SIA has proven itself a useful tool to compliment my work on free cash flow, but when analyzing commodities it could be an even more powerful tool, in that commodities have no earnings, no balance sheets and no cash flow statements to analyze, thus the only way to analyze them is through technical analysis or price action (of course Macro-events play a major role as well, but those cannot be quantified).
But what if you are long term investor or want to hedge for your business and want to go beyond the 200 day moving average. Your options are rather limited, because commodities are basically in the realm of the short term trader, so what can you do? Well I analyzed the Fuel Oil Industry using my SIA and came up with some amazing results.
I was able to get data for most of these fuel oils going back to 1986 and if we go forward 3650 trading days we end up with #1 trading day (on the horizontal axis of the chart) beginning in the year 2000. So we have 10 years of concrete SIA data to work with and that should be adequate.
I was able to analyze four different fuels for this article, and they are as follows.
The following is a chart for WTI Crude Oil;
As the chart clearly shows a pretty amazing thing happened with crude oil as it went up to $145.31 on trading day # 2130 (July 3, 2008) and on that day the SIA was $35.37, so Crude Oil was trading at 4.10 times its SIA. In the stock market I usually like to sell at 2.0 times SIA, so this was twice my sell price.
So what would have happened if you bought crude oil on that day and went long? Basically you would have lost -74% on your investment as oil prices fell off a cliff and kept dropping until February 23, 2009 when they broke below the SIA line (Red Line) for exactly one day. That’s right, oil fell below its SIA on February 23rd only and has never been down there again . So my SIA called the bottom in crude oil and the indisputable proof is in the chart before you.
I wrote an article on IBM a few days back, which you can read here;
http://freecashflowanalyst.com/2010/12/26/mycroft-research-analysis-of-international-business-machines-ibm.aspx
And in that article I posted this SIA chart:
As you can see on #8155 the stock broke its SIA for exactly one day as well and then shot up.
Is this a crazy coincidence or am I onto something here? IBM hit its low on November 20, 2008 and Crude Oil hit is low on February 23, 2009, so the dates are far apart from each other, thus the date could not be the reason. IBM has nothing to do with crude oil so, that could not be the reason either.
So what would happen if we put up the charts for the other fuel oils and see what happened with their historical SIA’s. The following may just surprise you as what happened is truly amazing;
Chart of U.S Gasoline prices;
Broke is SIA line for 10 days on December 2, 2008 and never looked back.
New York Heating Oil
Came within $.08 cents of its SIA and then shot up on February 18, 2009.
Texas Propane Spot
Broke below its SIA on February 18, 2009 and stayed around it until March 16, 2009 and never looked back.
So maybe some of these fuel oils are linked to Crude Oil and there is a direct correlation in their prices, but it seems that SIA could be a very useful tool for those doing commodity investing. Of course I have only investigated a few commodities so far, but it is very difficult to get your hands on the long term daily trading data necessary to do this analysis. I have been looking for daily closing prices for spot gold and silver for two days now and they are nowhere to be found. If anyone has access to any daily commodity prices for any commodity going back to at least 1986 all the way to today, I would love to try out my SIA on it and publish the results. So please send them to Mycroft@mycroftresearch.com if you don’t mind.
Before closing I would like to go back to the Crude Oil chart one more time and direct your attention to trading day #418, which was when crude oil broke below its SIA on November 5, 2001 and stayed there until February 22, 2002 and proceeded to go from $20 a barrel to $145.31 for a gain of 626% in just six years. Therefore as I have stated previously, when one buys at par with SIA or at a discount to it, the gains can be substantial and the farther you go away from it the greater the risk becomes. At crude oils current SIA of $44.74 and with my rule of thumb of selling at 2.0 times SIA, it could mean that crude oil would be a sell at $89.48. The historical price to SIA average for crude has been 1.88 times (the mean of 2752 trading days) so selling at a SIA of 2.0 could be a prudent move.
Diclosure; Long IBM, No Position in any of the commodities mentioned in this article.
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
Permalink: freecashflowanalyst.com/2010/12/27/analysis-of-fuel-oils-using-statistical-indicator-analysis-sia.aspx
________________________________________
By Mycroft Psaras
Research Director at GeaSphere
http://www.geasphere.com
877-351-4902
Tuesday, December 28, 2010
Monday, December 27, 2010
GeaSphere Research Analysis of Cisco Systems (CSCO)
The main thrust of this analysis is concentrated in three parts. The first two parts are based on free cash flow (current and historical) and the third is based on historical price action as a gauge of investor sentiment.
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher.
Analysis of Cisco Systems (CSCO)
Cisco Systems is the cover story of the latest issue of Barron’s, so I decided to do a write up on the company as well. The following is a table housing Cisco Systems Owners Earnings data from 1987-2011 (including estimates);
Cisco Systems closing price on December 23rd was $19.69 and its OE per share for 2010 came in at $1.55, which would give us a Price to OE (P/OE) of 12.70. I usually sell stocks that hit 30 times their P/OE, so at 12.70, using 2010 final results, Cisco Systems seems to have a long way to go before it becomes a sell on our P/OE scale, in fact the actual sell price would for P/OE would be $46.50 ($1.55 X 30)
On the COE front Cisco Systems has only been around since 1987 and the first 5 years of operations were quite meaningless from a data point of view. Therefore we only really have about 18 years to work with to determine its COE, which is not really enough data to make a conclusive analysis (I like to at have at least 25 years+ of data to get a more accurate reading). Never the less here is the chart for Cisco System’s COE:
Though the result is only $10.91 from 1987-2010, the trajectory is quite impressive and if we were to add its 2011’s estimate for Owners Earnings per share of $1.45, that would give us a COE of $12.36. Since Cisco Systems already reported their final 2010 numbers (as they close their books early), it is safe to use the $12.36 figure. So since we sell at 2.0 times a company’s COE our COE Sell Price would be $24.72.
Cisco Systems was one of those stocks that was a leader of the pack on the upside during the dot com boom and took a big hit during the dot com bust. Management in 2000 saw that their stock was over valued at the time and used it as currency to buy a multitude of firms. In the last ten years the company has slowed down its pace of accusations considerably and has concentrated all its attention on streamlining all those past purchases into one cohesive mega-firm. John Chambers and his management team have done an amazing job of controlling spending, while at the same time growing cash flow. This is the best of all worlds, when a management is able to do that and their CapFlow, as a result, is one of the best in their industry. Here is the CapFlow chart for Cisco Systems;
In it you can see the wild excessive spending that they did in 2000, finally caught up with them in 2001-2002, but fortunately they were able to learn from this and have evolved into a very conservatively managed company. All this is clearly demonstrated in its CapFlow chart.
As far as SIA goes our current SIA for Cisco Systems is $22.53, so it is trading currently at 0.87 times its SIA. I like to sell at 2.0, so from a strictly SIA point of view Cisco Systems has a sell price of $45.06. It is very rare to find a quality stock like Cisco Systems selling at a 13% discount to its SIA value, but even rarer when you can find such a stock that is also a member of the DJIA 30! I say this because most stocks in that index sell at a premium due to the fact that the DJIA components are so widely held. Cisco Systems is clearly a bargain from an SIA point of view
The following is a chart of Cisco Systems SIA from 2004-today;
So for Cisco Systems we now have three separate sell prices;
1) P/OE = $46.50 (30 times OE per Share)
2) COE = $24.72 (2 times COE)
3) SIA = $45.06 (2 times SIA)
Total = $116.28/3 = $38.76 = Sell Price
Buy Price = $19.38
Conclusion = Cisco Systems is a Very Strong Hold
Disclosure: Long CSCO
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
Permalink: freecashflowanalyst.com/2010/12/27/mycroft-research-analysis-of-cisco-systems-csco.aspx
Permalink http://geasphere.com/pages/geasphereUpdate.aspx?spid=111345&ptype=UPDATE
By Mycroft Psaras
Research Director at Gea Sphere LLC
http://geasphere.com
877-351-4902
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher.
Analysis of Cisco Systems (CSCO)
Cisco Systems is the cover story of the latest issue of Barron’s, so I decided to do a write up on the company as well. The following is a table housing Cisco Systems Owners Earnings data from 1987-2011 (including estimates);
Cisco Systems closing price on December 23rd was $19.69 and its OE per share for 2010 came in at $1.55, which would give us a Price to OE (P/OE) of 12.70. I usually sell stocks that hit 30 times their P/OE, so at 12.70, using 2010 final results, Cisco Systems seems to have a long way to go before it becomes a sell on our P/OE scale, in fact the actual sell price would for P/OE would be $46.50 ($1.55 X 30)
On the COE front Cisco Systems has only been around since 1987 and the first 5 years of operations were quite meaningless from a data point of view. Therefore we only really have about 18 years to work with to determine its COE, which is not really enough data to make a conclusive analysis (I like to at have at least 25 years+ of data to get a more accurate reading). Never the less here is the chart for Cisco System’s COE:
Though the result is only $10.91 from 1987-2010, the trajectory is quite impressive and if we were to add its 2011’s estimate for Owners Earnings per share of $1.45, that would give us a COE of $12.36. Since Cisco Systems already reported their final 2010 numbers (as they close their books early), it is safe to use the $12.36 figure. So since we sell at 2.0 times a company’s COE our COE Sell Price would be $24.72.
Cisco Systems was one of those stocks that was a leader of the pack on the upside during the dot com boom and took a big hit during the dot com bust. Management in 2000 saw that their stock was over valued at the time and used it as currency to buy a multitude of firms. In the last ten years the company has slowed down its pace of accusations considerably and has concentrated all its attention on streamlining all those past purchases into one cohesive mega-firm. John Chambers and his management team have done an amazing job of controlling spending, while at the same time growing cash flow. This is the best of all worlds, when a management is able to do that and their CapFlow, as a result, is one of the best in their industry. Here is the CapFlow chart for Cisco Systems;
In it you can see the wild excessive spending that they did in 2000, finally caught up with them in 2001-2002, but fortunately they were able to learn from this and have evolved into a very conservatively managed company. All this is clearly demonstrated in its CapFlow chart.
As far as SIA goes our current SIA for Cisco Systems is $22.53, so it is trading currently at 0.87 times its SIA. I like to sell at 2.0, so from a strictly SIA point of view Cisco Systems has a sell price of $45.06. It is very rare to find a quality stock like Cisco Systems selling at a 13% discount to its SIA value, but even rarer when you can find such a stock that is also a member of the DJIA 30! I say this because most stocks in that index sell at a premium due to the fact that the DJIA components are so widely held. Cisco Systems is clearly a bargain from an SIA point of view
The following is a chart of Cisco Systems SIA from 2004-today;
So for Cisco Systems we now have three separate sell prices;
1) P/OE = $46.50 (30 times OE per Share)
2) COE = $24.72 (2 times COE)
3) SIA = $45.06 (2 times SIA)
Total = $116.28/3 = $38.76 = Sell Price
Buy Price = $19.38
Conclusion = Cisco Systems is a Very Strong Hold
Disclosure: Long CSCO
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
Permalink: freecashflowanalyst.com/2010/12/27/mycroft-research-analysis-of-cisco-systems-csco.aspx
Permalink http://geasphere.com/pages/geasphereUpdate.aspx?spid=111345&ptype=UPDATE
By Mycroft Psaras
Research Director at Gea Sphere LLC
http://geasphere.com
877-351-4902
Sunday, December 26, 2010
Research Analysis of Exxon Mobil (XOM)
In my last three articles I introduced the various methods that I use to analyze a company for potential purchase. The main thrust of this analysis is concentrated in three parts. The first two parts are based on free cash flow (current and historical) and the third is based on historical price action as a gauge of investor sentiment.
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher, as exemplified by our investment in AAR Corp (AIR).
Analysis of Exxon Mobil
Oil prices have been rising recently and I thought that this would be a good time to see how Exxon Mobil (XOM) stacks up to our analysis. The following is the table housing XOM’s Owners Earnings data;
XOM’s closing price on December 23rd was $73.20 and its OE per share for 2009 came in at $1.84, which would give us a Price to OE of 39.78. I usually sell stocks that hit 30 times their P/OE, especially when OE per share fell off the cliff like it did in XOM’s case, dropping from $7.70 to $1.84 in just one year. If this happened in a tech company or pharmaceutical firm, I would have run away from the stock as fast as I could but with oil stocks you have a commodity based company and thus you have to factor cyclicality into your model.
The way you do that is look to future OE and we do this by estimating 2010 OE.
Before we do that though we will mention that the current COE for XOM is $50.55, which clearly shows that XOM has no problem generating OE over time and since we like to sell at 2.0 times a company’s COE we get $101.10 as our COE sell price;
In fact, XOM has 5.04 Billion shares outstanding and thus has generated $254.77 billion in OE from 1973 to 2009 and since they are projected to generate another $8.40 OE per share in the next two years, they should pump out another $42.74 billion in OE over the next two years. These are amazing numbers but then again everything is relative as XOM has a market capitalization of $369 billion currently.
If we use our estimate of $3.65 for OE in 2010 we have a forward Price to OE of 20.05. Our sell parameter for P/OE is 30, so our sell price here is $109.50.
As far as SIA goes our current SIA for XOM is $44.91, so it is trading currently at 1.63 times its SIA. I like to sell at 2.0, so SIA ranks XOM with a sell price of $89.82.
The following is a chart of Exxon Mobil’s SIA from 1984-today and in the last 26 years it has never hit its SIA line (Red Line) for the simple reason that it is one of the most widely held stocks in the world, is extremely well managed and is also the poster boy for "Economies of Scale."
