Diversification

Watch this 9 min video. Investment philosophy that has stood the test of time. Part 1.

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November and December, UP OR DOWN?

What happens in markets in the first 10 months of the year can shed light on what might happen in November and December.

The statistic-minded folks at Bespoke Investment Group crunched some numbers going back more than a century and came up with this interesting tidbit – when the Dow Jones Industrial Average is up 10 percent or more through October, the next two months have yielded positive Dow returns 87 percent of the time.

2009 marks the 47th time since 1901 that the Dow has topped 10 percent through October. When that occurs, Bespoke says, there has been an average Dow gain of 4.2 percent and a median gain of 3.6 percent through the end of the year.

Here’s another factoid – regardless of performance through October, the Dow has averaged a 65-basis-point gain in November over the past century. The results are better over the past 50 years and 20 years – monthly gains of 1.21 percent and 1.79 percent, respectively.

There are, of course, no assurances, that this year will follow the strong November-December historical trend. In 2007, for instance, the Dow dropped nearly 5 percent in the last two months of the year as the U.S. and other countries slipped into recession.

But for what it’s worth, Bespoke says all of the other five November-Decembers with negative Dow performance came before the end of World War II (1912, 1918, 1919, 1925 and 1943).

All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Dow Jones Industrial Average is a price-weighted average of 30 blue chip stocks that are generally leaders.

What do you think?

Eduard Hamamjian

Managing Director

Toll Free 877-351-4902

Fool me once shame on you.

Fool me twice, shame on me.

The Federal Reserve chairman Big Ben, recently told us that the recession is in technical terms, “over”. Big Ben however neglected to tell us some interesting facts. For example, that neither he nor other members of the Fed foresaw the current crisis even though it was staring them in the face, very much like a deer staring into the headlights of a coming truck. Big Ben also forgot to mention an important fact about when this current recession/depression really began. The period of economic contraction really began some time between 1998 and the year 2000.



If not for deliberate inflationary policies of both the Fed and the Government, we may have had a negative GDP growth rate for the past 8 to 11 years. The Fed is currently engaged in the largest Ponzi scheme ever witnessed in world history. The US government borrows money to finance deficit spending, and the Fed prints money to buy US government bonds. Meanwhile the dollar continues to lose value in real terms. To put this strategy in perspective we have to consider the following points.

The dollar peaked in value in late 1999, and has declined 30% since. The stock market has also been in a long-term bear market for at least the last 10 years. In real terms the market would have to triple or more for investors to achieve the same level of wealth they had at the peak of 1999. By “real terms”, I mean purchasing power of real goods and services.

Consider the following quote from economist, John Maynard Keynes,
"By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in 1 million can diagnose." (1920)




Let me use examples to better illustrate these points. $100,000 of cash in 1932 is now worth $2000 in purchasing power, that is a 98% destruction of purchasing power. 100,000 worth of gold bought in 1932 is now worth $4,449,000. Why did the Government take all the gold from the people then?

Big Ben has signaled more of the same for an extended period of time. Investing in forward-looking, quality companies and hard assets may have been just a preference for some in the past, but I believe it is a necessity today; not to accumulate wealth, but to simply maintain it.

As I have explained in the past, let me remind you again today. . .

Our economy for the past 400 years or so has had an average of 17 years of expansion, and an average of 17 years of contraction. This dynamic will not change because of idealistic Presidents or because of corrupt representatives.
Elected officials like all humans, want to believe they are contributing to the common good. The paradox is that their bloated egos and misplaced priorities are in fact the problems we citizens face. Over-regulatory measures combined with increased taxation during a recession are a recipe for the next Great Depression. There is no system that is perfect, as the nature of man is not perfect, but the overriding belief of politicians today seems to be that THEY know best exactly how to spend your money.

What do you think?

Is there a bull in our china closet?

The second leg of a bull run is here.

As I've talked about in previous blogs it is easy to make an argument, for the secular bear market we find ourselves in. The good news is that the markets do not go straight down, or straight up. I am going to make the technical case, for the beginning of the second leg up in a cyclical bull market.



The recession began in October of 2007, and will probably end on a technical basis in the current quarter. This recession by any historical measure, is one of the longest recessions in modern history. Typically the stock market acts as a leading indicator for future economic activity. Although the exact number of months the market leads is a debatable point, and variable itself. The consensus view, is the market leads the economy an average of 6 to 9 months.

We have witnessed two major declines in this decade as a result of a over-confident Fed and incredibly ignorant government polices. Both of these declines have had a similar pattern in forming a market base in which to catapult from. Typically the bottoming process that stock markets work through, last an average of six months to one year. Both bear markets this decade, have lasted nine months.

