Wednesday, November 25, 2009

Financial mess goes mainstream

When Saturday Night Live actually starts making fun of the price-tag of a new social program, be very afraid...

Saturday, November 14, 2009

H1N1 finally peaked?

Seasonal influenza in the United States normally peaks around the end of February in late winter. Swine flu, however, may have peaked 3 1/2 months earlier, in early November. If the new downtrend in influenza-like illnesses continues, then the worst may be over for H1N1.


Sunday, November 08, 2009

To be free, or not to be free

Tomorrow (November 9) marks the 20th anniversary of the fall of the Berlin Wall, a symbolic event that punctuated the roughly two year-long collapse of the Soviet Union and its Communist satellites from 1989 to 1991. The wall itself held East Berliners captive for 28 years, but if we include the entire post-war Soviet occupation along with the Nazi regime (National Socialists) then eastern Germany was under one form of socialist dictatorship or another for 56 years. Fortunately for Germans, the world in 1989 recognized tyranny for what it was, even when wrapped in the good intentions of egalitarianism, and pressure was brought to bear on the inhuman regimes in Eastern Europe and Russia.

My, how times have changed. Today we are on the brink of a major loss of liberty right here in the nation that used to be the champion of freedom around the world. Americans are only one Senate vote away from becoming sheep to a government health shepherd that's ready to tell us what we can't eat, what we can't do, and how we should live our lives.

Not ironically, our President Dear Leader B. Hussein Obama has declined an invitation from those liberated Germans to attend the ceremony commemorating the fall of the Berlin Wall.

Sunday, November 01, 2009

H1N1 Red Alert - or not.

Thanks to the H1N1 "Swine Flu" virus, more Americans are now ill with influenza than at any time in the past 3 years. However, the mortality rate due to influenza is still lower than the typical mid-winter rates from regular seasonal flu.This is welcome news, because it means that H1N1 is currently milder and less deadly than regular influenza. Hopefully the current outbreak will effectively inoculate the population against future H1N1 outbreaks before the virus has a chance to mutate into a more deadly strain.

Thursday, October 29, 2009

Mayday

My favorite commentator, Victor Davis Hanson, has just written a stark analysis of our present situation. As usual, his piece is packed with more historical references, insightful personal recollections, and straightforward distillations of ideas than you'll find anywhere else. Here's an excerpt from the column All Falling Down:
The difference between the 5th century BC and late 4th century BC at Athens is debt – and not caused just by military expenditures or war; the claims on Athenian entitlements grew by the 350s, even as forced liturgies on the productive classes increased, even as the treasury emptied. At Rome by the mid-3rd century AD the state was essentially bribing its own citizens to behave by expanding the bread and circuses dole, while tax avoidance became an art form, while the Roman state tried everything from price controls to inflating the coinage to meet services and pay public debts.
For those not familiar with the history, the 4th century BC and 3rd century AD happened to coincide with the end of independent Athens and the beginning of the end of the Roman Empire, respectively. Of course war usually accompanies the fall of great civilizations, and we may be no exception:

Remember, Jimmy Carter was loved up until about 1978, as he bragged of human rights, slashed defense to use the money for more entitlements, promised to get troops out of Korea, sold out the Shah, intrigued with the exiled Khomeini, pooh-poohed communists in Central America, sold warplanes without bomb racks to our allies, lectured on the inordinate fear of communism and sermonized how no one would die on his watch. ...

And then somewhere around 1979 the world finally sized him up — and the result was a bleeding American goat crossing the Amazon as the piranha swarmed. Radical Islam was on the rise. The Soviet army invaded Afghanistan. Nicaragua blew up. Iran took hostages. And in reaction Carter devised brilliant strategies like boycotting the Olympics and arming jihadists in Pakistan — and more lecturing us from the rose garden. He wanted a flashy hostage rescue mission — after slashing defense in 1977-8: but the two don’t mix, as he learned.

The message I get from all of this is "Brace for impact."

Friday, October 16, 2009

Dividend yield below 2%

Dividend payments from corporations continue to shrink. If one extrapolates all dividends over the past three months out to a full year, then the dividend yield of the S&P 500 index now stands at 1.97%.

Up until the mid 1990's, the normal range for the S&P yield was between 3% and 6%. In the late 1990's the yield made its first ever sustained dive below 3% as the dot-com bubble inflated prices. The yield finally rose back above 3% briefly in early 2009 as prices collapsed (yield = Dividends/Price) but since March it has been falling steeply as prices have risen and earnings have continued to dry up.

Assuming that earnings and dividends stabilize (an optimistic supposition) and that the yield returns to its historically familiar range, then the S&P 500 can be expected to fall eventually to between 720 and 360. However, if earnings and dividends continue to fall, then the "fair value" price range will be even lower.

Monday, October 12, 2009

Happy Columbus Day

Today I celebrate Christopher Columbus' first voyage of discovery because he was the ultimate trailblazer for the freedom-seeking English farmers who followed and founded the United States of America. The list of accomplishments of this relatively young nation with such humble beginnings is truly astonishing:
  • Started a worldwide democratic revolution that is still underway today.
  • Purged slavery from itself in its deadliest war to date.
  • Liberated hundreds of millions of people from Fascism, Nazism, Communism, and other forms of totalitarianism.
  • Saved and prolonged well over a billion lives around the globe by curing diseases and improving food production.
  • Invented most of the technology that you see around you, from the light bulb in your lamp to the airplanes overhead to the internet that sent you this text.
  • Westerns, stand up comedy, and Rock and Roll - need I say more?
More than anywhere else in the world, the adventurous spirit of Columbus lives on in America, which has landed men on the Moon and explored every planet in the Solar System.

God bless America, and happy Columbus Day to the billions of beneficiaries around the world.