So we now have three separate sell prices;
1) P/OE = $109.50
2) COE = $101.10
3) SIA = $ 89.82
Total = $300.42/3 = $100.14 = Sell Price
Buy Price = $50.07
Conclusion = XOM is a Strong Hold
Disclosure: Long AIR, No Position in XOM
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
By Mycroft Psaras
GeaSphere Research Director
http://geasphere.com
877-351-4902
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher, as exemplified by our investment in AAR Corp (AIR).
Analysis of Exxon Mobil
Oil prices have been rising recently and I thought that this would be a good time to see how Exxon Mobil (XOM) stacks up to our analysis. The following is the table housing XOM’s Owners Earnings data;
XOM’s closing price on December 23rd was $73.20 and its OE per share for 2009 came in at $1.84, which would give us a Price to OE of 39.78. I usually sell stocks that hit 30 times their P/OE, especially when OE per share fell off the cliff like it did in XOM’s case, dropping from $7.70 to $1.84 in just one year. If this happened in a tech company or pharmaceutical firm, I would have run away from the stock as fast as I could but with oil stocks you have a commodity based company and thus you have to factor cyclicality into your model.
The way you do that is look to future OE and we do this by estimating 2010 OE.
Before we do that though we will mention that the current COE for XOM is $50.55, which clearly shows that XOM has no problem generating OE over time and since we like to sell at 2.0 times a company’s COE we get $101.10 as our COE sell price;
In fact, XOM has 5.04 Billion shares outstanding and thus has generated $254.77 billion in OE from 1973 to 2009 and since they are projected to generate another $8.40 OE per share in the next two years, they should pump out another $42.74 billion in OE over the next two years. These are amazing numbers but then again everything is relative as XOM has a market capitalization of $369 billion currently.
If we use our estimate of $3.65 for OE in 2010 we have a forward Price to OE of 20.05. Our sell parameter for P/OE is 30, so our sell price here is $109.50.
As far as SIA goes our current SIA for XOM is $44.91, so it is trading currently at 1.63 times its SIA. I like to sell at 2.0, so SIA ranks XOM with a sell price of $89.82.
The following is a chart of Exxon Mobil’s SIA from 1984-today and in the last 26 years it has never hit its SIA line (Red Line) for the simple reason that it is one of the most widely held stocks in the world, is extremely well managed and is also the poster boy for "Economies of Scale."
So we now have three separate sell prices;
1) P/OE = $109.50
2) COE = $101.10
3) SIA = $ 89.82
Total = $300.42/3 = $100.14 = Sell Price
Buy Price = $50.07
Conclusion = XOM is a Strong Hold
Disclosure: Long AIR, No Position in XOM
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
By Mycroft Psaras
GeaSphere Research Director
http://geasphere.com
877-351-4902
Saturday, December 25, 2010
GeaSphere
Research Analysis of Exxon Mobil (XOM)
In my last three articles I introduced the various methods that I use to analyze a company for potential purchase. The main thrust of this analysis is concentrated in three parts. The first two parts are based on free cash flow (current and historical) and the third is based on historical price action as a gauge of investor sentiment.
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher, as exemplified by our investment in AAR Corp (AIR).
Analysis of Exxon Mobil
Oil prices have been rising recently and I thought that this would be a good time to see how Exxon Mobil (XOM) stacks up to our analysis. The following is the table housing XOM’s Owners Earnings data;
XOM’s closing price on December 23rd was $73.20 and its OE per share for 2009 came in at $1.84, which would give us a Price to OE of 39.78. I usually sell stocks that hit 30 times their P/OE, especially when OE per share fell off the cliff like it did in XOM’s case, dropping from $7.70 to $1.84 in just one year. If this happened in a tech company or pharmaceutical firm, I would have run away from the stock as fast as I could but with oil stocks you have a commodity based company and thus you have to factor cyclicality into your model.
The way you do that is look to future OE and we do this by estimating 2010 OE.
Before we do that though we will mention that the current COE for XOM is $50.55, which clearly shows that XOM has no problem generating OE over time and since we like to sell at 2.0 times a company’s COE we get $101.10 as our COE sell price;
In fact, XOM has 5.04 Billion shares outstanding and thus has generated $254.77 billion in OE from 1973 to 2009 and since they are projected to generate another $8.40 OE per share in the next two years, they should pump out another $42.74 billion in OE over the next two years. These are amazing numbers but then again everything is relative as XOM has a market capitalization of $369 billion currently.
If we use our estimate of $3.65 for OE in 2010 we have a forward Price to OE of 20.05. Our sell parameter for P/OE is 30, so our sell price here is $109.50.
As far as SIA goes our current SIA for XOM is $44.91, so it is trading currently at 1.63 times its SIA. I like to sell at 2.0, so SIA ranks XOM with a sell price of $89.82.
The following is a chart of Exxon Mobil’s SIA from 1984-today and in the last 26 years it has never hit its SIA line (Red Line) for the simple reason that it is one of the most widely held stocks in the world, is extremely well managed and is also the poster boy for "Economies of Scale."
So we now have three separate sell prices;
1) P/OE = $109.50
2) COE = $101.10
3) SIA = $ 89.82
Total = $300.42/3 = $100.14 = Sell Price
Buy Price = $50.07
Conclusion = XOM is a Strong Hold
Disclosure: Long AIR, No Position in XOM
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
By Mycroft Psaras
GeaSphere Research Director
http://geasphere.com
877-351-4902GeaSphere
In my last three articles I introduced the various methods that I use to analyze a company for potential purchase. The main thrust of this analysis is concentrated in three parts. The first two parts are based on free cash flow (current and historical) and the third is based on historical price action as a gauge of investor sentiment.
The three methods used in this analysis are:
1) Price to Owners Earnings (OE) = Current and future analysis
2) Cumulative Owners Earnings (COE) = Historical analysis of owners earnings
3) Statistical Indicator Analysis (SIA) = Historical price action
For those new to this analysis please link here for an introduction:
OE and COE = http://freecashflowanalyst.com/2010/12/22/-2.aspx
SIA = http://freecashflowanalyst.com/2010/12/24/an-introduction-to-statistical-indicator-analysis-sia.aspx
CapFlow = http://freecashflowanalyst.com/2010/12/22/introduction-to-the-theory-of-capflow.aspx
The main goal of my analysis is first to determine a sell price. With that in mind, we attempt to buy the stock at half its sell price and then hold it for 5 years (provided that no macro- economic negative catalysts force us to sell). Due to the fact that we bought it at par, we can potentially achieve an average annualized return of 15% per year. This may enable us to double our money every 5 years. Occasionally we do find a stock that is not selling at par, but is actually selling at a discount. When this happens, gains are usually higher, as exemplified by our investment in AAR Corp (AIR).
Analysis of Exxon Mobil
Oil prices have been rising recently and I thought that this would be a good time to see how Exxon Mobil (XOM) stacks up to our analysis. The following is the table housing XOM’s Owners Earnings data;
XOM’s closing price on December 23rd was $73.20 and its OE per share for 2009 came in at $1.84, which would give us a Price to OE of 39.78. I usually sell stocks that hit 30 times their P/OE, especially when OE per share fell off the cliff like it did in XOM’s case, dropping from $7.70 to $1.84 in just one year. If this happened in a tech company or pharmaceutical firm, I would have run away from the stock as fast as I could but with oil stocks you have a commodity based company and thus you have to factor cyclicality into your model.
The way you do that is look to future OE and we do this by estimating 2010 OE.
Before we do that though we will mention that the current COE for XOM is $50.55, which clearly shows that XOM has no problem generating OE over time and since we like to sell at 2.0 times a company’s COE we get $101.10 as our COE sell price;
In fact, XOM has 5.04 Billion shares outstanding and thus has generated $254.77 billion in OE from 1973 to 2009 and since they are projected to generate another $8.40 OE per share in the next two years, they should pump out another $42.74 billion in OE over the next two years. These are amazing numbers but then again everything is relative as XOM has a market capitalization of $369 billion currently.
If we use our estimate of $3.65 for OE in 2010 we have a forward Price to OE of 20.05. Our sell parameter for P/OE is 30, so our sell price here is $109.50.
As far as SIA goes our current SIA for XOM is $44.91, so it is trading currently at 1.63 times its SIA. I like to sell at 2.0, so SIA ranks XOM with a sell price of $89.82.
The following is a chart of Exxon Mobil’s SIA from 1984-today and in the last 26 years it has never hit its SIA line (Red Line) for the simple reason that it is one of the most widely held stocks in the world, is extremely well managed and is also the poster boy for "Economies of Scale."
So we now have three separate sell prices;
1) P/OE = $109.50
2) COE = $101.10
3) SIA = $ 89.82
Total = $300.42/3 = $100.14 = Sell Price
Buy Price = $50.07
Conclusion = XOM is a Strong Hold
Disclosure: Long AIR, No Position in XOM
Disclaimer:
Always remember that these are the results of our research based on the methodology that I have outlined above and in other articles previously published. This research is provided as an educational tool and should not be considered investment advice, but just the results of our research. There are many ways to analyze a stock and you should never blindly follow anyone’s work without doing your own due diligence or by seeking the help of an investment advisor, if you so need one. As Registered Investment Advisors, we see it as our responsibility to advise the following: We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong. Please note, investments involve risk and unless otherwise stated, are not guaranteed. Past performance cannot be used as an indicator to determine future results. Strategies mentioned may not be suitable for everyone. We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice. Information expressed does not take into account your specific situation or objectives, and is not intended as recommendations appropriate for you. Before acting on any information mentioned, it is recommended to seek advice from a qualified tax or investment adviser to determine whether it is suitable for your specific situation.
By Mycroft Psaras
GeaSphere Research Director
http://geasphere.com
877-351-4902GeaSphere
Wednesday, September 29, 2010
Why Protecting Your Assets is More Important Than Ever
The Stock Market Topping Process of a Lifetime
The bursting of the Internet bubble in 2000 devastated millions of investors, most obviously those who held shares of tech stocks. That bear market lasted three years (2000-2002), but was not enough to stop the resurgence of the stock market mania that drove prices to an all-time high in 2007. And even after this more recent and deeper plunge of 2007-2008, many investors are still bullish today. For example, this Yahoo! Finance headline from Sept. 24: "Market Mood Swings Back to Elation: Will the Good Times Last?" Similar headlines are now common in the financial media. Is it possible that the bullish majority is right? Robert Prechter wrote in the September Elliott Wave Theorist: "The public always does the wrong thing. Investors have gone from the frying pan (the NASDAQ in early 2000) into the oven (real estate in 2006) into the steamer (the Dow in 2007) onto the grill (commodities in 2008) and now into the fire. Each time, they are sure that their decision is sound." Gloom and Doom? No more so than a flood warning is a "gloom and doom forecast" when a river is rising rapidly. Those who live by the river welcome the warning. It's how they know to seek higher ground. The warning is not relevant to the actual flood waters, yet it's absolutely essential to the future of the residents. What do you think? Eduard Hamamjian GeaSphere LLC
Monday, September 27, 2010
Wednesday, September 22, 2010
Is your head in the sand?
The AAII sentiment index is reaching highs seen in three previous market crashes. This is bad news, especially when coupled with bearish technicals. When this sentiment indicator gets this overheated, the markets tend to peak. Just looking at the below chart, we can see that huge drops followed the peaks in bullish sentiment.
AAII Investors Sentiment Survey
AAII Sentiment % Bearish Index
There is no good reason for the current bullish sentiment. These levels of bullishness always end badly. Protect yourself or pay the consequence. We can help!
Eduard Hamamjian
GeaSphere LLC
877-351-4900
Head lines are bogus.
Fundamental analysis of financial markets suggests that the stock market trends are a direct result of news and events: A positive economic figure is released, and stocks rise; a destabilizing crisis occurs, and stocks fall. In reality, however, the system doesn't run so smoothly. Watch the news headlines, and you'll see how often they report on stock prices reacting one way to a certain factor -- only to make a U-turn later and print a story that completely opposes the earlier one. Take, for example this week's string of headlines regarding stocks and the September 21 Federal Open Market Committee. Here's a brief recap from some major news outlets: September 21:
So, on September 21 the Fed news "sounded" bullish. The very next day, when the news clips above weren't even cold yet, stocks declined -- and the September 22 headlines used the same Fed news to "explain" why:
- "Stocks Fall On Concerns about the implications of further Treasury buying by the Fed."
- "Fed Policy Hints Weighs On Stocks."
- Chances are, if stocks rally tomorrow, the "Fed-led" headlines will be back as if no one was the wiser.
- Observations from Elliot-wave International.
- Eduard Hamamjian
- GeaSphere LLC
Tuesday, September 7, 2010
The Investment Process:
The GeaSphere Price to Free Cash Flow Model determines the true value of stocks, based on the dynamic relationship of stock price to free cash flow. We determine the buy and sell price of a stock, based in part, on the historical dynamic of the Price to Free Cash Flow relationship. We also use technical analysis to determine the direction of the market. We use inverse ETF's to hedge the portfolio against market declines on a short or mid-term basis. This allows us to accumulate stocks with attractive valuations even during market declines. Finally, we incorporate an asset allocation methodology that creates a diversified portfolio, based on correlative movement of stocks, using current market data. This allows us to eliminate stocks that do not contribute to total return or diversification.
Tuesday, August 17, 2010
Slicing the Neckline
"The weekly Dow chart [below] shows the development of an intermediate-term, head-and-shoulders pattern from the January high at 10,729.90 to the present. The January high marks the left shoulder, the April 26 high at 11,258 is the head, and the right shoulder is now ending. The April [Theorist] discussed the pertinent characteristics that Edwards and Magee used to define this technical pattern ... all apply to the current formation. Observe how weekly stock trading volume has contracted during the development of the right shoulder, a necessary trait of this pattern. The downward-sloping neckline -- exactly as on the big ten year pattern -- displays market weakness, which is consistent with our interpretation of the wave structure."
