investing in Asian, multinational, technology and healthcare stocks. What are some specific names that could succeed in this roller-coaster environment?
HD: I focus more on sectors than stock analysis. In general, whenever there is a crash, you want to buy because another bubble or expansion will follow, even in a long-term bear market. You want to buy the sectors most favored by technology and demographic trends.
If I am right, and stocks crash again in late 2014 or early 2015, I want to buy in the healthcare sector in the U.S. and Europe, especially the most leveraged areas: biotech, medical devices and pharmaceuticals. The baby boomers will continue spending on healthcare and healthcare products, even as budgets get crimped by entitlement reductions. [Editor's Note: For more ideas on investing in the life sciences, visit The Life Sciences Report].
Next, I want to invest in areas of the world with strong demographics and emerging countries that are not as dependent on commodity cycles. We think commodity cycles, which have peaked every 30 years, most recently between 2008 and 2011, will go down into the early 2020s before turning up again. Instead of emerging areas like Brazil, the Middle East or Africa, which are large commodity exporters, I want to invest in countries like Vietnam, Cambodia, Thailand, Indonesia and especially India. India is not a major commodity exporter and it has the best demographics.
But whatever you buy, you have to wait for the crash, maybe two to three years from now. You have to wait for the crash because all stocks go down to some degree in a crash, so you do not want to buy now.
TGR: Do you also trade based on the daily headlines? For example, I have read about Apple Inc. (AAPL:NASDAQ) taking a short-term dip that is part of a larger wave. Do you take advantage of daily dips?
HD: We are more expert in the long-term trends, demographics and cycles, but, yes, we do look at the short-term technical indicators. Stock being oversold or overbought or people being overly bullish or bearish are the most important factors.
Apple is a classic example. It was around $700/share and in a matter of months went down to $440/share. Wall Street loved Apple and now is shedding the stock. That is classic short-term thinking.
Apple will probably go a little lower, but it is undervalued now. I would rather buy Apple than Google Inc. (GOOG:NASDAQ). In fact, I would rather buy gold, which is undervalued and overly bearish.
Long-term trends are highly predictable. Short-term trends depend on political decisions like the fiscal cliff and on traders over- or undervaluing stocks.
TGR: We have talked about the baby boomers. Let's turn to the other end of the age spectrum. According to your research, when will enough young people be in the workforce earning money, buying potato chips and houses to pump up the economy again?
HD: We are looking for that to happen in the early 2020s. That is when the echo boom, the next generation, will enter the workforce in large enough numbers and start to raise their families and buy housing. The next boom will not be as strong, but it will turn the trends back up.
The echo boom generation in almost every wealthy country—whether it is in Japan, which peaked earlier than us, or Korea, which will peak later—is not as large as the baby boom generation. The baby boomers built all this housing and infrastructure, and it bubbled and now it is bursting.
Look at Japan. Real estate there has been down for two decades. The next generation should be buying houses by now, except the young generation has much more part-time work and lower wages than its parents' generation. The older generation has been protecting all of its benefits and entitlements and retiring at their expense. A recent survey showed that 40% of young Japanese males have no interest in sex, dating or marriage. Why? Because they cannot afford it. They just want to be carefree and survive on a small budget.
Nikkei
Everything that has happened in Japan will happen in Europe and the U.S. The U.S. and Northern Europe, where the echo generation will move forward in the early 2020s, have better demographic trends than Southern Europe, Germany and Switzerland. The trends in East Asia, Japan, Singapore and Korea and eventually China, are horrible.
TGR: What should we be doing while the market is in a coma to be ready to prosper when the country comes back in 10 years?
HD: Fortunes were made in the early 1930s, from Joseph Kennedy to major companies, like General Motors and General Electric. In a downturn, you take advantage of the fact that everything falls. Buy when things are down.
Everyone likes a sale. Who would not want to buy a $500 Brioni shirt for $150 or pay $30,000 for a Mercedes that normally goes for $60,000? That is what will happen in financial securities over the next decade.
We will continue to see crashes, and after a crash you can buy businesses, commodities, real estate, stocks, even gold, at unbelievably lower costs. You create wealth by buying things at the bottom.
Gold
The smart people in the new normal environment of ongoing crashes think like long-term traders. They sell stocks, commodities, real estate and gold when they are high and re-buy them at unbelievable discounts when they crash. The world is your oyster if you are patient.
Your key goal should be to protect the gains you made in the greatest global bubble boom in history. Get out, keep cash and wait for the next big crash. Then buy at $0.20 or $0.40 on the dollar. What could be better than that?
TGR: Sounds like an opportunity to me. Thanks, Harry, for your time and your insights.
Harry S. Dent Jr. is founder of HS Dent, an economic research firm; editor of Survive and Prosper newsletter; and chairman of SaveDaily.com, a low cost investment platform for financial institutions. His mission is "Helping People Understand Change." Using years of hands-on business experience, in the late 1980s Dent developed a new way of understanding the economy and forecasting what lies ahead based on consumer demographics, which he outlined, in late 1992, in his book, "The Great Boom Ahead." In that book he stood virtually alone in accurately forecasting the unanticipated boom of the 1990s and even called for the next great depression to start in 2008. Dent has authored several bestsellers including "The Great Depression Ahead in 2008," and his latest, 2011 book "The Great Crash Ahead: Strategies for a World Turned Upside Down," he outlines why government stimulus is doomed to failure and the economic havoc that lies ahead. Dent regularly lends his economic expertise to the media on television, in print, and on the radio, and is sought after as a panelist and speaker for international forums around the world. He graduated from the University of South Carolina and earned his Master of Business Administration from Harvard Business School where he was a Baker Scholar. Subscribe to the free daily Survive & Prosper newsletter at www.harrydent.com.
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Stock Market Pullback Imminent, Cyclical Bull to Continue
http://www.marketoracle.co.uk/Article26347.html
Crisis High 2011
http://www.safehaven.com/article/19990/crisis-high-2011
After two years of issuing "sell" ratings on equities and making bearish pronouncements on the year-ahead economic outlook, Wall Street has finally turned bullish again. Recent analyst polls reveal the consensus outlook for 2011 is for another year of double-digit stock market gains. Even stalwart bears are starting to sound a more optimistic note on the prospects for continued economic recovery in 2011 and beyond.
One analyst who doesn't share this newfound optimism is far from the conventional Wall Street type. He correctly predicted the 2008 credit crash and also turned bullish in March 2009 following the crisis low. He has made a career of going against the consensus and he's once again staking his reputation against the Wall Street establishment. He believes that far from being the dawn of a bullish economy, 2011 will witness the end of the post-credit crisis economic recovery. He also believes 2011 will witness a "crisis high" in the stock market and most likely a turning point within the context of the long-term cycles. That analyst is none other than Samuel "Bud" Kress of the SineScope advisory (SJK Capital, 15 Phoenix Ave., Morristown, NJ 07960). His tenth and latest Special Edition is aptly titled, "Crisis High 2011-2014."
In the more than 10 years that Kress has been writing his Special Editions we've seen the long-term sequence of yearly cycles which bear his name unfold according to schedule. We saw the Kress 12-year cycle bottom hard in 2002, producing a major bear market low. We saw the 10-year cycle bottom in 2004, producing a mini-cyclical bear market and another leg of the bull market following its bottom. We saw the 6-year cycle descend into 2008, adding downside impetus to the credit crisis and producing another cyclical bull market in 2009. This year's notable cycle event is the peaking of the 6-year cycle, which takes on special significance since the 6-year cycle is the last of the major yearly cycles to be in the ascending phase. Once the 6-year peaks later this year, each one of the Kress yearly cycles (with the exception of the 4-year) will be in the final "hard down" phase until late 2014.
Until the 6-year cycle peaks, the next few months are likely to witness the transfer of wealth from the insiders to the outsiders. Private equity groups, for instance, will be looking to offload debt via the IPO market. Institutional traders who bought stocks around the lows of the last bear market in late 2008/early 2009 will be looking to sell to the public, which is only just beginning to return to the equities market after spending the last two years in low-yielding bond funds. Such tactics are always employed in critical years when the major yearly cycles are peaking and 2011 should prove to be no exception.
Kress sees 2011 as being the last year of the financial recovery that began in March 2009. He uses the metaphor of a storm to describe the 2008 credit crash and believes the financial storm of that year arrived beginning with the "leading edge," which gave way in 2009 to the benign "eye of the storm." As with a hurricane, the storm's "eye" isn't the end of the storm; rather it's merely a temporary respite as the storm's "trailing edge" follows at some point. Kress believes the "trailing edge" of the financial storm will begin by next year and he says it could be a tsunami.
In section two of the latest Special Edition, Kress provides an in-depth look at the major yearly cycles which comprise the 120-year Grand Super Cycle scheduled to bottom in 2014. When analyzing the impact of the yearly cycles it's important to keep in mind that the final 12% of the duration of any cycle is the "hard down" phase. The 120-year cycle's hard down phase began 14 years prior from 2014, which was 2000. This says Kress, "was the peak of the nation's economic expansion, the beginning of economic winter, and the terminal high."
The 120-year cycle includes two 60-year cycles, which also answers to the economic long wave (also known as the Kondratieff Wave, or K Wave). The K Wave tracks the four economic phases of the credit cycle from boom to bust. Applying the 12% "hard down" rule of thumb, 7 ¼ years retroactive from the scheduled 2014 Grand Super Cycle bottom is mid-2007. "This period began the 'hard down' phase of economic winter prior to the 'credit crash' and the beginning of deflation," writes Kress. "Of greater significance," he adds, "the current 60-year [cycle] is the fourth which completes the series which began with the first 120-year which transformed America into an independent country as we know it today." The inference here is that when the current 120-year/60-year cycles bottom in 2014, the United States will experience a revolutionary transformation, of which Kress has more to say elsewhere in the report.
60-Year Super Cycle
The 120-year cycle has also aptly been termed the "revolutionary cycle" since its bottom is always accompanied by a revolution of socio-political and economic import. Concerning the upcoming 2014 revolutionary cycle low, of which the recent Middle East uprisings are merely a portent, Kress asks: "Could wealth creation become a rarity; could the American Dream become a fantasy; could we become a socialistic economy; could a WWII equivalent develop; could our political structure be reformed; could it be the end of the Federal Reserve; could the U.S.A.'s premier world power become subordinated to second rate???"
In regard to the 6-year cycle, Kress points out that the present 6-year cycle began in later 2008 and is scheduled to peak in late September/early October this year. He says the peaking of the 6-year cycle should begin the second half of the credit cycle, and that "depression could accelerate the decline of the final three years of all the higher cycles comprising the 120-year Grand Super Cycle in later 2014."
Kress observes, "With all of SineScope's cycles being in the down phase for the first time since 1890, the potential for the worst of anything to occur exists. This elicits some very disarming implications for the U.S.A. and our lifestyles for the next three years."
The latest Special Edition by Kress also discusses the outlook for consumer spending in light of the long-term cycles. "With the consumer representing approximately 70% of our economy," he writes, "growth is dependent on consumer spending, which is a function of credit expansion and increased employment." The credit crisis, however, elicited a sea change of consumer attitude toward debt. As Kress observed, "Consumers not only ceased incurring additional debt, they also began reducing it, which is referred to as 'deleveraging' but in reality is liquidation of capital resulting in reduction of consumer spending."
Kress says that recent earnings gains have been mainly from cost savings realized from deleveraging and employee downsizing, with revenue gains being only a token rate reflection of low consumer spending. He believes that corporate cost savings have nearly run their course. "If [consumer] spending continues to decline," he writes, "corporations might have to close plants which would complete liquidation of the three assets comprising our economy -- human, capital, physical -- and the U.S.A. [will] effectively be in liquidation." He adds that if oil and food prices continue to rise it will further curtail consumer spending, and that an additional "red flag" would be an increase in the unemployment rate.
The most provocative aspect of Kress's latest Special Edition is the discussion of how low the S&P 500 could decline by the time the "revolutionary low" is reached in 2014. Prior to addressing this Kress writes, "Hundreds of equity mutual funds manage trillions of dollars of equities with positions in increments of 100,000 shares. What happens if and when these managers decide to sell -- and to whom?" Accordingly, Kress believes that capital preservation is the watchword for the years 2012-2014 as opposed to capital gains.
Concerning the outlook for gold, Kress points out that two opportunities exist during the 60-year Super Cycle to buy gold. The first is during the hyper-inflationary period of the cycle, in which gold is the ultimate hedge against the ravages of inflation. This period occurred during the inflationary period of 1966-1981 when the gold price increased approximately 23 times measured in price per ounce. Gold then entered a bear market until 2000. "If gold increases the same amount during the same 15 year period of economic contraction from 2000-2014," writes Kress, "gold would achieve over $5,000 per ounce."
Sector Business Cycle Strategy
http://www.sectortimingreport.com/stock-sectors.html
http://www.tradingonlinemarkets.com/Beat_the_Market/The_Business_Cycle.htm
Understanding the dry bulk market
http://www.allbusiness.com/operations/shipping/387530-1.html
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Anyone applying their crystal ball in the wet and dry freight markets--whether they be shippers, traders or brokers--need to keep several fundamental factors in mind when trying to analyse how the market will behave.
The freight market is subject to a wide range of external variables including politics, weather, catastrophes and war. But it is fundamentally driven by commodities--and an understanding of the major commodities being shipped around the world and their markets is vital in analysing the freight market.
The three major factors which determine the freight market are:
Fleet supply--How many different types of ships are available? How many vessels are being delivered by shipyards and how many are being scrapped? Which routes are ships taking? For instance, an Australia to Rotterdam route has a longer sailing time than Poland to Rotterdam and differences in distance affect the quantity of shipping available.
Secondly, there is trade demand for freight. Is this growing or declining? In looking at demand drivers, it is important to note that it is not whether a country's economy is booming or in recession which is the key factor. With the freight market, there is a far closer correlation with industrial production. If coal is needed for power stations, then coal will be imported. If the grain harvest is big, the country is likely to export more grain.
Thirdly, there is market sentiment. Because only 40-50% of the demand side is known in a timely fashion, market opinion will affect things just as much as actual underlying supply and demand.
Dry bulk market
So much for general market drivers, how about the dry bulk market in particular?
The dry bulk freight market generally has been bumping along the bottom for most of this year. By sector, Panamaxes have been weakest followed by Capesizes and Handymaxs. Handysize vessels, which constitute the largest sector by number of ships, have had a year of mixed fortunes with limited overall change. For most size ranges, average hire rates this year have typically been some 10-20% lower than last year.
Dry bulk demand
Last year was a record one for dry bulk demand. Average distances for some commodities fell as China, in particular, expanded its exports, including a 45M tonne increase in coal exports. This had the effect of displacing long-haul suppliers; South Africa and Australia were hit very badly.
This year, dry bulk demand has fallen by 2% (as at the end of May).
Total seaborne dry bulk trade is around 1.8bn tonne (see Table 1, opposite page) but, due to numerous problems of comprehensiveness and reliability, perhaps only 60% of this total is actively monitored. In addition, around 50% or less of this information is available in a timely fashion. It should be noted, too, that many of the trades that are lacking in coverage are those at the smaller end of the bulk shipping market, ie vessels below 40,000 dwt--the sector of major interest to shippers of oilseeds. Unfortunately, this is a sizeable chunk of the bulk carrier fleet, accounting for nearly 2,900 vessels. In terms of carrying capacity, these vessels account for roughly one-quarter of the total dry bulk fleet.
Although traders and shippers of oils and fats may feel they have no interest in the steel market, this would be a fundamental mistake. In fact, steel-related trades (iron ore, coking coal, steel, scrap etc) collectively account for almost exactly half of all seaborne bulk cargoes, and the owners of vessels employed in oilseeds (and other bulk trades) will almost certainly be casting one eye over their shoulder towards the steel industry whatever cargo they happen to be carrying today.
Iron Ore: Steel production continues to grow, albeit supported largely by China, the world's largest producer. Up to the end of May, global crude steel production was ahead of the same period last year by 3.1%. However, if China were taken out of the equation, then total production in all other countries would have fallen by 1.5%. As China only has low grade iron ore reserves, it has to import the bulk of its needs. Just 10 years ago China's imports of iron ore amounted to 18M tonne while Japan's imports were 127M tonne. Today, Japan's imports are unchanged but China's requirements have rocketed to more than 100M tonne. The impact on shipping demand has been tremendous, especially when combined with the imports of the other big importers in the region--South Korea and Taiwan. This is in the context of stagnant European demand.
A feature of bulk trade over the past 10 years has been the shift of cargoes towards the Asia/Pacific region and away from Europe and the rest of the world. In 1980, for example, dry bulk trade (five major bulks only) into Europe amounted to 369M tonne while Japan and other Asian countries together took 280M tonne. However, by the year 2000, Europe's imports were almost unchanged at 385M tonne (+4%) while Japan and the other Asian countries took 657M tonne (+135%). In percentage terms, Europe took 46% of these trades in 1980 and now takes 30%, while Japan plus other Asian countries took 35% in 1980 but 51% of all cargoes in 2000.
Grain trade is currently flat in overall terms albeit with the usual seasonal variations. The outlook for the year remains much the same, according to the International Grains Council (IGC). As at the end of June, the IGC expected wheat trade to fall by 2M tonne to 104M tonne in the year July 2002-June 2003 and coarse grain trade to decline by 1M tonne to 105M tonne. Total seaborne grain trade (including soyabeans and meal) is around 260M tonne. It is expected that Brazil will be the largest wheat importer this year taking around 6.6M tonne. Coarse grain trade remains dominated by Japan with its annual requirement of around 19M.
Coal trade is expanding at the moment--mainly due to steam coal and power station requirements--but a full recover, in coal trade requires the participation of the steel industry. Currently, with the exception of China, there are no imminent signs of this happening. Coal is, however, the largest single dry bulk trade, accounting for some 550M tonne/year, and remains highly influential in determining the overall demand-side outlook. The fact that coal trade growth is expected to slow down (although the trade will continue to expand) over the next few years--in the context of ever expanding new sources of oil supply--is not surprising given emissions legislation. But much of coal trade growth over the past 25 years has been about restructuring entire industries and setting up alternative, mostly overseas, sources. This, in turn, was driven by a combination of simple economics (cheaper, albeit more distant, supplies) and growing environmental concerns which perversely led to an expansion in coal trade at the expense, in many cases, of domestic industries.
Steel trade is currently mired in the US imposition of tariffs on certain steel imports and the threat of retaliation from European and other exporters. Currently, it seems the overall effect on steel trade will be to mute trade volumes rather than lead to further escalation of the dispute into other commodities.
As global dry bulk trade continues to expand, so the fleet supply will gradually come back into balance (from the oversupply position, which currently is causing the low freight rates). The key question is when will this balance (or at least shift towards balance) occur? For this part of the analysis, we need to consider the supply side of the equation in relation to fleet developments.
Fleet supply
The dry bulk fleet continues to expand both in terms of numbers of ships and in carrying capacity. Vessels are, on average, becoming larger as shipyards optimise cargo space to fit the dimensions of the Panama Canal.
The average size of Panamaxes used to be 55,000-65,000 dwt and this has risen to 75,000 dwt. Capesizes are now around 170,000 dwt compared with 120,000 dwt.
Compared to a year ago, the fleet is some 4% larger in terms of its earning capacity, Of this expansion (amounting to some 11M dwt), there was a net reduction of 1.7M dwt in Handysize, an expansion of 4.1M dwt in Handymax, an expansion of 5.5M dwt in Panamax and an expansion of 3.1M dwt in Capesize. So the impact on each size varies according to the existing size of that sector.
Daily Capesize hire rates fell to US$9,500/day in June; for comparison, aver. age rates in June last year were typically US$9,750/day, so superficially there is little difference in absolute levels, However, this is to forget that owners have had to live with these rates--which are well below running and financing costs--over the past 12 months. Some flurry of activity was seen in Cape rates at the end of the first quarter of this year but in the absence of clear-cut demand conditions, most of this rise was attributed to the manoeuvrings of one or two major players including Cape International. Since then, rates have languished at these cut-throat levels.
Panamaxes currently find themselves at the back of the queue when it comes to profits. But how could it be otherwise? With record deliveries last year amounting to some 110 new ships and a net increase in this fleet of 82 ships--after scrappings had been removed--it was no surprise that freight rates declined. The legacy of these new vessels will be with us for some time. As scrapping of older vessels counteracts the effects of this steep increase in supply and trade growth slowly absorbs the surplus capacity, so too, will the balance come back into the market.
Super-Handymax (50-54,000 dwt) rates have typically averaged around US$8,700/day this year. Conventional Handymax rates (45,500 dwt) have typically only managed around US$7,600/day. The Handysize group comprises the largest sector in terms of numbers of ships--around half of the entire fleet--but contributes only a quarter of its carrying capacity due to the smaller size of the units. At the same time, it is a sector that has been in slow decline for many years. Handysize rates this year have averaged around US$6,400/day and seem unlikely to vary much for the remainder of this year.
This year should see the bottom of the dry bulk freight market in terms of its current cycle. However, this does not alter the key question, which is not how much lower the market will go but how long freight rates will stay at this level.
If market fundamentals are in a corrective phase, then some signs of a recovery should be detected later this year. The low level of newbuildings to be delivered next year, coupled with the limited opportunity to place orders for delivery within next year, are setting the tone of the market over the next 18 months.
Demand recovery will generally be slow, steady and positive. The fleet continues to expand for this year and 2003 but at a much more modest pace than the 8% expansion of last year. The expansion in demand continues to be led by steam coal, and recovery will be in the sectors which carry most coal--Capesize and Panamax. However the surplus of Panamax vessels means that recovery in this sector is still fragile and will lag behind other types. For sub-Panamax sizes, the continuing weakness in the global economy and the time lag inherent in translating from economic conditions to bulk freight means that any recover will be muted.
[GRAPHIC OMITTED]
TABLE 2: DRY BULK FLEET DEVELOPMENTS
1996 +8.1
1997 +10.5
1998 -0.3
1999 +3.5
2000 +8.8
2001 +11.8
2002 +7.6
2002 +0.3
2003 -0.9
Note: Table made from bar graph.
Seven Investment Themes For 2011
http://www.financialsense.com/contributors/joseph-dancy/seven-investment-themes-for-2011
AstroCycle Analysis for 2011
http://www.safehaven.com/article/19755/astrocycle-analysis-for-2011
Global Stock Market Cycle Forecast 2011
http://www.safehaven.com/article/19583/global-stock-market-cycle-forecast-2011
The job of a stock market cycle tracker and forecaster is far more difficult with trillions of dollars in government intervention and global central bank quantitative easing sloshing around global markets. The liquidity is bidding up everything from oil to coffee to corn, but the cyclical stock market picture is clearing up. There is both good news and bad news regarding global stock market cycles for 2011. It is always better to get the bad news off your chest first, so let's dispense with the bad news, and move on to the good news.
The bad news is that the global Kondratieff long wave and winter season could have ended in 2009. If it had, a global long wave spring season would now be underway. An orderly unwinding of bad debt, the closing of the overproduction lines, and the deflationary implications of the regular long wave global economic forces is as natural as the turning of the annual seasons from fall to winter. The fall season is beautiful and the air is crisp and fresh, but government has no business trying to make it last forever. A free market economy would unwind the excesses of the long wave cycle in a far more orderly fashion than the job the Keynesians are doing.