Tuesday, September 29, 2009

Why I'm not tracking market technicals right now

I mentioned a while back that I was taking a break from making market forecasts. After the March low, I began to suspect that prices weren't playing by the normal "rules" - either fundamentally (PE or yield) or technically (price formations, volume, etc.) This chart of the S&P 500 index confirms my suspicions.

Normally I'd be inclined to say that the S&P is in an ascending wedge formation, which forecasts an eventual drop through the lower trend line. However, as the chart shows, prices have instead risen through upper trend lines twice already, so I'm doubtful that the new upper trend line is any more meaningful. My favorite sentiment indicators have been showing optimism about stock prices rather than pessimism, which is usually not a favorable condition for a rally like this.

Meanwhile, the dividend yield of the S&P 500 has fallen to near 2%, which is phenomenally overpriced by historical standards. My hat is off to those who have profited from this six-month rally, but everything about it seems far too speculative for me to comfortably participate in.

Saturday, September 19, 2009

Trough between waves, or pre-tsunami lull?

According to Federal Reserve Chairman Ben Bernanke, the recession is probably over, but I'm following several blog commentators who are making reasonable arguments that the worst is yet to come. The question is, "Who's right?"



It seems to me that debt is the one broad issue that distinguishes the two opposing viewpoints. A diverse group of pessimistic online pundits like Mike Shedlock, Karl Denninger, Max Keiser and bloggers on Fool.com argue that we are near - or have already exceeded - a total debt threshold that can no longer be sustained. When all forms of debt are considered together, including the Federal debt, mortgage debt, consumer debt, etc., the picture looks pretty grim. Total debt as a percentage of the nation's gross domestic product (GDP) was remarkably constant for decades, but started to increase in the mid 1980's and has been growing steadily ever since.


Karl Denninger has made a graph that breaks down the debt into categories, and it clearly shows that a recent retreat in mortgage debt and consumer debt has coincided with an accelerated increase in public debt.

It doesn't take a genius to realize that private debt (much of it owed to a few large banks) has simply been transformed into Federal debt over the last year or two by way of the trillion-dollar bailouts/stimuli. Notice too that when the Federal debt momentarily stopped growing in the late 1990's, mortgage debt growth kicked into high gear.

On the other side of the debate, the people in high offices who were proponents of the bailouts and stimulus packages, and who are suggesting that the worst is now over economically, are noticeably silent on the subject of the ballooning Federal debt. I'm neither an economist nor an accountant, but I'm pretty sure that debt can't increase forever without major negative consequences. It also makes sense to presume that the greater the debt is when the bubble finally pops, the greater the pain will be.

I'm afraid the economic pessimists have made stronger cases than the optimists up to this point. To some extent the current reprieve in corporate earnings and stock markets has to be the aftereffect of the astronomical Federal spending programs, but I fear that this only delays the inevitable day of reckoning, and ensures that the eventual fall will be deeper. The most reasonable solution - letting banks fail when they take too many risks and slashing the Federal budget - is still painful in the short term, but would ultimately lead to a sustainable recovery more quickly. However, elected officials in Washington are too worried about their own jobs to suggest such "heartless" measures. They would rather bail out the irresponsible banks, increase the national debt, and print money like mad to keep voters placated at least until the next election.

Much of the current economic data supports the pessimistic outlook. Unemployment continues to rise, a new round of mortgage defaults looms, the dollar is losing its value internationally, and state governments who can't print money like the Feds are running out of it.

I've been doing my best to plan for the worst, but I wonder if there is even any "high ground" to run to in this case. (The folks in this video saw the tsunami coming and got out of the way just in time.)


Friday, September 18, 2009

(Swine) Flu Update

Influenza in the U.S. is now at the highest level since the winter of 2007-2008, with 21 states reporting "widespread" activity.

Every state in the Southeast has been hit hard. (wunderground.com)


Given official reports and anecdotal evidence that I'm hearing, it's pretty clear that this is the second wave of H1N1 Swine Flu, which is acting independently of the normal seasonal influenza that peaks in the winter. I'm sticking with my prediction that the Swine Flu will reach a high peak in a few weeks, and that any widely available vaccine will be too late to make much of a difference.

Thursday, September 17, 2009

September 17, 1939-2009

This is a joke, right?

Exactly seventy years ago today, the Soviet Union began its invasion of eastern Poland, in accordance with the Molotov-Ribbentrop Pact that it signed with Nazi Germany. Thousands of Poles would die defending their country from Russian forces, and tens of thousands died later at the hands of the Soviets in group executions, torture, and mass deportations.

Today on the seventieth anniversary of this horrific event, the United States has announced that it will scrap plans for a missile defense shield in Poland and the Czech Republic, mostly in response to protests from Russia. Even for those in the West who oppose the missile shield, there's no denying that the timing couldn't be worse. Poland already has plenty of historical reasons to resent the choices made by the U.S. and Britain regarding Russia:
  1. Britain declared war on Nazi Germany for invading Poland, but looked the other way when the Soviets did it two weeks later. The U.S. wasn't moved to help at all.
  2. The U.S. and Britain allied with - and supplied - the Soviets from 1941-1945.
  3. The Soviet Union was allowed to occupy Poland again after the war.
Thus my gut reaction to today's news is "Oh no, not again." I hope that this move to appease Russia at Poland's expense doesn't prove to be prophetic, but I know that history has a tragic way of repeating itself.

Friday, September 11, 2009

If you're not already feeling blue...

Here comes the big bad Swine Flu.

Late summer is normally the low point for influenza activity in the United States, but that's not going to be the case this year. The following graph from the CDC shows influenza activity for the the past 52 weeks (red) and the previous two years (green and blue).