This chart shows the head-and-shoulders pattern.
Here's what Robert Prechter himself said in a recent Elliott Wave Theorist:"Generally, when the neckline slopes downward, the right shoulder does not rise to the level of the left shoulder ..."Eduard HamamjianGeaSphere LLC
877-351-4902
Wednesday, July 28, 2010
Monday, July 26, 2010
Wednesday, July 21, 2010
The Adviser View: Stress Test: How to Find the Safest Banks in the U...
The Adviser View: Stress Test: How to Find the Safest Banks in the U...: "Stress test results for the biggest European banks are due out on July 23, 2010, while the largest U.S. banks took their first stress tests ..."
Stress Test: How to Find the Safest Banks in the U.S. and Abroad
Stress test results for the biggest European banks are due out on July 23, 2010, while the largest U.S. banks took their first stress tests in May 2009. But most people don't really care how much stress their banks are under; they are more worried about their own stress levels. One thing that adds to personal stress is worrying about whether their deposits are in a safe place. Bob Prechter has encouraged people to find the safest banks for their money since he originally wrote his New York Times best-selling book, Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression in 2002. This excerpt explains why banks of all sizes are riskier than they used to be (think about portfolios stuffed with derivatives, emerging market debt and non-performing commercial loans).
Excerpted from Conquer the Crash: By Robert Prechter.
Many major national and international banks around the world have huge portfolios of “emerging market” debt, mortgage debt, consumer debt and weak corporate debt. I cannot understand how a bank trusted with the custody of your money could ever even think of buying bonds issued by Russia or Argentina or any other unstable or spendthrift government. As At the Crest of the Tidal Wave put it in 1995, “Today’s emerging markets will soon be submerging markets.” That metamorphosis began two years later. The fact that banks and other investment companies can repeatedly ride such “investments” all the way down to write-offs is outrageous.
Many banks today also have a shockingly large exposure to leveraged derivatives such as futures, options and even more exotic instruments. The underlying value of assets represented by such financial derivatives at quite a few big banks is greater than the total value of all their deposits. The estimated representative value of all derivatives in the world today is $90 trillion, over half of which is held by U.S. banks. Many banks use derivatives to hedge against investment exposure, but that strategy works only if the speculator on the other side of the trade can pay off if he’s wrong.
Relying upon, or worse, speculating in, leveraged derivatives poses one of the greatest risks to banks that have succumbed to the lure. Leverage almost always causes massive losses eventually because of the psychological stress that owning them induces. You have already read of the tremendous debacles at Barings Bank, Long-Term [sic] Capital Management, Enron and other institutions due to speculating in leveraged derivatives. It is traditional to discount the representative value of derivatives because traders will presumably get out of losing positions well before they cost as much as what they represent. Well, maybe. It is at least as common a human reaction for speculators to double their bets when the market goes against a big position. At least, that’s what bankers might do with your money.
Today’s bank analysts assure us, as a headline from The Atlanta Journal-Constitution put it on December 29, 2001, that “Banks [Are] Well-Capitalized.” Banks today are indeed generally considered well capitalized compared to their situation in the 1980s. Unfortunately, that condition is mostly thanks to the great asset mania of the 1990s, which, as explained in Book One, is probably over. Much of the record amount of credit that banks have extended, such as that lent for productive enterprise or directly to strong governments, is relatively safe. Much of what has been lent to weak governments, real estate developers, government-sponsored enterprises, stock market speculators, venture capitalists, consumers (via credit cards and consumer-debt “investment” packages), and so on, is not. One expert advises, “The larger, more diversified banks at this point are the safer place to be.” That assertion will surely be severely tested in the coming depression.
There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks’ debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients’ potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.
Financial companies are enjoying big advances in the current stock market rally. Depositors today trust their banks more than they trust government or business in general. For example, a recent poll asked web surfers which among a list of seven types of institutions they would most trust to operate a secure identity service. Banks got nearly 50 percent of the vote. General bank trustworthiness is yet another faith that will be shattered in a depression.
Well before a worldwide depression dominates our daily lives, you will need to deposit your capital into safe institutions. I suggest using two or more to spread the risk even further. They must be far better than the ones that today are too optimistically deemed “liquid” and “safe” by both rating services and banking officials.
Eduard Hamamjian
GeaSphere LLC
877-351-4902
Excerpted from Conquer the Crash: By Robert Prechter.
Many major national and international banks around the world have huge portfolios of “emerging market” debt, mortgage debt, consumer debt and weak corporate debt. I cannot understand how a bank trusted with the custody of your money could ever even think of buying bonds issued by Russia or Argentina or any other unstable or spendthrift government. As At the Crest of the Tidal Wave put it in 1995, “Today’s emerging markets will soon be submerging markets.” That metamorphosis began two years later. The fact that banks and other investment companies can repeatedly ride such “investments” all the way down to write-offs is outrageous.
Many banks today also have a shockingly large exposure to leveraged derivatives such as futures, options and even more exotic instruments. The underlying value of assets represented by such financial derivatives at quite a few big banks is greater than the total value of all their deposits. The estimated representative value of all derivatives in the world today is $90 trillion, over half of which is held by U.S. banks. Many banks use derivatives to hedge against investment exposure, but that strategy works only if the speculator on the other side of the trade can pay off if he’s wrong.
Relying upon, or worse, speculating in, leveraged derivatives poses one of the greatest risks to banks that have succumbed to the lure. Leverage almost always causes massive losses eventually because of the psychological stress that owning them induces. You have already read of the tremendous debacles at Barings Bank, Long-Term [sic] Capital Management, Enron and other institutions due to speculating in leveraged derivatives. It is traditional to discount the representative value of derivatives because traders will presumably get out of losing positions well before they cost as much as what they represent. Well, maybe. It is at least as common a human reaction for speculators to double their bets when the market goes against a big position. At least, that’s what bankers might do with your money.
Today’s bank analysts assure us, as a headline from The Atlanta Journal-Constitution put it on December 29, 2001, that “Banks [Are] Well-Capitalized.” Banks today are indeed generally considered well capitalized compared to their situation in the 1980s. Unfortunately, that condition is mostly thanks to the great asset mania of the 1990s, which, as explained in Book One, is probably over. Much of the record amount of credit that banks have extended, such as that lent for productive enterprise or directly to strong governments, is relatively safe. Much of what has been lent to weak governments, real estate developers, government-sponsored enterprises, stock market speculators, venture capitalists, consumers (via credit cards and consumer-debt “investment” packages), and so on, is not. One expert advises, “The larger, more diversified banks at this point are the safer place to be.” That assertion will surely be severely tested in the coming depression.
There are five major conditions in place at many banks that pose a danger: (1) low liquidity levels, (2) dangerous exposure to leveraged derivatives, (3) the optimistic safety ratings of banks’ debt investments, (4) the inflated values of the property that borrowers have put up as collateral on loans and (5) the substantial size of the mortgages that their clients hold compared both to those property values and to the clients’ potential inability to pay under adverse circumstances. All of these conditions compound the risk to the banking system of deflation and depression.
Financial companies are enjoying big advances in the current stock market rally. Depositors today trust their banks more than they trust government or business in general. For example, a recent poll asked web surfers which among a list of seven types of institutions they would most trust to operate a secure identity service. Banks got nearly 50 percent of the vote. General bank trustworthiness is yet another faith that will be shattered in a depression.
Well before a worldwide depression dominates our daily lives, you will need to deposit your capital into safe institutions. I suggest using two or more to spread the risk even further. They must be far better than the ones that today are too optimistically deemed “liquid” and “safe” by both rating services and banking officials.
Eduard Hamamjian
GeaSphere LLC
877-351-4902
Tuesday, July 13, 2010
The Bear Market and Depression: How Close to the Bottom?
While many people spend time yearning for the financial markets to turn back up, a rare few have looked back in time to compare historical markets with the current situation -- and then delivered a clear-eyed view of the future informed by knowledge of the past. One who has is Robert Prechter. When he thinks about markets and wave patterns, he goes back to the 1700s, the 1800s, and -- most tellingly for our time now -- the early 1900s when the Great Depression weighed down the United States in the late 1920s and early 1930s. With this large wash of history in mind, he is able to explain why he thinks we have a long way to go to get to the bottom of this bear market.
Here is an excerpt from the EWI Independent Investor eBook, which answers the question: How close to the bottom are we?
* * * * *
Originally written by Robert Prechter for The Elliott Wave Theorist, January 2009
Some people contact us and say, “People are more bearish than I have ever seen them. This has to be a bottom.” The first half of this statement may well be true for many market observers. If one has been in the market for less than 14 years, one has never seen people this bearish. But market sentiment over those years was a historical anomaly. The annual dividend payout from stocks reached its lowest level ever: less than half the previous record. The P/E ratio reached its highest level ever: double the previous record. The price-to-book value ratio went into the stratosphere, as did the ratio between corporate bond yields and the same corporations’ stock dividend yields.
During nine and a half of those years, from October 1998 to March 2008, optimism dominated so consistently that bulls outnumbered bears among advisors (per the Investors Intelligence polls) for 481 out of 490 weeks. Investors got so used to this period of euphoria and financial excess that they have taken it as the norm.
With that period as a benchmark, the moderate slippage in optimism since 2007 does appear as a severe change. But observe a subtle irony: When commentators agree that investors are too bearish, they say so to justify being bullish. Thus, as part of the crowd, they are still seeking rationalizations for their continued optimism, and one of their best excuses is that everyone else is bearish. This would be reasoning, not rationalization, if it were true.
But is the net reduction in optimism since 2000/2007 in fact enough to indicate a market bottom? For the rest of this issue, we will update the key indicators from Conquer the Crash that so powerfully signaled a historic top in the making. When we are finished, you will know whether or not the market is at bottom.
Figure 1 updates our picture of Supercycle and Grand Supercycle-degree periods of prosperity and depression. The top formed in the past decade is the biggest since 1720, yet, as you can see, the decline so far is small compared to the three that preceded it. There is a lot more room to go on the downside.
Figure 2 updates the Dow’s dividend yield. Over the past nine years, it has improved nicely, from 1.3 percent to 3.7 percent, near its level at previous market tops. If companies’ dividends were to stay the same, a 50 percent drop in stock prices from here would bring the Dow’s yield back into the area where it was at the stock market bottoms of 1942, 1949, 1974 and 1982. But of course, dividends will not stay the same.
Companies are cutting dividends and will cut more as the depression deepens. So, the falling stock market is chasing an elusive quarry in the form of an attractive dividend yield. This is a downward spiral that will not end until prices get ahead of dividend cuts and the Dow’s dividend yield goes above that of 1932, which was 17 percent (or until dividends fall so close to zero that the yield is meaningless).
Eduard Hamamjian
GeaSphere LLC
877-351-4902
Here is an excerpt from the EWI Independent Investor eBook, which answers the question: How close to the bottom are we?
* * * * *
Originally written by Robert Prechter for The Elliott Wave Theorist, January 2009
Some people contact us and say, “People are more bearish than I have ever seen them. This has to be a bottom.” The first half of this statement may well be true for many market observers. If one has been in the market for less than 14 years, one has never seen people this bearish. But market sentiment over those years was a historical anomaly. The annual dividend payout from stocks reached its lowest level ever: less than half the previous record. The P/E ratio reached its highest level ever: double the previous record. The price-to-book value ratio went into the stratosphere, as did the ratio between corporate bond yields and the same corporations’ stock dividend yields.
During nine and a half of those years, from October 1998 to March 2008, optimism dominated so consistently that bulls outnumbered bears among advisors (per the Investors Intelligence polls) for 481 out of 490 weeks. Investors got so used to this period of euphoria and financial excess that they have taken it as the norm.
With that period as a benchmark, the moderate slippage in optimism since 2007 does appear as a severe change. But observe a subtle irony: When commentators agree that investors are too bearish, they say so to justify being bullish. Thus, as part of the crowd, they are still seeking rationalizations for their continued optimism, and one of their best excuses is that everyone else is bearish. This would be reasoning, not rationalization, if it were true.
But is the net reduction in optimism since 2000/2007 in fact enough to indicate a market bottom? For the rest of this issue, we will update the key indicators from Conquer the Crash that so powerfully signaled a historic top in the making. When we are finished, you will know whether or not the market is at bottom.
Figure 1 updates our picture of Supercycle and Grand Supercycle-degree periods of prosperity and depression. The top formed in the past decade is the biggest since 1720, yet, as you can see, the decline so far is small compared to the three that preceded it. There is a lot more room to go on the downside.
Figure 2 updates the Dow’s dividend yield. Over the past nine years, it has improved nicely, from 1.3 percent to 3.7 percent, near its level at previous market tops. If companies’ dividends were to stay the same, a 50 percent drop in stock prices from here would bring the Dow’s yield back into the area where it was at the stock market bottoms of 1942, 1949, 1974 and 1982. But of course, dividends will not stay the same.
Companies are cutting dividends and will cut more as the depression deepens. So, the falling stock market is chasing an elusive quarry in the form of an attractive dividend yield. This is a downward spiral that will not end until prices get ahead of dividend cuts and the Dow’s dividend yield goes above that of 1932, which was 17 percent (or until dividends fall so close to zero that the yield is meaningless).
Eduard Hamamjian
GeaSphere LLC
877-351-4902
Thursday, July 1, 2010
Wednesday, June 30, 2010
Monday, June 21, 2010
"Mood Matters"
Cause & effect is the most basic human assumption about how the world works. Much of the time the assumption proves correct:
A pebble dropped in a pond (cause) will make a splash (effect).
