Getting Tough on Wall Street

President Obama is now, finally, getting tough on Wall Street. Today he’s giving his support to two measures critically important for making sure the Street doesn’t relapse into another financial crisis

1. Separating the functions of investment banking from commercial banking (basically, resurrecting the Depression-era Glass-Steagall Act) so investment banks can’t gamble with insured commerial deposits in order to scope of their risk-taking activities.
2. Giving regulatory authorities power to limit the size of big banks so they don’t become “too big to fail,” as antitrust laws do with every other capitalist entity.

The president, for the first time, will throw his weight behind an approach long championed by Paul A. Volcker, former chairman of the Federal Reserve and an adviser to the Obama administration. The proposal will put limits on bank size and prohibit commercial banks from trading for their own accounts — known as proprietary trading.

Only a handful of large banks would be the targets of the proposal, among them Citigroup, Bank of America, JPMorgan Chase and Wells Fargo. Goldman Sachs, the Wall Street trading house, became a commercial bank during this latest crisis, and it would presumably have to give up that status.

Mr. Volcker has been trying for weeks to drum up support — on Wall Street and in Washington — for restrictions similar to those passed in the Glass-Steagall Act in 1933. That law separated commercial banking and investment banking, so that the investment arm could no longer use a depositor’s money to purchase stocks, sometimes drawing money from a savings account, for example, without the depositor’s knowledge.

The 1929 stock market crash and subsequent Depression made a shambles of that practice. But Glass-Steagall was watered down over the years and revoked in 1999.

The Shift In Sentiment

Reason to Sell Off Recently

1. President Obama has signaled that a scaled back healthcare bill will be looked into.
2. China posted a quarterly GDP of 10.7% on a year over year basis – This is too “hot” by any measure.
3. The Obama administration is looking to present legislation that will severely reduce proprietary trading at major financial institutions.
4. Initial Claims were 40,000 higher than expected this morning, showing that employment trends are not getting better
5. Japan’s lending by companies has hit mutli-year lows. Business recovery is in jeopardy.
6. Earnings from many companies in the U.S. are meeting and exceeding estimates, while revenues are inline.
7. The Euro continues to lag against the U.S. dollar are a flight to safety continues.
8. Bullish sentiment has been at over-heating levels, usually a contrary indicator.
9. The risk trade has been off for the same time the U.S dollar is moving higher.
10. Australia is talking about taxing some mining companies to bring in additional revenue.

Bulletin of Economy 2010 Strategy

The 2010 Outlooks

Strategists, on average, see the S&P 500 gaining 9.5% to 1,222 and earning $76 per share in 2010

• Despite the view that the S&P 500 will gain over 9%, the consensus is to "underweight" or "benchmark" US equities
• Oil will rally slightly to $80
• Gold will rally to $1,213
• The Dollar vs the Euro will end 2010 at 1.45
• The US economy is expected to grow 3.1%
• The FRB will not hike interest rates until at least mid-2010

Themes for 2010:

1. Government balance sheet risk and Rising taxation
2. Alternative yield strategies
3. Financial sector rehabilitation
4. Corporate cash flow beneficiaries
5. Rising global growth and Emerging market consumers
6. Commodity price inflation
7. Return of active management
8. Alternative energy
9. Asia & Emerging-Market consumer (large-cap EM financial and consumer related stocks & US and Japanese multinationals)
10. Tightening plays as markets tighten by raising the price of commodities, the yield of gov't bonds, value of EM currencies: long global banks (including Japan) and large cap energy stocks
11. Hedge tail risks such as bubbles in China and gold, a double-dip, trade protectionism or a US dollar crisis by buying puts on volatility
12. Buy US companies that generate a high percentage of sales from BRICS
13. Invest in companies with high operating leverage that currently run at the bottom of their margin cycles
14. Buy stocks high Sharpe ratio
15. Looking ahead to 2H: free cash flow and dividend growth
16. Significant recovery upside but also downside risks: best of both worlds high-quality cheap stocks on normalized earnings
17. M&A up cycle beginning: buy aquisition targets
18. Rising rates: long brokers and short REITs
19. Stronger US dollar: long retailers and short energy
20. Overweight US versus Emerging Markets: long US financials and short EM financials
21. Flows follow: stay with value over growth
22. Uncertainty to decline: short S&P 500
23. 12m forward volatility
24. Stock rally to continue in a low rate world
25. Buy cyclicals now, own defensives later in the year
26. S&P 500 to rally to 1,300 in 1H then fall to 1,250 by year-end
27. Forecast Fed target rate unchanged until 2012