I've added a red arrow to highlight the most recent data from last week. As you can see, in the past two weeks influenza activity has jumped from a somewhat elevated summer plateau up to levels that are usually seen during the worst part of the winter. State-by-state data confirms that an early outbreak is in progress, with the southern half of the country feeling the worst of it at the moment. (From wunderground.com using data from the CDC)

The big concern this year is the new strain of Swine Flu (H1N1) which most people have less natural immunity to, and which apparently has the potential to mutate into a more deadly pandemic strain. It would be a pretty big coincidence if H1N1 wasn't behind this unusually early outbreak. There was hope that a vaccine for H1N1 could be developed and distributed in time, but I'd say all bets are off now. (At times like this I'd be happy to pay double the normal cost for a vaccine, and shield vaccine companies from exorbitant lawsuits.)

I'm doing what I can to avoid infection and to minimize the pain if I don't. I've deployed my own bottles of hand sanitizer at work and at home. I've got cans of soup stashed away, juice in the 'fridge, and a fresh bottle of cough medicine in case I succumb.

I can think of one way to forge a win-win situation out of all this: at the peak of the H1N1 influenza outbreak, which could arrive in just a few weeks, they could declare the anticipated bank holiday and shut down the banks for a bit while we're all cooped up in our homes. It's not like we're going to need the money for shopping or travel at that point anyways.

Mirror, Mirror

Exactly two presidential terms after the 9/11 attacks, things are repeating or persisting in ways I never would have imagined.

Eight years ago, nineteen Muslim men under the direction of Osama attacked the United States, prompting a final showdown with Hussein.

Today the President of the United States is B. Hussein Obama, the son and stepson of Muslim men. Is this more than a coincidence - a subconsciously motivated choice perhaps by voters who opposed the War on Terror in general, and the invasion of Iraq in particular?

Eight years ago the collapse of the twin towers left an empty, smoldering space in lower Manhattan.

Today Ground Zero is still an empty space. Why do I suspect that, had the attacks occurred in 1931 there would have been a new skyscraper on the skyline by 1939, despite the Great Depression?

Eight years ago we were suffering the consequences of a speculative bubble in the stock market.

Today we are suffering the consequences of an even larger speculative bubble in real estate, the stock market, consumer credit, and skyrocketing national debt.

I can still remember my raw emotion and my view of the future in the days following September 11, 2001, as I watched the smoke rising from the Pentagon, replays of the towers collapsing and people jumping to their deaths. If someone had told me back then where we'd be eight years later, I would have concluded he was nuts.



--------------------------
Update 9/12/2009: It's come to my attention that the Dow Jones Industrial Average closed at 9605 yesterday (Sept. 11, 2009) and at 9605 eight years earlier on Sept. 10, 2001. (The market was closed on Sept. 11, 2001, so the Dow was frozen in place at the same 9605 level for a week.) That's too weird. There's more mirroring going on than I was even aware of when I named this post.

Wednesday, September 09, 2009

Problem-solving 101

Question: What do these three things have in common?

Answer: I bought each of them with my own money in order to solve a problem.

My office is in a rather old building on an even older campus, and that means we have an archaic climate control system. The centralized air conditioning is primitive, and in a good fraction of the offices and classrooms in my department it is simply incapable of keeping the air cool in the summertime. This wasn't even a particularly hot summer in my part of the country, but still it was common to see fans placed in open doorways as a last-ditch effort to stay cool. The same thing happens every year: people in the hot offices complain to the maintenance staff to fix the problem; maintenance never gets around to fixing the problem; and then the hot people switch to complaining about the poor maintenance.

I had a different response to the heat. Several years ago, when I realized I couldn't keep my new office cool enough, I bought my own air conditioner for $80 at Walmart. I now have perfect control of the temperature in my office during the summer, and even on the hottest days I can make my office as cool as I want. Now, you might think that the hot people around me would copy this simple yet phenomenally effective solution, but you would be wrong. The complaints about maintenance have continued unabated.

The heating system here is equally crude. Every office has exposed steam pipes near the outside wall with a simple valve that losely controls the amount of heat radiated by the pipes. Of course, the central system that distributes the steam operates unevenly, and sometimes we arrive at work in the morning to find our offices baking at 85 degrees. That prompts people to turn off the valves and open the windows, which eventually cools the offices too much and ... well, you get the picture. I bought a space heater with a thermostat for $30 and closed my steam valve, and now I stay an even 70 degrees throughout the day, every day. Problem solved.
---
Last Spring my university was part of the insane nationwide push to purge trays from cafeterias, so now eating in the faculty dining room has become decidedly less convenient. Instead of being able to put a salad, an entree, a cup of soup and a drink on one tray and then walk to our tables, we now have to make two or three trips back and forth between the table and serving area in order to assemble our meals. It's comical to watch professors in suits and ties ignominiously shuttling around with plates balanced on their arms, and the sound of a dish shattering on the floor is not uncommon.

Besides the inconvenience of not having trays, I have concerns about sanitation. Without trays, utensils end up resting directly on a table that someone else has just eaten on, and at the end of the meal we resort to carefully stacking our used plates on an unsanitary communal pile. It's all the more ludicrous to do these things given the occasional outbreaks of Norovirus and the looming threat of Swine Flu. In response I bought two cafeteria trays online for $5 apiece. I brought one of the trays to the dining room for the first time today, and although I got some bemused looks from my colleagues, it worked like a charm.
---
Why am I talking about these things? At the very least I can claim to have a unique perspective among academics when it comes to problem-solving. My first instinct is to rely on myself to find the simplest solution, rather than hope that someone else will solve it for me. I've done the same thing now in anticipation of another financial meltdown: opening multiple bank accounts and hoarding cash in case the worst happens. I hope nothing happens, but if it does, there are quite a few academics around me who can't say I didn't warn them.