In The K Wave (1995), published by McGraw-Hill, I predicted a global banking crisis, real estate collapse, interest rate plunge and a deflationary unwinding of global long wave excesses, ending in 2009. The forecast was for the long wave to run its natural course and put in a long wave bottom, making the natural long wave turn from the winter season into a robust global economic spring. That call from almost 15 years out was looking interesting in early 2009, as global markets were in free fall. That call is actually even more interesting now, with the powerful global market rallies out of that low. The case presented was that emerging markets would lead the global economy out of the long wave winter season and into a new long wave spring season and global boom. The updated and expanded edition of the book is Jubilee on Wall Street (2009), and is available at Amazon, in the event you are interested in learning more about the long wave.
Unfortunately, something tragic happened on way to the long wave spring season. Government came to the rescue. Around the world, governments have run up trillions of dollars in debt, trying to stop the natural turn of the long wave seasons. They have created the greatest amounts of debt in human history trying to counter the Kondratieff long wave cycle, which they do not understand.
Beginning as far back as the 1980s and 1990s, aggressive government response to financial crisis, beginning with the Latin America debt crisis in the 1980s and then the savings and loan debacle in the early 1990s, has expanded the cycles. Debt was piled on top of debt; all in an effort to try to stop the natural long wave decline and letting bad debt fail. Japan was caught in a liquidity trap after their market top in 1989, due to the great debt pyramid created in the 1980s; they have been caught in the forces of a long wave decline every since, but have continued to pile debt on top of debt.
Bad credit risks, overproduction, ill-conceived ideas, and inefficient producers and suppliers going out of business and transferring capital from weak hand to strong hands should occur regularly in a market-based system. It is as natural as a winter snowstorm. It removes overproduction and restores pricing power so the deflation ends. Unfortunately, governments and central banks began stepping in with a massive effort to prop up the economy by ensuring and forcing the supply of credit to weaker and weaker hands, with taxpayer backstopped money. The final act should have been the government (taxpayer) insured and bailed out liar loans for 120% of value on delusional appraisals, but now we know that $9 trillion in loans to global enterprises have kept all the weak hands in the game. The last business cycle 2002-2009 was a monster, which is still haunting the global economy, a result of fiscal and monetary intervention.
There are those who believe the long wave crisis is behind the global economy and that a long wave spring has sprung. Unfortunately, when you pump money into the economy you expand the cycles and make them longer. All the effort by governments and central banks around the world have only served to lengthen the regular business cycles and the long wave. The global economy is now in the final business cycle of the long wave and the long wave is now on track to top in 2011 and then end with a bottom in late 2012. This will be in the wake of a global debt collapse, since all the debt has finally gotten too big for governments to manage.
The take away here is global stock market Kitchin cycle top coming in 2011, and a final business cycle and long wave descent into late 2012, and possible into 2013 if governments go overboard to try and delay the inevitable day of Kondratieff long wave reckoning. If this updated call is wrong, and the call in The K Wave (1995) was correct, it will become evident on the chart below, as interest rates rally above the declining trend line and U.S. GDP booms, as it did at the start of the last long wave spring in the early 1950s. If this updated call is correct, the GDP recovery will top out shortly and interest rates will not break out over that declining trend line, but end their rise in 2011 and resume their decline into 2012. That ends the bad news.
Now for the good news that is central to the LWD 2011 stock market cycle forecast. The late great market timer PQ Wall was the first to recognize that every business "Kitchin" cycle subdivides into nine smaller cycles, known historically as the 20-week cycle. In The K Wave (1995) this cycle was rechristened the "Wall" cycle in honor of PQ Wall, since he also recognized that a Wall cycle is a miniature long wave, but that is another subject.
Those familiar with PQ Wall's work will recall that he proposed that the nine Wall cycles in a regular business cycle come in three sets of three. These three sets of three Wall cycles often clearly appear on a market index chart. The rule of third last and weakest makes the third Wall cycle decline harder than the other two in the three sets and tends to show up clearly on a chart, which was what occurred on July 1, 2010. That outsized decline in the S&P 500 into July 1 clearly stands out as a third last and weakest Wall cycle.
Coming out of the Wall cycle bottom on July 1, 2010, Wall #4 has managed to make a new cycle high. The fact that global markets were able to make a new high, facing the undertoe of a global long wave debt collapse, is a very positive stock market cycle development. Sure, it was the most government sponsored and supported Wall cycle in human history. Government's and central banks spent billions if not trillions in your money, your children's money and your grandchildren's money pumping and propping it up. It is running long. A large portion of the market rally is real. How much chaff and how much wheat are hard to determine, but the market did print a new high and took out the important 1228 target in the S&P 500.
Here in early 2011, global stock markets are now sitting atop the great rally from the Kitchin cycle lows in March 2009 and at the top of Wall cycle #4 from the July 1 low. This is good news from a cycle perspective, because it means that the U.S. S&P and most global markets got to new highs not just in the Wall cycle but in the second set of three Wall cycles (the 2nd Kitchin 3rd) in this final Kitchin cycle of this long wave. That is no small feat. This new high suggests the upcoming winter cycle bottom will be milder than it otherwise would be. If the final years of this long wave cycle were going to be a worse case long wave scenario, markets would not likely have been able to rally to a new high in this second set of three Wall cycles.
There is no doubt that the rising economic force of emerging markets are allowing global markets to rally to new highs this far into the final business cycle of a long wave winter season. Many of the S&P 500 companies and other developed countries major companies have a large and significant presence in emerging markets and are major exporters to the emerging markets. Emerging markets are real and powerful long wave spring forces. The end of the long wave winter was delayed, but the coming long wave spring that will be driven by emerging markets is itching to get going.
Most developed global markets will follow the direction and cycle trends of the S&P 500. The emerging market will stay one-step ahead of developed markets. It appears as if key emerging markets entered new Wall cycles between mid-November and mid-December, while developed markets have yet to bottom.
It would be wise for all investors and traders to ponder the rise of emerging markets. Just in the BRICs, a large majority of the 2.5 billion citizens are hardworking, capital forming, and aspiring global middle-class participants. The implications are truly staggering; they are and will radically change the world.
The smaller stock market cycles, specifically the Quarter Wall and Wall #4, is overbought and topping out. A sizeable correction is in store, likely into late January to mid-February, which will produce the bottom of Wall cycle #4. Out of this low Wall #5 has a chance to rally to new highs, because it is the second Wall cycle in the unfolding set of three. The second Wall cycle in a set typically rallies to a new high. The high of Wall #5 is expected around the May target, whether it is a new price high or not. That will likely be the final high in this final business cycle of the long wave. A rally to a new high in Wall #6 will be a run against the clock of the ticking global long wave debt bomb. When it goes off, it will drive the global stock market cycles down sharply into late 2012.
They are more than a few shoes that could drop and wipe out the rally of Wall #5, so stay tuned to the important price supports. The exact price and date targets of the cycles are reserved for subscribers to The Long Wave Dynamics Letter. One subscriber said the Fibonacci grid price targets, from the Level 1 grids down to intraday grids, are like reading sheet music. If interested, you can read What LWD Subscribers are Saying.
I would be remiss in not pointing out that the S&P 500 price target of 1278.95 is the inverse golden price target in the current Level 2 Fibonacci Dynamic Web price grid. These are the sort of targets used to indentify precise entry, exit and stop loss targets. Note that the top tick on Thursday the 6th was 1278.16, in Quarter Wall and Wall cycles that are overbought and topping.
In conclusion, the good news is that the rally in global markets in this final business cycle of the long wave is a gift from the hard working citizens of the emerging markets, who will lead the next long wave spring season advance. And of course the hard working central bankers of the world. Take this cycle topping opportunity to prepare your finances. Consider yourself warned. The long wave spring is coming, but a late long wave winter blizzard lies on the other side of this false spring season.
Stock Market to Fall AT LEAST Another 40%!
http://www.marketoracle.co.uk/Article8772.html
America's Coming Financial Vortex;6 Predictions For 2009-2012
It has been an incredible year loaded with surprises but I think that the next few years will surprise even more. Whenever I feel certain about something coming, I 'm glad to put it in print. In 2004, I had successfully forecast many economic events such as the housing bubble popping and the credit crisis among other events. Current economic conditions and political outcomes have laid the groundwork for more events that we should be prepared for. All of these events combine to create a "Financial Vortex" that will hit us in the coming years.
First of all, be aware of what current conditions will help lay the groundwork for this financial vortex. They are:
America's debt load. The U.S. government has now $12 trillion in debt. Consumers and businesses are drowning in debt. America's gross domestic product (GDP) is about $13 trillion yet its total debt is over $44 trillion.
Derivatives. Derivatives are complicated, arcane and risky securities that now total about $500 trillion. That makes this market ten times greater than the dollar value of the world economy which is just under $50 trillion.
Unfunded Liabilities. The current future tally of the unfunded liabilities of Social Security, Medicare and Medicaid is nearly $99 trillion.
Growth of government. The expansion of the government's involvement in the economy is (and will be) massive. Taxes, regulations, controls, spending, etc. at all levels of government (both domestic and international) will be problematic by an order of magnitude that the private sector will not be able to tolerate.
Think about it for a moment. The past few months have shown us what a few trillion in bad debt and derivatives can do to the market. The Dow is down several thousand points in the past few months and is down nearly 40% since hitting its all-time high in October 2007 of 14,164.53. What will happen to the stock market when many multi-trillions of debt, derivatives and unfunded liabilities start hitting us like a powerful vortex in the coming years? The economy is extraordinarily weak right now and it would not take much to see millions of hard-working folks get devastated. It is time to prepare. America needs to know what is coming. Some of these events are now unavoidable so being fore-warned and getting prepared is crucial.
Here are my forecasts for what I believe is coming during the next few years:
1. You will see an inflationary depression that will be evident by 2010.
Maybe I'll be off a few months either way but an inflationary depression is almost guaranteed. Why? The latest batch of elected officials see government intervention as either a moral good or a necessary evil. The most likely policy initiatives that we will see in the coming months will be government controls, increased taxes and extraordinary "money" creation (inflating the money supply). In fact we have (and will) see trillions of new dollars will flood the economy in the coming months. This will probably cause the stock market and some economic indicators to rise and give the illusion of economic health during early 2009. This will cause many commentators to proclaim that we are coming out of the current recession. People will think that government intervention worked. Typically, government intervention only alleviates some of the symptoms in the short-term while postponing the problem(s) toward the long-term. Right now many commentators are calling the current economic environment "deflationary" but it is massive de-leveraging by huge financial entities that are selling off everything from stocks to commodities to accrue cash and stave off bankruptcy. As trillions of dollars flood into the economy, that condition will change. If they report the statistics properly, then we will see a contracting economy (measured by GDP) coupled with rising prices. A good example of this is Venezuela where that economy is struggling while their inflation rate is currently over 36% (as of October 2008). The government, in an attempt to revive consumption and job creation will increase the money supply by an order of magnitude never seen before in this country. Seeing the inflation rate soar to 20% and beyond during 2010 (or 2011) is a solid bet.
2. Unemployment in the private sector will soar into double-digits by 2010.
As the recession morphs into a depression and as the government grows partly as a "solution" to economic difficulties, the increased burdens of government (taxes, controls, spending, etc.) will grow to burdensome levels for both consumers and businesses. Government spending on unemployment benefits and "make work" projects will soar to address the large job losses in the private sector. Right now you should re-assess your job, your company and your industry to see if you are at risk.
3. More state and municipal governments will be federal bailout candidates.
I forecast this condition many months ago in my national seminars but recently this became headline news so it's not such a great forecast new.. California and New York State are already seeking taxpayer money from the Federal government. However, we will see much more of this. During 1995-2008, many state and local governments over-extended themselves. Because they thought that good times (and housing booms) would last indefinitely, they took on more spending and more borrowing. Many of these jurisdictions will be forced into either spending cuts, higher taxes or both. Some will be forced into bankruptcy. Because of these events, there will be some areas that will experience social unrest due to difficult financial conditions.
4. Commodities will be in the next leg of their long-term bull market starting in 2009.
Commodities such as oil, grains, precious metals, etc. had a great upleg in early 2008 and then had a brutal correction during the second half. Although much of it is attributed to deflation and "demand destruction", these conditions are short-lived. Why? Two basic reasons; shortages (supply destruction) and rising inflation. Since government policy makers will make every effort to avert an economic contraction, they will flood the economy with inflation and renewed government spending. Economic policy decision-makers at the federal level think that "increased consumption" is the key to economic growth because they are influenced by the Keynesian school of economics. The world hasn't figured out yet that John Maynard Keynes' policies are flawed and dangerous. The bottom line is that conditions are ripe for commodities to resume their bull market and reach new highs during 2009-2010. As an offshoot of this, you will also see conflicts across the globe tied to natural resources as countries with growing populations need more food, water, etc.
5. We will see oil hit $200 as Peak oil becomes obvious to all during 2009-2012.
Don't be fooled by the recent drop in oil from $147 in the summer of 2008 to $50 during November 2008. the recent data from the world energy market indicates that oil depletion ("supply destruction") is far more severe than the recent headlines blaring the misleading condition of "demand destruction". The most severe energy crisis in history is in my mind an unavoidable certainty during the next few years. America needs to go full-bore toward energy independence since we will have no choice. This energy crisis will be very difficult to get through and will cause tremendous social and economic difficulty.
6. International conflicts over natural resources will hit the headlines during 2009-12.
As governments across the globe seek to address the wants needs of their growing populations, there will be aggressive competition for the world's limited resources. Natural resources will be seen as strategic as well as economic. National and economic security for America will be a vital concern.
Now you can see why I refer to it as a "Financial Vortex". We pray for our country and we hope to get through this with a minimum of suffering but it behooves all of us to be ready. It is better to prepare for problems that may occur than to ignore reality and be set up for pain. Although the Financial Vortex conference will be held in New Jersey on December 6, 2008, let me share with you a few of the strategies that will be covered that day:
Buy gold and silver bullion. Yes…there have been physical shortages reported but that shouldn't stop you from getting some for your portfolio. Precious metals retain their value during a period of economic uncertainty and rising inflation.
Keep a cash cushion. Have money set aside in a safe venue such as a treasury money market fund. This is not for long-term purposes since inflation will be a major issue; it is there for an emergency fund for day-to-day needs.
Shift your retirement portfolio into stocks and ETFs tied to "human need" such as food, water, energy, etc. These companies and sectors will have a better time surviving the coming years than other sectors that are problematic such as real estate, financials and cyclicals (such as autos and other "big ticket" items). I believe that much of the conventional stock market will get slammed.
The Financial Vortex is coming. Millions will be blindsided but those that prepare will survive and even thrive. I am doing my conference primarily because I want people to be safe and do those things that will ensure greater financial security. It is also why experts such as David Morgan, Jay Taylor and Roger Wiegand will join me that day so that people can get specifics on what to expect and how to prosper. The bottom line is that it is better to be safe than sorry.
Sector Rotation for Recession - Lessons from the Business Cycle
http://www.marketoracle.co.uk/Article3618.html
In their never ending pursuit to uncover the next undervalued company, portfolio managers and investors often forget how equities, as a whole, fit into the stock market and business cycles. Though it is important to focus on the individual issues, it is never wise to forget about the surrounding environment and its positive or negative influences.
The basic pattern of the business or economic cycle has four steps. These steps, though never exactly unfold the same during each cycle, the basic structure remains firm and should be remembered.
1. Recession. A decline in the real GDP that occurs for at least two or more quarters. Recessions feed on themselves. During a recession, business people spend less than they once did. Because sales are failing, businesses do what they can to reduce their spending. They lay off workers, buy less merchandise, and postpone plans to expand. When this happens, business suppliers do what they can to protect themselves. They too lay off workers and reduce spending. Unemployment starts to rise (Chart 2).
As workers earn less, they spend less, and business income and profits decline still more. Businesses spend even less than before and lay off still more workers. The economy continues to slide.
2. Low Point, or Depression. State of the economy where there are large unemployment rates, a decline in annual income, and overproduction. The time at which the real GDP stops its decline and starts expanding; the lowest point. Sooner or later, the recession will reach the bottom of the business cycle. How long the cycle will remain at this low point varies from a matter of weeks to many months. During some depressions, such as the one in the 1930s, the low point has lasted for years.
3. Expansion and Recovery. A period in which the real GDP grows; recovery from a recession. When business begins to improve a bit, firms will hire a few more workers and increase their orders of materials from their suppliers. Increased orders lead other firms to increase production and rehire workers. More employment leads to more consumer spending, further business activity, and still more jobs. Economists describe this upturn in the business cycle as a period of expansion and recovery.
4. Peak. The point at which the real GDP stops increasing and begins its decline; the highest point. At the top, or peak, of the business cycle, business expansion ends its upward climb. Employment, consumer spending, and production hit their highest levels. A peak, like a depression, can last for a short or long period of time. When the peak lasts for a long time, we are in a period of prosperity.
The stock market (Chart 3) is a well proven leading indicated on the business cycle and normally leads by 6-9 months. The rise and fall of sectors within the equity markets provides ample clues to the investor of the correct phase of the business cycle.
For example, if a time slice from the last 2-3 months were examined closely, the following economic and stock sector evidence would be found. Interest rates are now falling (Chart 1). Gold and oil are making all-time highs. Defensive groups such as health care and staples are some of the top performing groups. Financials and discretionaries have started declining months ago (both are leading indicators on the stock market). Basic materials and consumer goods are trading flat. All of this data would suggest a peak in the economy has developed and that the stock market (usually 6-9 months behind the economy) has already topped. Technical models indicate the crest for global markets was in October.
Bottom line: The current fundamentals of a company can be greatly influenced by the surrounding economy. By understanding the basic structure of the business cycle, investors can determine the present position of the cycle and anticipate a weaker or stronger economy in the near future. The business cycle has one of the strongest influences on the present and future earnings of a organization.
Investment approach: Portfolios should be weighted toward sectors that have proven strength in economic contraction periods. This includes defensive groups, utilities and pharmaceuticals. Investors should also consider under weighting transportation, technology, basic industry and capital goods. These last groups usually perform poorly during economic slowdowns.
Additional information about the economy, global equity markets and commodities can be found in the February newsletter.
Your comments are alway welcomed.
By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com
6 predictions for 2009-2012
America’s Coming Financial Vortex
6 predictions for 2009-2012
by Paul Mladjenovic | November 26, 2008
It has been an incredible year loaded with surprises but I think that the next few years will surprise even more. Whenever I feel certain about something coming, I ‘m glad to put it in print. In 2004, I had successfully forecast many economic events such as the housing bubble popping and the credit crisis among other events. Current economic conditions and political outcomes have laid the groundwork for more events that we should be prepared for. All of these events combine to create a “Financial Vortex” that will hit us in the coming years.
First of all, be aware of what current conditions will help lay the groundwork for this financial vortex. They are:
America’s debt load. The U.S. government has now $12 trillion in debt. Consumers and businesses are drowning in debt. America’s gross domestic product (GDP) is about $13 trillion yet its total debt is over $44 trillion.
Derivatives. Derivatives are complicated, arcane and risky securities that now total about $500 trillion. That makes this market ten times greater than the dollar value of the world economy which is just under $50 trillion.
Unfunded Liabilities. The current future tally of the unfunded liabilities of Social Security, Medicare and Medicaid is nearly $99 trillion.
Growth of government. The expansion of the government’s involvement in the economy is (and will be) massive. Taxes, regulations, controls, spending, etc. at all levels of government (both domestic and international) will be problematic by an order of magnitude that the private sector will not be able to tolerate.
Think about it for a moment. The past few months have shown us what a few trillion in bad debt and derivatives can do to the market. The Dow is down several thousand points in the past few months and is down nearly 40% since hitting its all-time high in October 2007 of 14,164.53. What will happen to the stock market when many multi-trillions of debt, derivatives and unfunded liabilities start hitting us like a powerful vortex in the coming years? The economy is extraordinarily weak right now and it would not take much to see millions of hard-working folks get devastated. It is time to prepare. America needs to know what is coming. Some of these events are now unavoidable so being fore-warned and getting prepared is crucial.
Here are my forecasts for what I believe is coming during the next few years:
1. You will see an inflationary depression that will be evident by 2010. Maybe I’ll be off a few months either way but an inflationary depression is almost guaranteed. Why? The latest batch of elected officials see government intervention as either a moral good or a necessary evil. The most likely policy initiatives that we will see in the coming months will be government controls, increased taxes and extraordinary “money” creation (inflating the money supply). In fact we have (and will) see trillions of new dollars will flood the economy in the coming months. This will probably cause the stock market and some economic indicators to rise and give the illusion of economic health during early 2009. This will cause many commentators to proclaim that we are coming out of the current recession. People will think that government intervention worked. Typically, government intervention only alleviates some of the symptoms in the short-term while postponing the problem(s) toward the long-term. Right now many commentators are calling the current economic environment “deflationary” but it is massive de-leveraging by huge financial entities that are selling off everything from stocks to commodities to accrue cash and stave off bankruptcy. As trillions of dollars flood into the economy, that condition will change. If they report the statistics properly, then we will see a contracting economy (measured by GDP) coupled with rising prices. A good example of this is Venezuela where that economy is struggling while their inflation rate is currently over 36% (as of October 2008). The government, in an attempt to revive consumption and job creation will increase the money supply by an order of magnitude never seen before in this country. Seeing the inflation rate soar to 20% and beyond during 2010 (or 2011) is a solid bet.
2. Unemployment in the private sector will soar into double-digits by 2010. As the recession morphs into a depression and as the government grows partly as a “solution” to economic difficulties, the increased burdens of government (taxes, controls, spending, etc.) will grow to burdensome levels for both consumers and businesses. Government spending on unemployment benefits and “make work” projects will soar to address the large job losses in the private sector. Right now you should re-assess your job, your company and your industry to see if you are at risk.
3. More state and municipal governments will be federal bailout candidates. I forecast this condition many months ago in my national seminars but recently this became headline news so it’s not such a great forecast new.. California and New York State are already seeking taxpayer money from the Federal government. However, we will see much more of this. During 1995-2008, many state and local governments over-extended themselves. Because they thought that good times (and housing booms) would last indefinitely, they took on more spending and more borrowing. Many of these jurisdictions will be forced into either spending cuts, higher taxes or both. Some will be forced into bankruptcy. Because of these events, there will be some areas that will experience social unrest due to difficult financial conditions.
4. Commodities will be in the next leg of their long-term bull market starting in 2009. Commodities such as oil, grains, precious metals, etc. had a great upleg in early 2008 and then had a brutal correction during the second half. Although much of it is attributed to deflation and “demand destruction”, these conditions are short-lived. Why? Two basic reasons; shortages (supply destruction) and rising inflation. Since government policy makers will make every effort to avert an economic contraction, they will flood the economy with inflation and renewed government spending. Economic policy decision-makers at the federal level think that “increased consumption” is the key to economic growth because they are influenced by the Keynesian school of economics. The world hasn’t figured out yet that John Maynard Keynes’ policies are flawed and dangerous. The bottom line is that conditions are ripe for commodities to resume their bull market and reach new highs during 2009-2010. As an offshoot of this, you will also see conflicts across the globe tied to natural resources as countries with growing populations need more food, water, etc.