Buy & Hold .... 10 Year of Nothing

Click to Enlarge

For those Long-term investor, You better see this 10-years Annualized Return on US Stock. What a disappointed day !! Lower than 1% and Let's me told you that History tends to repeat itself and those who not learn from history will suffer except you are very long term investor.

Remark: This graph doesn't take inflation/deflation and dividend yield into account so it may not be accurate.

Loss Momentum as Financial Fade

S&P 500 Weekly Momentum

S&P Financial Sector

With above 2 charts, we can see that S&P 500 Index loss momentum as Financial sector show fading momentum in rally. Well S&P still loss 62.54% from their 2007 peak; a lot of room to fill. Some economists expect Double Dip in 2nd half of 2010. Many opinions is spreading around now and Future is not us to see.

And at some point Fed will raise interest rate but not soon for sure. Some risk still on the commercial real estate market right now but current P/E of stock market still look promisingly cheap compared to highest number at the tech bubble in 2000; however, you must be more selective and cautious as some downside still remain.

We know sure things that are the Fed won't leave US in Recession for long, the Fed will continue pump up stimulus as much as they can afford and "TOO BIG TOO FAIL" scheme still have its day as long as Mr. Bernanke alive.

Potential Market Risk and Opportunity:

1. P/E look reasonable at fair value.
2. A Commercial Real Estate is A walking zombie now.
3. Fed will not raise Interest Rate at least 12-18 months.

Que Sera, Sera (Whatever Will Be, Will Be) ....................

Future is not us to see ....... Que Sera, Sera.

Why Real Unemployment Rate Is 17.2 %

The U.S. unemployment numbers are out today, and most headlines will show that the U.S. unemployment rate in November was 10.0 percent, down from 10.2 percent in October. That number is depressingly large, but even that under-counts the true number of unemployed. For instance, it doesn’t count those people who don’t have a job and have given up looking for one, or those who have found marginal part-time work but still can’t make ends meet and are still looking for a full-time job.

The government keeps stats on all of these “marginally attached workers” and people “employed part time for economic reasons” (rather than by choice). If you add all of those people in, the total unemployment rate in the U.S. is 17.2 percent, compared to 12.6 percent a year ago. The only good news is that number is down from 17.5 percent in October.

To explain all of this, the folks at Mint prepared the video below. Despite its attempt to be lighthearted, it’s probably the most depressing cartoon you’ll see all month.

Is Global Warming A Hoax ?

Recently, a hacker leaked thousands of emails and documents from the University of East Anglia’s (UEA) Hadley Climate Research Unit which point toward Global Warming being a hoax. Find out Here

Stop the Insanity

Albert Einstein supposedly once defined insanity as doing the same thing over and over and expecting a different result. Immune to Einstein's logic, Washington politicians are considering a second stimulus package within a year, when only 25% of the currently authorized $787 billion of stimulus funds have been spent.

The government's short-term stimulus approach to job creation over the last two years

1. In February 2008 Washington passed a $170 billion stimulus in the form of the Economic Stimulus Act.
2. In July 2008 Washington passed a $345 billion stimulus in the form of the Housing & Economic Recovery Act.
3. In February 2009 Washington passed a $787 billion stimulus in the form of the American Recovery & Reinvestment Act.
4. In March 2009 Washington passed a $410 billion omnibus bill, which included $12 billion in pork barrel stimulus spending for 9,000 earmarked projects.