The premise is simple. Everyone gets it. Alas, "much of the time" does not mean all of the time. Not everyone "gets it" when it comes to an equally important truth: mistaken cause & effect assumptions lead to the most common failures of human logic. For example:
The Sun moves across the sky (effect) because it orbits the earth (cause).
That premise was also simple. Everyone got it. And as we learned in history class, this all-time doozy of failed human logic was virtually unchallenged until a 16th-century fellow named Copernicus changed everything.
And today, from solar systems down to the atomic level, science has conquered every major frontier of flawed cause & effect thinking -- at least about how the physical world works. But there is one major frontier to go: The false cause & effect thinking about how people work.
When a dropped pebble splashes in a pond, the cause & effect does not include psychology. But if you fail to include psychology in your assumptions about people -- specifically the collective mood of people in groups...
...Then your conclusions will be like astronomy before Copernicus.
That's where the new science of Socionomics comes in. And award-winning scientist and author John Casti's just-published book --Mood Matters: From Rising Skirt Lengths to the Collapse of World Powers -- is the next big step in the advance of socionomics.
Robert Prechter's hypothesis that social mood drives social events holds the promise of doing for the social sciences what Copernicus did for astronomy.
John Casti's Mood Matters builds on Prechter's hypothesis. A Ph.D in mathematics and Research Scholar at the International Institute for Applied Systems Analysis in Laxenburg Austria, Casti's work has earned favor among his fellow scientists and a broader audience.
Mood Matters is indeed written in clear, straightforward language that speaks to non-scientists who think for themselves. John Casti spells out one major flawed assumption, namely
"thinking of humans in a society as being simply 'particles' buffeted about by mysterious 'outside forces' that give rise to the ever-changing patterns of human behavior.... Mood Matters says Not so! Just because 'everybody' believed the earth was flat didn't make it so. And just because everybody believes events cause moods doesn't make that so, either."
What does the future of social science look like? Find out in Mood Matters: by John Casti From Rising Skirt Lengths to the Collapse of World Powers.
Recommended reading by GeaSphere LLC to help you understand the path we as a people are on.
Eduard Hamamjian
GeaSphere LLC
877-351-4902
A pebble dropped in a pond (cause) will make a splash (effect).
The premise is simple. Everyone gets it. Alas, "much of the time" does not mean all of the time. Not everyone "gets it" when it comes to an equally important truth: mistaken cause & effect assumptions lead to the most common failures of human logic. For example:
The Sun moves across the sky (effect) because it orbits the earth (cause).
That premise was also simple. Everyone got it. And as we learned in history class, this all-time doozy of failed human logic was virtually unchallenged until a 16th-century fellow named Copernicus changed everything.
And today, from solar systems down to the atomic level, science has conquered every major frontier of flawed cause & effect thinking -- at least about how the physical world works. But there is one major frontier to go: The false cause & effect thinking about how people work.
When a dropped pebble splashes in a pond, the cause & effect does not include psychology. But if you fail to include psychology in your assumptions about people -- specifically the collective mood of people in groups...
...Then your conclusions will be like astronomy before Copernicus.
That's where the new science of Socionomics comes in. And award-winning scientist and author John Casti's just-published book --Mood Matters: From Rising Skirt Lengths to the Collapse of World Powers -- is the next big step in the advance of socionomics.
Robert Prechter's hypothesis that social mood drives social events holds the promise of doing for the social sciences what Copernicus did for astronomy.
John Casti's Mood Matters builds on Prechter's hypothesis. A Ph.D in mathematics and Research Scholar at the International Institute for Applied Systems Analysis in Laxenburg Austria, Casti's work has earned favor among his fellow scientists and a broader audience.
Mood Matters is indeed written in clear, straightforward language that speaks to non-scientists who think for themselves. John Casti spells out one major flawed assumption, namely
"thinking of humans in a society as being simply 'particles' buffeted about by mysterious 'outside forces' that give rise to the ever-changing patterns of human behavior.... Mood Matters says Not so! Just because 'everybody' believed the earth was flat didn't make it so. And just because everybody believes events cause moods doesn't make that so, either."
What does the future of social science look like? Find out in Mood Matters: by John Casti From Rising Skirt Lengths to the Collapse of World Powers.
Recommended reading by GeaSphere LLC to help you understand the path we as a people are on.
Eduard Hamamjian
GeaSphere LLC
877-351-4902
Monday, June 14, 2010
Three times a charm!
The technical landscape,, today's S&P high at 1105.91 is the third time in the past three weeks that the index has attempted to push above the underside of its 200-day moving average. Each try has occurred on lesser upside momentum. The May 27 test occurred with a NYSE Tick of +1318 and NYSE daily volume of 1.4 billion shares traded (CQG data) as well as 493 of the S&P 500 issues advancing on the day. The June 3 test occurred in conjunction with a Tick of +1298, NSYE daily volume of 1.21 billion shares traded and 336 of the S&P's 500 issues advancing on the day. Today's test, the third and weakest, occurred with a Tick of +1194 and NYSE daily volume of 1.13 billion shares traded. Out of 500 issues in the S&P 500, 266 were up for the session. These figures suggest that the effort to rise above the moving average is becoming exhausted.
Another subtle reason to suspect that the entire correction is complete is seen on the above chart. Each wave since the April 26 has unfolded in a Fibonacci time proportion when measured in trading days. Thus, in terms of time, wave 2 is related to wave 1 by the Fibonacci ratio (.619) at today's high. Info from Elliott Wave International.
Eduard Hamamjian
GeaSphere LLC
877-351-4902
Another subtle reason to suspect that the entire correction is complete is seen on the above chart. Each wave since the April 26 has unfolded in a Fibonacci time proportion when measured in trading days. Thus, in terms of time, wave 2 is related to wave 1 by the Fibonacci ratio (.619) at today's high. Info from Elliott Wave International.
Eduard Hamamjian
GeaSphere LLC
877-351-4902
Friday, June 11, 2010
Monday, June 7, 2010
Markets must decline if history is our guide.
The major stock indexes extended their respective declines from last week's highs. Selling pressure was strong today: There were 2.75 stocks down for every one up on the NYSE and 84.8% of Big Board volume occurred on the downside. But with such an extreme sell-off on Friday, there was little way that today's decline could match Friday's downside intensity, which it did not. We are in a major decline in all markets. History defines this best.
Some of history's biggest market declines occurred after stocks were deeply oversold. Right now, stocks are deeply oversold. We are not interested in trying to forecast a near-term low as this exercise reaps little reward in the currant environment.
It is probable that we are at the end of this wave, with a near term bounce to follow. However to be long or aggressive in this environment would in my view be irresponsible. Hold on to your wallet as the roller-coaster is at the top of the ride. There are a couple of declines and rises before the screamer comes at the top. You will be fine if your seat-belt is on tight.
Eduard Hamamjian
GeaSphere
877-351-4902
Some of history's biggest market declines occurred after stocks were deeply oversold. Right now, stocks are deeply oversold. We are not interested in trying to forecast a near-term low as this exercise reaps little reward in the currant environment.
It is probable that we are at the end of this wave, with a near term bounce to follow. However to be long or aggressive in this environment would in my view be irresponsible. Hold on to your wallet as the roller-coaster is at the top of the ride. There are a couple of declines and rises before the screamer comes at the top. You will be fine if your seat-belt is on tight.
Eduard Hamamjian
GeaSphere
877-351-4902
Thursday, June 3, 2010
Reality Hurts When You Expect Fantasy
Reality hits people the hardest when they are expecting fantasy. That explains the shock too many investors felt on the recent day when the Dow Industrials dropped some 1,000 points within moments (Thursday, May 6). What made that reality even more shocking, however, was the realization that a peak may already have come -- on April 26, 2010.
For more than a year, economists and other experts were doing their best to tell the public that we were back in a bull market. They jumped on every optimistic event and used it to strengthen their claim. Yet here's the ironic truth: the bull market advocates were making their loudest claims -- evidenced by examples such as Newsweek’s “America’s Back” cover story in April -- at precisely the time the market peaked.
There is a large difference between looking for something vs. finding it. The over-optimism of these bull market economists amounted to looking for reasons to say that the bear market was a thing of the past. Elliott Wave International wants nothing to do with "looking"; our analysis is all about finding solid evidence to make clear, rational forecasts. An obvious example is the head and shoulders pattern that we identified.
In the April issue of The Elliott Wave Theorist, Robert Prechter showed subscribers the head and shoulders pattern unfolding in the Dow Industrials -- and he explained what it meant in full detail. The conclusion of this well-known technical pattern produces a significant change in the trend. The peak to the market rally in April came as a shock to many, and bullish economists still refuse to believe it.
"In late April, one scribe stated that the coast was clear for a continued stock rally because the sentiment readings never hit 'maximum exuberance. In short, investor sentiment doesn’t seem to be at a peak of euphoria.'"
Eduard Hamamjian
GeaSphere
877-351-4902
For more than a year, economists and other experts were doing their best to tell the public that we were back in a bull market. They jumped on every optimistic event and used it to strengthen their claim. Yet here's the ironic truth: the bull market advocates were making their loudest claims -- evidenced by examples such as Newsweek’s “America’s Back” cover story in April -- at precisely the time the market peaked.
There is a large difference between looking for something vs. finding it. The over-optimism of these bull market economists amounted to looking for reasons to say that the bear market was a thing of the past. Elliott Wave International wants nothing to do with "looking"; our analysis is all about finding solid evidence to make clear, rational forecasts. An obvious example is the head and shoulders pattern that we identified.
In the April issue of The Elliott Wave Theorist, Robert Prechter showed subscribers the head and shoulders pattern unfolding in the Dow Industrials -- and he explained what it meant in full detail. The conclusion of this well-known technical pattern produces a significant change in the trend. The peak to the market rally in April came as a shock to many, and bullish economists still refuse to believe it.
"In late April, one scribe stated that the coast was clear for a continued stock rally because the sentiment readings never hit 'maximum exuberance. In short, investor sentiment doesn’t seem to be at a peak of euphoria.'"
Eduard Hamamjian
GeaSphere
877-351-4902
Wednesday, June 2, 2010
A 64-Year Bear Market: History Shows a Precedent
Who says a bear market must only last one year?
Somewhere along the line, someone got out a calculator and concluded that a typical bull market lasts about two and a half years, while a bear market lasts about a year, on average.
So if you see an article in a financial magazine about the start of a new bull market, they might suggest keeping your money in stocks for at least two years. If they see a bear market coming, a market professional might suggest staying in cash or bonds for twelve months or so.
A little problem: History shows examples of when bull and bear markets did not follow the presumed average.
If investors bought a year after the South Sea Bubble collapse in 1720, believing they'd catch the start of a new bull market, almost all of them would never live to see the day when their investments paid off -- if they ever did. Look at this 300+ year chart from EWI president Robert Prechter's Conquer the Crash (now in 2nd edition). As you can see, stocks and the economy remained depressed for 64 years after the crash:
"In the 1720s, extreme over-optimism developed in what came to be known as the South Sea Bubble, which Mackay (1980) described in his work, Extraordinary Delusions and the Madness of Crowds. The social mood retrenchment from the South Sea Bubble ended in 1784, a 64-year period of retrenchment that should give pause to those with a buy-and-hold strategy."
-- Bob Prechter, The Elliott Wave Theorist, June 2001.
Now, notice the last labeled leg of "Prosperity" on the chart. See how long that uptrend lasted without a major downturn? Not your "typical" two-and-a-half-year run!
Eduard Hamamjian
GeaSphere LLC
877-351-4902
Somewhere along the line, someone got out a calculator and concluded that a typical bull market lasts about two and a half years, while a bear market lasts about a year, on average.
So if you see an article in a financial magazine about the start of a new bull market, they might suggest keeping your money in stocks for at least two years. If they see a bear market coming, a market professional might suggest staying in cash or bonds for twelve months or so.
A little problem: History shows examples of when bull and bear markets did not follow the presumed average.
If investors bought a year after the South Sea Bubble collapse in 1720, believing they'd catch the start of a new bull market, almost all of them would never live to see the day when their investments paid off -- if they ever did. Look at this 300+ year chart from EWI president Robert Prechter's Conquer the Crash (now in 2nd edition). As you can see, stocks and the economy remained depressed for 64 years after the crash:
"In the 1720s, extreme over-optimism developed in what came to be known as the South Sea Bubble, which Mackay (1980) described in his work, Extraordinary Delusions and the Madness of Crowds. The social mood retrenchment from the South Sea Bubble ended in 1784, a 64-year period of retrenchment that should give pause to those with a buy-and-hold strategy."
-- Bob Prechter, The Elliott Wave Theorist, June 2001.
Now, notice the last labeled leg of "Prosperity" on the chart. See how long that uptrend lasted without a major downturn? Not your "typical" two-and-a-half-year run!
Eduard Hamamjian
GeaSphere LLC
877-351-4902
Tuesday, May 25, 2010
Market Commentary 05/25/2010
Today's new low occurred on lessening downside breadth, dwindling down volume and a decrease in NYSE Ticks (intra day). There was also a clear divergence at today's low between the VIX, which remained beneath its May 21 extreme (48.11), and both the Dow and S&P, each of which made new intra day lows beneath the lows of that day.
There remains an open gap at 1115.05 in the S&P from May 19 (10,444.40 in the DJIA). Prices may try to fill this gap before rolling back to the downside. A 60% retracement is 1120 (S&P), which is just above the late high on May 19 (10,488.00 in the DJIA). So the rally should ideally end in the 1090-1125 area in the S&P and the 10,200-10,522 area in the Dow. A break of 9853.30 in the Dow and 1050.93 in the S&P would indicate that another selling phase to even lower lows was underway.