5. We will see oil hit $200 as Peak oil becomes obvious to all during 2009-2012. Don’t be fooled by the recent drop in oil from $147 in the summer of 2008 to $50 during November 2008. the recent data from the world energy market indicates that oil depletion (“supply destruction”) is far more severe than the recent headlines blaring the misleading condition of “demand destruction”. The most severe energy crisis in history is in my mind an unavoidable certainty during the next few years. America needs to go full-bore toward energy independence since we will have no choice. This energy crisis will be very difficult to get through and will cause tremendous social and economic difficulty.
6. International conflicts over natural resources will hit the headlines during 2009-12. As governments across the globe seek to address the wants needs of their growing populations, there will be aggressive competition for the world’s limited resources. Natural resources will be seen as strategic as well as economic. National and economic security for America will be a vital concern.
Now you can see why I refer to it as a “Financial Vortex”. We pray for our country and we hope to get through this with a minimum of suffering but it behooves all of us to be ready. It is better to prepare for problems that may occur than to ignore reality and be set up for pain. Although the Financial Vortex conference will be held in New Jersey on December 6, 2008, let me share with you a few of the strategies that will be covered that day:
1- Buy gold and silver bullion. Yes…there have been physical shortages reported but that shouldn’t stop you from getting some for your portfolio. Precious metals retain their value during a period of economic uncertainty and rising inflation.
2- Keep a cash cushion. Have money set aside in a safe venue such as a treasury money market fund. This is not for long-term purposes since inflation will be a major issue; it is there for an emergency fund for day-to-day needs.
3-Shift your retirement portfolio into stocks and ETFs tied to “human need” such as food, water, energy, etc. These companies and sectors will have a better time surviving the coming years than other sectors that are problematic such as real estate, financials and cyclicals (such as autos and other “big ticket” items). I believe that much of the conventional stock market will get slammed.
The Financial Vortex is coming. Millions will be blindsided but those that prepare will survive and even thrive. I am doing my conference primarily because I want people to be safe and do those things that will ensure greater financial security. It is also why experts such as David Morgan, Jay Taylor and Roger Wiegand will join me that day so that people can get specifics on what to expect and how to prosper. The bottom line is that it is better to be safe than sorry.
http://www.financialsense.com/fsu/editorials/2008/1126.html
How Does One Invest For "Muddle Through"?
http://globaleconomicanalysis.blogspot.com/2008/01/how-does-one-invest-for-muddle-through.html
A Whole Lotta Flation
Before we address specific ideas, let's tackle a common misconception that somehow we are going to have both inflation and deflation at the same time. The idea behind this faulty premise is that prices of things we need (food and energy) are going to rise and prices of things we want but do not need (manufactured goods from China) are going to fall.
While that is possible in regards to prices, the idea that we can have inflation and deflation at the same time is impossible. Inflation is an expansion of money and credit and deflation is the opposite. It is fundamentally impossible in the context of a correct definition to have inflation and deflation at the same time.
What about the prices of necessities?
Wendy, you may claim that all you care about is the prices of the goods and services you use, but I don't think you really mean it, at least from an investment standpoint.
In an investment context, it is important to understand why prices are rising. For example, if gasoline and food prices are both rising because of a misguided ethanol policy helped along by peak oil and failed administration policy in the Mideast (I believe that to be the case), the treasury market is going to respond in a far different manner than if energy prices are going wild because the Fed is printing money.
The average person at the pump may not care, but the investor better care because it matters. Certainly there is nothing the Fed can do about misguided administration policies but the Fed can address some money supply concerns.
Base Money Supply
click on chart to see a sharper image
Those who claim the Fed is currently printing like mad simply have no solid evidence to support it. What the printing like mad crowd is talking about is M3 (credit) which indeed has been soaring. Unfortunately these "printing" claims keep making the rounds but repeating a false claim 200 times does not make it the truth.
Printing claims are typically made by people who do not understand the difference between money and credit. While credit acts like money in most circumstances, when debt can no longer be serviced, the difference is enormous.
Right now we are seeing huge warning signs that debt can no longer be serviced. Those signs are soaring foreclosures, soaring bankruptcies, soaring defaults in credit cards, and a slowdown in consumer spending.
In spite of what one thinks about the CPI and how manipulated it might be, one can expect treasuries to rally in this environment. Indeed they have.
IEF Lehman 7-10 Year Treasury Fund
click on chart to see a sharper image
Many have emailed me with thought on the CPI rising a seasonally adjusted 0.8 percent in November, a whopping 4.6% increase from a year ago and screaming "Where are the bond vigilantes?"
My response was the treasury market is acting quite rationally in the face of rising defaults across the board in all kinds of financials. This leads us to a key idea.
Not All Muddle Throughs Are Created Equal
If one expects some sort of muddle through in which banks are impaired because of writeoffs, where foreclosures and credit card defaults are rising, and unemployment is about to increase dramatically, the correct answer is to continue to hold treasuries regardless of what one feels about the CPI and prices.
If one thinks the Fed will print its way out of deflation, then one certainly does not want to be in treasuries other than perhaps shorter term duration TIPS.
The nature of the "muddle through" will dictate investment strategy.
Not Your Father's Stagflation
The term stagflation is certainly being bandied about recently. I do not like the term stagflation because it is generally used in reference to prices while proper use of the terms inflation and deflation pertain to the expansion/contraction of money and credit.
In addition, this stagflation has a peculiar twist: falling interest rates. Typically, falling interest rates are associated with disinflation or deflation, not stagflation. Thus, stagflation proponents perhaps need to consider the possibility that "This is not your father's stagflation".
That last comment is in reference to Not Your Father's Deflation: Rebuttal and Peter Schiff Replies to Deflation Rebuttal.
Searching For Yield & Searching For Guarantees
I have received many emails recently in regards to yield and inflation adjusted returns. The most common complaint goes something like this: "Prices are rising at x%, the CPI is a crock, so if I get less return than x% then I am losing money." Yes, that is likely true. It has also fueled bubbles in many equity markets (and perhaps even commodity markets) by those looking to do something about it.
However, no one is entitled to positive returns. It is entirely possible that for a period of time the best thing one can do is minimize "real" (CPI adjusted) losses.
Just a bit ago someone replied to one of my posts "As long as banks can borrow short-term with negative real-rates and lend long-term banks effectively have a license to print money."
That is incorrect. Rising prices of goods and services does not guarantee rising price of any investment, including commodities.
In a muddle through environment, pension plan assumptions for 10% returns are going to be hard pressed to make. Those taking excessive risks to make them might find themselves with hugely negative returns instead.
An Asymmetrical Unwind of the Credit Bubble
Assuming we do muddle through, there is still a strong likelihood for a continued asymmetrical unwind of the credit bubble.
Muddle Through Assumptions
•Housing is going to continue to be weak
•Commercial real estate is going to be weak
•Capital impairments at banks will be an issue
•Unemployment is going to rise
•Consumer spending will be weak
•Credit card defaults will rise
•Foreclosures will rise
•Corporate earnings will be weak
•The Yen carry trade will unwind
Implications of that last point are particularly ominous. A carry trade unwind has the potential to affect nearly every equity class. In addition, there are obvious implications on emerging markets and China if US consumer spending is weak.
In the muddle through scenario, returns will be poor, and CPI adjusted returns might even be negative, assuming the prices of essential goods like food and energy continue to rise as stated in Wendy's email.
However, before anyone writes off the deflation thesis, please consider Things That "Can't" Happen.
Muddle Through Assumptions Discussion
It is no secret that massive amounts of mortgage resets for both Alt-A and Pay Option AMS will take place over the next few years with the Pay Option Arm problem peaking in 2011 as described in Housing: The Worst Is Yet To Come.
It was just six short months ago where corporate profits were expected to rise dramatically. Many claimed forward looking PEs were 16 or so and thus the stock market was "cheap". Some of us challenged that notion. We were correct.
Much of those earnings were based on financial engineering that is now producing writeoffs. Another portion of those earnings estimates were based on deal making profits at the brokerages like Bear Stearns (BSC), Morgan Stanley (MS), Merrill Lynch (MER), and Goldman Sachs (GS). These earnings were a complete mirage at best and unsustainable at worst.
Think earnings of homebuilders like Toll Brothers (TOLL), Lennar (LEN), or Pulte (PHM) are going to return? What about earnings at retail stores like Target (TGT) or Wal-Mart (WMT) now that cash out refinancing to support consumption is dead and overbuilding has increased competition?
The environment is different now. Leverage Buyout and commercial real estate deals on absurd terms are no longer getting done, the appetite for securitized junk has fallen off the cliff, and SIVs that may cost Citigroup (C) its financial life are now a thing of the past.
The credit conditions that fostered those so called "profits" are not returning no matter what the Fed does. S&P earnings are now estimated at 23 not 16. A PE of 23 is not cheap. In fact it is more closely associated with market peaks. If more writedowns than expected come, even 23 will be too low an estimate.
With sinking corporate profits, will corporate expansion and jobs be strong? Hardly. To muddle through, the Fed is going to have to cut interest rates. So will Europe and the UK. Japan on the other hand may have to start raising interest rates. This set of circumstance will lead to a forced unwind of the carry trade.
It's fine if you have a different set of assumptions about muddle through, just be prepared to defend them. But please remember that for the last few years nearly every investment class rose in union. It is entirely possible if indeed not likely, that the reverse happens for a few years. What was correlated on the way up can certainly remain correlated on the way down, even if there is an asymmetrical skew to the unwind.
In a muddle through economy with weak corporate earnings, mistakes will be punished quickly and severely. Thus safety should be the primary concern. Furthermore, risk in equities and risk in the economy are both heavily skewed to the downside.
Return of capital rather than return on capital cannot be overstressed. This idea and other means of "investing safely" regardless of what scenario one believes was discussed in How does one invest for inflation and deflation?
The key idea added here is to expect a continued asymmetrical unwind of the credit bubble and to take advantage of that as one can. In the muddle through economy, the Fed will fight deflation tooth and nail, and on again off again win and lose some battles.
Long-short strategies that can play relative strength within sectors and or stronger sectors vs. weaker sectors may be the best equity strategy going forward. Otherwise there is simply nothing wrong with building a CD or treasury ladder while one waits for better opportunities down the road.
Click Here To Contact Me about Investing For Muddle Through
How does one invest for inflation and deflation?
http://globaleconomicanalysis.blogspot.com/2007/12/how-does-one-invest-for-inflation-and.html
Rather than looking at things just from a deflationary viewpoint let's consider investment themes for various scenarios.
Investment Themes For Hyperinflation
•In hyperinflation the last place one wants to be is in cash.
•Commodities in general are a standout.
•Gold is a standout.
•Precious metals are a standout.
•Property is a winner.
•Equities are a winner.
•Treasuries are distinct losers if not an outright short.
•Foreign currencies
•Energy
The single best asset for a hyperinflation scenario is actually property. With housing or commercial real estate one can borrow with next to nothing down. No other asset class offers as much leverage. With no skin in the game one might amass $1 million dollars worth of property that might sell for an unbelievable amount in a few short years if not sooner.
Is there a catch? Why yes there is. One needs to be able to make mortgage payments on the loan. That means the timing of the hyperinflation better be spot on. It also means that property values better keep on rising from the moment the leverage is taken or income must rise enough to afford the mortgage if it does not.
Should ever one get in a position via excess leverage to not be able to sell the asset for more than one paid while not being to afford the mortgage payment, foreclosure or bankruptcy occurs. Losing a job ad being underwater on leveraged property is an instant enormous headache.
Leverage is obviously the biggest pitfall for the hyperinflationary investor. But even without excessive leverage, housing has been getting clobbered for two years, longer in Florida. Commodities, however have been on a tear. Commodities also benefit from what appears to be near insatiable demand from China.
Can anything go wrong with commodities? Actually yes. China and emerging markets could put on the brakes regardless of what happens to the US dollar. Furthermore, with the US headed into a recession, demand for base metals could collapse. Also note that treasury bears (except for nimble traders) have not exactly fared well to say the least.
Regardless of what happens to base metals or treasuries, peak oil just might keep energy prices high. Thus there are additional reasons to be bullish on energy regardless of the inflation/deflation debate.
Hyperinflation involves a complete collapse in confidence of a currency but with currencies there are always relative values. Commodity producing countries have strong currencies that hyperinflationists think have more room to run.
Is there a completely safe way to invest for hyperinflation? I think so but the ideas might seem rather boring to many. For example: Everbank has MarketSafe® Gold and Silver CDs. I talked about those products in A Safe Way to Own Gold and Silver.
The Everbank MarketSafe® products are principal protected CDs whose return is tied to the performance of gold and silver. Even if gold and silver collapsed, one's principal is protected as long as one does not exceed the FDIC limit. The products are suitable for investors with a safety first attitude, yet wanting a hyperinflation hedge.
A second safe way to play for hyperinflation is in Treasury Inflation Protected Securities. Here is a second article about TIPS.
Where are we now?
Collapsing property values simply are not synonymous with hyperinflation. So inquiring minds might be asking: Did we already have a hyperinflation (of credit) and is a hyperinflation by monetary printing going to follow? The articles above might help resolve those questions.
Regardless of what one thinks is coming, one look at millions of foreclosures happening right now suggests there is plenty of reason to be cautious here.
Investment Themes For Deflation
•In deflation, debt is the enemy.
•Risk is to be avoided.
•Cash is raised.
•Treasuries are sought out as a safe haven.
•CD ladders offer a good investment structure.
•Gold, acting as money does well.
•Select equity shorts or PUTs are a standout.
•Renting as opposed to owning a house should be considered.
•Currency plays
One can see the effect of excessive risk with the housing implosion regardless of what one thinks is going to happen down the line. Rising unemployment and/or falling income with no way to pay the bills is the chief concern. Before even thinking of investing in a deflationary environment, one should pay off all credit card debt, live below ones means, and have a cash cushion equal to one year's salary to pay the bills.
After decades of inflation the overall deflation theme may be hard to take, but it is what it is. The single best performing asset in this environment might be equity puts. However, just like those overleveraged in housing found out, timing must be precise. Anyone shorting or buying puts on strong stocks have gotten killed. Even index PUTs and index shorts have fared miserably for all but nimble traders. On the other hand, those in housing related shorts have done well. Those in gold have also done well.
Inquiring minds will note that gold is in the hyperinflation category and the deflationary category as well. That is because of gold's unique property with a dual role as a money and a commodity. Gold is money. The case was made in Misconceptions about Gold. Money is hoarded in deflation so gold should act well in deflation.
Do not make the mistake of thinking that gold always does well. It does not. It fell from over $800 to $250 in a decade's long crash. There was positive inflation all the way. Thus gold is not an inflation hedge no matter what anyone says, except perhaps in the very longest of timeframes. The key here is that gold does well at extremes. Those extremes are severe inflation and deflation.
When it comes to housing, a huge case can be made for renting vs. owning. The bigger the bubble, the better the case. California is in a tremendous bubble. I would not be buying in California any time soon. Florida has already crashed but further declines are likely. Another factor is availability of rental houses. The area where I live has few rental choices. I own but do so with open eyes. I also expect to have the house paid off within 5 years or so. My current leverage is small.
One possible currency play is the Yen. Leverage will be unwound in deflation and right now there is a massive leveraged carry trade in the Yen. The unwinding of that carry trade is likely to be very good for the Yen vs. the US dollar. I like the Yen here very much as a long term play.
A second possible currency play is related to the unwinding of leveraged dollar short positions as well as extreme anti-dollar sentiment, that fueled a mad dash into the Euro. I like the dollar vs. the Euro here.
Is there a completely safe way to invest for deflation? Yes, but once again the ideas are going to sound boring. CDs are still paying around 5%. One can build a CD ladder by buying 1, 2, 3, 4, and 5 year CDs and rolling over the proceeds into more 5 years CDs as each matures. The ladder can be for as long as one wants. It can be 3 years or 10 years, not just 5. The longer the duration the more risk there is but at least the principal is protected.
Once again, the super cautious wanting to protect against anything can try the MarketSafe® products mentioned earlier, or even TIPS.
There are other possibilities as well for those wanting more risk. If one accepts the peak oil argument, then energy should be a relative standout, at least compared to other commodities. And unlike homebuilders or banks, oil is not headed to zero and will eventually recover in a long enough timeframe.
Still another possibility are long/short funds that take on market risk when warranted and off when not. Sitka Pacific Hedged Growth strategy is one such option.
Sitka Pacific Hedged Growth was up about 10% after fees a few weeks back when the S&P 500 went flat for the year. It is still up about 10% on the year, even after this December rally. Volatility is low compared with the S&P. Currently the strategy is 33% cash, and market neutral (equal weighted longs and shorts) in the remaining portion. Bear in mind I have a vested interest in this idea given that I am a registered investment advisor representative for Sitka Pacific.
Hussman Funds are another possibility. John Hussman decides to put on or take off risk based on his perception of valuation and market action. I am an avid reader of his weekly columns.
To some, 10% returns simply do not cut it. For others 10% returns with low volatility are fantastic. It all depends on one's risk tolerances. While, strategies can be debated all day long but there is never any guarantee. Risk takers often act as if there is. Certainly there seems to be an amazing belief in the Fed's ability here in spite of the horrendous and obvious mistakes the Fed has made. That faith is unwarranted in my opinion, but we shall eventually see.
Furthermore, it is one thing to take risks with one's own capital, and it is another to take excessive risks with OPM (Other People's Money). Bear Stearns (BSC) had two hedge funds go to zero. I am quite sure more hedge funds are headed the same way regardless of what happens.
The key now is survival. Opportunities are easier to make up than lost capital no matter which way you are betting. Look at Citigroup (C), Morgan Stanley (MS), Ambac (ABK), MBIA (MBI), E*Trade (ETFC), Merrill Lynch (MER), Countrywide (CFC) and all of the homebuilders for proof.
Counter Trend Stock Index Futures Position Trading
http://marketoracle.co.uk/Article6145.html
Stock Market VIX Volatility and the 6 Year Cycle
http://marketoracle.co.uk/Article5959.html
An Interview With the Kress Stock Market Cycle Master
During my 10 year acquaintance with Mr. Kress, I've been privileged to learn of his discovery of a remarkable series of weekly and yearly cycles. These cycles (Kress Cycles as I've taken to calling them) have an amazing correlation to each other and are based on the Fibonacci sequence. More importantly, they have accurately identified the major turning points in the financial markets and the economy over the last several years. The Kress Cycles are predicting a major period of change ahead for the U.S. stock market and economy, particularly between the years 2010-2014.
Using his cycle system, Mr. Kress correctly identified the 1999/2000 stock market top and also the 2002/2003 end to the bear market. More recently, Kress identified the stock market top in 2007 and is looking for the start of a new cyclical bull market to begin soon. Kress recently published a “Special Edition” to his SineScope publication, the fifth one of the past 10 years. Each previous Special Edition has been eye-opening in its predictions for equities and thus far has proven to be accurate. The latest Special Edition is perhaps his most important one yet, and with that in mind I decided to pursue an interview with the author. Kress was kind enough recently grant me an interview concerning his cycle work and investment/economic outlook for the U.S. in the foreseeable future. He also shared his longer-term outlook for gold and commodities.
Q: How did you get your start in the business and what brokerage firms did you work for?
Kress: I started in the business right after graduating from college in the mid 1960s. I joined Smith, Barney & Co. which at that time was the premier fundamental research and investment banking and institutional research firm. More innovative firms were becoming more competitive with the advent of the smaller “boutique” firms. Prior to 1970, I joined Faulkner, Hawkins & Sullivan as an institutional rep. This time I shared the position with Donaldson, Lufkin & Jenrette at the premier “special situations” firms. I later became available to institutional buyers relegated as an institutional rep to nothing more than a link in the party line, so I decided to enter the retail (individual) side of the business and joined Kidder, Peabody & Co. I found this disconcerting for, in actuality, a rep was paid for the volume of business done rather than for the amount of money made for a customer.
Q: In the introduction to your latest publication, you make reference to the superiority of market analysis compared to fundamental analysis. At what point in your career did you discover the technical approach to the stock market worked best?
Kress: My gut told me that fundamental analysis was a reactionary, loss prone approach to value whereas sound market analysis is anticipatory and can provide a value added for the investor or trader. I became associated with an individual who did market analysis. This sparked my interest in doing my own work. In the earlier 1980s, I left the brokerage industry and joined a computer leasing firm wholesaling tax advantaged partnerships. While at the firm, I began developing a specialized methodology to market analysis. With the change in tax regulation, I left the leasing company in the early 1990s and became involved exclusively to developing SineScope [Kress's proprietary cycle method for stock market trading]. After years of trial and error, I finally achieved the desired level of competitive excellence last year.
Q: What about p/e ratios? Many fundamental analysts swear by them. Do you attach any importance to them?
A: Earnings are a lagging indicator. Prices are a leading indicator of earnings reversal, consequently they can have predictive value. The whole key is to identify price reversals using the Fibonacci-based mathematical identifications of the cycles. Mathematics being the most precise language allows the market to convey what it's doing.
Q: What is the philosophy behind your cycle method and how do you apply it to the stock market?
Kress: I believe that natural forces overpower those created by man and that everything goes in cycles. The market isn't exempt [from this principle]. Cycles are a natural phenomenon and represent the natural law of physics which states that what goes up must come down. In effect, this is a cycle in rudimentary form. The cycles' derivation are quantified by a basic mathematical sequence which identifies the natural order of universal events.
Q: What is the basis for the market's cycles?
A: Mathematics has been defined as the most precise language. Consequently, the mathematically based cycles are an orderly conduit though which the market conveys its directional behavior. In effect, my methodology tracks the least common denominator, which is time. I believe the market itself is the ultimate authoritative opinion. With an understanding of the cycles, the sequential series can be applied to both yearly for investment purposes, or weekly for interim-oriented traders.
Q: You place a lot of weight on the Fibonacci numerical sequence in your cycle work, don't you?
A: Yes. Let me give you just one example of how important the Fibinoacci sequence is. A deck of cards is constituted similar to a year: 52 cards (weeks), four suits (seasons), 13 cards in a suit (weeks in a season). The numbered cards begin with two, the basic prime number, and end in 10, a decade. The width of a conventional deck is 5/8 of the length (two Fibonacci numbers), the beginning of the 62% odd infinitum ratio. Fibonacci numerology is clearly evident in various aspects of life. Whenever a bear market or contracting economy occurs, the blame game begins. However, this is a futile exercise for “it's all in the cards.”
Q: Through the years I've noticed that you're a big believer in using the rate of change (momentum) in the new 52-week highs and lows to confirm your cycles in timing market reversals. You've even developed a tool you call “HILDEX” to quantify these reversals. Why are the new highs and lows so important?