Saturday, August 29, 2009

Economic pessimists: too many?

When in doubt, my instinct is to bet against the herd.

In 2007 there were only a small number of people predicting the looming disaster to come. Popular investing gurus like Ben Stein, Jim Cramer, and Bob Brinker only saw happy days ahead. When it came to the housing market, public television and late night advertisements featured people like Robert Kiyosaki and John and Greg Rice singing the praises of real estate investments.

We all know how that turned out, but now I'm starting to see the opposite phenomenon. Ben Stein, who usually advises us not to worry about the occasional bear market, is now expressing fear that the SEC is not doing its job to prevent corruption, and contemplating the possibility that "this time it's different." Robert Kiyosaki, who only a few years ago was saying that it's foolish not to go into debt, is now vaguely advising people to prepare for the worst. I happen to be in agreement with the pessimists right now, but I'm weary of seeing too many people join the doom-and-gloom camp. I don't think the pessimists are an overwhelming majority yet, but they seem to be growing in number.

Even if most people become bearish on the economy in the next several months, I'm still not sure what that would mean. Despite my contrarian philosophy, I can't help thinking that if we really do tax, borrow or print our way into financial oblivion, then sentiment may become irrelevant at some point. Is it ever possible for the herd to be right?

Friday, August 28, 2009

Unanticipated coincidence

I got the nickname "Hodar" in high school from variations of my first name, "Jody." Whether or not I have the talent described in the third item on Google, it's not the reason I use this name for my website.

Tuesday, August 04, 2009

Diversifying for Armageddon Part 2

In my March post, Diversifying for Armageddon, I voiced my fear that the FDIC would run out of money, meaning that future bank failures would cause savings and checking accounts to go up in smoke. My solution was to diversify my savings among several institutions as well as build up a pile of actual cash.

Today Karl Denninger voiced a similar concern on The Market Ticker. Although he's convinced that the FDIC is nearly out of funds, his worst-case scenario isn't quite as bad as mine. He thinks that the next banking emergency would force the FDIC to limit the amount of monthly withdrawals allowed for each account, thereby preventing a total collapse of the banks and giving the system time to recover. Even so, because the limit for one account may be too little to live on, he suggests the same solution that I proposed in March: spread your savings between as many banks as possible, thereby multiplying your personal withdrawal limit.
It is thus my position that even if you are well under FDIC limits you must move money around now so you have multiple bank accounts and thus if your withdrawals and access to your funds are "rationed" in a similar fashion you will be able to access what you need to pay your electric bill, put gas in your car and buy your food.
Food for thought - so to speak.

Sunday, August 02, 2009

Insanity

This little detail of the federal Cash for Clunkers program eluded me until just now: Dealers who obtain the traded-in cars are being forced to destroy the engines to make sure that the cars aren't re-sold on the market.

I understand not wanting to pay the $4,500 for the same car more than once, but couldn't we just record the VIN# of the cashed-in car to prevent fraud? As it stands, the program is destroying some perfectly good cars - ones that could be re-sold for cheap to needy people, or even better, DONATED by dealers to charities.

Here we are in a major recession, with an increasing number of people unemployed and unable to afford new cars, and the government is paying people to destroy working vehicles. For some reason I'm reminded of the vehicle-less victims of Hurricane Katrina who were trapped by government incompetence; I wonder what they would think of this program?

Coincidentally, I just made my last payment on my big roomy gas-guzzler. If and when the time comes, I'll give it away to someone who needs it before I let it be destroyed.

Tuesday, July 28, 2009

Bans on leveraged ETFs

Well, well, well....

A few brokerage firms have recently banned the sale of leveraged ETFs to their clients.
At least three brokerage firms have decided not to sell leveraged exchange traded funds a month after the Financial Industry Regulatory Authority Inc. warned brokers that they “typically are unsuitable for retail investors” who hold them longer than a day.
Hat tip: Bespoke Investment Group.

Wednesday, July 08, 2009

Grizzly Time

I've just put in an order to buy GRZZX with 50% of my Roth IRA. I think the purchase price will be today's closing price.

For those who don't know: GRZZX is a mutual fund which sells stocks short, meaning it goes up in price when the market falls.

Tuesday, June 30, 2009

Quiet market belies approaching storm

The S&P 500 has been relatively flat for the last couple of months.

I would be all too happy if the recent lull in the stock market portended a steady future for the US economy, but I see little to look forward to. I feel like I recognize America less and less with each passing week.

We bailed out the auto companies, which didn't work, so now we're nationalizing them? If the DMV is going to start building American cars, then my next car will be a Honda.

The only change I've seen in tax policies so far this year is tax increases, which is precisely the wrong way to bring a country out of a recession. The "cap and trade" bill which passed the House of Representatives (and which was voted on before the bill was even completely written) creates new forms of taxes on energy, meaning everyone from individual families to multinational corporations will have to pay more for living/operating in the United States. Any energy-intensive corporation which has the choice of moving somewhere else will now have a strong incentive to do so.

Despite the unwise tax increases, our government is on course to quadruple the federal deficit this year to nearly $2 trillion, ($2,000,000,000,000) which will increase our total national debt to more than $12 trillion by the end of the year. The only way that our elected officials can deal with our creditors and still get re-elected is to print more money, which creates inflation and reduces the real worth of the treasury bonds held by nations like China and Japan, and by U.S. bond holders.

California, the largest economy in the union, is out of money and is now paying contractors with IOU's. Perhaps they should be given access to the same printers? For that matter, why not just legalize counterfeiting and solve everyone's problems?