Current head winds in the Euro zone offer considerable headline risk. A crises of confidence can arise at any time, and derail any short term rally. Also the potential of escalating war of words in the Korean peninsula can destabilize markets and the world economy at any time. North Korea's clear act of war has gone under reported.
Markets in my view have not properly priced in the true effect of rising taxes on small business, or the cost of increased regulations and the effect on future employment. The Presidents threshold of $250,000 for higher taxes will impact the small business sector more then any other. With no bailout or access to capital because of higher lending standards, I expect additional layoff's to come in 2011.
Hang on to your seats, because this ride is not done.
Eduard Hamamjian
GeaSphere LLC
There remains an open gap at 1115.05 in the S&P from May 19 (10,444.40 in the DJIA). Prices may try to fill this gap before rolling back to the downside. A 60% retracement is 1120 (S&P), which is just above the late high on May 19 (10,488.00 in the DJIA). So the rally should ideally end in the 1090-1125 area in the S&P and the 10,200-10,522 area in the Dow. A break of 9853.30 in the Dow and 1050.93 in the S&P would indicate that another selling phase to even lower lows was underway.
Current head winds in the Euro zone offer considerable headline risk. A crises of confidence can arise at any time, and derail any short term rally. Also the potential of escalating war of words in the Korean peninsula can destabilize markets and the world economy at any time. North Korea's clear act of war has gone under reported.
Markets in my view have not properly priced in the true effect of rising taxes on small business, or the cost of increased regulations and the effect on future employment. The Presidents threshold of $250,000 for higher taxes will impact the small business sector more then any other. With no bailout or access to capital because of higher lending standards, I expect additional layoff's to come in 2011.
Hang on to your seats, because this ride is not done.
Eduard Hamamjian
GeaSphere LLC
Saturday, May 22, 2010
Bigger Than A "10% Correction"?
Every Big Bear Grew From a Cub
The famous "10% correction" that market pundits talk about sounds so nice and tidy, so predictable and tolerable. It's as if this "cute little correction" came neatly wrapped, looked like an M&M candy character, and smiled at you and your family after you open the box.
If only it were so.
"If all the market ever did on the downside was dip 10% once every two years, then investing would be easier than shooting fish in a barrel. Obviously, this is not the case. The fact is that the stock market's movements are a fractal. Declines come in widely varying sizes."
Elliott Wave Theorist, December 2001
There is no way to know in advance whether a particular market downturn will fall 11%, 35%, or 89%. Even the Wave Principle only forecasts probabilities -- not certainties.
One thing that is certain -- every bear market reached a 10% drop before prices fell even further.
And another near-certainty is that too many money managers will use the phrase "buying weakness" when the market falls 10%. On May 7, after the Dow Jones had fallen several hundred points in a few days, two money managers being interviewed side by side said in effect, "Buy." Not a word was said about caution. Not a word was offered about even the possibility of a major trend change in the market.
On the other hand, it was refreshing to hear a representative of a fund family say, "I don't know why anyone needs to be a hero, and try to catch the bottom."
You may be tempted to jump back in because the market has recently "corrected." Yet consider what EWI's Short Term Update subscribers read on May 7 -- ". . .we would caution that some of history's largest stock declines have occurred only after stocks were deeply oversold."
Eduard Hamamjian
GeaSphere LLC
The famous "10% correction" that market pundits talk about sounds so nice and tidy, so predictable and tolerable. It's as if this "cute little correction" came neatly wrapped, looked like an M&M candy character, and smiled at you and your family after you open the box.
If only it were so.
"If all the market ever did on the downside was dip 10% once every two years, then investing would be easier than shooting fish in a barrel. Obviously, this is not the case. The fact is that the stock market's movements are a fractal. Declines come in widely varying sizes."
Elliott Wave Theorist, December 2001
There is no way to know in advance whether a particular market downturn will fall 11%, 35%, or 89%. Even the Wave Principle only forecasts probabilities -- not certainties.
One thing that is certain -- every bear market reached a 10% drop before prices fell even further.
And another near-certainty is that too many money managers will use the phrase "buying weakness" when the market falls 10%. On May 7, after the Dow Jones had fallen several hundred points in a few days, two money managers being interviewed side by side said in effect, "Buy." Not a word was said about caution. Not a word was offered about even the possibility of a major trend change in the market.
On the other hand, it was refreshing to hear a representative of a fund family say, "I don't know why anyone needs to be a hero, and try to catch the bottom."
You may be tempted to jump back in because the market has recently "corrected." Yet consider what EWI's Short Term Update subscribers read on May 7 -- ". . .we would caution that some of history's largest stock declines have occurred only after stocks were deeply oversold."
Eduard Hamamjian
GeaSphere LLC
Thursday, May 13, 2010
DJIA: Rally Killer on the Loose?
How sentiment extremes mark trend reversals.
Here's something they don't teach you in Economics 101: Too many bulls can kill a rally.
Conversely, too many bears can stop a bear market. It sounds paradoxical, but it's true: When market sentiment gets to an extreme on either side -- pessimistic or optimistic -- more often than not, the trend is near its reversal.
We are not the first ones to pick up on that. Bernard Baruch, a famous rich man from "the roaring twenties," observed this before the 1929 stock market crash:
"Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929."
Here's also Elliott Wave International president Robert Prechter's comment:
"Extreme opinions, shared widely, constitute the single most reliable indicator of an impending change of direction for a market. If virtually everyone is thinking one way, they have already acted..."
-- The Elliott Wave Theorist, July 2006
Extreme sentiment is not a guarantee of a trend reversal -- no market indicator is. Yet it's worth paying attention to.
"...the latest weekly Investors Intelligence Advisors' Survey has the percentage of market bulls at 54, which exceeds the extreme set at the January high of 53.4."
January, as you remember, was the month the DJIA started an 800-point drop.
Note also that mutual fund managers' cash levels are low -- the rest of the money is in stocks. This chart is from our March Elliott Wave Financial Forecast:
In his current Elliott Wave Theorist, Bob Prechter adds:
"In March, the market rose virtually every day, so there is little doubt that the percentage of cash in mutual funds is now at an all-time low, lower than in 2000, lower than 2007!"
Eduard Hamamjian
GeaSphere
Here's something they don't teach you in Economics 101: Too many bulls can kill a rally.
Conversely, too many bears can stop a bear market. It sounds paradoxical, but it's true: When market sentiment gets to an extreme on either side -- pessimistic or optimistic -- more often than not, the trend is near its reversal.
We are not the first ones to pick up on that. Bernard Baruch, a famous rich man from "the roaring twenties," observed this before the 1929 stock market crash:
"Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929."
Here's also Elliott Wave International president Robert Prechter's comment:
"Extreme opinions, shared widely, constitute the single most reliable indicator of an impending change of direction for a market. If virtually everyone is thinking one way, they have already acted..."
-- The Elliott Wave Theorist, July 2006
Extreme sentiment is not a guarantee of a trend reversal -- no market indicator is. Yet it's worth paying attention to.
"...the latest weekly Investors Intelligence Advisors' Survey has the percentage of market bulls at 54, which exceeds the extreme set at the January high of 53.4."
January, as you remember, was the month the DJIA started an 800-point drop.
Note also that mutual fund managers' cash levels are low -- the rest of the money is in stocks. This chart is from our March Elliott Wave Financial Forecast:
In his current Elliott Wave Theorist, Bob Prechter adds:
"In March, the market rose virtually every day, so there is little doubt that the percentage of cash in mutual funds is now at an all-time low, lower than in 2000, lower than 2007!"
Eduard Hamamjian
GeaSphere
Thursday, April 29, 2010
Greece's Debt Crisis: What's in Store for the Rest of the PIIGS?
Can you imagine the chaos that would erupt if T-bill rates were to rocket from 5% to 19% in one month in the U.S.?
Something close is happening right now in Greece, Portugal and Spain -- and the contagion is spreading. EWI's analysts have been keeping their subscribers one step ahead of the curve of this sovereign debt crisis for months.
Excerpted below is some of EWI's prescient analysis about the growing crisis in Europe. As you'll see, the analysis describes what's happening in Europe now -- three months ago.
Excerpted from the February 2010 issue of Global Market Perspective.
High levels of global debt are both financially debilitating and deflationary because they commit scarce cash to servicing interest payments. Up until now, most sovereign credit defaults occurred in emerging-market countries, such as Argentina and Russia. The deflationary tide, however, is starting to lap up against more developed Eurozone economies.
The chart shows the value of credit default swaps -- an instrument similar to an insurance contract that pays holders (if they are lucky) in the event of default -- for Greece, Portugal, Spain and France. In recent weeks these contracts have soared, with credit-default swaps on Greece’s and Portugal’s debt already surpassing the January-March 2009 extremes established in the latter part of Primary degree 1 down.
Obviously, the market is growing more skeptical that Greece can pay its debts, so the cost of protecting against default is rising fast. Greece’s budget deficit is 12.7% of gross domestic product, and Portugal faces a budget shortfall that’s more than twice the European Union’s limit. Traders are now buying default protection on sovereign debt at a rate of more than five times that of specific company bonds. “Greece’s neighbors would ‘step in’ to prevent a debt default to avoid ‘a problem for the whole of Europe,’” a Tokyo-based bondsalesman says. Maybe so, but who will step in to bail out Portugal, Spain, the next sovereign default or the one thereafter?
The world is running out of money to service its mounting debts, and this chart simply depicts the front edge of the next great wave of credit contraction, which will sweep into more established countries throughout Europe and eventually to the United States.
Eduard Hamamjian
GeaSphere
Something close is happening right now in Greece, Portugal and Spain -- and the contagion is spreading. EWI's analysts have been keeping their subscribers one step ahead of the curve of this sovereign debt crisis for months.
Excerpted below is some of EWI's prescient analysis about the growing crisis in Europe. As you'll see, the analysis describes what's happening in Europe now -- three months ago.
Excerpted from the February 2010 issue of Global Market Perspective.
High levels of global debt are both financially debilitating and deflationary because they commit scarce cash to servicing interest payments. Up until now, most sovereign credit defaults occurred in emerging-market countries, such as Argentina and Russia. The deflationary tide, however, is starting to lap up against more developed Eurozone economies.
The chart shows the value of credit default swaps -- an instrument similar to an insurance contract that pays holders (if they are lucky) in the event of default -- for Greece, Portugal, Spain and France. In recent weeks these contracts have soared, with credit-default swaps on Greece’s and Portugal’s debt already surpassing the January-March 2009 extremes established in the latter part of Primary degree 1 down.
Obviously, the market is growing more skeptical that Greece can pay its debts, so the cost of protecting against default is rising fast. Greece’s budget deficit is 12.7% of gross domestic product, and Portugal faces a budget shortfall that’s more than twice the European Union’s limit. Traders are now buying default protection on sovereign debt at a rate of more than five times that of specific company bonds. “Greece’s neighbors would ‘step in’ to prevent a debt default to avoid ‘a problem for the whole of Europe,’” a Tokyo-based bondsalesman says. Maybe so, but who will step in to bail out Portugal, Spain, the next sovereign default or the one thereafter?
The world is running out of money to service its mounting debts, and this chart simply depicts the front edge of the next great wave of credit contraction, which will sweep into more established countries throughout Europe and eventually to the United States.
Eduard Hamamjian
GeaSphere
Wednesday, April 28, 2010
Would the U.S. be Better Off Not Spending -- Like Latvia?
Contributing writer Jason Farkas upends the argument that governments and central banks have much influence on markets in the April 2010 issue of The European Financial Forecast.
Here's how he poses his challenge:
Most investors, and government officials, seem to be under the delusion that government spending produces higher stock markets, inflation and recovery. But if that’s true, then spending cuts should lead to the opposite, right? We know of one region that implemented spending cuts in response to the 2008-09 global recession.…
That region includes four Soviet states -- Latvia, Estonia, Lithuania and the Ukraine -- all of which had major GDP declines in 2008 and 2009. In response, these countries reduced government spending. Such actions were the complete opposite of fiscal policies like those of the United States, which increased spending during the crisis.
With a few paragraphs of analysis and this one simple chart, Farkas tells the whole story. The NASDAQ OMX Baltic Index, the regional equity index, has more than doubled since March 2009. He discovered that although government responses to the crisis were completely opposite, these Baltic and U.S. markets have rebounded similarly. This finding, he suggests, strengthens the idea that the true driver of stock markets is psychology, not government policymakers.
Eduard Hamamjian
GeaSphere
Here's how he poses his challenge:
Most investors, and government officials, seem to be under the delusion that government spending produces higher stock markets, inflation and recovery. But if that’s true, then spending cuts should lead to the opposite, right? We know of one region that implemented spending cuts in response to the 2008-09 global recession.…
That region includes four Soviet states -- Latvia, Estonia, Lithuania and the Ukraine -- all of which had major GDP declines in 2008 and 2009. In response, these countries reduced government spending. Such actions were the complete opposite of fiscal policies like those of the United States, which increased spending during the crisis.
With a few paragraphs of analysis and this one simple chart, Farkas tells the whole story. The NASDAQ OMX Baltic Index, the regional equity index, has more than doubled since March 2009. He discovered that although government responses to the crisis were completely opposite, these Baltic and U.S. markets have rebounded similarly. This finding, he suggests, strengthens the idea that the true driver of stock markets is psychology, not government policymakers.
Eduard Hamamjian
GeaSphere
Friday, April 23, 2010
Will the Bear Market End the "War on Drugs"?