A: The new highs and new lows are important because they represent the incremental money changing the supply/demand equilibrium of equities. I developed this indicator to confirm the cycles' reversals. HILDEX includes two components to track each cycle. The first is called the reversal component and is used to confirm the day of a cyclical top, plus or minus 1-2 days standard deviation. The second series has a directional component, which tracks the interim trend. It also includes a longer term, or bias component. As the name implies, the bias component tracks the market's underlying bias [longer term]. When the directional component reverses and penetrates the bias, a bull or bear market is confirmed as the case may be. These components are all based on the difference between the number of the NYSE new 52-week highs minus the lows. The indicator is constructed using daily moving averages based on the Fibonacci sequence and corresponding to the cycles that are being tracked.
Q: Earlier this month you published a special edition to your SineScope publication entitled, “The Grand Bull's Terminal Years: 2009-2011.” It contained an ominous warning for the years 2012-2014. Please elaborate.
A: The term “Grand” was included since it refers to the composite of all the cycles. Its duration is 120 years and I refer to it as the revolutionary cycle. A revolution occurs with each cycle bottom which changes the three basic institutions that govern our lives: political, economic and social. The first revolution in this country was political since it involved war in the 1770s when America was freed from an occupied to an independent territory. The second occurred in the mid 1890s when America transcended from an agricultural-based to a manufacturing-based economy. This was an economic revolution. The third 120-year revolutionary cycle is scheduled to bottom in 2014. To complete the third institution, the upcoming Grand cycle bottom should be a social revolution. The final three years prior to the bottom are ominous, historically, for they include a depression and a devastating war. Since “history always repeats itself” and there is yet to be a precedent to violate this, the years 2012, '13 and '14 have grave, broad-based implications. The various potential is too lengthy to discuss now but they are discussed in the Special Edition.
Q: If an investor shares your conclusions based on the 120-year revolutionary cycle, what is the best strategy for the years ahead?
A: The answer is very simple and straightforward. Liquidate all conventional equities on strength in 2011. Notwithstanding the negative potential that exists during 2012-2014, funds can be 100% committed and produce gainful returns. However, the old generals who have fought the old wars during the past half century with the “buy and hold for the long term” philosophy will have to change their mindset. I have difficulty with this approach, for long term we're all dead. It appears that this is a rationalistic euphemism for the inability to manage and avoid interim risk, thereby awaiting the market to recover the investor's loss.
Q: What about income investors?
A: If current income is required, AAA rated quality must be employed but maximum maturity can be considered? The equity segment need include only three vehicles in the 2012-2014 time period: S&P index inverse dynamic funds, gold exchange traded funds (ETFs), and S&P index options. The percentage weighting between debt and equity and within equity can be determined by individual risk/return positions.
Q: Is the latest Special Edition we've been discussing available for individual evaluations?
A: Yes. You can request a copy by writing to the following address: Samuel J. Kress, 15 Phoenix Avenue, Morristown, NJ 07960.
By Clif Droke
www.clifdroke.com
The 5 C's of Trading Consistency
1. Clarity
The first C of trading consistency is clarity. This is one of the most important elements.
When we are not clear about why we are trading and our trading plan, we jump from one thing to another. Our actions are not focused. As a result, things take longer and we do not produce consistent profits.
With clarity comes focus. When we have focus, we have more profitable trades.
A good test to see how much clarity you have in your trading is to ask yourself:
• Why you are trading?
• What markets you are trading?
• What hours are you trading?
• What is your trading methodology?
• What systems are you using?
• What data are you using?
• What news sources are you using?
• How are you managing your environments, both physically and emotionally?
2. Commitment
The second C of trading consistency is commitment. I know this is stating the obvious. Find out how committed you are by answering the following questions.
When you are trading:
• What are you willing to do?
• What are you willing to give up?
• What do you do when things are not comfortable?
• What do you do when things are not convenient?
• What boundaries are you willing to set?
3. Courage
The third C of trading consistency is courage. Let me ask you a question. Have you had occasions that you know what you need to do and yet you don't do it?
The action might not be comfortable for you, or it might not be at the right time. Do you have the courage to take the action anyway?
This is where clarity comes into place. Knowing why you are doing something allows you to handle challenges that come in your way.
When I talk to some traders, they tell me because of lack of capital, they do not follow all the signals that their system gives them. They start picking and choosing. Then they have more losses than they care to. Then they lose more capital and this vicious cycle continues.
If they had the courage to follow all of the signals, they probably would've been in a better place.
4. Confidence
The fourth C of trading consistency is confidence. You might know what to do and you don't have the confidence to take the action. You might not believe that you can do it.
This is where courage comes into place. There are times that you might not fully believe you can do it. At these times, when you have courage to take action, you are one step closer to getting the results that you want.
By not taking action, you are guaranteed of not getting any results, both positive and negative.
I remember meeting a person who wanted to trade. However, he was afraid of losing even a penny. In addition, his wife was scared of losing money. As a result, after studying trading for over a year and a half he had not pulled the trigger yet.
A lot of times, we do not want to fail. So we do not take any action!!!
5. Calmness
The fifth C of trading consistency is calmness.
How do you handle adversity? What do you do when the markets go against you? Do you get angry and defensive or do you stay calm and play offensive?
When the markets go against you, do you overtrade? Do you try to make all of your losses in one deal? Or do you stay calm, take a breather and reevaluate the market?
When our emotions go up, our intelligence comes down. We make bad decisions. We take it personally. Then we start doubting ourselves and we start losing confidence. Then we start losing more and more…
When we stay calm, we can evaluate the market from an objective place. We can see the market for what it is and not what we want it to be. Then we can take a calculated risk.
To be a profitable trader, you need to be consistent. To be consistent, you need to develop all the 5 C's.
To summarize, the 5 C's of trading consistency are:
• Clarity
• Commitment
• Courage
• Confidence
• Calmness
Consistency is most difficult and most readily proven during tough times. How someone weathers the storms demonstrates their skills.
Here is to making trading success your habit™,
http://www.marketoracle.co.uk/Article5329.html
Car Rental Discount Codes
National
Under 25 Drivers
If you are under 25 use the Big 10 contract code. If you are under 21 use this code code.
Update 10.16..07
Triple miles Double Upgrade US Air
ND2119071Q - $35 off weekly rental – must stay over Sat Night – exp 12.31
Double Upgrade
American Casino Guide 20% discount free day, upgrade
AMEX Double Upgrade
Free Weekend Day
$30 Off Weekly Rental
Visa - 20% OFF plus One FREE Day with the rental of a compact through midsize car in the United States, Canada, Latin America, Caribbean or Asia Pacific – 5 Day Minimum
Free Weekend Day, One Car Upgrade Worldwide
20% Off, 1 Class Upgrade, Unlimited Mileage World Wide - Use MC
$15 Off 3 Day Weekly Rental Exp. 12.15.07
$20 Off Weekly Rental
$34.75 a Day For Fullsize - $6 Less In FLA - 5004625
Free Emerald Club, $2 Discount For Online Booking (compact $36, Double Car Upgrade, $15 Off 5 Day Rental – No Expiration Contract
CDN Discounts on National Through CATA
AMEX Two CarUpgrade
Mastercard/National - 20% Discount + One Car Upgrade In Europe
Mastercard/National – 20% Discount + Two Car Upgrade In USA and Canada
$79 Per Day One-Way Rental
Two car upgrade, free weekend day, $25 off 5 day rental of SUV – EXP. 12.31.07
Free Emerald, 2 Car Upgrade, $15 Off Weekly Rental
Triple miles Double Upgrade Continental Airlines Exp 12.31.06– Page Still Active
University of Pennsylvania Rates – 21 OK
State of Nevada
Big 10 Rental Rates
Washington University – St. Louis Travel Rental Rates
State of CA Rental Rates – All Rental Car Companies
Double Car Upgrade and Free Weekend Day From Geico
State of CA Discounts
Bunch Of Deals – All Rental Companies – Double Upgrades, 2X & 3X Miles, $$ Off, Free Days
Free Emerald Club
Free Weekend Day - Minimum 3 Day Rental - Visa
2X Car Upgrade $15 Off Weekly Rental
Discounted Park and Fly Rates - All States
Free Emerald Club
Mastercard 20% Off Rental One Car Upgrade
One Car Class Upgrade - Expires 121.31.07
Two Car Upgrade + $15 Off Weekly Rental
Discout National
National Two Car Upgrade Expires 12.31.07
Triple Miles + Double Upgrade United - Exp. 12.31.07
$15 off Weekly + 2 car upgrade
Master Card 20% Off One Car Upgrade – No Expiration Date
Free Weekend Day
Get $50 a month off rentals
Vacation Outlet Rental Deals Freebies + discounts
52-4 4562 1 – IATA # for Link
Sato Travel - Great Deals
Best Deal on European Car Rental - 17days to 6 mos.
BJ's Promotion Check the 3 Printable Coupons (1) Free weekend day, (2) $20 Off Weekly rental,(3) 1 car upgrade.
UC Santa Cruz Discounts
---------------------------------------------------------------------------------
Suggestion:
Discount prices too high? Make a confirmed reservation using one of these links and then a couple days before your travel, go to Price-line and bid a lower price for your car than your confirmed reservation states. To find out what price you need to bid, go to Biddingfortravel.com and look it up. Use the Price-line link through Amazing-Bargains.com. Nationwide, the prices for full-sized cars run around $15-$20. For you Orlando, Florida visitors and if you are renting over a weekend, try $14 a day for a full size car and $19 a day for a minivan.
--------------------------------------------------------------------------------
It takes a little patience putting in playing around with the different combinations, but you will save $$ and get upgrades if you spend the time.
Here are the National Contract ID's:
TRAVEL AGENT CONTRACT ID 5063773 + IATA # For PRT Travel - 52431993
Leads To Some Incredible Pricing
6600330 - Priceless Vacations
5436624 – UC Santa Cruz 21 OK – All California Universities
5185011 – University of Chicago $2 discount for booking online
5299328 - Can get lower than Carlson sometimes with this one* -new 7.22
5005467 - United Transportation Union
5004461 - Univ of Iowa LDW included
5160502 – Rutgers – midsize rate - drive off the Emerald Aisle in vehicle of your choice
5002341 – Ithaca College – 21 OK – Insurance Included
5004143 - UNLV - under 25 OK
5420154 – University of New Mexico
5710068 – American Veterinary Medical Association
5282865 – National Association of Broadcasters
6100253 – AAA
5004625 - State of GA - $37.37 a day fullsize 4dr, LDW included, Florida rates $6 below standard rate
6100497 – Illinnois Bar Association
5766241 - University of Milwaukee $231 a week for full size -
1991867 - Duke - Select ay car from the Emerald Aisle, and pay at midsize rate - 25 and under no upcharge, Free CDW
5400322 – University of CA
5190257
5036929 – American Airlines
5282865 - Michigan Farm Bureau
5003447 - Caltech - CDW/LDW included at no cost - Can Rent at 18 - no upcharge Link
5300743 - Washington University St. Louis
3614638 - National Corporate ID - Government of British Columbia, CA
5001856 - UPenn LDW/CDW included - 21yr OK.
75796 - Alamo $37 a day for fullsize, 21yr OK, CDW/LDW included - from UCLA
5125601 - special American Express promotion code - low rates
5400321 - $33.90 a day set rate - state of CA
5001856 - UPenn rent at 21 LDW included $41 Midsize
5004463 - $40 full size, $36 Midsize if reservations are made online - State of WI
5760339 - Try this one first. It ususally gives the best rates. It is Carlson Travel. Here is a .zdl file which can be opened in Avery Design Pro.
5125601
5706352 - Illinois Farm Bureau 20% discount ...and more
524992 - MA Higher ED Consortium
5004462 - $2 discount for internet booking, free LDW, no under 25 surcharge - Univ MN
5066904
5000491 – Has been known to be great
5004463 – University of Wisconsin
5766241 - Premium $280 a week
5004143 - UNLV
5400322 - UC Berkeley School of Law - Under 25 Contract ID 54366245001856
5601333 - APA
5282921 – IEEE
5710540 - Contract ID for SIU - Free LDW and automobile liability of $100,000/$300,000/ $25,000 is included regardless of rate selected. Rate works for under 25 also.
5004463, 5766241 - Contract IDs for the State of and University of Wisconsin - Rates look good
5160279 - Contract ID for Penn State University. ID works in Canada, Australia, Austria also.
5004462 - Contract ID for University of Minnesota. $2 off per day if you reserve online
5400325 - UC National code good for under 25 drivers
5000491 - Ohio University Contract Code. No upcharge for under 25 drivers.
5037126 - Continental Airlines Contract ID
5004459 - Purdue University Contract ID additional $2 per day discount if you book online.
5001661 - University of VA pretty good pricing
6666666 - Contract ID for University of North Carolina
5004172 – State of Louisana - $240 a week for premium, $299 Lux
5400321 - State of CA
5006897 – Boston College
5282865 – Hawaii State Bar Assn. – 20% Discount
5904196 - UCSD
5001514 - MSU Free loss damage waiver coverage
5000491 - Underage code - use if you are under 25 for a good rate
5185011 – University of Chicago
5282905 - MasterCard 20% discount
5185011 – University of Chicago
5450173 – AMS Users Group (insurance software)
5004461 – University of Iowa - must be 25 [link=Link]http://www.uiowa.edu/~fustd/travel/Trav%20Pref%20Vendors/pref_vendors.htm[/L]
5001514
6100120 – AARPLink
5766241- $79 a day one way rental for all classesCheck it out
6600330
5004462, 5004458 - New 9/23/05Big 10 Contract IDLoss Damage Waiver is included in the rate.
Other Rental Cars
One Way Rentals Post – Scroll to Bottom of Page for Post
Coupon Bonanza All Car Rental Companies
Discounts, $$ Off, Upgrades, All Car Rentals
rentalcodesdotcom
Discount Car Rentals - All
Rent at 18 – Great Prices - No Surcharges
University of CA Irvine – All Rental Company Codes
Enterprise
Word of Warning on Enterprise – At Enterprise a Reservation Has a Different Meaning – We'll be glad to take your reservation. When you get here, we'll see if we have any cars left. Make sure they have your car on the lot before you go.
9 Confessions From A Former Enterprise Rental Agent – Thanks Canoer
Multiple Discounts + Upgrades
20% Off Local + One Car Upgrade
Enterprise Entertainment Book Code ETBX7B
Enterprise - UVA - Personal Rental OK - 21 OK
Enterprise - Secret Rates
State of CA Rates - $32.39 Per Day – Rent at 21 – No Charge LDW Contract - Travel Site
Enterprise - Hawaii State Bar - 36a7933
Enterprise – IEEE-EE - 36a7933
Enterprise - California Alumni Association - ucbalum CA Alum - Rent at 21 No Upcharges - Printable
Enterprise – San Diego State University - NASDSU
Enterprise – State of Illinois – ILGOVT1
Enterprise - Cornell University
Enterprise - University of Texas - no drop-off charges on one-way rentals between any two Texas locations
Enterprise - State of Louisana - NA1403
Enterprise - State of CO - Personal Rentals OK - 21 OK Link
Enterprise - ESCOD Industries
State of SC - 26A4456 - Limited to the State of SC - $200 a week for premium - 21 OK - Personal rentals OK -
Link
Enterprise - State of NC - Personal Rentals OK - 21 OK
Enterprise - Rutgers Alumni
Enterprise - Stanford for Over 21 Drivers
Enterprise – University of Utah – 21 OK
Enterprise – Princeton University – 18 OK
Enterprise - Yale University - 21 OK
State of Mississippi
State of New York - Contract – Best Prices of All In NY
Enterprise – Washington State University Link
State of Utah – Password “STA”
University of Kentucky Pricing
University of Chicago More
Enterprise – Washington University STL – Personal Use OK – 21 OK
Enterprise – State of CA – 21 OK
State of Nevada
University and State of Oregon
State of West Virginia
San Diego State Univ – In state rentals
San Diego State Univ – Out of state rentals
Universtiy of California – All Rental Car Companies
State of NC
Enterprise – University of Oregon – 18 OK – Students OK
Link
Enterprise - Brown University
Caltech
University of Arkansas
University of Pennsylvania
State of CO – All Departments Rent at 18
Enterprise - State of MI - 21 OK - Great Prices
Enterprise - State of Utah
Budget
Budget - Great Budget Pricing, Upgrade, $15 off Week, free weekend day
Budget - Under 25 Budget
Canada Discount with Budget - $44CDN per day – Full Size
Budget - BCD X201400 - 25% off Worldwide
Budget - BCD U030094 – May be the best Budget Number
Budget - T255400 - Harvard University
All Rental Codes and Free Hertz Gold – UCLA
Budget - 1X Upgrade, Free Weekend Day, $15 Off Week Rental
Budget - Cheap Rentals in Alaska
Budget - Free Fast Break, $15 Off, Free Weekend Day, Good BCD - Expires 12.31.07
Budget - 25% Off 250 Miles AA
Budget Truck Rental - 10% Off One Way and Local Rentals
Budget - BCD Number T356877 – Ctiy of Seattle – OK to rent at 18 – No drop off charges in Washington.
Budget BCD U030093 weekly intermediate SUV $179 before taxes
standard SUV $199 before taxes - YMMV
Budget Federal Gov BCD + Free One Car Upgrade
Avis
U405347 - generic event code - BEST AWD
C070127 - Very good discount, LDW included
D302003 – Sears
D005927 – Best AWD For European Rentals
UUGA043 – Double Upgrade
TUGB348 – Free Weekend day when rented for 3 consecutive days
Avis one car upgrade – coupon UCNA024
Avis - D453800 25% off Worldwide
Avis - A6791000 – Hawaii State Bar
D002807 (Amateur Sports Assistance Program (ASAP)
K774100
State of Florida AWD #A113400 – Midsize $28.95 - FS $32.95 – Link ContractPricing
K312601 (American Express)
B900000 (generic AAA code)
C070127 (car and driver)
B790000 (Entertainment Book)
V125600 – Ohio State University 18 OK Avis - Ohio State University Coupons
K197800 (Alaska Air)
A555500 – US Government – Free Upgrade Use Coupon UULA004 - Linky
K817200 (Starwood)
K860600 (Starwood - seems to be geared towards higher Hawaii discounts)
K851000 (Hilton HHonors)
A205700 (Inside Flyer)
K0205700 (Continental)
K817200 (American! )
U405347 (generic event code - good discount)
B335100 (British Airways)
K817700 (Hyatt)
K019300 (United)
A108325 or A108300 (Costco)
A415900 (BJs Wholesale)
K666403
C031529 – Good rates
A359800
D002807 – Great rates
A108325 - Costco
B270898
A699800
L149332
Avis - State of Texas - F999303
Avis - Free Weekend Day
Avis Preferred Select
Avis - 1X Upgrade
Avis - A113400 State of Florida – 200 free miles per day - $200 a week for Full Size – No drop off charges in Florida
Hertz
$30 Off Weekly Rental
Best Hertz CDP code 1757580 – its from Car and Driver
Hertz CDP discount code 1757580 – supposed to be very good
760900 - CDP Code Travel Partners Club
31570 – CDP Harvard University
0081555 – CDP Federal Government Rate from EANGUS (enlisted National Guard)
0083080 – CDP Unknown
224764 – CDP FEMA
472871 – CDP American Red Cross
1757580 - CDP Car & Driver
— Coupons —
One Car Class Upgrade - PC# 962161
$10 off a weekly rental - PC# 962220
Up to $15 off a weekend rental - PC# 962216
Free child seat on a weekly rental - PC# 934732
1 free weekend day - PC# 924932
Hertz Double Upgrade - PC # 102815 – Exp. Dec. 31. 2007 – Quantas
Free Hertz Gold
Free Hertz Gold
Discounts, $$ Off, Upgrades, All Car Rentals
Dollar and Thrifty Rental – Use Code – PHONE – for best rates or just go without any code. Seems to give better rates sometimes. Dollar really jacks up prices in FL during holidays. Example same car for the same length in September v. December (Xmas) is $600+ higher i.e. $100 v. $700
Alamo
I.D. #430710
Rate BY
Coupon AD1462JOO – Excellent rates. Not sure what the coupon is for though.
Alamo Rental Car - Code BY and ID #253173.
Coupons—One free day for a rental of at least 5 days - Coupon FD6B - or $15 off a rental of at least 4 days - Coupon DT3B. Up to 15% off weekends. Reqest ID number –
Alamo Free Day When Renting For 5 Days – Expires 6.30.08– Printable Coupon
Alamo: 20% Off + Another $10 Off
Alamo: Rent 5 get one day free
Thrifty
Use Thrifty with Discount # 1660228069 to waive underage fee.
-No underage driver surcharge for drivers aged 21-25
-No mid-week or one-day surcharges
-No additional driver fee
Parking
Discount Airport Parking - Many Airports
15% Discount Off Park and Fly in Canada
Hotels
Cheapest Entertainment Book is Binghampton, NY - $25 Link. You can get 50% off rack rate at Hilton Hotels in Hawaii most of the year.
Real Cheap Hotels. Attend a 90 minute timeshare presentation from Marrxiott, Hilton, Sheraton – absolutely no pressure and get super deals like - Grand Wailea in Maui for $699/5 nights, including 6 days rental car and $100 resort voucher. Schedule the presentation early in the AM and tell the presenter you have another appointment in 2 hours. They will not pressure you but lay out all the benefits and ask for you to sign up. Check It Out
LaQuinta code DUKUNI from Duke University is good for a 15% discount has expiration date but may renew – thanks diazfranco
Travel Website
Discount Hotels
Discount Hotel Rates
Discount Hotels Nationwide
Marriott Discount Codes
$58 a night Las Vegas Hotels - For UCCSN Volunteers - University and Community College System in Nevada - UNLV Vendor Code: F521481337
Discount Chicago and IL Hotels
Discount Hotel Corp ID.
Club Quarters - Password YALE
GovArmTravel
Discount Travel, Hotels, Car, etc.
#1 - VOTED BEST HERTZ CDP discount code 1757580
Hertz CDP discount code 1757580
Bookable on Hertz.com
-Best premium business class car rental agency
-Excellent Rates
-Outstanding fleet. Interesting Hertz Prestige/Fun/Green Collection.
-Unlimited miles (even for one way trips)
-Anyone can use this code, this belongs to Car and Driver Magazine
readers (go pick one up from a magazine stand?)
-Hertz has excellent area / branch coverage
-Most airport locations are 24 hours and will stay open late until your
flight arrive
Stack your saving with coupon. search for the Hertz coupon thread.
http://www.fatwallet.com/forums/travel-deals/521905
6 signs of an economic rebound
http://money.cnn.com/2008/05/09/pf/rebound_predictors.moneymag/index.htm?postversion=2008051309
Every cycle has its wild cards, but history shows there are some clues to a recovery that are pretty reliable.
(Money Magazine) -- By now you've had enough of the endless gloom in today's economic news: record oil prices, slower home sales, deepening loan losses, disappointing corporate earnings. What you're really looking for at this point are a few signs of hope.
It's a certainty that the economy, the housing markets and the stock market have to bounce back sooner or later. If you could see that rebound coming, not only could you rest easier about everything from your job to your retirement, you could move forward confidently on all those financial plans you've put on hold until the way seemed clear.
You could, maybe, take a chance in the job market. You could think about trading up to a bigger home or downsizing to a place that better suits your needs. And even though you've stood unwavering by your investment strategy as the stock market tumbled - and you have, haven't you? - you could feel good once again about putting your money in something besides a chickenhearted money-market fund.