Since the first authorization of these four stimulus packages, the national debt has increased by $2.9 trillion while the unemployment rate rose to a 26-year high before backing off slightly to 10%. It's time to try a real plan for real job creation, starting with the goal of a balanced budget. From 1995 to 1998 federal spending rose by an average of 2.9% per year, the lowest increase since the 1920s. We can apply the same principles that worked at that time to create jobs and balanced budgets. The principles are smaller government, lower spending, lower interest rates and less debt.

Step We Should Take:

The 1st step we should take is to allow workers and employers to keep more of their hard-earned money through an immediate, two-year 50% reduction of the payroll tax. This step would immediately boost the take-home pay of every worker and dramatically free up cash for every employer to hire and invest. This tax relief could be paid for by redirecting unspent stimulus funds.

Second, we should allow small businesses to deduct 100% of new-equipment expenses to help them invest in more-productive technologies, which would in turn boost economic activity where it is needed most.

Third, in a globalizing economy we must find ways for America to be the best place for anyone to invest in and start a business. That begins with reducing the tax burden on businesses. Ireland's business tax rate is 12.5%, while ours is almost three times that and is the second highest in the world. Since adopting this 12.5% rate 15 years ago, Ireland has taken its per capita income from the second lowest in the European Union to the second highest.

Fourth, to encourage investment, we should match the Chinese rate of tax on capital gains. That rate is zero.

Fifth, we should abolish the death tax. This tax punishes Americans for working, saving and creating wealth--exactly the opposite of what we need to encourage economic growth. Repealing the death tax would create hundreds of thousands of new jobs.

Finally, we need to develop more of America's vast domestic energy resources, which can generate millions of new jobs and billions in new tax revenues here at home largely without having to spend any federal dollars.

The choice couldn't be clearer: We can either continue down the same path of big government stimulus and hope for a different result, or we can get back to balancing the budget and reducing taxes on small businesses and entrepreneurs to reward job creation, work, savings and investment. Politicians can afford to be insane; taxpayers cannot.

Predicting The Future

FYE ONLY HERE EXPECTED P/E IN OUR FUTURE

CLICK TO ENLARGE

US government manipulate stock market ?

Manipulating Market

Whether Federal Reserve and U.S. Government Rigged Stock Market, Pushing Market Cap up $6+Trillion since Mid-March. Only Logical Conclusion as to Why Market Soared, While Economy Faltered and Traditional Sources of Capital Remained Neutral. The most positive economic development in 2009 was the stock market rally. Since the middle of March, the market cap of all U.S. stocks has soared more than $6 trillion. The wealth effect of rising stock prices soothed the nerves and boosted the net worth of the half of Americans who own stock.

We cannot identify the source of the new money that pushed stock prices up so far so fast. Historically, the market cap has risen about 10 times the amount of net new cash invested in equities. For the most part, the roughly $600 billion of net new cash since March needed to boost the market cap $6 trillion did not come from the traditional players that provided money in the past

Retail investors through funds. Retail investors have hardly bought any U.S. equities through funds. U.S. equity funds and ETFs have received only $20 billion since the start of April. Meanwhile, bond funds and ETFs have received a record $355 billion.

Foreign investors. Foreign investors have provided some buying power, purchasing $109 billion in U.S. stocks from April through October. But foreign purchases may have slowed in November and December because the U.S. dollar was weakening last fall.

Hedge funds. We have no way to track in real time what hedge funds do, and they may well have shifted some assets into U.S. equities. But we doubt their buying power was enormous because they posted an outflow of $9 billion from April through November.

Pension funds. All the anecdotal evidence we have indicates that pension funds have not been making a huge asset allocation shift and have not moved more than about $100 billion from bonds and cash into U.S. equities since the rally began.

If the money to boost stock prices did not come from the traditional players, it must have come from somewhere else. We know that the U.S. government has spent hundreds of billions of dollars to support the auto industry, the housing market, and the banks and brokers. Why not support the stock market as well ?

