Everyone's Limiting Risk

Just spotted some news that regulators over in Switzerland are trying to add some new regulation that limits the risk that banks can take. They're trying to prevent the same situation from happening again that we saw when we were staring into the whites of the eyes of the financial crisis. Trader's Narrative puts it best in this summary:

Regulators looking to rein in the sort of risk-taking that caused the last financial crisis reached a compromise in Switzerland yesterday that more than doubles capital requirements for the world’s banks while giving them as long as eight years to comply. The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Banks that fail to meet the buffer would be unable to pay dividends. Bank shares gained after the Basel Committee gave firms as much as eight years to comply with stiffer capital requirements, more time than some analysts predicted – Bloomberg - the 7% minimum is a dramatic, but not unexpected, increase from the current 2%. If a bank’s capital ratio falls below 7% or would fall under 7% when the bank is stress tested, then it will be forced to raise capital. If it falls below 4.5%, then it will be put into ‘resolution.’

The biggest problem is that this regulation is coming after the fact. When are people going to start to realize that they need to recognize scenarios that are clearly too good to be true and are going to eventually spin out of control before they actually get to the point that they can derail the entire global economy and take everything down? Until then, we'll just put band-aids on severed limbs and amputate instead of getting to the heart of the matter and providing the correct incentives for people to actually behave properly -- or at least to not behave in a way that is a threat to the entire financial system.

Really Smart Guys That Can't Beat the Market

Saw this article in the Wall Street Journal over the weekend. It talks about how academics have long dabbled in the market. Professors whose thoughts while driving to work in the morning can squash the most intelligent thought of anyone else's. But just because they are smarter than the average bear, doesn't mean that they can consistently beat the market.

Prominent academics long have dabbled on Wall Street, scoring some big successes, such as mutual-fund firm Dimensional Fund Advisors—and spectacular failures like hedge fund Long-Term Capital Management, which imploded in 1998. 

The $800 billion ETF market seems to be especially fertile ground for academics these days. Unlike mutual funds or hedge funds, the vast majority of ETFs track market indexes. That passive investment style meshes particularly well with prevailing academic views about the stock market. 

It also means star stock pickers like Peter Lynch and Bill Miller, on whom mutual fund companies rely as pitchmen, can't play much of a role. In some cases, academics have stepped into the gap. 

For example, WisdomTree Investments Inc., founded with help from Jeremy Siegel, a Wharton School professor, enjoyed great fanfare in 2006 when it launched a roster of ETFs that emphasized dividend-paying stocks, which Prof. Siegel argued were the key to beating the market in the long run. 

Yet WisdomTree LargeCap Dividend Fund has posted negative average annual returns of 8% over the past three years, compared with 6.7% declines for the SPDR ETF, which tracks the Standard & Poor's 500-stock index, and 6.3% declines for the iShares Russell 3000 Index ETF. 

You don't need to have an Ivy League education to make money in the stock market. As long as you have a winning strategy that you have backtested over time, you can find a simple consistent strategy that rewards you with profits. If you would like to learn how to implement a simple trading system online with little time required, you should check out my free video walkthrough of finding good stocks to trade and how to trade them right here. I promise that if you give me 24 minutes of your time, you'll come out learning something valuable about making money in the stock market.

The Cloud Has a Silver Lining?

With all the people lining up to shout doom and glom from the rooftops, I was a little surprised to see Barry Ritholtz's breakdown of the jobs recovery in this "technical" recovery. He says that we experienced the worst jobs loss since the recession, but that we're actually adding jobs from the worst part of the recession (the trough) at a faster rate than the previous two recessions.

If the economy is in recovery — a new cycle –  for the the past 13 (or so) months — “technical” or not — should we perhaps be looking at the employment situation relative to the trough now, and not to the last peak?  To be clear, I am not advocating hard one way or the other (though I will offer some thoughts in closing), simply pointing out that if the recession ended — as many, including the St. Louis Fed (see: Dude, Where’s My Recession Bar, Jan 2010, and St. Louis Fed Tracks Nascent Expansion, Mar 2010) –  perhaps we should now be looking at our experience from the trough?  This is more my offering an item for discussion than taking a stand on the issue — both sides have valid arguments. 

Both of the following statements are true, and neither contradicts the other:  We experienced the worst labor market recession since the Great Depression.  From the trough, the labor market is generating jobs at a faster pace than the previous two recessions.

 This doesn't sound like much of a "less bad" scenario. Coming out from the depths at a faster rate is a genuinely good thing.

One inference (mine, as promised):  Although we experienced the worst job-loss recession since the Great Depression, this has not been as job-less a recovery as many would have us believe.  It is demonstrably better than the past two recessions as measured from the trough.  Put another way, the labor market was in the deepest ditch it had been in for some 80 years and, given that, is actually doing a fairly reasonable job of climbing out, though the pace simply must accelerate if we are to recover all the jobs we lost in any reasonable time frame (and I can’t stress that final point enough).

Maybe we will get out of this mess, after all...

I'm Not the Only One Who Knows that the Trend Is Your Friend

Just spotted a fantastic article over at Forex Blog. He talks specifically about trend following trading, riding trends up and down to exploit price moves in the market and the volatility that we currently face.