So what are the surefire signs that we're bouncing back? The only honest answer, of course, is that there are no 100% surefire signs. In every cycle there are wild cards that can trump even the best predictions.
On the other hand, history shows that some hints of renewal are far more reliable than others. At least one of them is worth watching in every market that matters to you, from stocks to real estate to jobs. Read further to find out where you'll find these harbingers of economic spring, why they work and how you can make the best use of them.
When will the economy get out of a rut?
Watch: Business sentiment
Current read: Recession's still on
While we won't know for certain whether we are in a recession - defined as a decline in gross domestic product for at least two quarters in a row - until later this year, most economists believe we are.
For starters, GDP growth slumped to an anemic 0.6% in late 2007. What's more, the measure that has been eerily prescient in the past decisively flashed "recession" just as the housing market peaked.
We're talking about the yield curve - or the relationship between short- and long-term interest rates. Long-term bonds usually pay more than short-term ones to compensate investors for locking up their money. When that relationship flips and produces what's known as an inverted yield curve, you can be pretty sure a slump is coming.
Since 1960, every time the yield curve, as measured monthly, has inverted (except once), a recession has followed. The last time this happened was July 2006. Unfortunately, the yield curve can't help you see the recovery that's bound to be over the horizon. What can?
What to watch: The most important clue may lie in the minds of business leaders, says Nariman Behravesh, chief economist at Global Insight. The more upbeat companies feel about their prospects, the more likely they are to expand and hire, which in turn lifts consumer confidence, sparks spending and boosts economic growth.
To get a read on business sentiment, Behravesh suggests looking at the Institute for Supply Management's nonmanufacturing index, a monthly survey of conditions in the service sector, which accounts for 80% of jobs. A reading below 50 is typically regarded as a recession signal; the lower it goes and the longer it stays down, the more severe the slump. Once it returns to 50-plus territory, a rebound is likely.
During the brief recession of 2001, the index dropped below 50 just as the slowdown started and hovered between 45 and 50 for most of the next eight months. A month before the recession ended, the index rose sharply to just under 50 and soon stabilized in the low 50s.
For a second opinion: Look to the real estate market. "Housing is what got us into this recession," says Gus Faucher, director of macroeconomics at Moody's Economy.com. "In terms of what's going to get us out of it, we're going to be looking for a bottom in the housing market."
How do you spot that? Brush up on supply and demand. Historically, the inventory of homes on the market - particularly how many months it would take to sell it off - has soundly predicted home prices. Six months of inventory appears to be the sweet spot. In 1996 inventory fell below six months and dropped for much of the decade - and prices climbed steadily.
What they're saying now: A mixed outlook. For March the ISM nonmanufacturing index stood at 49.6 - up from the precipitous drop to 44.6 in January but still below 50 for the third straight month.
"If the index goes to 40 and stays there, we're looking at a much deeper recession," says Behravesh. "If the number goes back up to 50 and remains at those levels, that's definitely a signal that things are going to get better." Housing inventory, however, has recently hit nearly 10 months' worth - bad news for prices and growth.
To keep track: The ISM nonmanufacturing index is released on the third business day of every month. It's widely reported in the press; or you can find the releases in the ISM Report on Business section of the Institute for Supply Management's Web site.
As for the real estate inventory yardstick, the National Association of Realtors puts out the data monthly (usually between the 22nd and 25th). Look in the Research section on its Web site.
The wild cards: As Federal Reserve governor Kevin Warsh recently quipped: "If you've seen one financial crisis, you've seen one financial crisis." Indeed, this slowdown has seen a massive credit crunch, a free-falling dollar and record oil prices. At the same time, exports to China and India are helping U.S. businesses offset weakness at home. Any or all of these factors could cloud the rebound picture.
As you know all too well from the skyrocketing cost of the milk you put in your cereal and the gas you pump into your car, inflation is back. Consumer prices are rising at 4% a year - well above the 2.6% average annual increase of the past decade.
Predicting inflation is one of the most hotly debated areas in economics. Still, there's one signpost worth watching.
What to watch: Follow the money supply. When the Federal Reserve cuts rates, it often does so by buying Treasury bonds from banks, giving them more money to lend and thereby pumping more money into the economy. When the growing supply of greenbacks outstrips demand, each dollar is worth less and buys less.
Presto: inflation. Every major increase in inflation over the past century has been preceded by a spike in the money supply, and a dip in the growth of the money supply has usually led to a drop in the inflation rate.
In the early 1980s, when inflation topped 10%, then-Fed chairman Paul Volcker embarked on an aggressive campaign to slow money supply growth and tame inflation. He succeeded - by 1983, inflation was 3.2% - but at a price. Clamping down on the money supply helped trigger a severe recession - one reason today's Fed is under pressure to keep up money supply growth.
What it's saying now: Going by the money supply, odds are good that inflation will continue rising in coming months. Since last September, the Fed has been on a rate-cutting tear, slashing the federal funds rate by three percentage points in an effort to stave off recession.
As a result, the money supply measure known as M2 has grown by a compound annualized 14% rate over the past two months. To put that in perspective, M2 grew at an average annual rate of 6.1% from 2000 to 2008.
To keep track: You can look up M2 at the Web site of the Federal Reserve Bank of St. Louis.
The wild card: It's not just the Fed that has control over our money. The owners of U.S. dollars can increasingly be found outside the U.S. China holds an estimated $1 trillion, much of it in the form of Treasury bonds. A decision by China to liquidate even a modest portion would drive up the money supply.
Watch: Money supply
Current read: No cooldown yet
As you know all too well from the skyrocketing cost of the milk you put in your cereal and the gas you pump into your car, inflation is back. Consumer prices are rising at 4% a year - well above the 2.6% average annual increase of the past decade.
Predicting inflation is one of the most hotly debated areas in economics. Still, there's one signpost worth watching.
What to watch: Follow the money supply. When the Federal Reserve cuts rates, it often does so by buying Treasury bonds from banks, giving them more money to lend and thereby pumping more money into the economy. When the growing supply of greenbacks outstrips demand, each dollar is worth less and buys less.
Presto: inflation. Every major increase in inflation over the past century has been preceded by a spike in the money supply, and a dip in the growth of the money supply has usually led to a drop in the inflation rate.
In the early 1980s, when inflation topped 10%, then-Fed chairman Paul Volcker embarked on an aggressive campaign to slow money supply growth and tame inflation. He succeeded - by 1983, inflation was 3.2% - but at a price. Clamping down on the money supply helped trigger a severe recession - one reason today's Fed is under pressure to keep up money supply growth.
What it's saying now: Going by the money supply, odds are good that inflation will continue rising in coming months. Since last September, the Fed has been on a rate-cutting tear, slashing the federal funds rate by three percentage points in an effort to stave off recession.
As a result, the money supply measure known as M2 has grown by a compound annualized 14% rate over the past two months. To put that in perspective, M2 grew at an average annual rate of 6.1% from 2000 to 2008.
To keep track: You can look up M2 at the Web site of the Federal Reserve Bank of St. Louis.
The wild card: It's not just the Fed that has control over our money. The owners of U.S. dollars can increasingly be found outside the U.S. China holds an estimated $1 trillion, much of it in the form of Treasury bonds. A decision by China to liquidate even a modest portion would drive up the money supply.
Watch: The Fed
Current read: A summer rally
This spring the stock market has flirted with the 20% decline that would mark an official bear. Now what every investor wants to know is when stocks will start climbing back.
What to watch: Again, follow the Fed. "Interest rates are probably the one thing that you really want to pay attention to," says Sam Stovall, chief investment strategist for Standard & Poor's Equity Research. Of the dozen times the Fed has embarked on a series of rate cuts since 1954, the S&P 500 has only once failed to deliver a gain one year later.
Why are rate cuts such a reliable predictor? Over the long term, stock prices follow corporate earnings, and while analysts use all sorts of methods to place a value on future earnings, one principal remains constant: The lower rates are, the more valuable future earnings are to investors.
For a second opinion: Not convinced by the march of history? Check out stock valuations. When share prices are cheap relative to earnings, the market is poised to take off.
One way to judge cheapness, says Stuart Freeman, an equity strategist at Wachovia Securities, is to compare the earnings yield of the S&P 500 - the inverse of its price/earnings ratio - to the yield on government bonds. The more the S&P 500 is yielding vs. bonds, the more inexpensive it is - and the more likely a recovery is.
What they're saying now: Based on rate cuts, the stock market should be going on a tear any minute now. But since the Fed began to lower rates last September, the S&P 500 is down about 8%.
Stovall believes that the market's prognosis is still positive for the fall. The earnings yield backs up that forecast. The price/earnings ratio of the S&P 500 stands at 16, making the earnings yield 6.3% (1 divided by 16).
The yield on the 10-year Treasury bond is only 3.6%. In March 2000, right before the market collapsed, the earnings yield was 3.9%, while the 10-year Treasury was paying 6.3%. "That would suggest that stocks are as cheap today as they were expensive back in 2000," says Freeman.
To keep track: The Federal Reserve Bank of New York posts rate cuts in the Markets section of its Web site. For the earnings yield, look up the S&P 500 P/E ratio in the Numbers section of our magazine (page 130) and then divide 1 by that figure. Find the yield on the 10-year Treasury bond at our Bond Center.
The wild cards: A long, painful recession that hits corporate earnings hard or a spike in inflation that forces the Fed to start hiking interest rates again.
Watch: Inventory
Current read: No recovery soon
Nationally, high inventory levels are signaling a long slog for the housing market. But what you care about are prices in your town, where conditions may be dramatically different.
What to watch: Locally, inventory is also the strongest price predictor, says Patrick Newport, a housing economist at Global Insight. Falling inventory - that is, fewer homes for sale - bodes well for prices. Rising inventory is a sign of more price cuts to come. Inventory in Phoenix, for example, has been rising consistently for the past year, while median prices have steadily fallen.
For a second opinion: While inventory represents the supply side of the market, the demand side of the housing equation is important too. For that, keep an eye on employment in your area.
More jobs means more fresh buyers. Reading the business section of your local paper is the best way to get a handle on job conditions in your city. Be on the lookout for big employers that are hiring - or downsizing.
To keep track: The National Association of Realtors publishes national inventory only. Your local association of realtors tracks it in your specific market, where it matters most. So ask your broker. As an alternative, go online. HousingTracker.net posts the change in inventory for more than 50 big markets.
Watch: Credit spreads
Current read: Continued tight credit
Despite aggressive Fed rate cuts, interest rates on 30-year fixed-rate mortgages have dropped, on average, by only about half a percentage point since last September. Rates on auto loans and credit cards have fallen even less. And more lenders are now reducing or completely freezing homeowners' ability to tap into their home equity, even for people with good credit.
You can blame this state of affairs on the ongoing credit crisis. Burned by the bad loans they made during the housing bubble, lenders are now looking at mortgages and other loans as far riskier than they did just recently. As a result, they're less inclined to lend in the first place. When will this freeze thaw?
What to watch: Credit experts say to keep a close eye on the three-month "TED spread." This is the difference between the interest rate at which banks borrow from one another (known as Libor) and the rate on three-month Treasury bills.
Since T-bills are essentially risk-free, the higher the TED spread, the more fearful banks are about lending. And if they're skittish about lending to one another, they're certainly not going to fall over themselves to lend money to you.
What it's saying now: More tight credit. The TED spread stands at 1.68%, far above historic levels. Kathy Bostjancic, a senior economist at Merrill Lynch, says the TED spread needs to come down to about 0.40% "before we can say the coast is clear." to keep track.
You can calculate the TED spread at Bankrate.com. Search for the three-month Libor rate and the three-month T-bill rate. Subtract the T-bill rate from Libor and you've got it.
Watch: Stock prices
Current read: Depends where you work
The unemployment rate stands at 5.1%, low by historical standards. But unemployment lags in recessions - it costs money to lay people off, so companies generally don't go down that road unless they are relatively sure a slowdown is here to stay.
If we are indeed in a recession, history tells us that we can expect an additional 350,000 workers to lose their jobs every month until it's over. At some point the job losses will stabilize. How can you tell when your job is less at risk?
What to watch: Take a cue from the stock market, advises John Challenger, CEO of outplacement firm Challenger Gray & Christmas. The stock price is a forward-looking measure of a company's future earnings prospects. "You can't guarantee the market has it right, but it's a pretty good gauge to be looking at," he says.
Start with the performance of your industry against the market over the past few months. If it's been doing significantly better, that's a good sign that your field has already started to rebound (or never faltered).
Next, if your company is publicly traded, compare its stock price with the industry index. If the stock is up and if it has done better than the industry, the market is signaling that it believes management can grow in the coming months and years. That often translates into more hiring or at least no more layoffs.
For a second opinion: It's also worth your while to keep your antenna up at work. You may know more than outside investors do. Are you being asked to scale back the budget? Are you hearing about products being discontinued? These could be warning signals.
What they're saying now: Of the 10 major sectors in the S&P 500, six have outperformed the broader index over the past year. So if you're not working in the financial services industry or for a business that is heavily reliant on discretionary spending, odds are decent that your job outlook may be fairly optimistic.
To keep track You can retrieve your firm's stock price in the quote box at the top of this page. Once you do, click on the "Advanced Charts" tab for industry and market matchups.
Global Stock Market Forecasts and Outlook for 2008
http://www.marketoracle.co.uk/Article4126.html
Great Depression
http://www.marketoracle.co.uk/Article4876.html
Investment Process
1. Identify the U.S. Market Cycle
In order to determine an appropriate asset mix, we need to assess the stock market and determine where we are in the market cycle.
Top end of a rolling bull>>> The market is mature, with little potential for substantial growth. At that point, we favor large value stocks.
Sliding bull>>> The market is losing momentum, which means a bear market is probably just around the corner. We continue to own large cap stocks, but shift the asset allocation, with less emphasis on stocks.
Bear market>>> We ride out the bear market with a lighter position in stocks and more money allocated to fixed income and cash-based investments.
New bull, first phase>>> Since smaller stocks tend to lead the way in a bull market, we add to our stock position with stocks that align more closely with the small stock market, while maintaining our emphasis on a low standard deviation.
Second phase, bull market>>> Larger cap stocks tend to lead the second phase of a bull market, so we shift our portfolio emphasis to larger cap stocks.
2. Where in the World
We take a global approach in constructing our portfolio because it:
Reduces standard deviation (risk)
Provides additional return opportunities
To determine geographic asset allocation, we look at two primary areas:
1. Domestic market cycle analysis (where are we in the cycle?)
2. Foreign market cycle analysis (where are other markets in the cycle?)
(When possible, we prefer to use ADRs for our foreign investment component).
3. Style
We select individual stocks based on style, depending on the current state of the market:
We are large (and larger) cap stock investors (the weighed average capitalization of our holdings is $71 billion).
To maintain consistency and our standard deviation parameters, we attempt to capture small market cycle performance with large cap holdings that align closely with the small stock market.
Each phase of the market cycle suggests a dynamic bias (see Axiom #1) toward a particular style--growth, value or GARP (growth at a reasonable price).
Over the course of the market cycles, our styles may change to fit the point in the cycle.
4. Sector Weightings
How do we determine our our sector allocation mix? We do a thorough analysis of the strengths and weaknesses of each sector to determine the role they should play in our portfolio:
We utilize sector business cycle analysis to determine optimum sector weightings in any give market cycle.
Deviation from the composite of the index at the sector level creates a basis for our spread
We also employee maximum coefficient correlation analysis at the sector level.
Our point of emphasis is that the nature of capitalism supports a reversion to a means on each sector level.
5. Individual Stock Selection
Once we've determined position in the cycle, optimum geographical allocation, style preference and sector weightings, the final step is to select individual stocks for the portfolio. We select our portfolio from a universe of 1,200 stocks from throughout the U.S. and around the world. We look at several factors in determining the right stocks for the portfolio:
Fundamental analysis. We look at sales and earnings, financials and cash flow and we prefer stocks in the top tier market position.
Style analysis. Depending on market cycle relevance, we decide whether to go with large or larger cap stocks--either growth or value. We use a natural and manual portfolio adjustment depending on a variety of factors.
Technical analysis. We use technical analysis to determine entry point in the market and we monitor alerts to stay atuned to events or changes in the economy that could affect the performance of certain stocks.
When we add a stock to the portfoliio, it is because it fits one of our key criteria:
> Market cycle location
> Geography
> Sector weighting
> Fundamentals
> Pairing relationships
We may sell a stock from the portfolio for one of several reasons:
> The stock has reached our price target
> The stock's fundamentals have deteriorated
> The sector is out of balance with the rest of the portfolio and needs to be reduced
http://www.oxfordpcg.com/gpage11.html
Stock Screener
http://www.diggsamachar.com/screener/screener1_by_pe.php
ECONOMIC REALITIES
by Gary Shilling
What's ahead for stocks and the economy in 2007? Setting aside unknown elements like major terrorist attacks or natural disasters, I believe six phenomena are shaping the investment climate this year. The world is awash in financial liquidity mainly due to rising house values, the negative U.S. corporate financing gap and the American balance of payments deficit. Inflation remains low despite higher energy prices. As a result, investment returns are low. Speculation remains rampant despite the 2000-2002 bear market. So, investors are accepting more risks to achieve expected returns. And then there's the insatiable U.S. consumer, who, thanks to the booming housing market, continues to spend freely.
In this climate, I foresee 12 investment themes, seven of which are likely to unfold in 2007 while four will probably work but maybe not until next year:
1. Housing prices will collapse. The housing bubble is deflating as sales of new and existing homes slide, prices begin to drop and housing starts decline. A bigger price plummet may start soon as many speculators give up on appreciation dreams and throw their properties on the market, triggering a downward spiral. Alternatively, interest rates on the Adjustable Rate Mortgages of many subprime borrowers will adjust up dramatically this year and force them into defaults and house sales.
Cheaper energy costs will not offset losses in house appreciation nor will non-residential construction growth. The Fed is unlikely to slash interest rates soon enough and big enough to save the day. Washington will be politically forced to bail out hapless homeowners, but as with the late 1980s-1990s S&L crisis, will probably arrive too late to prevent major damage.
The boom has largely been driven by investors' zeal for high returns, ample cheap mortgage money and lax lending standards. Unlike earlier U.S. housing booms and busts that were driven by local business cycles-such as the rise and fall of the oil patch along with oil prices in the 1970s and 1980s-this one is national and, indeed, global. And since houses are much more widely owned than stocks, the bubble's likely demise will shake the economy more than the earlier bear market in stocks.
2. The Fed will ease when house prices collapse. Meanwhile, the yield curve will remain inverted. Once the Fed embarks on an interest rate-raising campaign, it almost always keeps going until something big happens, and that something is normally a recession. Such a campaign clearly started in June 2004. This time, we're betting that the bursting of the housing bubble beats the Fed to the punch, but if not, the central bank will, as usual, do the recessionary deed. Once housing is in a shambles, either falling from its own weight as we expect or due to central bank action, the Fed, of course, will patriotically ease as the economy hits the skids.
The yield curve inversion, the only meaningful effect of the Fed's current campaign that we can find, rightfully worry many because they have preceded every recession since 1950 with only two fake signals. Today's rationalizations as to why long Treasury yields are artificially depressed appears no more valid than those in early 2000 as the yield curve neared inversion. The federal surplus at the time resulted in few new Treasury bond issues. That, the optimists believed, was depressing Treasury yields and causing a false recession-forecasting signal. But the 2001 recession followed the inversion, as usual.
3. U.S. stock prices will fall, perhaps below the 2002 lows, in the midst of a major recession. A major decline in housing prices and activity will almost surely precipitate a full-blown U.S. recession. That, in turn, will send corporate profits down after a spectacular advance over the last five years. Without this robust growth, stocks are vulnerable.
4. China will suffer a hard landing due to domestic cooling measures and U.S. recession. China is attempting to cool her white-hot economy, which grew at an estimated 10.5% rate last year, but is having difficulty. Fundamentally, China is experiencing a capital investment bubble, which is very misleading even in open market economies since is sends the wrong signals to participants. Since it takes capacity to build more capacity, what looks like strains and shortages are really symptoms of mammoth excess capacity problems that are only revealed when the boom subsides. That's what happened in the U.S. new tech boom in the late 1990s, and now in China in less sophisticated industries. That excess capacity will, of course, drive even bigger exports.
A major U.S. recession will shrink Chinese exports dramatically as U.S. consumers buy less of everything, especially imports. Indeed, as U.S. manufacturing shifts to China, so does its inherent volatility and inventory cycles-and the long shipping time between China and the U.S. enhances those cycles' violence. So between domestic economic cooling measures and a U.S. recession, a Chinese business slump is in the cards for 2007.
That, of course, doesn't mean an actual decline in real GDP in China. A cut from the current 10% growth rates to 4% or 5% would be severe since more than that growth rate is needed to employ the hordes that continue to stream from the hinterland to the coastal cities in search of better jobs and lives.
5. Weakness in U.S. and China will spread globally, dragging down economies and stocks universally. The U.S. economy dominates the world, not only because of its size but also because America is the only major importer. Most other countries are running trade surpluses, and the U.S. is the buyer of first and last resort for their excess products. The Chinese economy is closely linked to America's, as just discussed, and a U.S. recession combined with Chinese domestic economic restraint measures insure a global downturn. Other major economies in Japan and Europe simply can't pick up the slack.
6. Treasury bonds will rally. Yields rose a bit over the last year, but surprisingly little in view of continued economic growth and further Fed tightening. This tells me that global deflationary forces are robust.
Downward pressure on Treasury yields will result when the Fed reverses gears and eases once housing is clearly in retreat and a recession is evident. I expect the current 4.7% yield on the 30-year bond to decline in 2007 and ultimately reach my long-held target of 3% when deflation becomes irrefutably established.
7. The dollar will rally, but only after the recession becomes global. The greenback last year remained string against the yen but not against the euro. Of course, the global recession that will make the buck a safe haven is yet to unfold. Meanwhile, with the U.S. likely to be the first major economy to slump and the Fed the first major central bank to cut rates, the dollar may be weak early this year. Strength would come later in the year as U.S. consumers curtail spending, imports fall and, as a result, foreign economies become weaker than the U.S.
Later this year, the dollar should gain against the euro and yen and also against the commodity currencies-the Canadian, Australian and New Zealand dollars-which will suffer as global recession slashes commodity demand and prices. Emerging countries' currencies will also suffer in global recession.
8. Commodity prices will nosedive. Commodity prices have shown unusual strength in recent years. And the robustness has not just been in the energy sector, but spread broadly. Industrial metals prices have skyrocketed. So has livestock and grains of late. Even precious metals have reached prices not seen since inflation was raging in the late 1970s.
In the long run, we don't see any constraints that will prevent the normal reaction to high commodity prices-increased supply that will depress prices. In energy, the Hubbert's Peak devotees believe the world is running out of crude oil so prices will skyrocket in the years ahead. But we're convinced that human ingenuity will, as in the past, prevent a Malthusian outcome. The ongoing fall in U.S. home sales and likely collapse in prices will have very negative effects on the prices of building materials such as gypsum and copper. Lumber prices have already nosedived. And copper prices are already at a nine-month low.