We have essentially been in an extremely volatile trading range, from October of 2008 until the end of July 2009. On March 6, 2009 the market bottomed, and began its incredible rise from 666.79 to the June 11 high of 956.23. The June 11 high was an important technical level that was achieved. We then had a shallow correction into July 8 of 869.32. The market came roaring back and closed above the important psychological level of 1000 on the S&P 500. The first important test at this level was to close above 1007 on the S&P 500, and stay there for a week or two.

It is important to compare this cyclical bull market rally relative to past cyclical bull market rallies. There have been seven cyclical bear market rallies that occurred over the past century similar to this one. Let's break down these rallies using the analogy of a three legged stool. The first leg of the three legged stool, was the stock market move from the March 6, 2009 low to the June 5, 2009 level. The second leg of this cyclical bull market rally, when compared to past rallies, can be significant in its move higher from current levels.

The seven second leg rallies that most resemble our current market , occurred in 1908, 1938, 1904, 1974, 1921, 2003, 1933. According to historical data gathered from the Stock Market Almanac, Gannon Global Financial research data, and Thomson Reuters, the second leg of these rallies were major moves higher.

Four of the 7 rallies cited above had second leg moves of a minimum of 46%. Three of the seven had moves of a minimum of 23%. Given the violent decline we had in the market from September of 2008 until the low of March 6, 2009, I'M inclined to believe the second leg up of this rally will resemble a V-shaped stock market recovery. The next level of resistance is 1255 on the S&P500. Which was the point the violent decline began in September of 2008. My expectations is that this next move will take a minimum of two months or on maximum 10 months.

It is important to remember that technical analysis, or fundamental analysis, or any combination of other analysis used, is not an exact science. No one could know for sure the next move in the markets, as the markets are more complicated and wiser than any individual or organization.

However if you believe that history is a guide to help predict the future as I do, then the examples used in this blog are valid.

Tell me what you think?

Are you kidding me.

Congress implemented the cash for clunkers program. This one billion-dollar bailout of the already bailed out auto industry has been a stunning success with the entire amount being depleted in only six days. The auto industry continues to be on life support, while Congress is debating doubling the cash for clunkers program to a stunning $2 billion, all on the backs of taxpayers. This is the nature of stimulus, and we can all rest assured that more money will be spent to bail out broken industries, failed business models, and the systematic rewarding of the least productive members of our society.

The unemployment rate in the state of Rhode Island is estimated to be around 12%, which is the second highest in the nation. It is suprising to me how full restaurants are, given these astounding rates. The restaurant owners that I have talked to say business is down well over 30% on a year over year basis. Although the same people are going to the same restaurants, their eating habits apparently have changed. They are ordering less food, skipping desserts, not ordering the same wines or keeping their selection to a minimum. This dynamic will have a deflationary effect on local businesses as these businesses begin to compete on price rather than value. Competing over price instead of value never works out in the end for any business. We have seen examples of this in the financial service industry right after the Internet penetrated the vast majority of our population. There was a time, for example, that a person would go to their stockbroker to buy their stocks. Buying stocks at the time before the Internet age was in fact a monopoly of the large firms that are mostly gone today. But the Internet changed all that, and discount brokerage firms started popping up and offering customers of these former large mostly bankrupt firms, an alternative to purchasing these stocks at a significantly lower cost. The competition then began to be about price, rather than the overall value. The net result of this dynamic as we have recently witnessed, has been the destruction of that industry. This was the first shoe to fall that put these firms down the path of bad behavior. This was a perfect example of a failed business model that should not be bailed out.

As prices for goods and services continue to fall in the short-term, this dynamic should improve consumer sentiment, and result as a net positive for the stock markets.

There is no question that we have seen inventory liquidation taking place in America. The magnitude of sales promotion programs at the retail level have been massive. The problem is sales have fallen at about the same pace as inventories have declined. The inventory to sales ratio is almost unchanged over the past year. For an inventory replacement cycle to take place, inventories must be depleted and there has to be an incentive to restock the inventories. Businesses need to see a light at the end of the tunnel, otherwise they will not or cannot restock depleted inventories.

Either sales must rise or inventories must fall further in order for the economy to find its equilibrium. If sales rise, then GDP is going to improve. If inventories fall, further deflationary effects will be felt, and the stage might be set for a genuine rebound in manufacturing, as lower prices increase demand. What worries me most is how small and medium size businesses will continue to cut costs. Once the fat is cut out of a business, the only thing left is further layoffs of the workforce. The unemployment rates will get worse before they start to improve.