In short, it seems like the definitions of "dollar," "stock," and "bond" are changing week-by-week, bailout-by-bailout, and vote-by-vote. If you're thinking of buying a stock today, the question is no longer how profitable the company will be, but whether the company will eventually be bailed out by the government printers like Goldman Sachs (good for stock prices) or nationalized like GM (bad for stock prices). If you can predict what the government is going to do next - or just bribe someone to do it - then you'll be a winner in the stock market. The rest of us are out of luck.

Thursday, June 04, 2009

No more bear market (for now)

There's no longer any measure of the market that says we're in a bear market, so I can't justify holding a bear fund at this time. Therefore I've just entered an order to cash out of GRZZX completely. This doesn't mean that a bear market can't return - in fact I fully expect it to given the forward projected P/E ratio of 25 and ~3% dividend yield for the S&P 500. Hopefully I'll be able to get back in to BEARX GRZZX at an even lower price when the next bear market begins and recoup some of my recent losses.

Sunday, May 31, 2009

Still on the edge

I haven't been writing for a while because, as far as stock market trends go, nothing has happened in the past three weeks. Since my previous post, the S&P 500 index closing values have remained between 880 and 920.
My Roth IRA remains 100% in GRZZX.

Friday, May 08, 2009

On the edge and stumped

I've just returned from a three-week astronomy marathon in Texas. Maybe it's from a lack of sleep, but the stock market's behavior since I've been gone doesn't make any sense to me.

For starters, the S&P 500 index has just broken up through a rising tops trend line, without going through a significant correction first.

This doesn't happen very often. To add insult to injury, the accelerating rally is following earlier price formations that usually forecast price declines, such as the ascending wedge formation which formed last month.

My automated model which is based on historical trends is coming close to confirming an end to the bear market. In my gut I know this can't be the case, but I'm not about to toss away decades of stock market data based on a hunch. Since market sentiment remains very optimistic, my investment stance would change to neutral (cash/money market) rather than long (SPY, etc.)

For what it's worth, the stock market is highly over-valued, meaning that the current rally is mostly speculative and not based on any reasonable valuations. The projected real P/E ratio of the S&P 500 for the end of 2010 is now 26, and the dividend yield is still below 3%. However, as I've said before, earnings have very little effect on stock prices. The stock market goes up or down based mostly on whether investors have the desire to own stocks and the money to buy them. Apparently somebody out there has both!

Thursday, April 16, 2009

Short-term bearish, long-term not so bearish

These have been the most difficult stock market conditions for at least the past year.

The S&P 500 index has crossed the first of two key thresholds that usually forecasts the end of a bear market, so my long-term forecast is now "unconfirmed end of bear market." However, assuming that the market turns around soon, my long-term forecast will switch back to "bear market" when stock prices cross back.

Meanwhile, sentiment remains bullish, which is almost always bearish for stock prices on short-to-medium time frames. I admit that I did not expect such a strong rally in the face of overwhelming optimism, but one case of contrarian market-timing investing opposite to a large rally is not a reason to dump the method. If anything, it may cause other contrarian investors to give up, which would actually help to make the method more effective again. Time will tell.

Adding to my short-term bearish conviction is the formation of a rising wedge formation.

These almost always end with a violation of the lower trend line and a decline in prices, so I'm staying fully invested in GRZZX. Thanks to the wedge formation, I think the wait will finally end soon.

Wednesday, April 15, 2009

Something's gotta give

This post is about much more than the stock market. For many months now I've been reluctant to openly speculate on our future, but now I'm compelled to drop a few hints.

Most of us are familiar with the landscape by now:
  • Trillions of dollars of new public debt marketed as a cure for a nation with too much private debt.
  • Massive loans from foreign governments (treasury sales), followed by equally massive printing of new dollars, effectively reneging on part of our debt payments.
  • The rise of newly hostile nations like Venezuela along with a military resurgence of old bad guys like Russia, Iran, N. Korea, and even African pirates(!) - just at the time that our politicians are talking about cutting missile defense and reducing the military budget.
  • A widening divide between two irreconcilable political camps in our own country (conservative vs. liberal).
  • Record ammunition sales to private citizens.
  • Increasing government control of corporations and the economy.
I can't predict exactly when or what event will trigger the next wave of massive changes to our country, because I'm not an historian and I'm not wise enough to choose from numerous possible scenarios. However, I wouldn't be surprised if a fed-up China did something drastic with its two trillion dollars of U.S. Treasury bills. Nor would I be surprised if China, Iran and N. Korea took advantage of perceived weakness to move on Taiwan, Israel, and S. Korea, respectively. Finally, I'm not surprised that Texas is making noises about state sovereignty and the right to secede from an increasingly cowboy-hostile Washington D.C.

The bottom line is that the world is starting to ponder the possibility of a bankrupt yet power-hungry U.S. federal government. China doesn't want to get stuck with worthless T-bills; states would rather be free from both federal control and the federal debt; and enemy nations are licking their chops at the prospect of mothballed U.S. aircraft carriers and shelved missile shields. Even if all of these details are wrong, there's little doubt in my mind that the world is in store for even more painful upheaval. We can't trick hostile foreign governments into funding our gargantuan federal budget forever, nor do our own citizens have infinite patience for a fiscally irresponsible and meddlesome federal government.

Something's gotta give.

Monday, April 06, 2009

The suspense is killing me

The S&P 500 index is tiptoeing along just below a threshold that will make the long-term component of my timing model start to turn from bearish to neutral. Meanwhile, as has been the case before in 2009, my sentiment readings are about as optimistic as they can be, which is bearish in short/medium term. Since the March-April rally has been slowing down but not stopping or reversing, the market may remain in this frustrating limbo for some time to come.

I don't really care which direction the market ends up going. I simply want it to give clear signals either way before it makes a big move so that I can profit from it. Take note, though, that with a dividend yield of 3.5% and forward P/E ratio of 19 for the end of 2010, the S&P 500 index is still on the expensive side of the historical average, so stocks are probably not good long term investments right now, even if this is the beginning of a bull market rally.