As far as we know, it is not illegal for the Federal Reserve or the U.S. Treasury to buy S&P 500 futures. Moreover, several officials have suggested the government and major banks could support stock prices. For example, former Fed board member Robert Heller opined in the Wall Street Journal in 1989, “Instead of flooding the entire economy with liquidity, and thereby increasing the danger of inflation, the Fed could support the stock market directly by buying market averages in the futures market, thereby stabilizing the market as a whole.

Think back to mid-March 2009. Nothing positive was happening, and investor sentiment was horrible. The Fed, the Treasury, and Wall Street were all trying to figure out how to prevent the financial system from collapsing. What if Ben Bernanke, Tim Geithner, and the head of one or more Wall Street firms decided that creating a stock market rally was the only way to rescue the economy?

One way to manipulate the stock market would be for the Fed or the Treasury to buy a nominal $60 to $70 billion of S&P 500 stock futures each month for as long as necessary. Depending on margin levels, as little as $5 billion to $15 billion per month was all that was necessary to lift the S&P 500 by 67%. Even $15 billion per month would have been peanuts compared to what was being doled out elsewhere.

This type of intervention could explain some of the unusual market action in recent months, with stock prices grinding higher on low volume even as companies sold huge amounts of new shares and retail investors stayed on the sidelines. Some market watchers have charted that virtually all of the market’s upside since mid-September has come from after-hours futures activity.

Business Cycle Info

As earning is up, Growth stocks P/E increase because their Price increase more than earning while Cyclical stocks (Value) P/E decrease since their price increase less than their earning. This statement will converse as we going to business downturn.

ABSOLUTE IMPACT of ARRA 2009

The Economic Impact of the American Recovery and Reinvestment Act of 2009

What is the the American Recovery & Reinvestment Act (ARRA) ? Should we investors pay attention to it ? Yes Of course, the Federal Government always play an important part in any economy recovery stage. Such The Act of Congress was based largely on proposals made by President Barack Obama and was intended to provide a stimulus to the U.S. economy in the wake of the economic downturn; creating a job that will put Americans back to work and get U.S. economy back on track ASAP. The measures are nominally worth $787 billion.

The Act includes federal tax cuts, expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, health care, and infrastructure, including the energy sector. You can see from a balloon diagram below.

The Act specifies that 37% of the package is to be devoted to tax cuts equaling $288 billion and $144 billion or 18% is allocated to state and local fiscal relief (more than 90% of the state aid is going to Medicaid and education). 45% or $357 billion is allocated to federal social programs and federal spending programs.

Recently, The Council of Economic Advisers has released a report on the economic impact of the stimulus package. The estimates, which have a lot of uncertainty attached to them, are that the recovery package "added roughly 2.3 percentage points to real GDP growth in the second quarter and is likely to add even more to growth in the third quarter"

Cap and Trade ....

CAP & TRADE = LESS CO2

The term cap and trade describes a set of environmental laws and regulations that aim to reduce greenhouse gasses and other pollutants. They combine a “cap” on emissions with the ability to “trade” emissions permits.

The idea is to give companies a certain amount of flexibility: You can invest in new, energy-efficient technology, and you won’t get fined for exceeding the cap. Or, you can buy permits on the open market and keep right on emitting as much as you want.

A Cap and Trade system is a market-based policy tool usually used by a state or central government to reduce the overall carbon dioxide or other greenhouse gas emissions. It is one of two major market-based options to lower emissions, the other being a carbon tax. In a cap and trade system a central authority sets a limit, or a cap, on the overall amount of pollutants that are allowed to emit in one certain area and allocates permits representing the right to emit a specific amount of pollutants to companies. Companies then can trade permits on a created market. Over time, the limit or the cap becomes stricter, allowing less and less pollutions, until the final reduction goal is met.

The development of the concept can be divided into four phases:

1. Gestation: Theoretical articulation of the instrument by Coase, Dales, Montgomery etc and, independent of the former, tinkering with "flexible regulation" at the US Environmental Protection Agency (EPA).
2. Proof of Principle: First developments towards trading of emission certificates based on the "offset-mechanism" taken up in Clean Air Act in 1977.
3. Prototype: Launching of a first "cap and trade" system as part of US Acid Rain Program, officially announced as a paradigm shift in environmental policy, as prepared by "Project 88", a network building effort to bring together environmental and industrial interests in the US.
4. Regime Formation: branching out from US clean air policy to global climate policy, and from there to the European Union, along with the expectation of an emerging global carbon market and the formation of the "carbon industry".