“Trend-Style” trading is also known as trend-following, and is just as it sounds. Traders identify one-way patterns in specific currency pair(s), and attempt to ride them for as long as possible. Given all of the big movements in currency markets this year, it’s no wonder that trend-following is the most popular. If you look at the 52 week trading ranges for the six most popular USD currency pairs, you can see that highs and lows are often as far as 20% apart. The EUR/USD pair, for example, fell 20% over a mere 7 months. Anyone who sold in December 2009 and bought to cover in June 2010 would have earned an annualized return of 35% without leverage! Even if you had captured only a couple months of depreciation would have yielded impressive returns. In addition, you could have traded the Euro back up from June until August and reaped a 60% annualized return. Best of all, both of these trends (down, then up) unfolded very smoothly, with only minor corrections along the way.

I’m sure serious technical analysts are rolling their eyes at the chart above, but the point stands that trend-following has never been easier and rarely more profitable than it is now. One fund manager summarized, “Trend-following investors are capturing the momentum in several big currency moves. You have so much uncertainty in the world now with regard to inflation or deflation, which typically makes currency markets and interest rates move. That is good for trend followers as it causes volatility, which typically creates good profits.” In other words, there is a tremendous amount happening in forex markets at the moment, and this is reflected in protracted, deep moves in currency pairs, which can change direction without notice and yet continue moving the opposite way for just as long. If you think this sounds obvious, look at historical data (5-10 years) for the majority of currency pairs: while trends have always been abundant, it was only recently that they began to last longer and became more pronounced.

He makes the point that in this current type of market environment for the currency markets, and any market in general for that matter because of the across the board volatility, trend following is the best strategy to pursue. Now that's what I'm talking about!!

If you're interested in learning about how to use this methodology to make money in the markets, to ride stock trends up and down, to truly profit from the stock market in a way that is consistent and proven, you should check out my free video walkthrough of a trend following trading system right here. I take you on my favorite online stock website, show you how to find good stocks to trade, and then how specifically to trade them. All I ask is that you give me 24 minutes of your time, and I'll show you a proven stock market trading strategy to make money in good markets and bad. Check it out right here.

A Black Swan Event in Gold

Nassim Taleb (or at least I assume that's who wrote the article because it's written by Black Swan Capital) talks over at SeekingAlpha.com about his perspective on gold. He thinks that the rising risk to the Eurozone will knock the euro off its feet and into next week -- thus sending gold into an upward spiral. He shows tons and tons of charts that point to the fact that the recent uptick in interest in the Swiss franc, the US dollar, adn gold point to some serious trouble lying ahead for the Euro. His conclusion?

For now, we sit squarely on the fence, pecking away at seeming near-term opportunities. But, if yield spreads continue to blow out in Europe, a new big trend lower in the euro will likely resume and gold will likely make my esteemed father-in-law a very happy man. 

The SPDR Gold Trust (symbol GLD) is an ETF that makes it easy to play the price fluctuations in gold without delving into the futures market. Perhaps a consolidation is in order as gold challenges its all-time highs; either way a blast through resistance looks to be in order. 

Additionally, if Soverign Default in Europe reignites the risks to the eurozone banking system, as discussed today and more in-depth in yesterday's post, then the easiest way to play it outside the FX market would be through the ProShares UltraShort Euro Fund (symbol EUO), an ETF that gives investors to 2x leverage and allows them to essentially be "short" the euro without having to "sell short" a security.

Quick, a little lesson in trend following! Spot the trend. In what direction is the current trend on the Euro?

Scary stuff going on out there. Only one way to deal with it. Ride trends up and down and benefit whether the stock market goes up to the moon or gets absolutely, positively clobbered. If you haven't seen it yet, you should check out my free video walking you through a trend following strategy that you can use to make money whether a stock goes up or down. Sign up to receive the free video right here.

Danger, Danger Eurozone!!!

Some scary stuff ahead according to Brian Dolan on SeekingAlpha.com. His key points for this week ahead are:

• Consolidation may give way to risk aversion
• BIS capital reforms may hit Euro-area banks
• Eurozone debt concerns resurface
• Democratic Party of Japan’s Election and the JPY
• Key data and events to watch next week

Specifically, he got me a little concerned about what's happening across the pond in the EU. Bond spreads have been widening significantly of late, highlighting a lot of the damage that has been done to the Euro and the tough economic times that lie ahead for the Eurozone region. Here are his specific comments and bonds and credit default swaps danger ahead.

This past week saw a continued widening of Eurozone peripheral bond spreads relative to Germany. The spreads have been widening since the end of July, however recent news helped to push some of the spreads to record levels. A report on Tuesday showed that the European stress test results released by the Committee of European Banking Supervisors (CEBS) may have understated some holdings of sovereign debt. Tuesday saw the 10-year yield differentials between Portugal and Germany rise to record levels around 354 basis points and the differential between Ireland and Germany 10-year yields climb to around 372 basis points – also record highs. This highlights the ongoing sovereign debt concerns in the Eurozone which has weighed on the common currency and risk sentiment. The spreads between Greece 10-year yields and their German equivalents also advanced to levels which have not been seen since the height of the sovereign debt crisis back in May. This highlights that structural issues of the peripheral countries remain present.

At the same time yield spreads are widening between the core and periphery nations, sovereign debt credit default swaps (CDS), which are a measure of the risk of default, are reaching elevated levels for the peripheral-EU. Tuesday saw Ireland’s 5-year CDS reach record highs of roughly 382bps. It is also of note that Greece, Portugal, and Spain 5-year CDS have all increased this past week. The heightened CDS are not a factor of new sovereign issues but rather a reminder that fears continue to lurk under the surface. 