Monday, March 30, 2009

Rolling over

Today's fall was the second time this month that the S&P 500 index broke through a rising bottoms trend line.

There will probably be more exhilarating one-day gains in the near future, but the bigger trend seems to be a rally that is running out of steam. It looked to me like the rally trend had ended on March 20th, and despite a huge gain on the next day, the S&P 500 hasn't made much progress since then.

Thursday, March 26, 2009

Rage, rage against the dying of the light

I'm a contrarian investor, meaning that when in doubt, I try to bet against the masses. However, the stock market isn't the only place where I apply this philosophy.

Global warming alarmists have established an Earth Hour this weekend as an opportunity for people to "vote" for saving the planet. They're asking people to turn off their lights from 8:30 to 9:30pm to demonstrate that they want to save energy and make the planet cooler.

The irony is that Earth Hour has it completely backwards. The Sun is just beginning a multi-decade quiet period which will probably cool the Earth substantially. If carbon dioxide really does have any effect on the Earth's climate, then we should work to increase it to maintain the relatively mild temperatures that we've been enjoying for the past several decades. The last time that solar activity waned (1600's-1800's) was no picnic - in fact, that period is now known as the "Little Ice Age."

There are also economic considerations. Corporate profits have been falling for some time, the economy has been shrinking, and unemployment is on the rise. It strikes me that using electricity helps anyone associated with coal mining, coal transportation, or nuclear power. I don't know about anyone else, but I'd like to help the economy recover as soon as possible.

At 8:30 pm this Saturday, I'm going to turn on every light bulb, television, computer, fan, air filter, air conditioner and heater in my home. It should be pretty cheap electricity anyways if everyone else is in the dark.

Monday, March 23, 2009

Putting my method to the test

After bouncing off of the declining tops trend line on Friday, the S&P 500 index plowed through 800 today on the way to a 7.1% rally.

This is the umpteenth example of a single-day large rally accompanied by optimism in this bear market, and after every previous example the market eventually reached a new low.

Obviously I couldn't predict the news events on Wednesday (the Fed buying Treasury bills: $300 billion) or today, (the Treasury buying bad bank assets: $1 trillion) and I'm pretty sure that these have sustained the rally up to this point against the headwind of market optimism.

I've wired some new money to my Roth IRA to take advantage of lower GRZZX prices, but I won't count this new purchase towards my track record here on this blog.

By the way, one of my end-of-bear-market signals would trip if the S&P 500 closed in the vicinity of 850, which is less than 4% higher than today's close of 823. I won't say anything more about that unless and until it happens.

Friday, March 20, 2009

Earnings and dividends in the doldrums

The dividend yield for the S&P 500 based on the most recent quarter is only 2.75%, which remains highly overvalued and outside of the normal range of 3%-6%. In order to return to an historically average yield of 4.5%, the S&P 500 index would have to fall to about 485, which is a 37% drop from here.

Meanwhile, earnings continue to deteriorate. The projected real P/E ratio of the S&P 500 for the summer quarter of 2009 is an other-worldly 243. The forecast for the end of 2010 sees a more reasonable but still overvalued P/E of 19, however I don't really trust any forecast at this point given the earnings crash that earlier forecasts missed.

Looks like a reversal

The S&P 500 index has broken below the lower trend line of its confined two-week rally. The declining tops trend line at 800 shown in the previous post has held for now. I think this is the end of the sucker rally, and the beginning of a retreat that will take the S&P below the previous low near 670.

Wednesday, March 18, 2009

Technicals

The S&P 500 index has rallied straight up from its bear market low, breaking through one potential resistance line and bumping into the next.

Market sentiment has become extremely optimistic during this rally, so I'm not too concerned about the first trend line violation. If the resistance line at 800 holds and the market turns down, then my GRZZX position could pay off pretty quickly. If the S&P manages to keep rallying, then I plan to sit tight as long as sentiment continues to climb, and might even consider adding funds to my Roth IRA for another GRZZX purchase.

The situation that would compel me to cash out of GRZZX with a loss would be if sentiment starts to turn pessimistic while the market continues to rally. Stay tuned.

The Fed will buy Treasury bills

Good news everybody! The left hand (Federal Reserve Bank) has agreed to loan money to the right hand (U.S. Treasury). This should make everyone feel better about the economy, and it has absolutely-positively nothing to do with any bond/debt bubble. Ha-ha! Really. Everything is just fine.

Tuesday, March 17, 2009

Inflation

I have no idea if we're going to suffer from high inflation in the near future or not, so I don't anticipate placing a large bet either for or against it. However, for those folks who are convinced that the value of the dollar is about to take a dive, I can suggest some relatively low-risk funds. Depending on one's certainty or fear level, these can either be a small part of a diversified portfolio, or a larger part of an anti-inflation strategy.

Treasury inflation-protected securities (TIPS) are Treasury bonds that are linked to the rate of inflation, meaning that both the underlying principal of the bond and the interest payments are adjusted up or down in proportion to the rate of inflation/deflation in the U.S. This is obviously a very attractive investment when inflation hits, because the holder will earn real interest when other fixed-income investments are effectively losing value. Of course the reverse is also true, as deflation in the U.S. will cause TIPS to actually lose value relative to other bonds.

Access to TIPS funds varies between accounts. For Roth IRAs and taxable accounts there is an exchange traded fund composed entirely of TIPS with an easy-to-remember symbol: TIP. (Right now TIP has an impressive dividend yield of 5.9%.) In the case of limited accounts, (401(k)s, 403(b)s) some institutions offer TIPS funds while others don't, so anyone in this category who's interested in TIPS should check with his provider.