9. Maybe global and chronic deflation will commence in 2007. With a global recession collapsing commodity prices and the robust deflationary forces already at work, major goods and services price indices here and abroad, such as the CPI, will fall this year if a global recession unfolds. But that doesn't guarantee chronic deflation. Inflation usually recedes in recessions, so it's the action in the following recovery in 2008 that will tell the tale. If price indices continue to fall then, true deflation will have arrived.
10. Maybe U.S. consumers will start a saving spree, replacing their 25-year borrowing and spending binge. The money extracted from, first, stocks, and more recently, from houses are behind the drop in the U.S. consumer saving rate. Just like the falling saving rate, the rising debt and debt service rates can't continue forever. With stocks likely to again fall significantly, a significant fall in house prices seems almost certain to precipitate the monumental shift from a quarter century borrowing-and-spending binge to a saving spree-unless another source of money can bridge the gap between consumer incomes and outlays. But no other sources such as inheritances or pension fund withdrawals are likely to fill that gap.
With no remaining alternatives, and with baby boomers needing to save for retirement, American consumers will be forced to embark on a long-run saving spree, although clear evidence of a chronic saving binge may be postponed until after the forthcoming recession.
11. Maybe deflationary expectations will become widespread and robust. Deflationary expectations spread and intensified in 2006 as consumers waited for lower prices for cars, airline tickets and telecom fees before buying. Christmas 2006 sales depended heavily on slashed electronic gear prices.
When consumers wait to buy, producers are left with excess capacity and inventories that force them to cut prices. Those cuts only fulfill consumer expectations and encourage them to wait for even lower prices. "Maybe" those expectations will leap this year because "maybe" widespread and chronic deflation will be recognized. If so, then buyers will wait for lower prices, and vigorously so in many more product areas.
12. Speculative areas beyond housing may suffer in 2007. Housing is not the only area of heavy risk-taking. It just appears to be the most vulnerable. A Great Disconnect between the real economy and the speculative financial world has existed since the late 1990s. It's been fed by mountains of liquidity sloshing around the world, expectations of and demands for oversized investment returns, and low volatility, all of which have encouraged risk taking. Anticipated stock volatility remains at rock bottom. Spreads between yields on junk bonds and Treasurys are tiny as ample financing and loose lending keep corporate defaults at record lows.
The huge gap between speculative financial markets and economic reality has persisted for a decade. It will probably be closed with many tears in the next recession, only adding to its depth.
TO BEAT THE MARKET, BE IN THE RIGHT SECTOR, PART 3
http://www.financialsense.com/fsu/editorials/wagner/2007/1024.html
Picking Hot Industries
With the major averages down for the year, the market has been nothing to shout about recently.
But investors holding Health Care Plan stocks may not have noticed. When I checked last week, stocks in that industry were up 27 percent on average, over the past six months. What뭩 more, I counted at 13 other industries showing at least 20 percent returns over the same period.
Those returns show that investors in the right industry can make money, even if the market is going nowhere. That뭩 why many money managers advise that your chances of making money depend more on selecting the right industry than it does on picking the right stock.
An industry is a group of companies in the same or related business such as grocery stores, disk drive makers or hospitals. Stocks in the same industry tend to move together for a couple of reasons. For starters, all companies in an industry are affected in similar ways by market conditions. Secondly, mutual fund and other institutional managers track performance to determine which industries are cooling down and which are coming into favor. Once they identify a trend, the industry 뱑otates into favor? as the big players accumulate shares in the industry뭩 best prospects.
Here뭩 a rundown on my favorite resources for finding hot and cold industries.
Prophet.Net
Prophet.net (www.prophet.net) is a useful resource for tracking recent industry performance. Click on Explore and then Industry Rankings to see a list of the top performing industries over the past six months. In addition to showing the current rank, Prophet also shows the change in rank over the timeframe displayed. For instance, the top ranked industry, Beverages-Winery/Distillers, had moved up 12 notches, from number 13, over the last six-months. By contrast, Medical Practitioners soared from a lowly 124 rank to number three in the same period, so it may have stronger momentum.
Usually an industry stays in favor for, at most, six months to a year. You have to spot a hot industry early, and hop on it before it loses steam.
Consequently, it뭩 best to pay most attention to shorter timeframes, such as one- or two-months. Looking at the past month, the Biotechnology, Retail Real Estate Investment Trusts (REITs), and Specialty Eateries industries were the best performers.
You can see the charts of the stocks making up each industry by clicking on the Charts icon. If you do, use the Chart Controls to change the default chart timeframe from the one-day default to one-year to get a better perspective on each stock뭩 long-term performance.
Equity Trader
Equity Trader, founded by technical analysis guru John Bollinger, is another resource for spotting strong industries. Bollinger employs technical and fundamental factors to spot economic sectors (e.g. technology), industries within those sectors (e.g. software), and stocks within those industries likely to move up in price in the coming weeks.
Equity trader displays a set of six signals; two red, two yellow, and two green, for each sector, industry and stock. They look like traffic signals and interpretation is intuitive. Two green lights forecast the strongest expected performance, and two red lights the weakest.
On Equity Trader뭩 homepage (www.equitytrader.com), click where it says, ?a target="_blank" href="http://www.equitytrader.com/support/default.php">Click here to bypass registration?and select Structure (top menu) to see the indicators for the 13 major economic sectors. Then click on a sector name to see the industries within that sector. Finally, click on an industry to see stocks making up that industry.
Briefing.com
Briefing.com (www.briefing.com) takes a different approach to industry analysis. Instead of using computers to crunch the numbers, Briefing.com employs real people to analyze the future prospects of each industry.
Briefing.com is mostly a pay site, but its industry analysis is in the free (Silver) section. Get to the sector analysis by selecting Silver Index from Briefing뭩 homepage and then Sector View.
Briefing starts by rating each of 10 major economic sectors: healthcare, telecom, industrials, financial, basic materials, technology, utilities, consumer staples, energy, and consumer discretionary. Each sector is rated as 뱋verweight,?뱈arket weight,?or 뱔nderweight.?The ratings reflect Briefing뭩 view of each sector뭩 outlook of the next three months.
Then, Briefing gives you a detailed sector analysis, including its view of the prospects for the major industries within each sector.
Stovall뭩 Sector Watch
Sam Stovall literally wrote the book on sector investing. His 밪tandard & Poor뭩 Guide to Sector Investing?was the first in-depth guide on the subject. You can read his weekly commentary, 밪tovall뭩 Sector Watch, on the Business Week site.
Each week he reviews an industry sector in depth, or gives his take on sectors coming into-, or going out-of-favor. He also frequently lists S&P뭩 top-rated stocks in sectors of interest. Stovall뭩 column is frequently featured on Business Week뭩 homepage (www.businessweek.com). If not, find it by selecting Investing and then Investing Columns.
Sticking with strong sectors is a good start. Usually the best performing stocks within each sector are your best bet. But you still have to research each stock before you buy.
http://www.winninginvesting.com/hot_industries.htm
Sector Rotation: The Essentials
If you’ve spent any time at all following financial markets, you’ve probably heard of sector rotation. Certain sectors of business profit more in certain stages of an economic cycle. This simple arrangement of stages provides a useful road map to traders of most stripes. Here, we’ll look at the economic research to back it up and where to find it; the basic sectors of the economy; and the telltale signs of each economic stage.
Sector rotation is an investment strategy involving the movement of money from one industry sector to another in an attempt to beat the market. It sprouted as a theory from NBER (National Bureau of Economic Research) data on economic cycles, dating back to 1854. It’s thanks to this cadre of government and academic economists that we know the start, end and duration of each business cycle.
You may have heard of the NBER before, they’re the ones that announce that a recession has officially ended - three years after the fact. The data may be slow to develop, and a bit dry, but a little digging can provide insight into investment decisions. Sam Stovall, chief investment strategist at Standard & Poor’s, has done some digging. Here is a recent quote from his indispensable BusinessWeek column, “Sector Watch”:
“The National Bureau of Economic Research sets dates for peaks and troughs in economic activities, based on its assessment of such factors as gross domestic product and employment growth. Since 1945, the U.S. economy has experienced 11 recessions and 10 expansions (it's now in our 11th expansion). Growth periods have lasted an average of nearly five years (59 months, to be exact), with the shortest being 12 months from July, 1980, to July, 1981, and the longest at 120 months from March, 1991, to March, 2001.”
Stovall goes on to suggest that by dividing the NBER cycles into sub-stages, historically successful periods for stocks in certain business sectors become apparent:
“Breaking expansions into early, middle and late phases of equal durations, and recessions into early and late periods of similar lengths, and then analyzing the frequency of the market outperforming the industries in the S&P 500 during these periods, a pattern of sector rotation is apparent….”
He has also written “Sector Investing” (McGraw-Hill, 1996) and “Standard & Poor’s Guide to Sector Investing” (McGraw-Hill, 1995). The guide provides a general idea of how prosperity has historically moved through the economy. It’s important to remember that past performance in the stock market does not always mean future success, and a particular sector may, or may not, be in favor at any time, due to outlying factors. That said; let’s look at what has worked for stocks in the past. This model is partially borrowed from stockcharts.com.
Market Cycle in Four Stages
Markets move up and down just like the economy. For the purpose of this discussion, we will divide that cycle into four stages:
Market bottom - This is represented by diving prices, culminating in a long-term low.
Bull market - This begins as the market rallies from the market bottom.
Market top - Just as it sounds, this stage hits the top as the bull market starts to flatten out.
Bear market - Here we go down again. This is the precursor to the next market bottom.
Most of the time, financial markets attempt to predict the state of the economy, anywhere from three to six months into the future. That means the market cycle is usually well ahead of the economic cycle.This is crucial to remember because as the economy is in the pits of a recession, the market begins to look ahead to a recovery.
Economic Cycle in Four Stages
Here is a list, in the same order as above, of four basic stages of the economic cycle, and some associated telltale signs - again, keep in mind that these usually trail the market cycle by a few months.
Full Recession - Not a good time for businesses or the unemployed. GDP has been retracting, quarter-over-quarter, interest rates are falling, consumer expectations have bottomed and the yield curve is normal. Sectors that have historically profited most in this stage include:
-Cyclicals and transports (near the beginning).
-Technology.
-Industrials (near the end).
Early Recovery -Finally, things are starting to pick up. Consumer expectations are rising, industrial production is growing, interest rates have bottomed and the yield curve is beginning to get steeper. Historically successful sectors at this stage include:
-Industrials (near the beginning).
-Basic materials industry.
-Energy (near the end).
Late Recovery -In this stage, interest rates can be rising rapidly, with a flattening yield curve.Consumer expectations are beginning to decline, and industrial production is flat. Here are the historically profitable sectors in this stage:
-Energy (near the beginning).
-Staples.
-Services (near the end).
Early Recession -This is where things start to go bad for the overall economy. Consumer expectations are at their worst; industrial production is falling; interest rates are at their highest; and the yield curve is flat or even inverted.Historically, the following sectors have found favor during these rough times:
-Services (near the beginning).
-Utilities.
-Cyclicals and transports (near the end).
Summary
With this general outline in mind, traders can try to anticipate which companies will be successful in the coming stages of an economic cycle. Equally important can be the signs the market is exhibiting on future economic conditions. Watching for these telltale signs can give great insight into which stage traders believe the economy is in. For those looking to dig deeper into sector rotation, below are three great resources:
Stockchart.com’s interactive SPDR Sector Rotation Chart, is found at:
http://www.stockcharts.com/charts/performance/SPSectors.html
The NBER publishes most of its data online, and is found at:
http://www.nber.org/
Sam Stovall’s weekly column "Sector Watch" on BusinessWeek Online, is found at:
http://www.businessweek.com/investor/list/stovall_toc01.htm
http://www.investopedia.com/articles/trading/05/020305.asp
FORECAST 2007
Our conclusions on market direction in 2007 are clear. While the broad market could survive until March, we believe that will be either the high or a secondary high. Following that we will begin a five-year bear market with a big portion of the collapse occurring in 2007-08, very similar to the collapse of 1937-38. Gold and precious metals should resume their bull runs in 2007, with an outside chance of gold running to $1,000 an ounce. Other commodities should also rise. Oil should resume its bull market once again once we break out over $70. The US dollar should go into decline, but we expect it to be orderly, with periodic sharp corrections.
http://www.gold-eagle.com/editorials_05/chapmand122206.html
DJIA PARALLELS: THE 1930’s & THE 2000’s
The close similarities between the timing of the New York stock market in the 1930’s and 2000’s were first commented upon by David Chapman. There were remarkable parallels of about 70 years in the major shifts in investor sentiment between the two eras. The markets peaked after the two of the greatest stock market manias in US history, then crashed in October 1929 & April 2000. The market finally bottomed two years later in July 1932/October 2002, which was followed by a secondary low in March 1933/March 2003. Both markets recovered to record a ‘flat’ 1934/2004, in which the market tended to move sideways. The share markets experienced boom conditions in 1935-36/2005-06 with new highs being recorded. Corrections occurred in April 1936/May 2006, but the markets quickly resumed their upward momentum to set new highs. The 1930’s experienced a major peak in March 1937 and entered a protracted bear market, bottoming in March 1938. It remains to be seen whether this will be repeated with a peaking of the market in coming months followed by a serious market downturn.
Will there be a record peak in 2007? Will the panic of October 18, 1937 be repeated in October 2007? Will a low happen in March 2008, following trends as in March 1938. As always only time will tell.
http://www.davidmcminn.com/pages/19302000.pdf
Deflation (economics)
From Wikipedia, the free encyclopedia
Deflation is a decrease in the general price level, over a period of time. Deflation is the opposite of inflation. For economists especially, the term has been and is sometimes used to refer to a decrease in the size of the money supply (as a proximate cause of the decrease in the general price level). However, this latter is now more often referred to as a 'contraction' of the money supply. During deflation the demand for liquidity goes up, in preference to goods or interest. During deflation the purchasing power of money increases.
Contents [hide]
1 Definition
2 Effects of deflation
3 Causes of deflation
3.1 Alternative causes and effects
3.1.1 The neoclassical school of economics
3.1.2 The Austrian school of economics
3.1.3 Keynesian economics
4 Impacts of deflation
5 Counteracting deflation
6 Examples of deflation
6.1 United Kingdom
6.2 Deflation in the United States
6.2.1 Major deflations
6.2.2 Minor deflations
6.3 Deflation in Hong Kong
6.4 Deflation in Japan
7 References
8 See also
9 External links
[edit] Definition
The 'general price level' comprises the price of wages, consumption goods and services. As with inflation, there are economists who regard deflation as a purely monetary effect, when the monetary authority and the banks constrict the money supply, and there are those who believe that price deflation follows dramatic falls in business confidence, which reduces the velocity of money, i.e. the speed with which money is circulating. However, it is at least theoretically possible to have a falling money supply but stable or rising prices, if the rate of increase of the velocity of money is substantially greater than the rate at which the money supply is falling. Presumably, this is what happens in the early stages of a hyper-inflation as the monetary authorities lose control over the money supply (but are initially, at least, trying to put on the brakes by the usual remedy of restricting money supply).
In the recent years, economists have also started to use the term inflation and deflation in relation to assets (i.e. as a short-hand for price inflation or price deflation), such as stocks and housing (production goods). Indeed, policies designed to fight inflation in goods, services and wages, have seemed to spur stock and housing price inflation, or asset bubbles. During deflation, while consumers can buy more with the same amount of money, they also have less access to money (e.g., as wages, debt, or the return realized on sales of their products). Consumers and producers who are in debt, such as mortgagors, suffer because as their (money) income drops, their (money) payments remain constant. Central bankers worry about deflation, because many of the tools of monetary policy become ineffective as the real cost of money (the interest rate minus the inflation rate) begins to turn higher again once the inflation rate drops below zero (nominal interest rates cannot fall below zero; that would be equivalent to the banks paying customers to borrow money!). Deflation may set off a deflationary spiral, where businesses slow or stop investing, because the investment risk is perceived as higher than just letting the money appreciate due to deflation. (The deflationary spiral is the opposite of the hyper-inflationary spiral.)
Deflation is generally regarded as a negative in modern currency environments, because a deflationary spiral may cause large falls in GDP and purchasing power, and may take a very long time to correct.
However, a deflationary bias is the norm under specie or specie backed money economies, as population and production tend to increase faster than the stock of specie. (Conversely, an inflationary bias is the norm under credit money economies.) There are also episodes where there may be deflation in only a particular kind or type of goods, such as commodities during the Great commodities depression of 1982-1998.
Deflation should not be confused with disinflation which is a slowing in the rate of inflation, that is, where the general level of prices are still increasing, but slower than before.
In monetarists theory, deflation is defined in terms of a rise in the demand for money, based on the quantity of money available. The Quantity Theory of Money is founded on the Fisher equation (also called the equation of exchange),
MV = PT, [1]
where M is the money supply, V is the velocity of money, P is the average price level and T is the total number of transactions.
In this model of deflation, it is a contraction of the money supply which reduces the velocity of mone, and thus the number of transactions falls and therefore the general price level falls in response.
[edit] Effects of deflation
In mainstream economic theory deflation is a general reduction in the level of prices, or of the prices of an entire kind of asset or commodity. Deflation should not be confused with temporarily falling prices; instead, it is a sustained fall in general prices. In the IS-LM model this is caused by a shift in the supply and demand curve for goods and interest, particularly a fall in the aggregate level of demand. That is, there is a fall in how much the whole economy is willing to buy, and the going price for goods. Since this idles capacity, investment also falls, leading to further reductions in aggregate demand. This is the deflationary spiral. The solution to falling aggregate demand is stimulus either from the central bank, by expanding the money supply, or by the fiscal authority to increase demand, and borrow at interest rates which are below those available to private entities.
In more recent economic thinking, deflation is related to risk, where the risk adjusted return of assets drops to negative, investors and buyers will hoard currency rather than invest it, even in the most solid of securities. This can produce the theoretical condition, much debated as to its practical possibility, of a liquidity trap. A central bank cannot, normally, charge negative interest for money, and even charging zero interest often produces less stimulative effect than slightly higher rates of interest. In a closed economy, this is because charging zero interest also means having zero return on government securities, or even negative return on short maturities. In an open economy it creates a carry trade and devalues the currency producing higher prices for imports without necessarily stimulating exports to a like degree. The experience of Japan during its 1988-2004 depression is thought to illustrate both of these problems.
In monetarist theory deflation is related to a sustained reduction in the velocity of money or number of transacitons. This is attributed to a dramatic contraction of the money supply, perhaps in response to a falling exchange rate, or to adhere to a gold standard or other external monetary base requirement.
Deflation is generally regarded negatively, as it is a tax on borrowers and on holders of illiquid assets, which accrues to the benefit of savers and of holders of liquid assets and currency. In this sense it is the opposite of inflation (or in the extreme, hyperinflation), which is a tax on currency holders and lenders (savers) in favor of borrowers and short term consumption. In modern economies, deflation is caused by a collapse in demand (usually brought on by high interest rates), and is associated with recession and (more rarely) long term economic depressions.
In modern economies, as loan terms have grown in length and financing is integral to building and general business, the penalties associated with deflation have grown larger. Since deflation discourages investment and spending, because there is no reason to risk on future profits when the expectation of profits may be negative and the expectation of future prices is lower, it generally leads to, or is associated with a collapse in aggregate demand. Without the "hidden risk of inflation", it may become more prudent just to hold onto money, and not to spend or invest it.
Deflation is, however, the natural condition of hard currency economies when the rate of increase in the supply of money is not maintained at a rate commensurate to positive population (and general economic) growth. When this happens, the available amount of hard currency per person falls, in effect making money scarcer; and consequently, the purchasing power of each unit of currency increases. The late 19th century provides an example of sustained deflation combined with economic development under these conditions.
Deflation also occurs when improvements in production efficiency lowers the overall price of goods. Improvements in production efficiency generally happen because economic producers of goods and services are motivated by a promise of increased profit margins, resulting from the production improvements that they make. But despite their profit motive, competition in the marketplace often prompts those producers to apply at least some portion of these cost savings into reducing the asking price for their goods. When this happens, consumers pay less for those goods; and consequently deflation has occurred, since purchasing power has increased.
While an increase in the purchasing power of one's money sounds beneficial, it can actually cause hardship when the majority of one's net worth is held in illiquid assets such as homes, land, and other forms of private property. It also amplifies the sting of debt, since-- after some period of significant deflation-- the payments one is making in the service of a debt represent a larger amount of purchasing power than they did when the debt was first incurred. Consequently, deflation can be thought of as a phantom amplification of a loan's interest rate. (But, conversely, inflation may be thought of as a regressive, across the board general tax.)
This lesson about protracted deflationary cycles and their attendant hardships has been felt several times in modern history. During the 19th century, the Industrial Revolution brought about a huge increase in production efficiency, that happened to coincide with a relatively flat money-supply. These two deflationary catalysts led, simultaneously, not only to tremendous capital development, but also to tremendous deprivation for millions of people who were ill-equipped to deal with the dark side of deflation. Business owners-- on average, better educated in economic theory than their unfortunate cohorts (or just better able to withstand the economic stresses)-- recognized the deflation cycle as it unfolded, and positioned themselves to leverage its beneficial aspects.
Hard money advocates argue that if there were no "rigidities" in an economy, then deflation should be a welcome effect, as the lowering of prices would allow more of the economy's effort to be moved to other areas of activity, thus increasing the total output of the economy. However, while there have been periods of 'beneficial' deflation (especially in industry segments, such as computers), more often it has led to the more severe form with negative impact to large segments of the populace and economy.
Since deflationary periods favor those who hold currency over those who do not, they are often matched with periods of rising populist sentiment, as in the late 19th century, when populists in the United States wanted to move off hard money standards and back to a money standard based on the more inflationary (because more abundantly available) metal silver.
Most economists agree that the effects of modest long-term inflation are less damaging than deflation (which, even at best, is very hard to control). Deflation raises real wages which are both difficult and costly for management to lower. This frequently leads to layoffs and makes employers reluctant to hire new workers, increasing unemployment. However, in the last 5 years or so, real wages for the average worker has remained fixed or actually decreased, with little effect on unemployment.
[edit] Causes of deflation
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From a monetary perspective deflation is caused by a reduction in the velocity of money and/or the amount of money supply per person. In a hard money economy (with limited specie sources), deflation is the more natural state of the economy - people multiply and economies grow faster than hard money is created. Capitalism (when sufficient competition exists) is also an engine of deflation: as capital stocks improve, and there are more competitors, the supply of goods goes up, which means prices must fall until they balance demand. Capitalism also drives efficiency and innovation which has a downward pull on prices.