The elevated yield differentials and CDS should keep the euro under pressure in the week ahead. EUR/USD has consolidated over the past few days, confined to a tight range that is supported by its 100-day sma and capped by resistance in its 21-day sma. While the bias is to the downside we would note the risks to the upside as a potential bull flag consolidation pattern is also evident. Key support levels are the 100-day sma and 23.6% retracement level of the move from the November 2009 highs to June 2010 lows which converge around 1.2650. Below here is likely to see to the 1.2400-1.2430 area which is the bull flag support and 61.8% retracement of the rally from June lows. The 21-day sma and Kijun line come in around 1.2750-80 to provide immediate resistance for EUR/USD. Above here may see to bull flag resistance around 1.2850 and then to the daily Ichimoku cloud top around 1.3030.

The Musings of a Discretionary Technical Trader

Here are some excerpts from the commentary of a discretionary trader at Trading Stock Market. Instead of focusing on buy and hold fundamental investing principles, he implements a discretionary technical analysis.

Last week in my "Side-Way Trading" post I mentioned about a possibility of short-term up move, yet, I was skeptical about strong up-move. It appeared to be that I was wrong. We did have a strong up-move. One more time the stock-market has proved that sooner or later everybody makes mistakes in analysis and stop-loss strategy should be used not just to cut losses but to protect profit as well.

During the last four positive sessions the indexes (Nasdaq 100, S&P 500, DJI, etc) have come close to their June's and Augusts' high levels. So far, the odds are good (from technical analysis prospective) we may see the indexes third time at those levels. Twice the stock market (indexes) has bounced down from these levels and most likely we may see slow down again.

Majority of technical indicators continue to be bullish and as I already mentioned, the technical analysis suggests that we may see the indexes moving higher. There are only two negative sings from my point of view.

First thing is high volatility level. The stock market continue to be highly volatile and this is a bearish sign. In such volatile market we could have strong down move in the same short period of time as we had the current 4-day up-run.

Second negative thing, from my point of view is that the market was not strongly oversold, yet it did make strong up-move in short period of time. It is more like some institutional investors came back from vacations, they saw stocks cheaper than a month ago and they started to buy. What is going to happen when their buying power became exhausted?

Because of these two points above, it is still difficult for me to believe in strong recovery (Yet, I could be wrong). Because of that I would not be playing long at this moment. At the same time there is no bearish signals and because of that I would not be playing short either.

One of the rules in my trading strategy is staying in cash until I see a pattern. I missed the last up-move - I did not lose money on that, I just did not make as much as I could. Still, the fact is that I missed this move and now it is better to stay in cash in order to avoid another mistake. My view on the current stock market condition is that I would expect to see indexes at their June's and Augusts' high levels. Then, depending on how those levels are hit (is they are hit) I would built further analysis.

In other words, he's a chart gazer, looking into patterns and trends on charts and searching for good opportunities to get in based on momentum and reversals. This type of trader is closer to the type of strategy that we want to implement. He very likely has a system for determining when to buy and sell in his head, when to get out of a losing position to cut and run before the loss gets too big, and how big of a position to take on.

The only problem is that he doesn't sound like he has a specific set of computerized rules for any of these aspects of his internal mental trading system. So while he has a loose trading system, he might not be able to specifically distill it into set rules in order to backtest it over the past and see how profitable it is before he trades it. He can fudge the numbers one way or another according to his gut feeling about something, which makes it impossible to test over the past. Kind of this cute little comic that I just found:

Here's Why Fundamental Investing is Flawed

Just came across a post about why Lucent might be a good buy over at The Stock Market Blog.

He talks about the attractiveness of buying the stock because its fantastic cash flow and its monstrous 13% dividend.

Yes, you read that right. Lucent, the voice, data, and video communication services company, pays a very high yield. This particular stock is not the Lucent common stock that used to trade on the NYSE under the symbol LU, nor is it the Alcatel-Lucent (ALU) common stock which is the result of the merger between French communications company Alcatel with Lucent. Of course, I'm talking about Lucent's preferred stock, with the official name of Lucent Technologies Capital Trust I (LUTHP.PK). This is a 7.75% Cumulative Convertible Trust Preferred Security which was first issued in 2002. The stock pays $19.375 per quarter, giving it a current yield of 10.2%.

If you think that Alcatel-Lucent is a survivor, and you like high income, it may be worth taking a closer look at this investment. It is convertible into the common shares but it is far away from conversion, as the conversion share price is 24.80. Could the common go that high before 3/15/2017, the trust's maturity date? Stranger things have happened, but even if it doesn't, as long as the company stays in business, you will also make about $240 per share in capital appreciation as the stock recently traded at $760 per share. This boosts the yield even higher, giving it a yield to maturity in excess of 12.9%.

Will Alcatel-Lucent survive? The stock is trading at its cash per share, which doesn't mean much, as the company carries a huge amount of debt at $6.1 billion. On the plus side, it has the same amount of cash. Although the company has been reporting negative earnings, the operating cash flow has been running at $380 million and levered free cash flow is at $1.1 billion.

 The problem is that, like most fundamental investors, there's no mention of how many shares we should buy and at what point we should cut and run if the investment is not going in our favor. Now, I don't expect him to tell us these things, but he seems like the type of investor who doesn't worry about limiting his risk and cutting his losers short. He's in for the long haul on Lucent. And that strategy may be working well for him. He might have a decent buy and hold strategy in his mind with rules for getting in and out that he doesn't reveal to us. But for the most part, most buy and hold investing strategies are just seat-of-the-pants appeals to gut feeling. You just have a good feeling for something and go for it. The problem is that when you don't look where you leap, you might find that you don't like where you land a lot of the time.