I don't necessarily recommend TIPS as hedges against financial Armageddon, because the government's ability to increase payments to TIPS holders depends on whether or not it has sufficient funds in the first place. In addition, any general sell-off of U.S. Treasury bonds will affect TIPS prices. Nonetheless, I think TIPS may be the safest liquid hedges against inflation because they pay interest and don't involve derivatives. In the case of limited accounts they're usually the only hedge.

Now if only I knew how to predict inflation...

Monday, March 16, 2009

GRZZX update

The GRZZX purchase that I made with my 50% cash reserve was completed on Friday at a price of $9.32. Since the other half of my Freedom account was already in GRZZX at a purchase price of $9.03, the average purchase price of of my current position is $9.18. (I'll round up, which actually works against me.)

Now, the accounting is more complicated than that, because that 50% cash position came from two sales that resulted in an average gain of 9.1%, or 4.5% (rounded down) for my entire account. To make the math simpler from here on out, I will forget about the 4.5% profit and fold it into the purchase price of the current GRZZX position. Thus, it is as if I purchased GRZZX for $8.79 back in December and January with the original amount of money.

Whew.

Friday, March 13, 2009

The human side of bear markets

This bear market has been educational for me, and not because of anything I've learned about stocks. If timing the low points in a bear market is difficult, navigating the storm of human emotions that comes with a bear market is even more challenging. I often hear that economic downturns will cause people to focus on what's important in life, which sounds like it would work to improve human relations, but I don't think that's the whole story.

On the one hand, buy-and-hold investors who have been losing money in long-term stock positions understandably resent hearing that someone is making any money at all in a bear market. I learned early on not to volunteer investing advice or news of my success to anyone in person, when a professional colleague actually sniped at me with "F- y-." Even when someone asks me for advice today, I try to tread lightly. Someone who's lost 50% in the market isn't about to pat me on the back with a hearty "congratulations." Instead I'm usually met with skepticism or painful silence.

On the other hand, more recently I've been the object of criticism or outright ridicule by people who think I'm hurting my returns by being too timid with my timing or with my choice of funds. A couple of comments that I've actually allowed to appear on the blog can attest to this. On the stock-rating page of fool.com, called CAPS, the overall tone of the public blogs there has taken a somewhat darker turn, even among the successful players who are actively trading and profiting from the bear market.

Aside from the damned-if-you-do, damned-if-you-don't attitudes of others, there is something unseemly about making money in a bear market. Every profitable trade that I make comes with the knowledge that hundreds of millions of investors around the world just lost by the same percentage, and it feels like an ill-gotten gain. I'm not going to stop using bear funds, but I'm not enjoying the whole experience quite as much as I thought I would.

Can you please tell me...

Tell me how you compute short-term sentiment.

NO.

Tell me your secret to identifying a bull market top.

NO.

Tell me your secret to identifying a bear market bottom.

NO.

Tell me how you made your Dow 8500 forecast in January 2008.

NO.

Thursday, March 12, 2009

Let's start the insanity

This 3-day rally has returned optimism to near-record levels, and that's enough for me to go 100% bearish again. That's right: I'm putting the 50% cash position back into GRZZX, which is now at a lower price than at least one of the two previous 25% selling points. It helps that there's a potential resistance line around 775 or 800 on the S&P which will probably cap whatever momentum is left in this rally.

The last time the market was this optimistic was early February, when the S&P peaked near 870. Now that optimism is peaking at only 750, I expect the next downward leg to take the market to new bear market lows below 670.

Your retirement account owns stocks.

I think there are many people who don't understand this basic fact:

If you own a retirement account, and if you haven't specifically contacted the administrator to move your savings out of the stock market, then you are at least partly invested in the stock market.


"Funds," "mutual funds," "equity funds," "index funds," and "growth and income funds" are all fancy names for a group of stocks. If you own one or more funds, then you probably own stocks, and that portion of your savings will move more or less in lock-step with the S&P 500, plus or minus any theme variations like company size or foreign/domestic breakdown. Fund managers and retirement account sponsors (Fidelity, TIAA-CREF, etc.) are not allowed to time the stock market, and will never pull your money out of stocks in anticipation of a crash. If they did, they themselves would be instigating a selloff and a crash.

It's up to the individual investor to allocate his savings between various stock funds and debt market funds (bonds, money market), either by calling his investment company or by going online and using their website. It's unfortunate that most retirement accounts are limited to these two types of funds, beacause we may be in the middle of both a stock and bond bubble, but at the moment we have to make do with what we have. My "Limited" portfolio is in a U.S. Treasury money market fund, which is as close to simple cash as any fund can be.

Diversifying for Armageddon

A troubling mega-trend has me thinking about the worst-case scenario for the U.S. economy. The Federal government has been creating and borrowing money at a mind-boggling rate in a supposed attempt to revive the economy, and I fear that it will ultimately have the opposite effect. I've lost track of how much money we're on the hook for, as it's been a blur of a half-trillion dollars here, 3/4 trillion dollars there, seemingly repeating every week or two. Our capacity to borrow from ourselves and from other nations is limited, and it's possible that the limit has already been crossed, even though the fallout has yet to fully materialize. The real irony is that the subprime mortgage collapse has just provided a hard lesson in what happens when people take on too much debt. It's almost as though the folks in D.C. are living in a different universe.

The latest news is that the FDIC, the Federal Deposit Insurance Corporation, is low on funds, and has asked for a half-trillion dollar loan. The FDIC is the insurance program for our bank accounts, and with all of the recent bank failures, its cash reserves are running out. Without a loan to save the FDIC, it's possible that at some point in the near future a bank could fail and all of the savings accounts could go up in smoke along with it. I speculated earlier that foreign governments like China might not be willing to lend us money forever, so scrounging up another $500 billion at the last minute could prove difficult.