A distinction then, should be drawn between deflation in hard currency economies, such as those on the gold standard and economies which run on credit. In modern credit based economies, a deflationary spiral may be caused by the (central bank) initiating higher interest rates (e.g., to 'control' inflation), thereby possibly popping an asset bubble or the collapse of a command economy which has been run at a higher level of production than it could actually support. In a credit based economy, a fall in money supply leads to markedly less lending, with a further sharp fall in money supply (since debt is money), and a consequent sharp fall-off in demand for goods. Demand falls, and with the falling of demand, there is a fall in prices as a supply glut develops. This becomes a deflationary spiral when prices fall below the costs of financing production. Businesses, unable to make enough profit no matter how low they set prices, are then liquidated. Banks get assets which have fallen dramatically in value since the (mortgage) loan was made, and if they sell those assets, they further glut supply, which only exacerbates the situation. To slow or halt the deflationary spiral, banks will often withhold collecting on non-performing loans (as in Japan, most recently). This is often no more than a stop-gap measure, because they must then restrict credit, since they do not have money to lend, which further reduces demand, and so on.
In unstable currency economies, barter and other alternate currency arrangements are common, and therefore when the 'official' money becomes scarce (or unusually unreliable), commerce can still continue (e.g., most recently in Russia and Argentina). Since in such economies the central government is often unable, even if it were willing, to adequately control the internal economy, there is no pressing need for individuals to acquire official currency except to pay for imported goods. In effect, barter acts as protective tariff in such economies, encouraging local consumption of local production. It also acts as a spur to mining and exploration, since one easy way to make money in such an economy is to dig it out of the ground.
When the central bank has lowered nominal interest rates all the way to zero, it can no longer further stimulate demand by lowering interest rates - "deflation is when the central bank cannot give money away". This is the famous liquidity trap. When deflation takes hold, it requires "special arrangements" to "lend" money at a zero nominal rate of interest (which could still be a very high real rate of interest, due to the negative inflation rate) in order to (artificially) increase the money supply.
This cycle has been traced out on the broad scale during the Great Depression. Specifically when the collapse of the Viennese Credit-Anstalt bank led to the subsequent collapse of the entire global financial system.[2] International trade contracted sharply, severely reducing demand for goods, thereby idling a great deal of capacity, and setting off a string of bank failures. A similar situation in Japan, beginning with the stock and real estate market collapse in the early 1990s, was arrested by the Japanese government preventing the collapse of most banks and taking over direct control of several in the worst condition. These occurrences are the matter of intense debate. There are economists who argue that the post-2000 recession had a period where the US was at risk of severe deflation, and that therefore the Federal Reserve central bank was right in holding interest rates at an "accommodative" stance from 2001 on.
[edit] Alternative causes and effects
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Please see the discussion on the talk page.
[edit] The neoclassical school of economics
The neutrality and factual accuracy of this section are disputed.
Please see the relevant discussion on the talk page.
In the ideal perfect market world, no deflation can happen because monetary authorities control money creation and prices are allowed to fluctuate.[citation needed]
[edit] The Austrian school of economics
The Austrian school defines deflation and inflation solely in relation to the money supply. Deflation is therefore defined to be a contraction of the money supply. Under this definition, the Austrian school sees deflation as a cause of a general fall in prices, not a general fall in prices itself. They attribute the other main cause of a general fall in prices to be an increase of productivity relative to the money supply.
For instance if there is a fixed money supply of 400 kg of gold in an economy that produces 200 widgets, then one widget will cost 2 kg of gold. However, next year if output is 400 widgets with the same money supply of 400 kg of gold the price of each widget will drop to 1 kg of gold. In this case the general fall in price was caused by increased productivity.
The opposite of the above scenario has the same effect on prices, but a different cause. If there is a fixed money supply of 400 kg of gold in an economy that produces 200 widgets, then once again each widget will cost 2 kg of gold. However, if next year the money supply is cut in half to 200 kg of gold with the same output of 200 widgets, the price of each widget will now only be 1 kg of gold. When capital profits are dropping rapidly, there is no reason to invest gold, which breaks the savings identity, and thus the automatic tendency of the economy to move back to equilibrium.
Austrians view increased productivity to be a good cause of a general fall in prices, while credit/money supply contraction as being a bad cause of a general fall in prices. Austrians contend that in the first scenario wages will remain the same because of the unchanged money supply but that a general increase in wealth will be reflected in lower prices. Austrians also take the position that there are no negative distortions in the economy due to a general fall in prices in the first scenario. However, in the second scenario where a general fall in prices is caused by deflation, Austrians contend that this confers no benefit to society. For in this scenario wages will simply be cut in half and lower prices will not reflect a general increase in wealth. In addition, Austrians believe that deflation causes negative distortions in the economy with debtors and creditors as well as other areas.
[edit] Keynesian economics
Keynesians insist on the distinction between consuming goods and producing goods (assets), and between exogeneous (government based) and endogeneous (credit based) money supply. For a given money supply, if wages rise faster than productivity, profits will fall, and with them the price of producing goods (deflation), while consuming goods will rise (inflation). This happens in times when labor supply is tight and bargaining power is strong (prior to mid 1970s). When wages rise slower than productivity, profits rise as do the prices of assets relative to consuming goods. This can occur when labor supply is great and bargaining power is weak (mid 1970s to present).
Inflation and deflation occur when the economic policies allow wages to increase or decrease at differing rates than productivity. Wages rising faster than productivity lead to inflation. Wages failing to increase at the rate of productivity for protracted periods will cause deflation as it will lead to reduced consumption or debt accumulation as producers lend to wage earning consumers part of their profits, in order to sell their products. When debt payments exceed the borrower's ability to pay, debt accumulation and endogeneous money creation stops, demand and goods' prices fall (deflation), manufacturers reduce production, employment falls, and fewer borrowers are thus able to pay their debts, and the cycle exacerbates.
Keynesians advocate corrective action. While they realise the market often gets out of control and turns into booms, most believe it is hard to recognise booms from growth, and therefore the government should concentrate on fighting busts. In case of debt deflation, keynesians advocate "pump priming" or government creation of credit/money that has a cost interest rate below inflation or market rates. As witnessed since 1990 in Japan, and in the 1930's in the USA, this policy is not very effective unless government creates employment via public works projects or military manufacturing.
Austrians and keynesians agree on the idea that there are counterproductive cycles of booms and bust but while the former believe the government tends to be a cause of those cycles, the latter believe it is a means to resolve those cycles.
[edit] Impacts of deflation
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Please see the discussion on the talk page.
Nominal prices are always somewhat sticky due to institutional factors, therefore a monetary deflation can lead to widespread bankruptcy. Prices fall over a long period of time, as institutional barriers need be broken (ie contract commitments) before the downward price spiral can be fully transmitted to other sectors.
[edit] Counteracting deflation
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Please see the discussion on the talk page.
Until the 1930s, it was commonly believed by economists that deflation would cure itself. As prices decreased, demand would naturally increase and the economic system would correct itself without outside intervention.
This view was challenged in the 1930s during the Great Depression. Keynesian economists argued that the economic system was not self correcting with respect to deflation and that governments and central banks had to take active measures to boost demand through tax cuts or increases in government spending. Reserve requirements from the central bank were high and the central bank could then have effectively increased money supply by simply reducing the reserve requirements and through "open" market operations (e.g., buying treasury bonds for cash) to offset the reduction of money supply in the private sectors due to the collapse of credit (credit is a form of money).
With the rise of monetarist ideas, the focus in fighting deflation was put on expanding demand by lowering interest rates (i.e., reducing the "cost" of money). This view has received a setback in light of the failure of accommodative policies in both Japan and the US to spur demand after stock market shocks in the early 1990s and in 2000 - 2002, respectively. Economists now worry about the (inflationary) impact of monetary policies on asset prices. Sustained low real rates can be the direct cause of higher asset prices and excessive debt accumulation. Therefore lowering rates may prove only a temporarily palliative, leading to the aggravation of a(n eventual) future debt deflation crisis.
[edit] Examples of deflation
[edit] United Kingdom
During World War I the British pound sterling was removed from the gold standard. The motivation for this policy change was to finance the First World War; one of the results was inflation, and a rise in the gold price, along with the corresponding drop in international exchange rates for the pound. When the pound was returned to the gold standard after the war it was done on the basis of the pre-war gold price, which, since it was higher than equivalent price in gold, required prices to fall to realign with the higher target value of the pound.
[edit] Deflation in the United States
[edit] Major deflations
There have been two significant periods of deflation in the United States. The first was after the Civil War, sometimes called The Great Deflation.
"The Great Sag of 1873-96 could be near the top of the list. Its scope was global. It featured cost-cutting and productivity-enhancing technologies. It flummoxed the experts with its persistence, and it resisted attempts by politicians to understand it, let alone reverse it. It delivered a generation’s worth of rising bond prices, as well as the usual losses to unwary creditors via defaults and early calls. Between 1875 and 1896, according to Milton Friedman, prices fell in the United States by 1.7% a year, and in Britain by 0.8% a year.[3]
The second was between 1930-1933 when the rate of deflation was approximately 10 percent/year. The first was possibly spurred by the deliberate policy in retiring paper money printed during the Civil War; the second was part of America's slide into the Great Depression, where banks failed and unemployment peaked at 25%. Both were world-wide phenomena.
The deflation of the Great Depression did not occur because of any sudden rise or surplus in output. It occurred because there was an enormous contraction of credit (money), bankruptcies created an environment where cash was in frantic demand, and the Federal Reserve did not adequately accommodate that demand, so even sound banks toppled one-by-one (because they were unable to meet the sudden demand for cash— see Fractional-reserve banking). From the standpoint of the Fisher equation (see above), there was a concommitant drop both in money supply (credit) and the velocity of money which was so profound that deflation took hold despite the increases in money supply spurred by the Federal Reserve.
[edit] Minor deflations
Throughout the history of the United States, inflation has approached zero and dipped below for short periods of time (negative inflation is deflation). This was quite common in the 19th century and in the 20th century before World War II.
[edit] Deflation in Hong Kong
Following the Asian financial crisis in late 1997, Hong Kong experienced a long period of deflation which did not end until the 4th quarter of 2004 [4]. Many East Asian currencies devalued following the crisis. The Hong Kong Dollar, however, was pegged to the US Dollar. The gap was filled by deflation of consumer prices. The situation is worsened with cheap commodity goods from Mainland China, and weak consumer confidence. According to Guinness World Records, Hong Kong was the economy with lowest inflation in 2003 [5].
[edit] Deflation in Japan
Deflation started in the early 1990s. The Bank of Japan and the government have tried to eliminate it by reducing interest rates (part of their 'quantitative easing' policy), but despite having them near zero for a long period of time, they have not succeeded. In July 2006, the zero-rate policy was ended.
Systemic reasons for deflation in Japan can be said to include:
Fallen asset prices. There was a rather large price bubble in both equities and real estate in Japan in the 1980s (peaking in late 1989). When assets decrease in value, the money supply shrinks, which is deflationary.
Insolvent companies: Banks lent to companies and individuals that invested in real estate. When real estate values dropped, these loans could not be paid. The banks could try to collect on the collateral (land), but this wouldn't pay off the loan. Banks have delayed that decision, hoping asset prices would improve. These delays were allowed by national banking regulators. Some banks make even more loans to these companies that are used to service the debt they already have. This continuing process is known as maintaining an "unrealized loss", and until the assets are completely revalued and/or sold off (and the loss realized), it will continue to be a deflationary force in the economy. Improving bankruptcy law, land transfer law, and tax law have been suggested (by The Economist) as methods to speed this process and thus end the deflation.
Insolvent banks: Banks with a larger percentage of their loans which are "non-performing", that is to say, they are not receiving payments on them, but have not yet written them off, cannot lend more money; they must increase their cash reserves to cover the bad loans.
Fear of insolvent banks: Japanese people are afraid that banks will collapse so they prefer to buy gold or (United States or Japanese) Treasury bonds instead of saving their money in a bank account. This likewise means the money is not available for lending and therefore economic growth. This decreases the supply of money available for lending and economic growth. This means that the savings rate depresses consumption, but does not appear in the economy in an efficient form to spur new investment. People also save by owning real estate, further slowing growth, since it inflates land prices.
Imported deflation: Japan imports Chinese and other countries' inexpensive consumable goods, raw materials (due to lower wages and fast growth in those countries). Thus, prices of imported products are decreasing. Domestic producers must match these prices in order to remain competitive. This decreases prices for many things in the economy, and thus is deflationary.
http://en.wikipedia.org/wiki/Deflation_(economics)
12 investment themes for 2007
Eight of them are likely to unfold this year while four will probably work but maybe not until later:
1. The housing bubble will burst. If so,
2. The Fed will ease; meanwhile, the yield curve will remain inverted
3. U.S. stock prices will fall, perhaps below the 2002 lows, in the midst of a major recession
4. China will suffer a hard landing due to domestic cooling measures and U.S. recession
5. Weakness in U.S. and China will spread globally, dragging down economies and stocks universally
6. Treasury bonds will rally
7. The dollar will rally, but not before the recession is global
8. Commodity prices will nosedive
9. Maybe global and chronic deflation will commence in 2007.
10. Maybe U.S. consumers will start a long-run saving spree, replacing their 25-year borrowing and spending binge
11. Maybe deflationary expectations will become widespread and robust
12. Speculative areas beyond housing may suffer in 2007
The Coming Stock Market Crash of 2007
http://chartingstocks.net/2007/01/01/the-coming-stock-market-crash-of-2007/
Four Reasons for Potential 2007 Stock Market Crash2006
was profitable for stock investing, but that may abruptly end says Commodity Futures Broker Tom Reavis.
According to expert futures trading broker Tom Reavis, 2006 was an exciting and profitable year for stock investing but there is good reason to believe that may soon come to an end in 2007. Reavis, president and CEO of Worldwide Futures Systems, a commodity futures trading firm that develops alternative investment strategies for clients, cites four key indicators that foretell a potential disaster for the stock market in 2007.
1. The S&P 500 has a very high correlation to the Housing Market Index (HMI) released by the National Association of Homebuilders. There is a lag time of 12-15 months. When the HMI index goes up, the next year the S&P Stock Index typically rallies. When the HMI falls, the next year the S&P 500 typically declines. The Building Index last peaked in October 2005 and reached its lowest level in 15 years in September 2006. If history repeats itself, the Stock Indexes are about ready to plunge.
2. Money managers generally spread their investments between stocks and bonds. One way of judging if stocks are too pricey is to compare them against the performance of bonds. The argument being that if the difference becomes too great investors will sell stocks and buy bonds. The surge in stocks of 2006 has not been matched by the increase in bond yields. In fact, stocks are rarely as overvalued to bonds as they are right now. The current gap has only been seen one percent of the time. This signal has indicated the two largest market corrections of the last decade.
3. Reavis said he was taught to "follow the guys driving the big cars." In other words, what are the big boys doing? Currently short positions held by large commercial traders are at a level so high that it has only been reached twice before. The first was in 2001 before the S&P 500 plunged 38 percent and again in late 2004 before prices fell in 2005.
4. Mutual fund managers are very short on cash. Funds are allowed to keep cash reserves instead of stocks and bonds. The percentage of cash that they have on hand is often a good indicator of what might happen in the stock markets. With present interest rate levels smart managers should be maintaining at least 7 percent cash position. Current cash position in stock mutual funds is running just over 4 percent. This means that there is very little cash left to drive prices higher, and if the market does head south, mutual fund managers would have to sell stock to cover redemptions. This would drive stocks even lower. The last two times that cash hit this low level the stock market plunged, first, in 1981 before a two year market slump and again in 2000 before the last big bear market.
To protect against a potentially substantial drop in the stock market, diversify with alternative investments with very low correlation to standard stock and bond portfolios
Analysis of October 1987 Crash
http://archive.gao.gov/d30t5/134907.pdf
The Impact Of An Inverted Yield Curve
http://finance.yahoo.com/bonds
The term yield curve refers to the relationship between the short- and long-term interest rates of fixed-income securities issued by the U.S. Treasury. An inverted yield curve occurs when short-term interest rates exceed long-term rates. From an economic perspective, an inverted yield curve is a noteworthy event. Here we explain this rare phenomenon, discuss its impact on consumers and investors, and tell you how to adjust your portfolio to account for it.
Typically, short-term interest rates are lower than long-term rates, so the yield curve slopes upwards, reflecting higher yields for longer-term investments. This is referred to as a normal yield curve. When the spread between short-term and long-term interest rates narrows, the yield curve begins to flatten. A flat yield curve is often seen during the transition from a normal yield curve to an inverted one.
Figure 1 - A normal yield curve
What Does an Inverted Yield Curve Suggest?
Historically, an inverted yield curve has been viewed as an indicator of a pending economic recession. When short-term interest rates exceed long-term rates, market sentiment suggests that the long-term outlook is poor and that the yields offered by long-term fixed income will continue to fall. More recently, this viewpoint has been called into question as foreign purchases of securities issued by the U.S. Treasury have created a high and sustained level of demand for products backed by U.S. government debt. When investors are aggressively seeking debt instruments, the debtor can offer lower interest rates. When this occurs, many argue that it is the laws of supply and demand, rather than impending economic doom and gloom, that enable lenders to attract buyers without having to pay higher interest rates. (To learn more, see Forces Behind Interest Rates and Trying To Predict Interest Rates.)
Figure 2 - An inverted yield curve: note the inverse relationship between yield and maturity
Impact on Consumers
In addition to its impact on investors, an inverted yield curve also has an impact on consumers. For example, homebuyers financing their properties with adjustable-rate mortgages (ARMs) have interest-rate schedules that are periodically updated based on short-term interest rates. When short-term rates are higher than long-term rates, payments on ARMs tend to rise. When this occurs, fixed-rate loans may be more attractive than adjustable-rate loans.
Lines of credit are affected in a similar manner. In both cases, consumers must dedicate a larger portion of their incomes toward servicing existing debt. This reduces expendable income and has a negative effect on the economy as a whole. (See ARMed And Dangerous, Mortgages: Fixed-Rate Versus Adjustable-Rate and APR vs APY: How The Distinction Affects You.)
Impact on Fixed-Income Investors
A yield curve inversion has the greatest impact on fixed-income investors. In normal circumstances, long-term investments have higher yields; because investors are risking their money for longer periods of time, they are rewarded with higher payouts. An inverted curve eliminates the risk premium for long-term investments, allowing investors to get better returns with short-term investments. When the spread between U.S. Treasuries (a risk-free investment) and higher-risk corporate alternatives is at historical lows, it is often an easy decision to invest in lower-risk vehicles. In such cases, purchasing a Treasury-backed security provides a yield similar to the yield on junk bonds, corporate bonds, real estate investment trusts and other debt instruments, but without the risk inherent in these vehicles. Money market funds and certificates of deposit (CDs) may also be attractive - particularly when a one-year CD is paying yields comparable to those on a 10-year Treasury bond. (For further reading, see Getting To Know The Money Market and Why do interest rates tend to have an inverse relationship with bond prices?)
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Impact on Equity Investors
When the yield curve becomes inverted, profit margins fall for companies that borrow cash at short-term rates and lend at long-term rates, such as community banks. Likewise, hedge funds are often forced to take on increased risk in order to achieve their desired level of returns. In fact, a bad bet on Russian interest rates is largely credited for the demise of Long-Term Capital Management, a well-known hedge fund run by bond trader John Meriwether. (For further reading, see Corporate Bonds: An Introduction To Credit Risk.)
Despite their consequences for some parties, yield curve inversions tend to have less impact on consumer staples and healthcare firms, which are not interest-rate dependent. This relationship becomes clear when an inverted yield curve precedes a recession. When this occurs, investors tend to turn to defensive stocks, such as those in the food, oil and tobacco industries, which are often less affected by downturns in the economy. (For further reading, see What are defensive stocks? and Recession: What Does It Mean To Investors?)
Conclusion
While experts question whether or not an inverted yield curve remains a strong indicator of pending economic recession, keep in mind that history is littered with portfolios that were devastated when investors blindly followed predictions about how "it's different this time". Most recently, short-sighted equity investors spouting this mantra participated in the "tech wreck", snapping up shares in tech companies at inflated prices even though these firms had no hope of ever making a profit.
If you want to be a smart investor, ignore the noise. Instead of spending time and effort trying to figure out what the future will bring, construct your portfolio based on long-term thinking and long-term convictions - not short-term market movements. For your short-term income needs, do the obvious: choose the investment with the highest yield, but keep in mind that inversions are an anomaly and they don't last forever. When the inversion ends, adjust your portfolio accordingly.
For further reading, see The Impact of Interest Rates On REITs.
http://www.investopedia.com/articles/basics/06/invertedyieldcurve.asp
4 Year Presidential Cycle (FY 2007)
Profiting in the expected stock market storm
Stocks could take a big hit this summer but that may set the stage for a powerful rally. What should your next move be?
By Alexandra Twin, CNNMoney.com senior writer
March 28, 2006: 12:51 PM EST
NEW YORK (CNNMoney.com) - If history is any guide, the stock market's in for a rough ride the next six months -- but then a powerful rally could very well follow.
So what's an investor to do? Bail out now? Stay put and wait for the tough times to pass?
Keeping in mind that every investor's portfolio is different, and that generalizing can be hazardous, stepping back a bit over the next few months probably couldn't hurt, said Harry Clark, founder and CEO of Clark Capital Management Group.
"People may want to lighten up on some stocks that have reached their targets and raise a little more cash, maybe put 20 percent in cash," Clark said. "Then when the market bottoms in the late summer or early fall, they have money to put back to work."
Clark said he is expecting the Dow to pull back around 12 percent, with declines perhaps starting after the Federal Reserve finally does pause in its interest-rate hiking campaign, which most people on Wall Street expect to happen later this year.
Barry Ritholtz, chief investment officer at Ritholtz Capital Partners, said the market drop could be even steeper. But as with all historical indicators, the trend doesn't always hold true.
Here's a look at why the trend may very well prove consistent this year, with a big fall followed by a good buying opportunity near the end of the year.
Bracing for a fall?
Sure, stocks look fine now, but things could get uglier as the year wears on.
The Dow and the S&P 500 are nearing five-year highs, the economy is strengthening after a rough fourth quarter and interest rates, though set to keep rising at least a little while longer, remain historically low.
All of that is fairly supportive for stocks. But it's not as supportive as the extremely upbeat environment three years ago that sparked the current bull market, Ritholtz said.
At that time, in late 2002, "corporate profits were improving, interest rates were declining and oil wasn't the issue it is now," Ritholtz said, noting overall the market looks a lot more risky now.
There's also the issue of the bull getting old and the market perhaps being due for a sell-off.
"In this cyclical bull market that's been in place since October 2002, we haven't had a big pullback," said Sam Stovall, chief investment strategist at Standard & Poor's, noting that the S&P 500 has not seen a decline of more than 10 percent.
"You need to digest some of those gains in order to move higher," Stovall added.
There are also all the seasonal factors to suggest a decline is coming.
As the old Wall Street adage, "sell in May and go away," makes clear, the six months between May and October are typically tough for stocks.
Market historians who think the market follows the four-year cycle of the presidency say year two is typically the weakest. 2006 is year two of President Bush's second term.
Put these two factors together, and you get something of a potential 'worst of the worst' scenario over the next six months, as a recent study from Standard & Poor's made clear. (Full story).
Essentially, the study noted that seasonally, the second and third quarters of 2006 -- and any second year in the presidential cycle -- tend to be worse than any other quarters in the four-year period.
Fall tomorrow, get flush the day after?
Since 1913, the Dow industrials have seen an average decline of 22.2 percent between the high it hit in the first year of the four-year cycle -- in this case 2005 -- and the low hit in the second year, namely 2006, according to the Stock Trader's Almanac.