Alternative energy companies (solar, wind) are the obvious picks to benefit from cap and trade if you believe that their products will be more attractive as pollutants from traditionalsources (oil, coal, natural gas) become more costly. But the whole solar thing depends heavily on the cost of alternatives. The dollar per watt of a solar panel has to make economic sense to individuals and larger users. And cap and trade won’t necessarily affect the price of oil and coal.

The technology that utilities, for example, may use to clean their emissions to slide under the cap probably won’t have anything to do with solar. The big engineering firms could get some contracts out of this. And if the utilities become more efficient at producing power, they’ll use less coal, for example, and the price could come down.

How about the big, consolidated oil companies? Cap and trade is tougher to analyze there. Under the plans being discussed, the government will hand out permits to companies that produce the emissions, but not evenly. Utilities will get more of them; the oil companies, much less. Each company will be affected differently because of its different operations and the different sources of oil. Companies whose operations are concentrated in the U.S. will likely be hit hardest by the regulations.

More Information on EPA Website Here

Bubble 2000

The Biggest Bubble of All: Surfing on the Internet

The NASDAQ Index, an index essentially representing high-tech New Economy companies, more than triples from late 1998 to March 2000. The P/E ratios of the stocks in the index that had earnings soared to over 100.

Amazon sold at prices that made its total market cap larger than the total market values of all the publicly owned booksellers such as Barnes & Noble. Priceline sold at a total market cap that exceeded the cap of the major carriers United, Delta, and American Airlines combined.

Cooper, Dimitrov and Rau found that 63 companies that changed their names to include some Web orientation enjoyed a 125% greater increase in price during 10 day period than that of their peers. In the post-bubble period, they found that stock prices benefited when dot-com was deleted from the firm’s name. The relationship between profits and share price had been severed.

Security analysts Speak up: Mary Meeker was dubbed by Barron’s the “Queen of the Net.” Henry Blodgett was known as “King Henry”. Henry flatly stated that traditional valuation metrics were not relevant in “the big-bang stage of an industry.” Meeker suggested that “this is a time to be rationally reckless.” Traditionally, ten stocks are rated “buys” for each on that is rated “sell.” But during the bubble, the ratio of buys to sells reached close to 100 to 1.

The writers of the media: the bubble was aided and abetted by the media – which turned us into a nation of traders. Journalism is subject to the laws of supply and demand. Since investors wanted more information about Internet investing opportunities, the supply of magazines increased to fill the need.

The result was that turnover reached an all-time high. The average holding period for a typical stock was not measured in years but rather in days and hours. Redemption ratios of mutual funds soared and the volatility of individual stock prices exploded.

History tells us that eventually all excessively exuberant markets succumb to the laws of gravity. In the early days of automobile, we had close to 100 automobile companies, and most of them became roadkill. The key to investing is not how much industry will affect society or even how much it will grow, but rather its ability to make and sustain profits.

The lesson here is not that markets occasionally can be irrational and, therefore, that we should abandon the firm foundation theory. Rather, the clear conclusion is that, in every case, the market did correct itself. The market eventually corrects any irrationality – albeit in its own slow, inexorable fashion. Anomalies can crop up, markets can get irrationally optimistic, and often they attract unwary investors. But eventually, true value is recognized by the market, and this is the main lesson investors must heed.

Market from 60's to 90's

By the 1990s, institutions accounted for more than 90% of the trading volume on the NYSE. And yet professional investors participated in several distinct speculative movements from the 1960s through the 1990s. In each case, professional institutions bid actively for stocks not because they felt such stocks were undervalued under the firm foundation principles, but because they anticipated that some greater fools would take the shares off their hands at even more inflated prices.