Friday, September 10 Market Summary

Nice summary of the Friday financial market action over at Between the Hedges. Just started checking out this guy's blog but apparently he's an anonymous hedge fund manager. Pretty cool to get insight from inside the industry.

Warning, however: discretionary input at the end. Remember what we think about discretionary trading advice??

BOTTOM LINE: Today's overall market action is mildly bullish as the S&P 500 is trading near session highs despite tech sector weakness. On the positive side, Education, Oil Service and Defense shares are especially strong, rising 1.25%+. The 10-year yield is rising +4 bps to 2.80%. The Spain sovereign cds is dropping -3.22% to 226.90 bps. The total put/call is high at 1.25. On the negative side, Wireless, Semi, Computer, Steel, Utility, Alt Energy, Bank and Disk Drive shares are down on the day. Small-caps are underperforming. (XLF) has also underperformed throughout the day. Copper is falling -.97%. The Greece sovereign cds is rising +1.02% to 919.49 bps. Breadth is mediocre and volume is very light again today. Developing weakness in the tech sector is a concern. With much more economic data on tap and investors returning from vacation next week, a more clear picture of the market's health should develop. I expect US stocks to trade mixed-to-lower into the close from current levels on profit-taking, technical selling, eurozone bank worries and increasing terrorism fears ahead of 9/11.

Fault Lines: How Hidden Fractures Still Threaten the World Economy

Just spotted a new article on SeekingAlpha.com. It's a book review of Raghuram G. Rajan's new book "Fault Lines: How Hidden Fractures Still Threaten the World Economy." I haven't heard of the author before, but from the book review posted on the site, it sounds like he has some really interesting points. He talks about how even though it seems like we're out of the woods, there's still a lot moving underneath the surface of the economy. Even though we have what appears to be a recovery, it's really just a pseudo economic recovery and there's a lot of tectonic activity churning underneath the surface of the U.S. and global economy.

Here's a short excerpt from the book review.

Many of the financial innovations created in the past fifty years have been purchased under the assumption that the securities acquired are independent of other instruments. We have learned that these instruments are not always independent of one another. The probability that these securities will not be independent may not be very high, but the potential costs of this loss of independence may be quite large. 

The government has introduced moral hazard into this picture by providing protection against the downside. Rajan states that the government “delivered on the guarantees to the best of its ability” and, in fact really did more than promised to protect against this downside risk... The government “now has the task of convincing the financial sector that it will not do so again.”
But the question that follows is, “How do we get the private sector to price risk properly again, without assuming government intervention?” 

Rajan concludes that “The problems emanated at the interfaces between the private sector and the government” and “we cannot do away with either side” for “realistic reforms have to work on managing the interface.” As we have seen, “The supercharged financial sector, having taken advantage of the implicit guarantees embedded in the government’s desire to push housing credit and promote employment growth, has ended up flat on its back. “
The ultimate question is how do we avoid this possibility in the future. Rajan spends the rest of the book trying to provide answers to this question.

Sounds like something worth checking out.

The Confirmation of the Bond Bubble

Great post from a guest poster over at Trader's Narrative. He talks about what I was discussing earlier: how the huge run-up in the price of bonds has us facing a huge bond bubble. He says it perfectly right here, comparing the bond bubble to the recent housing bubble and burst.

We can’t help but draw similarities to the housing bubble that began inflating at the start of the new century. As home prices started escalating, they drew the attention of a growing pool of investors. And soon this becomes a self-reinforcing phenomenon; higher prices attract greater numbers of investors that drive prices higher. Likewise for bonds. Bond returns are rising because bond returns are rising. Got it? 

We have entered the terminal phase of a bond bull market ushered in thirty years ago by Paul Volcker, who drove interest rates over 20%. With 30-year U.S. government paper now under 4%, the easy profits have been made and the low-hanging fruit consumed. Investors today are shimmying out on a very tall and thin branch in search of higher “total return.” The snapping of the branch – sending investors big losses – may not be imminent, but it is inevitable. 

As we at Casey Research have discussed and warned about often, the fiscal misadventures of the U.S. government will have their consequences. And one of the first victims will be bond investors as interest rates are forced higher, much higher, to attract buyers, particularly foreign buyers. When this happens, the total return on bond funds will be smashed. 

The sad and pathetic irony: to escape the beatings endured in the stock markets, millions have sought safety in bonds. The punishment is not over. 

We are afraid an awful lot of investors will be left asking, “What was I thinking?”

Told you so?? ;-)

The Habits of the Investor Mind

Kudos to Barry Ritholtz for finding this cool little list from this math teacher's blog. It's meant to be a list of the habits of mind that a good mathematician should have.

But Ritholtz mentions that with just a little adaptation, it can be made to apply to traders and investors. What are the habits of mind of the greatest investors and traders out there? Quite a lot like this little checklist.