The bottom line is that something has to give eventually. The unraveling may begin with an uninsured bank failure, or with a sell-off of U.S. Treasuries by foreign governments, or by hyperinflation brought about by too many dollars being in circulation, or by outright bankruptcy of the federal government. I don't know where, when or how it will all come down, but I don't plan on being blindsided by it.

I'm spreading around my liquid savings/checking account funds to minimize the risk from any one institutional failure. I'm opening up an account with a second bank in my neighborhood, and I'm already transferring some of my savings to a third online account with yet another institution. In addition, I'm taking out a little extra cash every time I visit an ATM to stash away in case the entire banking system collapses. (That's mostly to make sure I have enough gas and food to drive to the Midwest and hook up with family.) I fully realize how insane and paranoid this sounds, but I see these as small measures which could make a big difference if things get really bad.

If it turns out that the financial system recovers without any major damage, then I'll be very happy to withstand the embarrassment of having gone overboard with my preparations. On the other hand, if a collapse is looming, then I only hope I can make sufficient preparation before it's too late.

Wednesday, March 11, 2009

Beating the Market vs. Making Money

Medium-term bottoms in bear markets are steep and brief, and it's basically guaranteed that I won't be cashing out of GRZZX on the right day or at the best price, so I'm happy to make any positive returns at all in this market. The thing to remember about bear markets is that cash outperforms stocks, and anyone who's been 100% in cash or money market funds has been doing better than just about every other stock-holding portfolio.


Making MoneyBeating the S&P
Bull MarketEasy: Index fund (SPY)Hard: Timing or stock picking
Bear MarketHard: Shorting+timingEasy: CASH!


Update: The sale of the 2nd GRZZX position today happened at a price of $10.00 on the nose, for a gain of 10.7%. Half of my original $9.03 purchase of GRZZX has now been cashed out, for an average gain of 9.1%.

Tuesday, March 10, 2009

Upper trend line breached - cashing out 25%

The S&P 500 closed at 720 today, which is above the upper channel line, but not decisively so.
Today's large 6% rally was also accompanied by yet another spike in optimism, which suggests this rally may be short lived. Since I'm not very impressed with this rally just yet, I'm going to cash out of only 1/3 of my GRZZX position, meaning 25% of my "Freedom Account" will be transferred from GRZZX to cash tomorrow. That will leave 50% in GRZZX and 50% in cash.

Friday, March 06, 2009

An orderly retreat

The past month's decline in the S&P 500 index has formed a narrow channel pattern, with a well-defined lower trend line and a not-so-well defined upper trend line.

This is a helpful development, because these close trend lines are like trip wires that will give an early warning signal when the overall market trend changes. Sentiment is neutral right now and not much help, so this formation showed up at just the right time.

Thursday, March 05, 2009

I don't give a damn about the Dow

I've written before about how the "experts" do their best to hide the most factual and useful data by promoting fanciful or useless data. For instance, it's easy to find P/E ratios for stocks using operating earnings, but not so easy to find the numbers with real as-reported earnings. Similarly, when the stock buyback craze swung into full gear in the middle of this decade, pundits suddenly started singing the praises of buybacks while ignoring the historically low (and worthless) dividend yields.

The talking heads do the same thing when it comes to stock market indexes. No matter whether you get your stock market news from TV, radio, the internet or the printed page, the first number you probably see or hear is the Dow (the Dow Jones Industrial Average), which has become the standard gauge for "how the market is doing." The Nasdaq is usually the second number reported, and if you're lucky you might get as an afterthought the value of the S&P 500 index. Not surprisingly, it is this last and least-followed number which actually matters.

The Dow Jones Industrial Average suffers from two fundamental flaws. First, the 30 companies whose stock prices are used to calculate the average are chosen somewhat arbitrarily. Sure, its 30 members are among the largest companies, but they are not the largest, and therefore are not as representative of corporate America as one might think. Among the top-30 companies which aren't in the Dow are Cisco, Apple, Google, PepsiCo, and Philip Morris. Conversely, several companies which are in the Dow 30 are quite small by comparison, like DuPont (87th largest), Caterpillar (98), American express (103), and Alcoa (243).

The second problem with the Dow is how the index average is computed. The stock prices of the 30 companies are weighted, not by the size of each company, but by the price of a single share of stock, which is a meaningless number. So IBM, the 7th largest corporation in America, has the greatest weight in the Dow 30 index (10% of the total) because its share price is $88. Meanwhile, AT&T and Microsoft, the 4th and 5th largest corporations in the U.S., are only ranked 16th and 22nd in the Dow, respectively, counting less than 3% each towards the total.

By comparison, the S&P 500 index is a far more logical, meaningful, and useful measure of the stock market. Not only is the S&P comprised of 500 companies instead of the paltry 30 in the Dow, but the contribution of each stock in the index is weighted by the size of the company. More specifically, each company in the S&P is weighted by its market capitalization, which is the total price of all of the shares of stock, or the amount of money required to buy the entire company at its current share price.

The membership of the S&P 500 is also more logical and relevant. With only a few exceptions, the 500 corporations in the S&P are the largest 500 stock-issuing companies in the country, accounting for approximately 78% of the entire net worth of all stocks traded in the U.S. markets. (The largest corporation not included in the index is Berkshire Hathaway, whose class-A shares are worth $72,000 each today, thus placing it in a very exclusive market that most investors can't participate in anyways.)

For these reasons, I use the S&P 500 index to follow the stock market instead of the Dow Jones Industrial Average. Sure, the Dow still has some use in historical studies (it's a few decades older than the S&P) and as a sentiment gauge, (more people pay attention to it) but it's simply inferior to the S&P 500 when it comes to tracking the overall U.S. stock market.