Marijuana legalization has come a long way (in a short time), baby
In 1996 California voters approved Proposition 215, which extended legal protection to doctors who recommend and patients who use marijuana for medical reasons. This inspired the "medical marijuana" movement, though it made only sporadic progress in the decade that followed. Beyond a few mostly Western states, the movement found meager legislative support.
Until around 2007, that is.
In 2007 and 2008, legislatures in 27 states considered bills related to marijuana -- each one sought to relax or eliminate the current penalties for use and/or possession in those states. The trend continued into 2009 and 2010. This past March saw the most far-reaching legislative proposal yet, again in California: the state legislature will vote on a bill to allow adults over 21 to personally possess and cultivate marijuana. It would also implement a regulatory regime that taxes pot sales by licensed vendors.
The trend itself may not be news to you, even if you don't know all the particulars. This past January, an ABC News/Washington Post survey found that 81% of Americans support the legalization of medical marijuana (up from 69% in 1997). The same survey found 46% support "legalizing small amounts of marijuana for personal use" (up from 22% in 1997).
Still, you may not have gotten the memo about this past Tuesday (April 20) and the event known as 4/20, aka "Pot Day." Participants made a public show indeed of how much this day means to them: behold the crowd gathered for the occasion on the campus of the University of Colorado.
This apparent willingness toward tolerance and use also extends to controlled substances which create clouds only a user might see. Earlier this month The New York Times reported the experience of a retired clinical psychologist who was deeply depressed while going through treatments for kidney cancer:
"Nothing had any lasting effect until, at the age of 65, he had his first psychedelic experience. He left his home in Vancouver, Wash., to take part in an experiment at Johns Hopkins medical school involving psilocybin, the psychoactive ingredient found in certain mushrooms."
The article said that one year later, the gentleman's "profoundly transforming" hallucinogenic encounter had helped him "overcome his depression." What's more, his story is by no means unique: "Researchers from around the world are gathering this week in San Jose, Calif., for the largest conference on psychedelic science held in the United States in four decades."
Now, please know that I do not wish to make light of cancer, depression, or the taking of psilocybin. My purpose is not to condone or condemn pot smoking (okay, I did inhale… but that was a long time ago).
Instead, I want to show that the timing of this trend is no accident. Above I noted that 2007 began a measurable change in attitude -- that is, a change in social mood.
The July 2009 issue of The Socionomist published Euan Wilson's "The Coming Collapse of a Modern Prohibition," which showed how the large trend that now drives the financial markets also drives public sentiment today regarding marijuana. Sound far fetched? Well, the analysis and charts in the article draw a clear and persuasive parallel with the repeal of the 21st Amendment (alcohol prohibition), as part of a survey of prohibition/repeal efforts in the 20th century.
Eduard Hamamjian
GeaSphere LLC
In 1996 California voters approved Proposition 215, which extended legal protection to doctors who recommend and patients who use marijuana for medical reasons. This inspired the "medical marijuana" movement, though it made only sporadic progress in the decade that followed. Beyond a few mostly Western states, the movement found meager legislative support.
Until around 2007, that is.
In 2007 and 2008, legislatures in 27 states considered bills related to marijuana -- each one sought to relax or eliminate the current penalties for use and/or possession in those states. The trend continued into 2009 and 2010. This past March saw the most far-reaching legislative proposal yet, again in California: the state legislature will vote on a bill to allow adults over 21 to personally possess and cultivate marijuana. It would also implement a regulatory regime that taxes pot sales by licensed vendors.
The trend itself may not be news to you, even if you don't know all the particulars. This past January, an ABC News/Washington Post survey found that 81% of Americans support the legalization of medical marijuana (up from 69% in 1997). The same survey found 46% support "legalizing small amounts of marijuana for personal use" (up from 22% in 1997).
Still, you may not have gotten the memo about this past Tuesday (April 20) and the event known as 4/20, aka "Pot Day." Participants made a public show indeed of how much this day means to them: behold the crowd gathered for the occasion on the campus of the University of Colorado.
This apparent willingness toward tolerance and use also extends to controlled substances which create clouds only a user might see. Earlier this month The New York Times reported the experience of a retired clinical psychologist who was deeply depressed while going through treatments for kidney cancer:
"Nothing had any lasting effect until, at the age of 65, he had his first psychedelic experience. He left his home in Vancouver, Wash., to take part in an experiment at Johns Hopkins medical school involving psilocybin, the psychoactive ingredient found in certain mushrooms."
The article said that one year later, the gentleman's "profoundly transforming" hallucinogenic encounter had helped him "overcome his depression." What's more, his story is by no means unique: "Researchers from around the world are gathering this week in San Jose, Calif., for the largest conference on psychedelic science held in the United States in four decades."
Now, please know that I do not wish to make light of cancer, depression, or the taking of psilocybin. My purpose is not to condone or condemn pot smoking (okay, I did inhale… but that was a long time ago).
Instead, I want to show that the timing of this trend is no accident. Above I noted that 2007 began a measurable change in attitude -- that is, a change in social mood.
The July 2009 issue of The Socionomist published Euan Wilson's "The Coming Collapse of a Modern Prohibition," which showed how the large trend that now drives the financial markets also drives public sentiment today regarding marijuana. Sound far fetched? Well, the analysis and charts in the article draw a clear and persuasive parallel with the repeal of the 21st Amendment (alcohol prohibition), as part of a survey of prohibition/repeal efforts in the 20th century.
Eduard Hamamjian
GeaSphere LLC
Wednesday, April 21, 2010
I Herd, You Herd, We Herd
In financial markets, the crowd is the perceived leader, but it comprises nothing but followers.
One of the fundamental revelations of the Elliott Wave Principle is that investors herd.
For any thinking, independent person, that's a hard idea to accept. The Socionomics Institute's Alan Hall recently explained herding in an interview with Esquire magazine, and:
"People do hate this theory, Hall admits. Nobody wants to think that he's engaged in 'pre-rational survival behavior,' that he's no smarter than a gnu on the Serengeti, that rumors and movies and hemlines and even politics are just our way of sniffing the wind -- that history itself is just a glorified herding pattern."
But as hard as it is to swallow, let me give you an example of herding behavior that I myself recently engaged in -- perhaps you have too.
The other day, my wife and I went to a concert. We parked farther away from the venue than we would have liked -- so far, in fact, that we couldn't see the place, and it took us a minute to figure out which direction to go. We weren't the only ones trying to save a buck on parking -- there were 10-15 other people locking their cars.
The concert venue sits in the middle of a busy downtown area. I'd been there only once before and remembered having trouble finding it. Others have probably felt the same way -- I say that because as we all were leaving the parking lot, everyone kind of, sort of... well, formed a herd. A few people toward the front looked confident enough in the direction they'd chosen. The rest of us followed. We figured the ones upfront knew where they were going.
As we walked -- this group of people stretched along the sidewalk for half-a-block -- it occurred to me that if those at the front suddenly stopped, or turned into a bar, then my wife and I and most others in the group would likely feel lost. Yes, we would have kept going to save ourselves the embarrassment. But we would do so without really knowing where we were going, and only hoping to get there in time.
That's when I wished I had my TomTom GPS navigator with us.
It's the same in investing. There are stock exchanges in New York, London and other major cities. There are financial experts out there who seem confident about the market's direction. The rest of us, well... We watch, we listen, we share our own viewpoints -- but ultimately, most of us follow. When stocks go up -- "they are buying!" -- we buy. When stocks go down -- "they are selling!" -- we sell. In the absence of information, we rely on behavior of others.
Here's an important question, though. Walking to the concert, we could see our "leaders." But who "leads" investors? Here's how Elliott Wave International's founder and president Robert Prechter answered that in his May 2009 Elliott Wave Theorist:
Market Herding
Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do.
Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions.
Another term for "the mood of the herd" is social mood. It changes according to the patterns R.N. Elliott first described in the 1930s. These patterns reflect social mood changes -- and in turn make financial markets predictable.
Eduard Hamamjian
GeaSphere LLC
One of the fundamental revelations of the Elliott Wave Principle is that investors herd.
For any thinking, independent person, that's a hard idea to accept. The Socionomics Institute's Alan Hall recently explained herding in an interview with Esquire magazine, and:
"People do hate this theory, Hall admits. Nobody wants to think that he's engaged in 'pre-rational survival behavior,' that he's no smarter than a gnu on the Serengeti, that rumors and movies and hemlines and even politics are just our way of sniffing the wind -- that history itself is just a glorified herding pattern."
But as hard as it is to swallow, let me give you an example of herding behavior that I myself recently engaged in -- perhaps you have too.
The other day, my wife and I went to a concert. We parked farther away from the venue than we would have liked -- so far, in fact, that we couldn't see the place, and it took us a minute to figure out which direction to go. We weren't the only ones trying to save a buck on parking -- there were 10-15 other people locking their cars.
The concert venue sits in the middle of a busy downtown area. I'd been there only once before and remembered having trouble finding it. Others have probably felt the same way -- I say that because as we all were leaving the parking lot, everyone kind of, sort of... well, formed a herd. A few people toward the front looked confident enough in the direction they'd chosen. The rest of us followed. We figured the ones upfront knew where they were going.
As we walked -- this group of people stretched along the sidewalk for half-a-block -- it occurred to me that if those at the front suddenly stopped, or turned into a bar, then my wife and I and most others in the group would likely feel lost. Yes, we would have kept going to save ourselves the embarrassment. But we would do so without really knowing where we were going, and only hoping to get there in time.
That's when I wished I had my TomTom GPS navigator with us.
It's the same in investing. There are stock exchanges in New York, London and other major cities. There are financial experts out there who seem confident about the market's direction. The rest of us, well... We watch, we listen, we share our own viewpoints -- but ultimately, most of us follow. When stocks go up -- "they are buying!" -- we buy. When stocks go down -- "they are selling!" -- we sell. In the absence of information, we rely on behavior of others.
Here's an important question, though. Walking to the concert, we could see our "leaders." But who "leads" investors? Here's how Elliott Wave International's founder and president Robert Prechter answered that in his May 2009 Elliott Wave Theorist:
Market Herding
Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do.
Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions.
Another term for "the mood of the herd" is social mood. It changes according to the patterns R.N. Elliott first described in the 1930s. These patterns reflect social mood changes -- and in turn make financial markets predictable.
Eduard Hamamjian
GeaSphere LLC
Monday, April 5, 2010
The US Economy Has Recovered: Hip, Hip, Hooray! April Fools
Our charts reveal the true progress of stock market growth.
On Thursday (April1) the Dow Industrials continued to flirt with the 11,000 level, and held tight to its much-exalted 18-month highs. And according to the mainstream experts, the "Green Shoots" of recovery have popped up on the US economic soil like pink flamingo yard ornaments signifying the start of a new bull market. Here, this April 1 news item reads: "Bulls Sipping April Fuel." (MarketWatch)
This has to be some kind of April fool's joke. Because in reality, the regenerative "fuel" in the US economy's engine couldn't run a lawn mower. Ipso Facto(s) -- these recent stats:
In January, employers slashed 23,000 private sector jobs as opposed to the widely expected creation of 40,000 jobs.
On March 31, Moody's Investors Service downgraded five major banks in Greece to confirm the deterioration -- not improvement -- of the country's debt crisis.
From December 2009 to January 2010, the S&P/Case-Shiller Home Price Index rose a paltry .3%. The increase did nothing to erase the fact that home values are still 30% below their July 2006 peak.
February 2010 saw the fourth consecutive drop in new home sales to the lowest level since such records started in 1963.
US Treasuries in March suffered their first monthly loss for the year, while the 10-year yield stands at its highest level in TEN months.
Despite a modest drop, US unemployment still stands at a dreadful 9.7%
The much-celebrated rise in fourth-quarter Gross Domestic Product was largely driven by the temporary fixes of Federal bailouts and inventory declines, NOT sustainable trends in consumer spending, business investment or employment growth.
So far in 2010, the Federal Deposit Insurance Corporation has dissolved 41 US banks. US lenders are collapsing at the fastest pace in 17 years while the number of banks on the FDIC's "Problem" list has climbed to its highest level since 1992.
The list goes on -- suffice it to say: The mainstream experts will explain away the upbeat performance in stocks via a feather of good news, EVEN IF it means "shrugging off" a two-ton elephant of negative data. And in the end, their analysis becomes a matter of convenience and crowd appeal -- NOT accuracy.
For that, the March 31 Short Term Update (STU, for short)steps in with an eye-opening account of the real health of the US stock market. In this publication, our analysts present a series of charts that reveal how the market's stack up against sure-fire measures of momentum, strength, and wave structure.
Here is a partially reprinted version of one of those charts: the DJIA, Daily versus NYSE Daily Volume since March 15.
As you can see in the top panel, the Dow registered four consecutive up closes in the final week of March. And, in the original STU chart, our analysts show whether the rally in prices was matched by an increasing volume; a bullish signal.
Also, Short Term Update presents a compelling snapshot of the S&P 500 versus the Percentage of S&P 500 stocks above their 10-day moving average since August 2009.
Eduard Hamamjian Managing Director
GeaSphere LLC
On Thursday (April1) the Dow Industrials continued to flirt with the 11,000 level, and held tight to its much-exalted 18-month highs. And according to the mainstream experts, the "Green Shoots" of recovery have popped up on the US economic soil like pink flamingo yard ornaments signifying the start of a new bull market. Here, this April 1 news item reads: "Bulls Sipping April Fuel." (MarketWatch)
This has to be some kind of April fool's joke. Because in reality, the regenerative "fuel" in the US economy's engine couldn't run a lawn mower. Ipso Facto(s) -- these recent stats:
In January, employers slashed 23,000 private sector jobs as opposed to the widely expected creation of 40,000 jobs.