I. The Soaring Sixties

The New “New Era”: The growth-stock/New-issue craze:

• Growth was the magic work in those days, taking on an almost mystical significance. More new issues were offered in the 1959-62 period than at any previous time in history. It was called the “tronics boom”, because the stock offering often included some garbled version of the word “electronics” in their title, even if the companies had nothing to do with the electronics industry.
• Jack Dreyfus commented on the mania as follows: a shoelace making firm (P/E ratio is 6) changed the name from Shoelaces, Inc. to Electronics and Silicon Furth-Burners. In today’s market, the words “electronics” and “silicon” are worth 15 times earnings. However, the real play comes from the word “furth-burners,” which no one understands. A word that no on understands entitles you to double your entire score. Therefore, after the name change, the new P/E ratio = (6 + 15)*2=42!
• The SEC uncovered many evidence of fraudulence and market manipulation in this period. Many underwriters allocated large portions of hot issues to insiders of the firms such as partners, relatives, officers, and other securities dealers to whom a favor was owed. The tronics boom came back to earth in 1962.

Synergy Generates Energy: The conglomerate Boom.

• Part of the genius of the financial market is that if a product is demanded, it is produced. The product that all investors desired was expected growth in earnings per share. By the mid-1960s, creative entrepreneurs had discovered that growth meant synergism, which is the quality of having 2 plus 2 equal 5.
• In fact, the major impetus for the conglomerate wave of the 1960s was the acquisition process itself could be made to produce growth in earnings per share. The trick is the ability of the acquiring firm to swap its high-multiple stock for the stock of another firm with a lower multiple. The targeting firm can only “sell” its earnings at multiple of 10, say. But when these earnings are packaged with the acquiring firm, the total earnings could be sold at a multiple of 20.
• As a result of such manipulations, corporations are now required to report their earnings on a “fully diluted” basis, to account for the new common shares that must be set aside for potential conversions. The music slowed drastically for the conglomerates on January 19, 1968. On that day, the granddaddy of the conglomerates, Litton Industries, announced that earnings for the second quarter of that year would be substantially less than had been forecast. In the selling wave that followed, conglomerate stocks declined by roughly 40% before a feeble recovery set in.
• The aftermath of this speculative phase revealed two factors. First, conglomerates were mortal and were not always able to control their far-flung empires. Second, the government and the accounting profession expressed real concern about the pace of mergers and about possible abuses. Few mutual or pension funds were without large holdings of conglomerate stocks. They were hurt badly. During the 1980s and 1990s deconglomeration came into fashion. Many of the old conglomerates began to shed their unrelated, poor-performing acquisitions to boost their earnings.

Performance comes to the market: the Bubble in Concept stocks

• With conglomerates shattering about them, the managers of investment funds found another magic word: performance in the late 1960s. The commandments for fund managers were simple: Concentrate your holdings in a relatively few stocks and don’t hesitate to switch the portfolio around if a more desirable investment appears. And because near-term performance was important it would be best to buy stocks with an exciting concept and a compelling and believable story. Hence, the birth of the so-called concept stock.
• Cortess Randall was the founder of National Student Marketing (NSM). His concept was a youth company for the youth market. Blocks of NSM were bought by 21 institutional investors. Its highest price was 35.25. However, in 1970, its lowest price was 7/8.

II. The Sour Seventies

1. In the 1970s, Wall Street’s pros vowed to return to “sound principles.” Concepts were out and investing in blue-chip companies was in. They were called the “Nifty fifty”, also “one decision” stocks. You made a decision to buy them, once, and your portfolio-management problems were over.
2. Hard as it is to believe, the institutions had started to speculate in blue chips. In 1972, P/E for Sony is 92, for Polaroid is 90, for McDonald’s is 83. Institutional managers blithely ignored the fact that no sizable company could ever grow fast enough to justify an earnings multiples of 80 or 90.
3. The end was inevitable. The Nifty fifty were taken out and shot one by one.