Habits of mind
1. Pattern Sniff
. . .A. On the lookout for patterns
. . .B. On the lookout for shortcuts
2. Experiment, Guess and Conjecture
. . .A. Can begin to work on a problem independently
. . .B. Estimates
. . .C. Conjectures
. . .D. Healthy skepticism of experimental results
. . .E. Determines lower and upper bounds
. . .F. Looks at small or large cases to find and test conjectures
. . .G. Is thoughtful and purposeful about which case(s) to explore
. . .H. Keeps all but one variable fixed
. . .I. Varies parameters in regular and useful ways
. . .J. Works backwards (guesses at a solution and see if it makes sense)
3. Organize and Simplify
. . .A. Records results in a useful way
. . .B. Process, solutions and answers are detailed and easy to follow
. . .C. Looks at information about the problem or solution in different ways
. . .D. Determine whether the problem can be broken up into simpler pieces
. . .E. Considers the form of data (deciding when, e.g., 1+2 is more helpful than 3)
. . .F. Uses parity and other methods to simplify and classify cases
4. Describe
. . .A. Verbal/visual articulation of thoughts, results, conjectures, arguments, etc.
. . .B. Written articulation of arguments, process, proofs, questions, opinions, etc.
. . .C. Can explain both how and why
. . .D. Creates precise problems
. . .E. Invents notation and language when helpful
. . .F. Ensures that this invented notation and language is precise

5. Tinker and Invent
. . .A. Creates variations
. . .B. Looks at simpler examples when necessary (change variables to numbers, change values, reduce or increase the number of conditions, etc)
. . .C. Looks at more complicated examples when necessary
. . .D. Creates extensions and generalizations
. . .E. Creates algorithms for doing things
. . .F. Looks at statements that are generally false to see when they are true
. . .G. Creates and alters rules of a game
. . .H. Creates axioms for a mathematical structure
. . .I. Invents new mathematical systems that are innovative, but not arbitrary
6. Visualize
. . .A. Uses pictures to describe and solve problems
. . .B. Uses manipulatives to describe and solve problems
. . .C. Reasons about shapes
. . .D. Visualizes data
. . .E. Looks for symmetry
. . .F. Visualizes relationships (using tools such as Venn diagrams and graphs)
. . .G. Vizualizes processes (using tools such as graphic organizers)
. . .H. Visualizes changes
. . .I. Visualizes calculations (such as doing arithmetic mentally)
7. Strategize, Reason and Prove
. . .A. Moves from data driven conjectures to theory based conjectures
. . .B. Tests conjectures using thoughtful cases
. . .C. Proves conjectures using reasoning
. . .E. Looks for mistakes or holes in proofs
. . .F. Uses indirect reasoning or a counter-example (Park School)
. . .E. Uses inductive proof
8. Connect
. . .A. Articulates how different skills and concepts are related
. . .B. Applies old skills and concepts to new material
. . .C. Describes problems and solutions using multiple representations
. . .D. Finds and exploits similarities between problems (invariants, isomorphisms)
9. Listen and Collaborate
. . .A. Respectful to others when they are talking
. . .B. Asks for clarification when necessary
. . .C. Challenges others in a respectful way when there is disagreement
. . .D. Participates
. . .E. Ensures that everyone else has the chance to participate
. . .F. Willing to ask questions when needed
. . .G. Willing to help others when needed
. . .H. Shares work in an equitable way
. . .I. Gives others the opportunity to have “aha” moments
10. Contextualize, Reflect and Persevere
. . .A. Determines givens
. . .B. Eliminates unimportant information
. . .C. Makes and articulates reasonable assumptions
. . .D. Determines if answer is reasonable by looking at units, magnitudes, shape, limiting cases, etc.
. . .E. Determines if there are additional or easier explanations
. . .F. Continuously reflects on process
. . .G. Works on one problem for greater and greater lengths of time
. . .H. Spends more and more time stuck without giving up

The Zombie Economy

Some pretty spooky stuff going on in the Federal Reserve these days. Fed Chairman Ben Bernanke has recently vowed to stand by the U.S. economy and make sure that we don't descend into a spiral of deflation and ever-swelling debt. The Fed has already used up much of its ammunition to keep the economy afloat, but it has vowed to use unconventional tools to make sure that we stay strong. I guess that means inventing new weapons.

The question that people are posing, however, is whether Big Ben's promises are good enough?

A new article on Yahoo Finance! suggests that his promises to keep our economy properly inflated are probably not good enough. There's only so much more that he can do. Interest rates are already basically at 0. He's initiated large scale programs to further increase the supply of money available to banks. There has to be a limit to what he can actually do to keep this current situation alive?

The scary thing is that our economy is currently in a zombie-like state. It is the epitome of the "living dead." The economy seems like it's alive by our consistent spending and the statistical signs that business is moving. But when you look underneath the surface, everything is hollow. The unemployment picture remains downright horrible. Individuals repeatedly say that things are not as good as they seem, whether for their small businesses or in their cutbacks at their jobs.

We can't stay in this state forever. Something has to break.

What will happen?

Who knows!!

But one thing I do know... whatever happens, good or bad, trend followers like you and me will be there to REAP THE REWARDS. The stock market will go up and down as the zombie-economy ebbs and swells, and we will collect HUGE PROFITS from its movements.

Do you want to learn how to do this? While everyone else cowers in fear from this scary situation, do you want to be able to capitalize on it and actually make money? If you said yes, then you should definitely check out my book. Learn the strategies to profit from boom or doom so that you are ready to POUNCE on PROFITS regardless of which direction they can be had. Check it out right HERE.

Analysis Paralysis

I just saw this article on one of my favorite blogs -- that of Mr. Seth Godin, internet marketing extraordinaire. His post is called "The blizzard of noise (and the good news)" and talks about the endless inputs that flood our lives and consciousness on an everyday basis. We are completely bombarded by a never-ending supply of options and choices these days -- which of 1000+ channels should we watch, which of countless well-reviewed brands should we buy, which of a million different career paths and job opportunities should we pursue.

So how do we decide which input to follow, which information to actually give some weight and pay some attention to?

Well, that's exactly the problem. Too many people try to follow too many sources and get completely overwhelmed by the choices available. They see limitless opportunities that await them, but they're afraid of picking the wrong one, and end up completely paralyzed. They're confused and scared and completely bewildered... and they don't want to make any choices at all on their own.