On March 31, Moody's Investors Service downgraded five major banks in Greece to confirm the deterioration -- not improvement -- of the country's debt crisis.
From December 2009 to January 2010, the S&P/Case-Shiller Home Price Index rose a paltry .3%. The increase did nothing to erase the fact that home values are still 30% below their July 2006 peak.
February 2010 saw the fourth consecutive drop in new home sales to the lowest level since such records started in 1963.
US Treasuries in March suffered their first monthly loss for the year, while the 10-year yield stands at its highest level in TEN months.
Despite a modest drop, US unemployment still stands at a dreadful 9.7%
The much-celebrated rise in fourth-quarter Gross Domestic Product was largely driven by the temporary fixes of Federal bailouts and inventory declines, NOT sustainable trends in consumer spending, business investment or employment growth.
So far in 2010, the Federal Deposit Insurance Corporation has dissolved 41 US banks. US lenders are collapsing at the fastest pace in 17 years while the number of banks on the FDIC's "Problem" list has climbed to its highest level since 1992.
The list goes on -- suffice it to say: The mainstream experts will explain away the upbeat performance in stocks via a feather of good news, EVEN IF it means "shrugging off" a two-ton elephant of negative data. And in the end, their analysis becomes a matter of convenience and crowd appeal -- NOT accuracy.
For that, the March 31 Short Term Update (STU, for short)steps in with an eye-opening account of the real health of the US stock market. In this publication, our analysts present a series of charts that reveal how the market's stack up against sure-fire measures of momentum, strength, and wave structure.
Here is a partially reprinted version of one of those charts: the DJIA, Daily versus NYSE Daily Volume since March 15.
As you can see in the top panel, the Dow registered four consecutive up closes in the final week of March. And, in the original STU chart, our analysts show whether the rally in prices was matched by an increasing volume; a bullish signal.
Also, Short Term Update presents a compelling snapshot of the S&P 500 versus the Percentage of S&P 500 stocks above their 10-day moving average since August 2009.
Eduard Hamamjian Managing Director
GeaSphere LLC
Thursday, April 1, 2010
DEFLATION IS HERE
Think back to the fall of 2007. The deflationary "liquidity crunch" that over the next year-and-a-half cuts the DJIA in half, decimates commodities, real estate and world markets is only starting. Almost no one believes that the crash is coming -- to a large degree, because everyone is convinced that the U.S. Federal Reserve Bank, with Ben Bernanke at the helm, will never allow deflation to happen: It can just print money!
You cannot pick up a newspaper, turn on financial TV or read an economist’s report without hearing that the Fed’s latest discount-rate cut is bullish because it indicates the Fed’s decision to “pump liquidity” into the system. This opinion is so completely wrong that it is hard to believe its ubiquity.
First of all, the Fed does not “decide” where it wants interest rates. All it does is follow the market. Figure 17 proves it. Wherever the T-bill rate goes, the Fed’s “target rate” for federal funds immediately follows. That’s all there is to it.
If you refuse to believe your eyes, then listen to the chairman; Alan Greenspan is very clear on this point. On September 17, a commentator on CNBC asked, “Did you keep the interest rates too low for too long in 2002-2003?” Greenspan immediately responded, “The market did.” Rates were not “too low” or the period “too long,” either, because the market, not the Fed, made the decision on the level and the time, and the market is never wrong; it is what it is. If investors in trillions of dollars worth of U.S. Treasury debt worldwide had demanded higher interest, they would have gotten it, period.
Second, falling interest rates are almost never bullish. All you have to do to understand this point is look at Figure 18.
Interest rates fell persistently through three of the greatest bear markets in history: 1929-1932 in the Dow, 1990-2003 in the Japanese Nikkei, and 2000-2002 in the NASDAQ. The only comparably deep bear market in the past 80 years in which interest rates rose took place in the 1970s when the Value Line index dropped 74%. Economists all draw upon this experience, but they ignore the others. Today’s environment of extensive investment leverage and an Everest of debt in the banking system is far more like 1929 in the U.S. and 1989 in Japan than it is like the 1970s. Why is a decline in interest rates bearish in such an environment? Because it means a decline in the demand for credit. When people want less of something, the price goes down.
The recent drop in rates indicates less borrowing, which means that the primary prop under investment prices -- the expansion of credit -- is weakening. That’s one reason why stock prices fell in 2000-2002 and why they are vulnerable now. This is the opposite of “pumping liquidity”; it’s a slackening in liquidity.
Eduard Hamamjian
GeaSphere LLC
You cannot pick up a newspaper, turn on financial TV or read an economist’s report without hearing that the Fed’s latest discount-rate cut is bullish because it indicates the Fed’s decision to “pump liquidity” into the system. This opinion is so completely wrong that it is hard to believe its ubiquity.
First of all, the Fed does not “decide” where it wants interest rates. All it does is follow the market. Figure 17 proves it. Wherever the T-bill rate goes, the Fed’s “target rate” for federal funds immediately follows. That’s all there is to it.
If you refuse to believe your eyes, then listen to the chairman; Alan Greenspan is very clear on this point. On September 17, a commentator on CNBC asked, “Did you keep the interest rates too low for too long in 2002-2003?” Greenspan immediately responded, “The market did.” Rates were not “too low” or the period “too long,” either, because the market, not the Fed, made the decision on the level and the time, and the market is never wrong; it is what it is. If investors in trillions of dollars worth of U.S. Treasury debt worldwide had demanded higher interest, they would have gotten it, period.
Second, falling interest rates are almost never bullish. All you have to do to understand this point is look at Figure 18.
Interest rates fell persistently through three of the greatest bear markets in history: 1929-1932 in the Dow, 1990-2003 in the Japanese Nikkei, and 2000-2002 in the NASDAQ. The only comparably deep bear market in the past 80 years in which interest rates rose took place in the 1970s when the Value Line index dropped 74%. Economists all draw upon this experience, but they ignore the others. Today’s environment of extensive investment leverage and an Everest of debt in the banking system is far more like 1929 in the U.S. and 1989 in Japan than it is like the 1970s. Why is a decline in interest rates bearish in such an environment? Because it means a decline in the demand for credit. When people want less of something, the price goes down.
The recent drop in rates indicates less borrowing, which means that the primary prop under investment prices -- the expansion of credit -- is weakening. That’s one reason why stock prices fell in 2000-2002 and why they are vulnerable now. This is the opposite of “pumping liquidity”; it’s a slackening in liquidity.
Eduard Hamamjian
GeaSphere LLC
Monday, March 29, 2010
BNN TV Interview with Eduard.
I hope you enjoy the 6 minute interview with me on the Canadian news channel. I would appreciate your feed back.
Copy and paste in your browser, and turn the sound on.
http://watch.bnn.ca/#clip282146
Copy and paste in your browser, and turn the sound on.
http://watch.bnn.ca/#clip282146
Friday, March 26, 2010
Pensions: No Wonder States Are Broke
We know many state governments are financially hurting. But how much of that "hurt" is "self-inflicted"? Let's start by looking at one state. The governor of New Jersey is quoted in the March 15 issue of Forbes:
"One state retiree, 49 years old, paid, over the course of his entire career, a total of $124,000 toward his retirement pension and health benefits. What will we pay him? $3.3 million in pension payments over his life and nearly $500,000 for health care benefits -- a total of $3.8 on a $120,000 investment.
"A retired teacher paid $62,000 toward her pension and nothing, yes nothing, for full family medical, dental and vision coverage over her entire career. What will we pay her? $1.4 million in pension benefits and another $215,000 in health care benefit premiums over her lifetime."
No wonder New Jersey is facing a budget crisis. Those are just two examples in the governor's quote. Imagine those examples multiplied. Institutional Investor Magazine reports that since 1999, California's ". . .pension outlays have ballooned by 2,000%, while state revenues have increased onlWord from the Center on Budget and Policy Priorities is that forty-one states are expecting a mid-2010 budget gap. A news item released March 5 reveals Alabama, Hawaii, and North Carolina plan to delay sending out tax refunds -- they don't have the money now. Other states are considering doing the same thing. How come they are finding themselves in this sad shape?
"For years, state governments have been spending every dime they could squeeze out of taxpayers plus all they could borrow. . .But now even states' borrowing ability has run into a brick wall, because the basis of their ability to pay interest -- namely, tax receipts -- is evaporating." --Robert Prechter, Elliott Wave Theorist, November 2009.
Tuition increases, trimming of government services and "secondary" tax hikes (like liquor taxes) have already occurred. But what if the world financial crisis is not over? Are states prepared for another round of deflation?
In the 2007-2009 stock market crash, you've already seen how devastating a deflation (a.k.a. "liquidity crunch," "credit crunch," etc.) can be for states' tax revenues. This chart from EWI's February 2010 Elliott Wave Financial Forecast (EWFF) makes it clear:
Eduard Hamamjian Managing Director
GeaSphere LLC
Thursday, March 25, 2010
How to Flee the Flock
At different times in our history, political operatives would plant applauders in the audience when their candidates made speeches. The rest of the audience would usually follow. The newspapers would then report the candidate was well-received.
The mother of a famous American comedian Milton Berle sat in the front row when her son performed. She would start to laugh hysterically when a joke fell flat. The "flock" usually followed.
George Evans once managed Frank Sinatra's career. Explaining Sinatra's meteoric rise in the early '40s, Evans said "...Sinatra's talents provided an 'initial impetus'. His [Evans'] own planting of 'organized and regimented moaning' in Sinatra's crowd accounted for some of the panic." ("Prechter's Perspective")
In a crowd, it's easy and comfortable to do what others are doing, especially when emotions are running high, like at a concert. Or when your money is at stake.
The absolute majority of investors are unsure whether to buy or sell -- they simply do as others do. Herding happens. It's a natural process: "...emotional impulses from the limbic system impel a desire among individuals to seek signals from others in matters of knowledge and behavior and therefore to align their feelings and convictions with those of the group. 'Wall Street' certainly shares aspects of a crowd, and there is abundant evidence that herding behavior exists among stock market participants." (Robert Prechter, Science is Revealing the Mechanism of the Wave Principle.)
We've all been there. Surely you can remember yourself unwittingly believing the last few people you heard who offered a market opinion: they have a fancy title under their names, and they are on TV, so they must know. But the 2007-2009 financial crisis revealed yet again that the Wall Street crowd is often wrong; the fact that they had to be bailed out with taxpayer money is a tacit admission of that.
In fact, crowd psychology in the financial arena is often used as a contrarian indicator. You probably remember how bullish CEOs and mainstream experts were in 2007, just before stocks tanked. Yet early in that year, here is what readers saw in the March issue of EWI's Elliott Wave Financial Forecast:
"The percentage of Investors Intelligence bulls has been equal to or greater than the percentage of bears for 228 straight weeks. The streak of bullish weeks is now 50% longer than the second longest streak, which took place through the all-time highs in 2000 and was followed by a devastating decline to the lows of 2002/2003."
Those in 2007 who realized the pendulum had swung too far in one direction got out in time. Those who remained with the flock were led to financial slaughter. Today, the same experts are bullish again. They use the same indicators they did in 2007 -- how do you know they will be right this time?
Eduard Hamamjian Managing Director
GeaSphere LLC
The mother of a famous American comedian Milton Berle sat in the front row when her son performed. She would start to laugh hysterically when a joke fell flat. The "flock" usually followed.
George Evans once managed Frank Sinatra's career. Explaining Sinatra's meteoric rise in the early '40s, Evans said "...Sinatra's talents provided an 'initial impetus'. His [Evans'] own planting of 'organized and regimented moaning' in Sinatra's crowd accounted for some of the panic." ("Prechter's Perspective")
In a crowd, it's easy and comfortable to do what others are doing, especially when emotions are running high, like at a concert. Or when your money is at stake.
The absolute majority of investors are unsure whether to buy or sell -- they simply do as others do. Herding happens. It's a natural process: "...emotional impulses from the limbic system impel a desire among individuals to seek signals from others in matters of knowledge and behavior and therefore to align their feelings and convictions with those of the group. 'Wall Street' certainly shares aspects of a crowd, and there is abundant evidence that herding behavior exists among stock market participants." (Robert Prechter, Science is Revealing the Mechanism of the Wave Principle.)
We've all been there. Surely you can remember yourself unwittingly believing the last few people you heard who offered a market opinion: they have a fancy title under their names, and they are on TV, so they must know. But the 2007-2009 financial crisis revealed yet again that the Wall Street crowd is often wrong; the fact that they had to be bailed out with taxpayer money is a tacit admission of that.
In fact, crowd psychology in the financial arena is often used as a contrarian indicator. You probably remember how bullish CEOs and mainstream experts were in 2007, just before stocks tanked. Yet early in that year, here is what readers saw in the March issue of EWI's Elliott Wave Financial Forecast:
"The percentage of Investors Intelligence bulls has been equal to or greater than the percentage of bears for 228 straight weeks. The streak of bullish weeks is now 50% longer than the second longest streak, which took place through the all-time highs in 2000 and was followed by a devastating decline to the lows of 2002/2003."
Those in 2007 who realized the pendulum had swung too far in one direction got out in time. Those who remained with the flock were led to financial slaughter. Today, the same experts are bullish again. They use the same indicators they did in 2007 -- how do you know they will be right this time?
Eduard Hamamjian Managing Director
GeaSphere LLC
Friday, March 19, 2010
2010 Academy Awards: Why Did Such Negative Characters Win?
This year's Academy Awards was a jarring mix of glam and glum, starting with the contrast between the ultra-elite posing on the red carpet and the array of down-and-dirty films that walked away with the coveted golden statues. On March 8, Brooks Barnes of The New York Times observed:
"The Oscars telecast exposed an Academy of Motion Picture Arts and Sciences in full-fledged identity crisis. Almost everything about the ceremony was big and commercial; almost everything about the winners was small and arty."