III. The Roaring Eighties

1. The Triumphant Return of New issues: the high-technology, new-issue boom of the first half of 1983 was an almost perfect replica of the 1960s episodes, with the names altered to include the new fields of biotechnology and microelectronics. The total value of new issuers in 1983 was greater than the cumulative total of new issues for the entire preceding decade.
2. Concepts Conquer Again: the Biotechnology Bubble: valuation levels of biotechnology stocks reached an absurd level. In 1980s, some biotech stocks sold at 50 times sales.
3. From the mid-1980s to the late 1980s, most biotechnology stocks lost three-quarters of their market value.

What does it all mean? – Styles and fashions in investors’ evaluations of securities can and often do play a critical role in the pricing of securities. The stock market at times confirms well to the castle-in-the-air theory.

IV. The Nervy Nineties

1. One of the largest booms and busts of the late twentieth century involved the Japanese real estate and stock markets. From 1955 to 1990, the value of Japanese real estate increased more than 75 times. By 1990, Japan’s property was appraised to be worth 5 times as much as all American property.
2. Stock prices increased 100-fold from 1955 to 1990. At their peak in Dec 1989, Japanese stocks had a total market value of about $4 trillion, almost 1.5 times the value of all U.S. equities and close to 45% of the world’s equity market cap. Stocks sold at more than 60 times earnings, almost 5 times book value, and more than 200 times dividends.
3. The financial laws of gravity know no geographic boundaries. The Nikkei index reached a high of almost 40,000 on the last trading day of the decade of the 1980s. By mid-August 1992, the index had declined to 14,309, a drop of about 63%. In contrast, the DJIA fell 66% from Dec 1929 to its low in the summer of 1932.

Economy Cycle & Sector Rotation

Let's talk about economy cycles. As we all know, business have 2 main stages; Expansion and Contraction. Normally, Expansion will last about 36 months while Contraction last about 18 months. Well, you easily compare side-by-side between business cycle and stock market because they are a replica of each others; just the main street (business) behind wall street (stock market) about 6 months.

Each sector are strong in different phases of the cycle. Let's explain more .... About Sector Rotation.

Early Bull - Transportation (Airlines, Railroads and Trucking) and Technology (Software, Hardware, Box Makers)
Middle Bull - Capital Goods (Manufacturing equipment)
Late Bull - Basic Materials (Aluminum, Copper, Steel, Chemicals, Paper)
Top Bull - Energy (Oil, Oil Services, Coal, Natural Gas)
Early Bear - Defensives (Non-Cyclicals) like Health Care and Consumer Staple (Food, Beverages, Drugs, Cosmetics, Tobacco)
Middle Bear - Utilities (Electricity, Gas)
Late Bear - Consumer Cyclicals like Housing and Autos
Bottom Bear - Financial Sector

Madness of Crowds

The psychology of speculation is a veritable theater of the absurd. Although the castle-in-the-air theory can well explain such speculative binges, outguessing the reactions of a fickle crowd is a most dangerous game. Unsustainable prices may persist for years, but eventually they reverse themselves.

Act I - The Tulip-Bulb Craze

1. In the early 17th century, tulip became a popular but expensive item in Dutch gardens. Many flowers succumbed to a nonfatal virus known as mosaic. It was this mosaic that helped to trigger the wild speculation in tulip bulbs. The virus caused the tulip petals to develop contrasting colored stripes or “flames”. The Dutch valued highly these infected bulbs, called bizarres. In a short time, popular taste dictated that the more bizarre a bulb, the greater the cost of owning it.
2. Slowly, tulipmania set in. At first, bulb merchants simply tried to predict the most popular variegated style for the coming year. Then they would buy an extra large stockpile to anticipate a rise in rice. Tulip bulb prices began to rise wildly. The more expensive the bulbs became, the more people viewed them as smart investments.
3. People who said the prices could not possibly go higher watched with chagrin as their friends and relatives made enormous profits. The temptation to join them was hard to resist; few Dutchmen did. In the last years of the tulip spree, which lasted approximately from 1634 to early 1637, people started to barter their personal belongings, such as land, jewels, and furniture, to obtain the bulbs that would make them even wealthier. Bulb prices reached astronomical levels.
4. The tulip bulb prices during January of 1637 increased 20 fold. But they declined more than that in February. Apparently, as happens in all speculative crazes, prices eventually got so high that some people decided they would be prudent and sell their bulbs. Soon others followed suit. Like a snowball rolling downhill, bulb deflation grew at an increasingly rapid pace, and in no time at all panic reigned.