So what do they do?

They look to people they trust for guidance. And who do they trust? Well, friends and family certainly. But in this day and age, media pundits and bloggers and celebrities are all included in that same category. These paralyzed masses look to these people who have made choices and follow along. They want to wear what they wear, act like they act, do like they do, and believe like they believe.

This is exactly what happens when inexperienced investors start to dabble in the stock market. They see all the endless choices out there of different stocks to buy, different companies to put your money with. They are flooded with information from CNBC and the Wall Street Journal and Fox Business and countless other sources that provide recommendations for taking action. And each source seems to provide recommendations that are directly contradictory to another!!

So they look to someone, some trusted authority to tell them exactly what to do, exactly what steps to take in order to be successful. And that's exactly why people have gravitated to guys like Jim Cramer. He's funny, he's witty, he's charming -- and he tells people what to do. So whether it's in their best interest or not, they follow his lead.

But instead of trusting someone or something unproven, how would you feel if you could put your trust in something that is proven to be successful? How would you feel if you could see beforehand the exact kind of results you can expect in the future?

Well, the thing to trust most is -- yourself. The best way to deal with the "blizzard of noise" out there is to develop your OWN set of rules. Using proven techniques and strategies, you can filter out all the nonsense and let your system do all the heavylifting. And you can adjust these rules so that they give you exactly the kind of results you want.

Head for the Hills!

HEAD FOR THE HILLS!!.... Well, at least that's what a lot of small individual investors are doing these days, according to this article. Scarred by two crashes in two years, underperforming mutual funds, and downright scary monthly account statements, individual investors have thrown in the towel on the stock market.

That's right, they have completely given up making money on stocks. What have they decided to put their money in?

BONDS.

So what do you think? Good idea? Bad idea?

Well, I'm gonna make a ruling on this one.

Bad idea. Bad idea. BAD IDEA.

Why's that? Bonds offer consistent returns. They're safe, right? You can't lose money in them, right?

WRONG.

I'm not even gonna get into the safer argument here, because let's face it -- as much as people worry about the imminent collapse of the U.S. economy because of the enormous burden of debt that we owe to the entire world, it just ain't gonna happen. That's right, there's absolutely no way that the U.S. government will default on our debt. No one in the world wants that to happen. No one in the world will let that happen... But if it does happen, wondering what financial assets to buy is the least of our problems.

So ignoring the scenario of armageddon, let's get into the "you can't lose money in bonds" discussion.

Whoever says you can't lose money in bonds is wrong. You can.

First of all, the yield on bonds these days is so disgustingly low, I don't know why you would actually want to buy them. Everybody is afraid and is fleeing to bonds for shelter, driving the price of the bonds up and therefore driving the yield that bonds return WAY WAY down. If you keep the bonds for 10 years or 30 years (whatever the maturity is), you will make the collective yield on the bonds... however small it is. But if you decide to sell out of those bonds sometime before the maturity date, the price of the bonds could go down dramatically. This is especially the case if some government defaulting goes down.

And that's exactly what that article is talking about. They're saying that so many people are buying up bonds at such a rapid rate these days, driving the prices up so high, that a NEW BUBBLE is being created.

That's right.

You thought the stock market bubble burst in 2000 was bad. Wait till you see the government bond bubble burst. The fallout will be magnificent.

The consensus is that such an event would coincide with an enormous bull market in stocks, as people would pull their money out of bonds to put into "riskier" plays in the stock market. Others might say that people will just pull their money out of bonds and stocks altogether and put it into gold or oil or some other store of value.

Which scenario will play out?

Who knows... but we don't need to know. Whether the stock market soars in the future, or sinks like the Titanic, we trend followers will be there to reap FANTASTIC rewards from the resulting price trends. These are great times for trend followers. Big things are brewing on the horizon. You can make a LOT more money just riding price trends up and down in the stock market.

If you're tired and frustrated about getting beaten down by the current stock market, about trading your old strategies that don't work any more and don't look like they will ever work again, and you just want to know how to trade stocks the intelligent way, the proven way, with superior returns and superior growth while avoiding costly mistakes, you should check out free video walkthrough of a trading strategy that actually WORKS today and has worked consistently throughout the past, as I show in the video at: www.bootyourbroker.com

1. I will lead you to my favorite online trading resource -- a hidden oasis of valuable information in the desert wasteland of financial websites. 

2. I will show you exactly how and where to find the diamonds in the rough -- the hidden gems -- the very best stocks to trade in this extremely tough stock market.

3. And I will walk you through the secret strategy, step by step, for when to buy and sell these stocks and make money both when the stock market goes up and when it goes down, too.

Now, I know you probably don't believe me. After all, why should you? I'm just as skeptical as anyone. So, all I ask is that you spend 24 minutes of your time watching my video and I'll PROVE to you that I can help you discover your own proven successful trading strategy and put your money making on autopilot with little risk and almost no management needed (just 10 minutes at the end of the day). The funny thing is that I figured this out the long and hard way that it's actually not hard to learn this AT ALL, anyone can… that is, if you let me show you HOW TO DO IT THE RIGHT WAY. In just 24 minutes, I'll show you the hidden stock market secrets that took me over 5 years to discover. Click on the link to start watching right now: www.bootyourbroker.com/

Proof that Analysts Don't Know Squat

If you've read my book Boot Your Broker: Investing Secrets that Wall Street Doesn't Want You to Know yet, you know that I criticize "fundamental" buy-and-hold analysts a lot. They research a company, look into the tiniest intricacies of its operations, analyze the current growth of the business, and predict how the company's earnings will grow into the future. There are two serious problems with this strategy:

1. You can't predict the future. No matter how likely your prediction might be, you cannot rely on the future to play out that way. (You have to bet on probabilities and be prepared if that prediction doesn't go your way - something that fundamental analysts do not plan for).
2. Even if you could predict the future of a company's earnings 100% of the time, you wouldn't ever know for sure how that would affect the stock price. Sure, if you absolutely knew ahead of time if a company was going to shatter expectations with a hugely profitable quarter, the stock would most likely go up. But barring a spectacular beat or miss of earnings expectations, you cannot predict how the market will digest the news and how the price of the stock will be affected. Even if the earnings are "good" and you know this ahead of time, a stock trending to the downside will likely continue even if there is a short few-day spike in the stock price. If the earnings are "bad," a stock trending to the upside will likely continue to climb higher. The market is very unpredictable. If you count on one single outcome to occur and do not bet wisely on high probability moves, you're just begging to be torn apart by the stock market.

So those are the two biggest problems with using analysts' strategies to buy stocks. Want a little proof? Well, look no further than McKinsey Quarterly. In this newsletter, McKinsey shows that analysts don't even correctly predict the earnings results of companies.



Over 25 years now, analysts have consistently been too optimistic on the earnings growth for companies in the S&P 500. Despite their enormously high salaries and fat cat bonuses, they still can't accurately foretell the future! We pay them to be clairvoyant, but really, they're just guessing just like the rest of us.

Now, I know that these guys can't predict the future. I'm just giving them a hard time. But they are paid as if they can predict the future. In fact, it's their job to accurately predict the future. They have all the monetary incentive in the world to put up the right numbers. But they just can't. It's not possible.

And that's exactly why it's silly to try to rely on earnings predictions to determine what stocks to buy. You can't know how the future earnings will be digested by the stock market, and you can't even know what those future earnings will be. So let's just get right down to betting on trends in the stock price and riding those out to profits.

The Obama Indicator

I found this amusing article on Bloomberg Business the other day. It talks about how companies whose CEOs have grabbed a spot of tea and lunch with President Obama have seen their stocks outperform the S&P 500. If you take a look at the chart below, the results are pretty solid. I guess CEOs should be lining up to power lunch with the guy.

But seriously, this is just another example of how the media loves to overanalyze things. The media loves to make connections between things that are completely unrelated and just happen to occur by mere coincidence. This is pretty much the same thing as when baseball announcers alert you to some obscure statistic - like no other catcher has ever hit a double and a triple in back to back at bats on consecutive days (I just made that up but you get the point). It's perhaps interesting to know that Obama's picking winners to luncheon with, but it's nothing to base any investing or trading decisions from.

The reason why a story like this was even written was because the media has one mission - to entertain you. They are not there to provide you useful information to base your decisions upon. They are there to sell newspapers, and online subscriptions, and to get viewers to their articles so that you can be exposed to their advertising.

This is perhaps most true about the financial media. All day long on Bloomberg, CNBC, Fox Business, or whatever media source you desire, you are bombarded by a series of people presenting a million different viewpoints, recommendations, and conflicting positions. If you listen to them all, you'll get completely paralyzed and never actually do anything - they all seem to counteract each other.

On the contrary, what you need to do is to develop a system that hinges not on the conflicting recommendations of a bunch of media pundits, but on what actually matters - the movement of the stock price. Only this kind of system can be backtested throughout the past and be proven to succeed time and time again.

Distorted Reality

I just saw Christopher Nolan's amazing new movie Inception the other day. Most of the movie takes place within dreams. Leonardo DiCaprio and his gang of infiltrators pry their way into another person's thoughts when he is sleeping in order to extract valuable information from his subconscious when he is at his most vulnerable. The trick to doing this successfully is a good architect, Ellen Page, who artificially constructs the dream environment for Leonardo DiCaprio and his extractors. She has the freedom to bend her surroundings in any way she pleases, as you see in the trailer when she folds the city block back on itself. But when infiltrating the minds of others, she has to construct a dream environment that is believable so that the dreamer will not realize that something is completely strange and out of the ordinary and wake up, dashing their chances at extracting the information.

Photograph: Warner Bros/Sportsphoto Ltd/Allstar

This made me think about how we distort things in our mind. We can be confronted with cold, hard facts, but we can be convinced or convince ourselves of just about anything even when the facts are staring us in the face. When we dream, we can be in the presence of people who look nothing like our family, but we somehow perceive that it is our family standing next to us. We might be doing things that are totally outrageous, but somehow we think everything is very very real. In the same way, when we're awake, we can hold on to a belief with very few facts to back it up. A belief can be so entrenched in our mind that we don't really know why we believe it anymore, but we cling to it so desperately that our life depends on it. If it's all we know, how can we possibly change?

That's how I feel about the media's treatment of buy and hold investing. All around us, we are surrounded by people who preach buy and hold investing, buying up shares of undervalued companies and holding on to them to ride out their business success. But it seems to me that this ideavirus has populated the world not because of the cold hard facts backing its success. In fact, it's the exact opposite. We are infused the belief that this method works, without being shown any proof that it works consistently. We just trust that it works, until events like we've seen over the past few years shake our belief to its core.

In addition, ideas can be implanted into the minds people, lead them to behave in certain ways, and can have a viral influence. Trends are born when enough people start believing something that is perceived as important or trustworthy information. A trend in a stock price emerges as a result of many people acting as sheep and just following along with the herd. New products, strong business growth, an exponentially rising stock price, among countless other things, persuade many people of a particular outcome all at the same time and serve to accentuate and perpetuate a trend.