Right now the Dow is hovering about 3 percent above last year's high, hit in March of 2005, suggesting a big drop may be coming.
But after it bottoms out, the Dow tends to rally substantially through the third year of the presidency -- in this case 2007. On average, since 1914, the Dow has jumped a whopping 50 percent from the bottom it hits in the second year to the top in the third year, the Almanac says.
This bounce ties in with statistics that show the second and third years of the four-year cycle tend to be the best for stock markets as the party in power gears up for the following year's election, and tries to keep investors happy.
Barring unpredictable developments in Iraq or global oil supply, the analysts said, the market could see a similar move, down and then back up, later in 2006 and 2007.
What about years 3 & 4 ? - November 2006 to November 2008
The second part of the presidential cycle is usually the most bullish for the stock market, in the lead up to the next Presidential Election as promises are made and the White House tends to embark on a spending spree to bring about a feel good factor amongst the electorate. The gain from the 2nd year low to the 4th year high has averaged some 35%, which would put the Dow some 2,000 points higher.
http://money.cnn.com/2006/03/28/markets/markets_bearbull/index.htm
Sell In May and Go Away
Worst six months on tap?
A choppy market worried about inflation and interest rates now has another issue: seasonal weakness.
May 2, 2005: 4:32 PM EDT
By Alexandra Twin, CNN/Money Staff Writer
NEW YORK (CNN/Money) - You think the stock market's been troubling lately? Get ready for what's often the worst six months of the year.
The period from May 1 through Oct. 31 is usually not so great for stocks, as the old Wall Street saw "sell in May and go away" tells you.
But followers of the hemline indicator, the Super Bowl indicator and the dreaded Shaq curse will also tell you that these so-called Wall Street indicators are suspect. The trends can sometimes be chalked up to coincidence and they typically analyze too few years to be relevant statistically.
Still, as indicators go "the seasonal tendencies can provide a good backdrop," said Ed Clissold, senior global analyst at Ned Davis Research. "But they have to be taken within the context of whatever else is going on in the market."
And to be sure, many of the issues that are troubling investors are unlikely to just go away anytime soon.
Click here for the earnings scorecard.
Those include the slowdown in economic growth, the commensurate deceleration in corporate earnings growth, the steady rise in short-term interest rates, and -- oh yeah -- soaring prices for oil and other commodities that have pushed up the pace of inflation. (For more on whether "stagflation" is making a comeback, click here.)
The best of times ...
To demonstrate the strength of the November through April period versus May through October, the Stock Trader's Almanac tracks the gains you'd see if you invested $10,000 in the Dow industrials on Nov. 1 of each year and then sold April 30.
If you'd done that every year since 1950, you'd have earned $492,060 on a $10,000 investment, according to the Almanac. But if you'd reversed the whole process, and invested the compounded $10,000 during the May-October period, after 54 years you would have ended up with a $318 loss.
For the S&P, the gains would be $349,165 over the 54 years during the "best" six months and gains of $7,102 during the "worst" six months.
Of course, it seems perfectly logical that if the last six months weren't so great for the market, the next six might not be so bad. But does that mean a pickup is ahead for stocks?
The current strong months for the market, measured by the "Sell in May" indicator, ended Friday, with a whopping 0.4 percent gain for the Dow, and a 1 percent rise in the S&P 500.
But seasonal factors are always going to be in play to some extent, since that's a function of the "habitual behavior of society, which extends to stocks," said Jeffrey Hirsch, president and editor of the Hirsch organization, which publishes the Stock Trader's Almanac.
... and the worst of times
The second quarter, which starts in April, tends to be weaker, as the positive effects of holiday bonuses and the holiday retail sales period fade out, and a "spring cleaning" mentality kicks in, Hirsch said.
As summer rolls around, people would rather be spending less time in the office and more time enjoying the weather. That change in psychology often extends to the market as well, Hirsch said, with lower trading volume and more rangebound markets.
When the fall creeps in, the psychology switches to getting back to school and back to work and, from a stock standpoint, to cleaning house. To that end, September is traditionally the biggest loser on a percentage basis for the Dow, S&P 500 and Nasdaq.
October, which starts the fourth quarter, can be tough at the beginning but usually turns around by month end, and the quarter as a whole tends to be more upbeat, especially once work bonuses and the holiday sales period kick in.
Bulls destined to be beached?
So will this year be any different? The Fed is expected to keep raising short-term rates when the central bank's policy-makers meet Tuesday, due to the pressures from higher energy prices and other inflationary trends.
Meanwhile, as the recent weak retail sales and slide in first-quarter GDP growth make clear, fears about an economic slowdown are not unfounded.
But some market pros said stocks are more likely to churn over this period, rather than fall much.
And some are looking for something a little better.
As the months wear on, and "investors realize that the economic growth will slow, but not halt, and that the consumer is not tapped out, stocks may be able to move a bit higher," said Jon Brorson, head of growth equities at Neuberger Berman.
http://money.cnn.com/2005/04/29/markets/worstsixmonths/index.htm
The Psychology Behind Common Investor Mistakes
in Psychology/Sentiment
From R. Douglas Van Eaton, CFA, professor of finance in the College of Business Administration at the University of North Texas, discusses common investor errors:
Overconfidence
Fear of regret/pain of regret
Cognitive dissonance
Anchoring
Representativeness
Myopic risk aversion
Van Eaton notes "A better understanding of the psychology of investor mistakes can reduce their effects on investment decisions. Here is a list of the most common psychological effects, and how you can reduce their impact and incorporate them into your own investment decisions."
The full piece is below.
Source:
The Psychology Behind Common Investor Mistakes
R. Douglas Van Eaton
AAII Journal
http://www.aaii.com/promo/evergreen/basics/jrnl200004p02.cfm
Complete piece:
"Behavioral finance, a relatively new area of financial research, has been receiving more and more attention from both individual and institutional investors. Behavioral finance combines results from psychological studies of decision-making with the more conventional decision-making models of standard finance theory.
By combining psychology and finance, researchers hope to better explain certain features of securities markets and investor behavior that appear irrational. Standard finance models assume that investors are unbiased and quite well informed. Investors are assumed to behave like Mr. Spock from Star Trek, taking in information, calculating probabilities and making the logically "correct" decision, given their preferences for risk and return. Behavioral finance introduces the possibility of less-than-perfectly-rational behavior caused by common psychological traits and mental mistakes.
Six common errors of perception and judgment, as identified by psychologists, are examined in this article. Each has implications for investment decision-making and investor behavior. An understanding of the psychological basis for these errors may help you avoid them and improve investment results. And in some cases, market-wide errors in perception or judgment can lead to pricing errors that individuals can exploit. Understanding the psychological basis for the success of momentum and contrarian strategies can help investors fine-tune these strategies to better exploit the opportunities that collective mental mistakes create.
Overconfidence
A good starting point for a list of psychological factors that affect decision-making is overconfidence. One form is overconfidence in our own abilities. A great number of psychological studies have demonstrated that test subjects regularly overestimate their abilities, especially relative to others. Studies also show that people tend to overestimate the accuracy of information. With respect to factual information, research subjects consistently overestimated the probability that their answer to a question was correct.
You might expect that professional stock analysts are less prone to psychological biases than non-professional investors and the general public. With regard to overconfidence, however, this is not the case. A leading researcher found that when analysts are 80% certain that a stock is going to go up, they are right about 40% of the time.
How does overconfidence affect investment behavior?
Models of financial markets with overconfident investors predict that trading will be excessive. One recent study used a creative approach to see if overconfidence is related to high levels of trading. Many psychological studies have shown that men are more prone to overconfidence than women. If overconfidence causes overtrading, then men should exhibit their greater tendency toward overconfidence by trading more. The results of the study show exactly that-for a large sample of households, men traded 45% more than women, and single men traded 67% more than single women over the period of the study.
Is the active trading that overconfidence leads to actually 'excessive,' causing lower performance? A study of the trading activity and returns for a large national discount brokerage suggests that it is. For all of the households, returns averaged 16.4% over the period. However, those that traded the most averaged 11.4% in annual returns, significantly less than for an account with average turnover. Over the same period, the S&P 500 returned 17.9% on average.
What, if anything, can investors do about the general tendency toward overconfidence?
You can profit from this research only by heeding its message: Trade less. This is perhaps more easily said than done. Placing too much confidence in an analyst's buy/sell recommendation or earnings projection may lead to excessive trading even without any illusions about your own stock-picking abilities.
Other aspects of overconfidence are more subtle. People prefer to bet on the flip of a coin if it has not already been tossed. Psychologists relate this to a tendency for people to believe that they either have some ability to foretell the future or some control over the outcomes of future events.
Another behavior that is related to overconfidence in our abilities is the tendency to treat historical information as irrelevant and to place much more importance on current circumstances as a determinant of future outcomes. The psychological basis for such a tendency is called "historical determinism," the belief that historical events could or should have been predictable given the circumstances of the past. For investors, this translates to a belief that market events, such as the 1929 crash, could not have developed any other way. Only if we determine that current circumstances mirror those of some past time period will we be inclined to give history its due. Our collective social memory may tend to emphasize things that are seen as directly causing past events, and exclude circumstances that suggest a different outcome. The cry of "this time it's different" has a special place in investment lore. It is perilous to ignore stock market history based on a belief that present circumstances make historical market performance irrelevant to current decisions.
Fear of Regret
A second mental error that can affect decision-making is an excessive focus on the potential feelings of regret at having made a poor decision (or a 'good' decision that turns out poorly). This type of error is rooted in most individuals' (sometimes extreme) dislike for admitting they are wrong. The tendency to feel distress at having made a mistake that is out of proportion to the size and nature of the error is what psychologists label the "pain of regret." The fear of regret manifests itself when the potential regret from making an error has an influence on our decision-making that is out of proportion to the actual penalty an error would impose. Some behavioral models are constructed around the idea that people make decisions so as to minimize the potential regret that may result.
The fear of regret influences behavior when individuals procrastinate in making decisions. Studies have shown that people will postpone a decision, claiming that they are awaiting an upcoming information release, even when the new information will not change their decision (called the disjunction effect by psychologists).
The fear of regret can play an important role in our investment decision-making in other ways as well. In stock transactions, acting so as to avoid the pain of regret can lead to holding losing stocks too long and selling winners too soon. When stocks go down in value, investors seem to delay the selling of those stocks, even though they likely have not met expectations. Selling the position would finalize the error and the pain of regret is delayed by not accepting the purchase as an error. Winning stocks, on the other hand, contain the seeds of regret. The sale of appreciated shares removes the possibility that those shares will fall in value along with the potential for regret should this occur before the shares are sold. Besides avoiding poor decisions from too much focus on the fear of regret, you may also be able to improve performance by exploiting pricing patterns that result from behavior rooted in the fear of regret. A general tendency among investors to hold on to losers too long will slow the price declines, since less shares are offered for sale. Similarly, a tendency to sell winners too soon will increase the number of shares for sale and slow price increases. Both of these effects can enhance opportunities for investors.
Strategies based on price momentum and earnings momentum seek to exploit the fact that price changes occur slowly, over a sometimes prolonged period of time. Studies show that stocks that have performed the best (or worst) over six months to a year are likely to remain good (or poor) performers over the next year. There has been considerable research over the years showing that firms that announce surprisingly good (or poor) quarterly earnings tend to outperform (or underperform) for up to a year after the earnings announcement.
While the success of momentum strategies may also be a result of other psychologically driven behaviors, a tendency to sell winners too soon and losers too late will, in general, make price adjustments to a new equilibrium level a more drawn-out process than it would otherwise be. Investors can purchase stocks of firms that are in an established uptrend, with both earnings and price momentum, and hold them until the trend has reversed. For stocks that show a negative trend in earnings and price, the message here is: Get out. The deterioration will likely be longer and more severe than you think. Such discipline should reduce the tendency to sell winners too soon and hold losers too long, and improve investment results.
Cognitive Dissonance
A psychological characteristic that is related to the fear of regret is the desire to avoid cognitive dissonance. This psychological trait is one you might remember from Psychology 101. Without the jargon, the reference is to a desire to avoid believing two conflicting things. If one of the beliefs is supported by emotional involvement or attachment, the brain will attempt to avoid or discount a conflicting belief and seek out support for the preferred belief.
In the classic study of this characteristic, researchers found that once a person had made a decision and purchased a particular automobile, they would avoid ads for competing models and seek out ads for the model purchased. Avoiding the pain of regret may be the basis for this behavior. One way to avoid regretting the purchase decision is to (irrationally) filter the information received (or believed) after the decision has been made. Alternatively, people can minimize the importance of subsequent information that would call their original decision into question, if the truth can't be avoided or denied. Beliefs that we wish to maintain are defended by many mechanisms, even if the strong desire to maintain existing beliefs has a less-than-rational basis.
How can you adjust for the tendency to avoid or deny new, conflicting information? As in other areas, investment discipline can help. By writing down the reasons for purchasing a stock and re-evaluating their validity over time as dispassionately as possible, investors can force themselves to maintain a selling discipline. If the reasons for purchase no longer hold and the share price indicates deteriorating fundamentals, admitting a mistake may often be the prudent thing to do. Another disciplined approach is to set a time limit for a newly purchased stock to perform as expected. If, for example, the earnings and/or price expectations have not been met after three months, then the stock must go. While this is not necessarily a good rule for value investors (since that approach often requires longer holding periods before expectations are met), it can help those who pursue a growth strategy to avoid holding losing positions over a prolonged period of price deterioration.
Anchoring
The three psychological characteristics discussed so far are all based, to some extent, on feelings and emotions. But some decision-making errors result from mental shortcuts that are a normal part of the way we think. The brain uses mental shortcuts to simplify the very complex tasks of information processing and decision-making. Anchoring is the psychologists' term for one shortcut the brain uses. The brain approaches complex problems by selecting an initial reference point (the anchor) and making small changes as additional information is received and processed. This reduces a complex problem, evaluating all information as a whole as new information is received, to the simpler task of revising conclusions as each new bit of information is received.
In the case of bargaining, a salesman may begin with a high price to bias upward the final price. Research shows that the listing prices for homes influence estimates of their values. The listing price apparently serves as an anchor, even though it does not necessarily contain relevant information about the home's value. Recent prices or recent earnings performance may serve as a similar psychological anchor for investors, and may have predictable effects on subsequent returns.
Understanding the role of anchoring in the decision-making process can help you avoid some investment pitfalls. "Bottom fishing," the practice of buying stocks that have fallen considerably in hopes of getting them cheaply, can be quite hazardous to your wealth. The motivation behind this strategy is similar to the concept of anchoring. A higher recent price is taken as evidence of value, so that the new price seems cheap.
The old pros say, "Don't bottom fish," but they also say "Buy on weakness." What's the difference? If you have evaluated a stock and determined that you would like to accumulate a position, then you can and should time your buys to take advantage of the ebbs and flows in the market and price weakness in the stock when it goes below your buy price. If, on the other hand, a sharp price decline lies behind the decision to buy and a recent higher price looms large in the stock's initial attraction, beware—the odds are against you.
One effect of anchoring on investment decisions is similar to that of the fear of regret; losing positions will be held too long and improving stocks will be sold too soon. In each case the effect of a recent price as a psychological anchor in the complex process of stock valuation will slow the revision of valuation estimates. Losers will appear cheap and winners will seem to have gotten ahead of themselves. As with the fear of regret, anchoring can slow the process of revaluation and contribute to the gains from momentum strategies. In general, the less clear the underpinnings of a stock's value, the greater the importance of an anchor in the process of establishing value. The valuations of highly speculative stocks, such as Internet high flyers without visible earnings, will likely be more influenced by recent prices, than those of stocks with visible and predictable earnings.
Representativeness
Another shortcut that the brain uses to reduce the complexity of thought is called representativeness by psychologists. This is an assumption the brain makes that things that share similar qualities are quite alike. Classifications are made based on a limited number of shared qualities.
One example of representativeness in our thinking is the tendency to classify people as either "good" or "bad" based on some short list of qualities. When we do this, we gain in simplicity and speed, but at the expense of ignoring the much more complex reality of the situation.
The effect of representativeness in investment decisions can be seen when certain shared qualities are used to classify stocks. Two companies that report poor results may both be classified as poor companies, with bad management and unexciting prospects. This may not be true, however. A tendency to label stocks as either bad-to-own or good-to-own based on a limited number of characteristics will lead to errors when other relevant characteristics are not considered.
Representativeness may also be related to the tendency of stock prices to reach extremes of valuation. If poor earnings and share price performance has a stock branded as "bad," representativeness will tend to delay the reclassification of the stock as one investors would like to own. On the other hand, "good" stocks may continue to be classified as such by investors well after the firm's prospects for either earnings or price appreciation have diminished significantly.
Contrarian or value strategies seek to exploit just such erroneous classifications. If a firm has been classified by most investors as a bad one and the stock as a loser, initial changes in the company's outlook may leave the classification in investors' minds essentially unchanged. This collective classification can lead to stocks being unloved and underpriced. A value investor seeks to buy the stocks others classify as "bad," ideally at the time when the greatest majority holds this view. When fundamentals have started to deteriorate but the majority of investors have not yet reclassified the stock in their minds, it is often an ideal time to sell.
Myopic Risk Aversion
The term "myopic risk aversion" refers to the tendency of decision makers to be shortsighted in their choices about gambles and other activities that involve potential losses. Much research has examined what types of gambles people will accept, the effects of how the possible outcomes of the gamble are presented, and whether people make consistent choices.
As an example of how these results can apply to investment decision-making, consider an investor saving for retirement. Each year's investment in equities rather than a lower-risk alternative can be viewed as a single gamble. Unlike casino gambling, however, the expected payoff is positive, and the investor has the opportunity to invest in equities over a period of many years.
Two leading researchers in behavioral finance have concluded that investors in this situation tend to hold less than the optimal amount of equities because they place too much emphasis on the potential loss from a single year's investment in equities. They term this shortsightedness myopic risk aversion.
In one study, investors in a company retirement plan chose larger equity allocations after they were shown the actual results of investing in equities over many different 20-year periods. The research suggests that if investors focus on the distribution of outcomes for the whole period, they are more likely to make the correct decision."
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Summary
A better understanding of the psychology of investor mistakes can reduce their effects on investment decisions. Here is a list of the most common psychological effects, and how you can reduce their impact and incorporate them into your own investment decisions:
Overconfidence: Trade less, especially in taxable accounts. In terms of probabilities, you are not as good at investment decisions as you think you are. Discount the opinions of analysts, who tend to go to extremes, either overly confident or overly pessimistic.
Fear of regret/pain of regret: Don't let the prospect of regret at making a decision that turns out poorly have disproportionate weight in your decisions. Convince yourself that unrealized losses are equivalent to realized losses.
Cognitive dissonance: Seek out contrary opinion. Research doesn't stop when a purchase is made. Strive to identify your mistakes as early as possible and take pride in the ability to do so.
Anchoring: Be aware of how recent prices, earnings and growth rates can serve as psychological anchors in thought processes. Avoid price-driven "bottom fishing."
Representativeness: Step back and look at the whole picture on a stock. Don't place too much emphasis on a few qualities that good stocks or loser stocks share. Winners turn into losers and vice versa, so be open to their changing nature.
Myopic risk aversion: Long-term investors should make asset allocation decisions based on possible multi-year outcomes and not focus on single-period return possibilities.
R. Douglas Van Eaton, CFA, is a professor of finance in the College of Business Administration at the University of North Texas in Denton, Texas.
22 Rules of trading pilfered from an article
1. Never, under any circumstance add to a losing position.... ever! Nothing more need be said; to do otherwise will eventually and absolutely lead to ruin!
2. Trade like a mercenary guerrilla. We must fight on the winning side and be willing to change sides readily when one side has gained the upper hand.
3. Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. Holding to losing positions costs measurable sums of actual capital, but it costs immeasurable sums of mental capital.
4. The objective is not to buy low and sell high, but to buy high and to sell higher. We can never know what price is "low." Nor can we know what price is "high." Always remember that sugar once fell from $1.25/lb to 2 cent/lb and seemed "cheap" many times along the way.
5. In bull markets we can only be long or neutral, and in bear markets we can only be short or neutral. That may seem self-evident; it is not, and it is a lesson learned too late by far too many.
6. "Markets can remain illogical longer than you or I can remain solvent," according to our good friend, Dr. A. Gary Shilling. Illogic often reigns and markets are enormously inefficient despite what the academics believe.
7. Sell markets that show the greatest weakness, and buy those that show the greatest strength. Metaphorically, when bearish, throw your rocks into the wettest paper sack, for they break most readily. In bull markets, we need to ride upon the strongest winds... they shall carry us higher than shall lesser ones.
8. Try to trade the first day of a gap, for gaps usually indicate violent new action. We have come to respect "gaps" in our nearly thirty years of watching markets; when they happen (especially in stocks) they are usually very important.
9. Trading runs in cycles: some good; most bad. Trade large and aggressively when trading well; trade small and modestly when trading poorly. In "good times," even errors are profitable; in "bad times" even the most well researched trades go awry. This is the nature of trading; accept it.
10. To trade successfully, think like a fundamentalist; trade like a technician. It is imperative that we understand the fundamentals driving a trade, but also that we understand the market's technicals. When we do, then, and only then, can we or should we, trade.
11. Respect "outside reversals" after extended bull or bear runs. Reversal days on the charts signal the final exhaustion of the bullish or bearish forces that drove the market previously. Respect them, and respect even more "weekly" and "monthly," reversals.
12. Keep your technical systems simple. Complicated systems breed confusion; simplicity breeds elegance.
13. Respect and embrace the very normal 50-62% retracements that take prices back to major trends. If a trade is missed, wait patiently for the market to retrace. Far more often than not, retracements happen... just as we are about to give up hope that they shall not.
14. An understanding of mass psychology is often more important than an understanding of economics. Markets are driven by human beings making human errors and also making super-human insights.
15. Establish initial positions on strength in bull markets and on weakness in bear markets. The first "addition" should also be added on strength as the market shows the trend to be working. Henceforth, subsequent additions are to be added on retracements.
16. Bear markets are more violent than are bull markets and so also are their retracements.
17. Be patient with winning trades; be enormously impatient with losing trades. Remember it is quite possible to make large sums trading/investing if we are "right" only 30% of the time, as long as our losses are small and our profits are large.
18. The market is the sum total of the wisdom ... and the ignorance...of all of those who deal in it; and we dare not argue with the market's wisdom. If we learn nothing more than this we've learned much indeed.
19. Do more of that which is working and less of that which is not: If a market is strong, buy more; if a market is weak, sell more. New highs are to be bought; new lows sold.
20. The hard trade is the right trade: If it is easy to sell, don't; and if it is easy to buy, don't. Do the trade that is hard to do and that which the crowd finds objectionable. Peter Steidelmeyer taught us this twenty five years ago and it holds truer now than then.
21. There is never one cockroach! This is the "winning" new rule submitted by our friend, Tom Powell.
22. All rules are meant to be broken: The trick is knowing when... and how infrequently this rule may be invoked!
Jesse Livermore
http://www.trading-naked.com/library/jesse_livermore.pdf
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