We are already hearing chatter about the recession being over. In technical terms, these predictions could be correct, but the reality of this recession is the massive overreaction of the federal government and the Fed. The overreaching regulation and massive bailouts by the government of failed banks and industries will result in numerous unintended consequences. For example, I believe we have entered a long-term bear market for bonds. The government's massive borrowing will crowd out the private sector, and raise interest rates for decades to come.

We should see markets rising in the short-term, because of government bailouts and interference in the free markets by the Fed. None of these policies are sustainable, and they will not stimulate entrepreneurship and ultimately job growth in the private sector. Look for a double dip recession late in 2010.

Tell me what you think?

Interesting times.

The S&P 500 is now up nearly 100 points or 11% in a matter of nine trading sessions. Short-term, the market may be getting ahead of itself as bullish sentiment are just as high today as the Bears were confident a few weeks ago. This market has been notable for its head fakes, so it will be interesting to see if the indices can hold on to their gains.

Better than expected second-quarter earnings numbers have consistently been a product of lowered expectations and sharp cost cutting, i.e. job cuts. Generally, cost-cutting has successfully improved bottom-line results. Despite shrinking topline sales. The bad top-line/good bottom-line theme has been very consistent in the second quarter reporting period. While the headlines have been bullish, there are still plenty of question marks for the economy moving forward. The biggest question mark for the stock market is whether Corporate America can still grow its bottom line in a weak economy without resorting to further cost-cutting measures, job cuts etc. Or, will topline continue to shrink along with the economy and lead to disappointed investors in the future quarters?

Given the way second-quarter earnings have played out, my focus going forward will be on the health of the US economy. It doesn't take a rocket scientist to know that stocks will not do well if we continue to have higher unemployment rates, slowing business activity, and rising costs a.k.a. government spending and tax hikes. It will become obvious if we are in the second leg of a new bull market, or if we simply had an unmistakable head fake where we will go to new lows in the markets.

Tell me what you think?

Is confidence just a dream?

We have rising unemployment, declining real estate values, rising government debt, a record level of consumer debt, a doubling of foreclosures and bankruptcies,and the inevitability of rising taxes. Who is confident now? In the face of these facts we have a government that has helped us be confident. The drop in the headline consumer confidence index fell from 54.8 in May to 49.3 in June, presumably reflected this month's 15% surge in gasoline prices. Confidence remained well above February's record low of 25.3, but it has yet to recover to the level of 61.4 scene when Lehman's collapsed last September, let alone the levels normally associated with a healthy economy . It is possible that confidence will rise in the coming months. The case Shiller 20 city index suggested that the rate at which housing prices are falling has slowed. Meanwhile, employment has also started to fall more modestly and gasoline prices have stabilized. But confidence is unlikely to recover to the levels that were the norm before the recession. Households still need to reduce their debt to more manageable levels. That will be even harder to achieve if we are right in thinking that income growth will continue to slow in the coming months and years. Overall there is no doubt that confidence has recovered from the depths we saw earlier this year. But we have many issues still to contend with. For example, we still have not seen the inevitable effects of rising foreclosures in the prime real estate market still to come, over the next two or three years. Most of the refinancing and new purchase loans that were done in the real estate market in the years 2004, 2005, 2006 were five year adjustable rate mortgages that started with a teaser rate that would change dramatically at the end of five years. A significant portion of these prime borrowers could not afford their monthly payments under the adjusted rate of interest. This will inevitably spark a new round of foreclosures, but this time in the prime real estate market, which is significantly larger than the sub-prime market. It would be difficult for the government or so-called financial experts (cheerleaders) often seen on television to talk up confidence in what is clearly bad news. Today the S&P 500 completed the right shoulder of the classic head and shoulders formation with the bearish bias. We are looking at a perfect storm of both fundamental and technical data points that point to a correction in the markets, that could accelerate to the downside on any given day. This bias to the downside began in the first week of June, but it has been slow to materialize and follow through. Time will tell. Tell me what you think?

I love my sushi.