What can the Home Run Derby teach us about investing?

What does the Home Run Derby have to do with the stock market? Absolutely nothing, right?!?

Well call me crazy, but while watching Big Papi mash over 30 homers on his way to the home run crown during the All Star break, I made an unexpected connection between the two.

(Courtesy of NY Daily News)

Going into the Home Run Derby, I was tempted to pick David Ortiz to win, but then I remembered that he had been in a few Derbies (is that how you pluralize it?) before and hadn't won. So I decided on Vernon Wells because of his trademark short, powerful uppercut swing.

Then, the first round came.

Vernon Wells was DOA and hit just two homers in the first round. There goes my pick.

But I wasn't down and out. Just because I picked a losing candidate based on a misguided prediction doesn't mean that I just stuck with him and hoped that none of the other players would hit more than two home runs so that he could make it to the second round. I knew that the chances were not in my favor by staying with Vernon Wells to win, so I changed my pick to someone different. That got a bad reception from my friend. Apparently, you can't change your prediction once the contest has started. Maybe that takes the fun out of picking a Home Run Derby winner, but you sure can do that in the stock market.

So I picked a different player. Who did I pick? Did I go with a diamond in the rough Nick Swisher or Matt Holliday before the first round was over because they nearly crawled into the second round? *#@% no!!

I wanted to go with a hot hand, someone who hit a lot of homers in the first round and was going to continue to stay hot in the second round. Corey Hart had the most bombs in the first round with 13, but the order for the second round was designed in such a way that he was to bat last. That means that even after the scorching first round, he would be ice cold by the time he picked up the bat again. And so it was.

So I was left with the choices of Miguel Cabrera, David Ortiz, and Hanley Ramirez. Each one of them was pretty hot in the first round, not as much as Corey Hart but enough to get the job done. But again, I referenced the schedule for the second round. Hanley was going second to last, so I figured he might cool down too much to hit some true moonshots. But Big Papi and Miguel Cabrera went first and second, respectively. They both had just had their first round not too long ago, with Big Papi having a little more rest than Miguel who only had one player hit between his first round and second round appearance.

Considering Miguel Cabrera probably wouldn't be able to sustain the same trend trajectory, that he wouldn't be able to continue belting homers at a high rate so soon after his first round, I decided to pick David Ortiz to win. I went with a high probability pick based on who was building positive momentum and who would have the ability to sustain that momentum based on the length of his rest. And the rest, my friends, is history because I picked the winner!!... even though I jumped ship from Vernon Wells in a matter of minutes.

That might not fly in a friendly game of picking the winner of a home run contest, but that's fair game in the stock market. If you pick a stock based on some interesting research or a clever idea (like Vernon Wells and his uppercut swing), you don't have to ride it into the ground just to prove that you're right. You can abandon ship when things start to get rough and use the lifeboats before your boat is completely submerged under the waves. And you can instead pick a stock with some momentum behind it, with a higher probability of success based on the trajectory of its trend, and laugh at the people floundering around in the waves struggling to keep their head above water.

Where to Next?

I was just checking out Barry Ritholtz's blog The Big Picture, and I came across his post about the AAII Investor Sentinment Survey. The AAII (American Association of Individual Investors) conducts a survey of individual investors and asks whether they are "bullish, bearish, or neutral on the stock market for the next six months." I guess it's interesting to find out that lots and lots of people out there are bearish about the stock market. But my question is: how does this help you make money in the stock market?

Most of these surveys are considered to be contrary indicators - that is, the more bearish people are, (supposedly) the more likely the market is going to bounce pretty soon. The more bullish people are, well, look out below. For what it's worth, I was curious and overlaid a chart of the S&P 500 over the Investors Intelligence Bearish Sentiment survey to see if there was anything to this. It's not the same survey, but it's got a similar idea behind it. Check it out.

(Courtesy of Bespoke Group and Yahoo! Finance)

I guess you might say that when there are big spikes up in the Investors Intelligence Bearish Sentiment Survey, the stock market goes on a little temporary relief rally. But if you bought stocks when this indicator spiked and held on for more than just a couple of weeks, you would be hurting big time.

Other than these tiny little relief rallies that seem to last a couple of weeks, it seems to me that a rising bearish sentiment actually indicates a longer-term trend to the downside. Look at how the bearish sentiment had a pretty upward trend starting in July of 2007 all the way until October or November 2008, and it was just about that point that marked that start of a major decline in the stock market including a complete crash.

Ironically, even as the bearish sentiment started to subside, the market continued to carve out lower and lower depths until March of 2009. After that the bearish sentiment really started to come down in earnest, accompanied by a huge rise in the S&P 500 off its March 2009 lows to new 52-week highs.

So what does this chart tell us? It seems that a big spike in the Bearish Sentiment Survey is a pretty poor time to buy up stocks. It's a pretty bad countertrend indicator except for the occasional schnitzel trade for a couple of weeks.

Rather, the crowd seems to be more right than not. When the Bearish Sentiment starts on an upward trend, when people start to feel like the stock market is headed for a dive, it's a self-fulfilling prophecy. People start getting bearish and scared, start selling their stocks, and then when prices go down, more people start to sell their stocks and drive prices down even further, etc. It's a vicious cycle.

So does the big spike up in Bullish Sentiment at the right side of the chart indicate that the stock market is headed for a big upswing? Who knows? All I know is that I'm going to follow the crowd and ride the trend whichever way it goes.