Act II - The South Sea Bubble

1. The South Sea Company had been formed in 1711 to restore faith in the government’s ability to meet its obligations. The company took on a government IOU ( I owe you: debt) of almost 10 million pounds. As a reward, it was given a monopoly over all trade to the South Seas. The public believed immense riches were to be made in such trade, and regarded the stock with distinct favor.
2. In 1720, the directors decided to capitalize on their reputation by offering to fund the entire national debt, amounting to 31 million pounds. This was boldness indeed, and the public loved it. When a bill to that was introduced in Parliament, the stock promptly rose from ￡130 to ￡300.
3. On April 12, 1720, five days after the bill became law, the South Sea Company sold a new issue of stock at ￡300. The issue could be bought on the installment plan - ￡60 down and the rest in eight easy payments. Even the king could not resist; he subscribed for stock totaling ￡100,000. Fights broke out among other investors surging to buy. The price had to go up. It advanced to ￡340 within a few days. The ease the public appetite, the company announced another new issue – this one at ￡400. But the public was ravenous. Within a month the stock was ￡550, and it was still rising. Eventually, the price rose to ￡1,000.
4. Not even the South See was capable of handling the demands of all the fools who wanted to be parted from their money. Investors looked for the next South Sea. As the days passed, new financing proposals ranged from ingenious to absurd. Like bubbles, they popped quickly. The public, it seemed, would buy anything.
5. In the “greater fool” theory, most investors considered their actions the height of rationality as, at least for a while; they could sell their shares at a premium in the “after market”, that is, the trading market in the shares after their initial issue.
6. Realizing that the price of the shares in the market bore no relationship to the real prospects of the company, directors and officers of the South Sea sold out in the summer. The news leaked and the stock fell. Soon the price of the shares collapsed and panic reigned. Big losers in the South Sea Bubble included Isaac Newton, who exclaimed, “I can calculate the motions of heavenly bodies, but no the madness of people.”

Act III - Wall street lays an egg

1. From early March 1928 through early September 1929, the market’s percentage increase equaled that of the entire period from 1923 through early 1928.
2. Price manipulation by “investment pools”: The pool manager accumulated a large block of stock through inconspicuous buying over a period of weeks. Next he tried to enlist the stock’s specialist on the exchange floor as an ally. Through “wash-sales” (buy-sell-buy-sell between manager’s allies), the manager created the impression that something big was afoot. Now, tip-sheet writers and market commentators under the control of the pool manager would tell of exciting developments in the offing. The pool manager also tried to ensure that the flow of news from the company’s management was increasingly favorable – assuming the company management was involved in the operation. The combination of tape activity and managed news would bring the public in. once the public came in, the free-for-all started and it was time discreetly to “pull the plug”. Because the public was doing the buying, the pool did the selling. The pool manager began feeding stock into the market, first slowly and then in larger and larger blocks before the public could collect its senses. At the end of the roller-coaster ride the pool members had netted large profits and the public was left holding the suddenly deflated stock.
3. On September 3, 1929, the market averages reached a peak that was not to be surpassed for a quarter of a century. The “endless chain of prosperity” was soon to break. On Oct 24 (“Black Thursday”), the market volume reached almost 13 million shares. Prices sometimes fell $5 and $10 on each trade. Tuesday, Oct 29, 1929, was among the most catastrophic days in the history of the NYSE. More than 16.4 million shares were traded on that day. Prices fell almost perpendicularly.
4. History teaches us that very sharp increases in stock prices are seldom followed by a gradual return to relative price stability.
5. It is not hard to make money in the market. What is hard to avoid is the alluring temptation to throw your money away on short, get-rich-quick speculative binges.