Barnes could just as easily been describing the Dow Jones and its own identity crisis. A quick look at the Dow price chart over the past few months reveals that it has moved largely sideways, with little jumps upward here and minor dips downward there. With the flatness of the market, it's hard to know if we are headed towards a fabulous recovery, or on the verge of another inglorious drop.
Socionomics, the science that looks at events through the lens of social mood, uses the stock market as a barometer to measure social mood and make social predictions.
A look at the 2010 Oscar winner's circle suggest that social mood may be in flux. While Jeff Bridges and Sandra Bullock walked away with the best actor nods for inspiring movies about country music and football, it was the supporting actor and actress winners that told the grimmer story: Christoph Waltz for his portrayal of a Machiavellian Nazi "Jew-hunter" in Inglorious Basterds and Mo'Nique for her role as a hateful, abusive mother in Precious.
Putting aside debates on the makeup of the Academy, the priorities of the movie-going public, and the significance of an Oscar statuette, the darkness of Waltz and Mo'Nique's characters illustrates a declining social mood. The larger mood of the populace has not yet become negative enough to award the "best actor" title to a character of such a dark nature. But let's remember how much more uplifting the Best Supporting Actor awards were in 2007 when the Dow was on its way to an all-time high. Alan Arkin won for his performance as Grandpa Edwin in the blunt-but-uplifting comedy, Little Miss Sunshine, and Jennifer Hudson was honored for her portrayal of a 1960s pop star in Dreamgirls.
Just as the Oscars were a mix of Hollywood glitz and glam pitted against relative unknowns, so too is the social mood -- the Dow in an upswing, but the backdrop of social mood of the masses turning darker and more negative. Socionomics is dedicated to social prediction, to predicting and preparing for the big shifts in politics and culture before they happen.
Eduard Hamamjian Managing Director
GeaSphere LLC
"The Oscars telecast exposed an Academy of Motion Picture Arts and Sciences in full-fledged identity crisis. Almost everything about the ceremony was big and commercial; almost everything about the winners was small and arty."
Barnes could just as easily been describing the Dow Jones and its own identity crisis. A quick look at the Dow price chart over the past few months reveals that it has moved largely sideways, with little jumps upward here and minor dips downward there. With the flatness of the market, it's hard to know if we are headed towards a fabulous recovery, or on the verge of another inglorious drop.
Socionomics, the science that looks at events through the lens of social mood, uses the stock market as a barometer to measure social mood and make social predictions.
A look at the 2010 Oscar winner's circle suggest that social mood may be in flux. While Jeff Bridges and Sandra Bullock walked away with the best actor nods for inspiring movies about country music and football, it was the supporting actor and actress winners that told the grimmer story: Christoph Waltz for his portrayal of a Machiavellian Nazi "Jew-hunter" in Inglorious Basterds and Mo'Nique for her role as a hateful, abusive mother in Precious.
Putting aside debates on the makeup of the Academy, the priorities of the movie-going public, and the significance of an Oscar statuette, the darkness of Waltz and Mo'Nique's characters illustrates a declining social mood. The larger mood of the populace has not yet become negative enough to award the "best actor" title to a character of such a dark nature. But let's remember how much more uplifting the Best Supporting Actor awards were in 2007 when the Dow was on its way to an all-time high. Alan Arkin won for his performance as Grandpa Edwin in the blunt-but-uplifting comedy, Little Miss Sunshine, and Jennifer Hudson was honored for her portrayal of a 1960s pop star in Dreamgirls.
Just as the Oscars were a mix of Hollywood glitz and glam pitted against relative unknowns, so too is the social mood -- the Dow in an upswing, but the backdrop of social mood of the masses turning darker and more negative. Socionomics is dedicated to social prediction, to predicting and preparing for the big shifts in politics and culture before they happen.
Eduard Hamamjian Managing Director
GeaSphere LLC
Tuesday, March 16, 2010
2010 Tea Parties and 1970s Anti-War Rallies: Polar Opposites but Same Mood
Anyone who was on a college campus in the 1970s might not imagine that demonstrators against the Vietnam War and the current anti-tax Tea Party attendees could be moved by the same force. In both cases, though, negative social mood has contributed to the kind of polarization that brings out the desire to protest and march.
We haven't yet seen the kind of massive rallies that were common in the 1970s, but as the bear-market rally peters out and the bear market re-appears, we may witness more people willing to march for their beliefs. As socionomics, the science of social prediction, describes it, bull markets reflect positive social moods and social harmony, while bear markets reflect negative social moods and social unrest. Bob Prechter explains the connection among the markets, social mood, polarization and conflict in his New York Times best-selling book, called Conquer the Crash, which came out in a second edition the end of 2009. Here's an excerpt from Chapter 26, which describes what to expect when markets turn bearish.
Polarization and Conflict
In essence, bull and bear markets are social mood trends. Social mood trends have consequences.
A positive social mood has positive social consequences. The great bull market of the past quarter-century created a wonderful world. Major antagonists in the areas of politics, religion and race kissed and made up. The Cold War ended. Communism collapsed. Markets became global and sophisticated. The world embraced, to one degree or another, capitalism and freedom. The Information Age was born. Even country music got raucous and happy. In the 1990s, people felt secure, and today wealth abounds.
Generally speaking, that environment has been safe, profitable and fun. However, social mood trends are a two-way street. When the positive trend ends, a negative one takes over for a while. Those trends have social consequences, too: destructive ones, which affect finance, the economy, politics and all kinds
of social relationships.
[Editor's note: The Dow is currently in a bear-market rally, according to Elliott Wave International's analysis, with the larger bear market due to re-assert itself. In this next section, Prechter outlines what happens during bear markets, some of which has already begun to crop up.]
…
The main social influence of a bear market is to cause society to polarize in countless ways. That polarity shows up in every imaginable context — social, religious, political, racial, corporate and by class. In a bear market, people in whatever way are impelled to identify themselves as belonging to a smaller social unit than they did before and to belong more passionately. It is probably a product of the anger that accompanies bear markets, because each social unit seems invariably to find reasons to be angry with and to attack its opposing unit. In the 1930s bear market, communists and fascists challenged political institutions. In the 1970s bear market, students challenged police, and blacks challenged whites. In both cases, labor challenged management and third parties challenged the status quo.
In bear markets, rallies, marches and protests become common events. Separatism becomes a force as territories polarize. Populism becomes a force as classes polarize. Third parties, fourth parties, and more, find constituents. Bear markets engender labor strikes, racial conflict, religious persecution, political unrest, trade protectionism, coups and wars. In the area of personal behavior, part of the population gets more conservative, and part gets more hedonistic, and each side describes the other as something that needs reform. One reason that conflicts gain such scope in depressions is that much of the middle class gets wiped out by the financial debacle, increasing the number of people with little or nothing to lose
and anger to spare.
Excerpted from Chapter 26 of Conquer the Crash, You Can Survive and Prosper in a Deflationary Depression, by Robert Prechter, 2nd edition published 2009
We haven't yet seen the kind of massive rallies that were common in the 1970s, but as the bear-market rally peters out and the bear market re-appears, we may witness more people willing to march for their beliefs. As socionomics, the science of social prediction, describes it, bull markets reflect positive social moods and social harmony, while bear markets reflect negative social moods and social unrest. Bob Prechter explains the connection among the markets, social mood, polarization and conflict in his New York Times best-selling book, called Conquer the Crash, which came out in a second edition the end of 2009. Here's an excerpt from Chapter 26, which describes what to expect when markets turn bearish.
Polarization and Conflict
In essence, bull and bear markets are social mood trends. Social mood trends have consequences.
A positive social mood has positive social consequences. The great bull market of the past quarter-century created a wonderful world. Major antagonists in the areas of politics, religion and race kissed and made up. The Cold War ended. Communism collapsed. Markets became global and sophisticated. The world embraced, to one degree or another, capitalism and freedom. The Information Age was born. Even country music got raucous and happy. In the 1990s, people felt secure, and today wealth abounds.
Generally speaking, that environment has been safe, profitable and fun. However, social mood trends are a two-way street. When the positive trend ends, a negative one takes over for a while. Those trends have social consequences, too: destructive ones, which affect finance, the economy, politics and all kinds
of social relationships.
[Editor's note: The Dow is currently in a bear-market rally, according to Elliott Wave International's analysis, with the larger bear market due to re-assert itself. In this next section, Prechter outlines what happens during bear markets, some of which has already begun to crop up.]
…
The main social influence of a bear market is to cause society to polarize in countless ways. That polarity shows up in every imaginable context — social, religious, political, racial, corporate and by class. In a bear market, people in whatever way are impelled to identify themselves as belonging to a smaller social unit than they did before and to belong more passionately. It is probably a product of the anger that accompanies bear markets, because each social unit seems invariably to find reasons to be angry with and to attack its opposing unit. In the 1930s bear market, communists and fascists challenged political institutions. In the 1970s bear market, students challenged police, and blacks challenged whites. In both cases, labor challenged management and third parties challenged the status quo.
In bear markets, rallies, marches and protests become common events. Separatism becomes a force as territories polarize. Populism becomes a force as classes polarize. Third parties, fourth parties, and more, find constituents. Bear markets engender labor strikes, racial conflict, religious persecution, political unrest, trade protectionism, coups and wars. In the area of personal behavior, part of the population gets more conservative, and part gets more hedonistic, and each side describes the other as something that needs reform. One reason that conflicts gain such scope in depressions is that much of the middle class gets wiped out by the financial debacle, increasing the number of people with little or nothing to lose
and anger to spare.
Excerpted from Chapter 26 of Conquer the Crash, You Can Survive and Prosper in a Deflationary Depression, by Robert Prechter, 2nd edition published 2009
Wednesday, March 3, 2010
Optimism has run amok.
There is an old saying that states the following, "The stock market climbs a wall of worry". There is a world of wisdom behind that statement. Every time during past periods of unrealistic optimism by the following suspects, economist, government, money managers, and pundits on television or print. We have had a problem.
Consider that over the past several months Mutual Fund Managers, Hedge Fund Managers and generally money managers of all type have become extremely optimistic with their funds. Managers vote their optimism with money invested in their funds. There are numerous studies that suggest when money managers vote by being fully invested, the action alone has signaled a market top.
Examples of past market tops were as follows. January 2000, October 2007, March 2010. These periods all have one thing in common, money managers have reduced their cash holdings to less than 4%. What followed the first two periods was significant stock market declines lasting for several years. We may be at the top of the next significant decline. Time will tell?
Consider the following observation. The markets are the collective wisdom of all its players, that are at any one time collectively optimistic or pessimistic. As we know from many studies about human nature, we tend to move in lockstep if there is extreme optimism or pessimism. Or described in another way when we have greed or fear. The pendulum always swings too far in one direction or the other.
Our so-called professionals are influenced by the collective so-called wisdom of the masses. Consider the following example. The Federal Reserve Bank has demonstrated throughout its existence the uncanny ability to raise interest rates right before major stock market declines. Examples would be 1929, 1987 and 2000 for instance. And of course the resent discount rate hike to .75%. The latter hike was of course not at the same magnitude as the other examples given, but nonetheless it was a hike during a period of very high unemployment, unprecedented government involvement in business and in social programs, and generally a period of extreme uncertainty.
Much of my recent observations are data dependent. And although I am not completely ready to call the top today. It is clear to me that we do not have a competent government in place to handle the current situation. The credit crisis that began in 2007 has not completed its devastation throughout our economy. There are too many countries, states and local governments spending beyond their means. None of this is sustainable, and the markets will anticipate future problems before it becomes obvious to the casual observers. Much more to come on this topic.
To our clients rest assured, we are prepared to take action in either direction of the market.
What do you think?
Consider that over the past several months Mutual Fund Managers, Hedge Fund Managers and generally money managers of all type have become extremely optimistic with their funds. Managers vote their optimism with money invested in their funds. There are numerous studies that suggest when money managers vote by being fully invested, the action alone has signaled a market top.
Examples of past market tops were as follows. January 2000, October 2007, March 2010. These periods all have one thing in common, money managers have reduced their cash holdings to less than 4%. What followed the first two periods was significant stock market declines lasting for several years. We may be at the top of the next significant decline. Time will tell?
Consider the following observation. The markets are the collective wisdom of all its players, that are at any one time collectively optimistic or pessimistic. As we know from many studies about human nature, we tend to move in lockstep if there is extreme optimism or pessimism. Or described in another way when we have greed or fear. The pendulum always swings too far in one direction or the other.
Our so-called professionals are influenced by the collective so-called wisdom of the masses. Consider the following example. The Federal Reserve Bank has demonstrated throughout its existence the uncanny ability to raise interest rates right before major stock market declines. Examples would be 1929, 1987 and 2000 for instance. And of course the resent discount rate hike to .75%. The latter hike was of course not at the same magnitude as the other examples given, but nonetheless it was a hike during a period of very high unemployment, unprecedented government involvement in business and in social programs, and generally a period of extreme uncertainty.
Much of my recent observations are data dependent. And although I am not completely ready to call the top today. It is clear to me that we do not have a competent government in place to handle the current situation. The credit crisis that began in 2007 has not completed its devastation throughout our economy. There are too many countries, states and local governments spending beyond their means. None of this is sustainable, and the markets will anticipate future problems before it becomes obvious to the casual observers. Much more to come on this topic.
To our clients rest assured, we are prepared to take action in either direction of the market.
What do you think?
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