Japan by all accounts is the sushi capital of the world,

and I have my excuse to consider Japan. Foreigners have been piling into Japanese equities in recent months, helping the Japanese stock markets to rally nearly 30% since early March. Let the sushi times roll. With risk appetite now waning, the buying spree may not last. Japanese stocks are not as overvalued on an international basis as they once were. And there is growing evidence that Japan's economy is firmly on the fix. Indeed, I suspect Japan will grow faster than any of the major developed economies next year. The share of Japanese equities owned by foreigners at the end of 2008 was 23.6% according to the latest annual share ownership survey published by the Tokyo Stock exchange last Friday. While still high, that share represents a fall of four percentage points in the space of just one year. 2008 witnessed the greatest annual liquidation of Japanese equities by foreigners, since at least the 1970s. Last year's decision to unload Japanese shares was motivated by risk aversion after the collapse of Lehman Brothers, together with concerns about the impact of the strengthening yen.This concern was well justified as global trade and profitability of exporters was and is still a issue. Fortunately, the selling pressure has shown signs of ending. Of the major economies, Japan was the first to enter the recession and will probably be the first to lead us out of the world recession we are in the midst of today. With the US market, now clearly in the correction phase, we can expect to see 15 to 20% decline from current levels. This would only represent about half of the retracement of the recent rise from the March lows. Assuming there are no other unforeseen surprises for us in the markets. This decline should last most of the summer, if not all, and we should have a significant opportunity to buy stocks at a historically low prices. The trade that I'm now considering is therefore, (long, Japan and short, the US). With the recent rally in treasuries and the ongoing decline in commodities, the possibility of a strengthening dollar, would further boost exports coming out of Japan. Please remember, the strategies that I talk about are not to be considered as investment advice. All of these strategies have considerable risk of not working, and the potential for significant capital losses. These are strategies for experience, money managers only. Tell me what you think?

Is the economy and the market about to roll over.

The US auto industry collapse will have a profound impact on the budgets of the states. Auto sales generate significant sales tax revenue. Auto dealers also pay property taxes, to local economies. The loss of the sales tax revenue, which typically accounts for 33% of state tax revenues, and the closing of dealerships nationwide, will reduce revenues for the local towns and cities. This bit of bad news is on top of the ongoing reduction of state revenues because of higher unemployment rates and continued job losses. Most states, cities and towns are faced with the unpleasant choice of cutting services or cutting government employment. Or of course, what we would expect they will do, is raise taxes. Each decision will exaggerate the problem. Most small investors feeling the pressure of declining wealth and the prospect of unemployment have in recent months, began to invest in mutual funds at accelerating rates. Small investors have been investing in both equity and bond mutual funds. Even though both have returned negative returns over the past 12 months. What surprises me is the investments in the bond mutual funds which offer very little upside, little interest and a considerable amount of downside risk, given deficit spending by the federal government and the ongoing assault on the dollar by the Fed. This increased flow in mutual funds by small investors, is a contrary indicator. We may have reached the top of this recent run up in the market. Technically, as discussed in previous blogs, the moving averages for all of the major indexes have been rolling over on low volume. The downside risk in my opinion is increasing with each passing day. I do believe we have put in the lows in the market. However, we should expect a 10 to 20% retracement to begin at any time. As stated in previous comments, we should have an significant upside and the opportunity for above-average profits in the period that immediately follows the correction. Good investing.

Here comes a slow motion train wreck.

What goes up, must come down.

The S&P 500 over the past seven trading days, has displayed a classic triple top, when measured on a daily basis. With the various moving averages crossing negative and the S&P 500 drifting lower, it appears the market will correct, but to what levels?
I do believe the lows are in this time around. However, this correction, could and probably will approach the March lows. At the completion of this correction, we will have a once in a lifetime opportunity to buy the markets at historically low levels.
We are still in a secular bear market, which started in 1998 or 1999 and as history has shown us before. These periods of contraction tend to last on average, 17 years plus or minus. In other words, when all is said and done, tighten your seat belt. As we going down again. But for today's trading, and I want to emphasize trading, and not long-term investing. It is important to understand that the market will offer many opportunities to be long or short in our quest to rebuild our investments.
This trade, like all trades are just that, a trade. Please don't bet the farm. You may lose it. Many of the strategies that I will talk about in my blog will be similar to how a poker player plans out and assesses his opponents. The idea is very simply, play the odds that are most favorable to you. You have to know when to fold.

Do we hold or fold.

Today the S&P 500.

Over the past five trading sessions, we experienced fractional new highs above the January 6 high of 943.85 without experiencing follow-through to the upside. Given today's retreat off the highs, it is a distinct possibility of an reversal pattern to begin. The Mac turned negative on a daily basis. Giving the failed follow-through, the probability of a dramatic decline to take place has increased. Although it is normal for markets to take two steps forward and one step back before going to higher highs. We have been at this level before. January 6 at 943.85 comes to mind.
There are many experts on the various financial channels that believe we are in a bull market, and they could be correct. However, with rising unemployment, and declining real estate values, along with a credit crisis for small businesses. The economic engine for the US economy appears to be somewhat muted. All small businesses are experiencing a continuing credit crunch with lines of credit being closed and interest rates increasing further hampering the cash flow of small business nationwide. There is no compelling reason for small businesses to take risks or consider hiring new employees. The changing tax structure for small business and uncertain regulatory environment is a negative affect on risk-taking. Over the coming weeks, but especially the coming days we will have a much clearer picture to the direction the market will go to. Send me your thoughts?

We are going to fly or die in the market.