A Bourse Diary

What China can learn from history

2007-03-08T01:58:00.000-08:00

There is an analysis of Lawrence Summers of what lessons China can learn from economic history. It is published in Financial Times Germany (in English though): History holds lessons for China.

It was a cliché in US-Japan relations during the late 1980s and early 1990s that the US-Japan link was the world’s most important bilateral relationship. Given China’s greater scale, more rapid growth and the greater level of imbalances in today’s global economy, Chinese economic policy and its international economic relations are even more important. By learning from a rather unfortunate history, policymakers on both sides of the Pacific can avoid repeating its mistakes.

For how the author suggests some crucial point are to be addressed, read on the article.

I could add - in the 80s I remember, everyone was scared and excited by Japanese growth and financial power. Voices of Japan buying out America (from Empire State Building to Hollywood Studios) were omnipresent. Often they spoke of new shift of global economic power balance to Asia (at that time with Japan in focus). Watch out! Back there, we spoke of Japan with more or less stable democratic political system and - this for sure - with much more developed economy. Now we talk about - please don't forget about it - a authoritarian regime, non-present democracy, mostly poor and underdeveloped China.

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Ken Fisher on housing

2007-02-22T03:22:00.001-08:00

I like the optimism of Ken Fisher...

Currently the big concern for the US economy appears to be the housing slowdown. Some commentators already speak about crunch, crash, disaster and so on. Quite too early - we really do not need the "dreams" of the bears - for now ...

So Ken Fisher is writing in his Forbes column:

For months now the debate has been over whether America will have a hard landing or soft landing, the answer hinging on how big 2007's housing disaster turns out to be. Well, there won't be any housing disaster. We won't have a landing at all, soft or hard. Right now the U.S. and global economies are both accelerating.

You can see right through the housing crash story by looking at the prices of housing stocks. The market knows what the economic worrywarts do not, which is that the housing sector is already making a comeback. In the last six months housing stocks are up 24%, well ahead of the overall market. If housing were destined to fall apart in 2007 these stocks wouldn't be so strong now.

Housing Boom!

Fed guess by Capmarketline

2007-02-19T15:55:00.001-08:00

All the data suggests a coming monetary easing. But I have a strange feeling. I am not that convinced the Fed will be inclined to ease so soon - maybe because everyone, especially the stock market, is appreciating this so much. The relief would be too furious and the job of crunching down inflation not done.

And in Capmarketline I have found some interesting thoughts, which go in my direction:

My guess is the Fed sees the run offs of excess housing and goods inventories as the prelude to eventual recovery of production and later, housing investment. So, the Fed is forecasting that rising final demand for consumer goods, services and exports will lead to this upcoming recovery of production and housing. Implicit of course, is the notion that weaker production and housing will not produce increases in joblessness and weakened confidence that could bring the economy down. The Fed may also not mind if the economy stagnates for a few months, if it makes it easier to squelch

inflation pressure further and create enough slack to goose the economy later this year for a clean run through 2008.

Bearish toughts

2007-02-19T15:47:00.001-08:00

My sentiment is bearish. The market is much higher than when I first, incorrectly as it turned out, became bearish. The defensive action taken last summer was far from extreme, and I am less defensive than I was a few months ago. Technically speaking we are closer to the next correction than we were six months ago.

This is Roger Nusbaum at SeekingAlpha: Bearish and Long.

I really gladly hear bearish thoughts. My perception is, more bloggers (in particular) are bearish. But they are forced to follow the trend. Roger speaks of his equity exposure to have risen - but we don't know how high it was. And, yes, surely it has risen - most probably due to the strong market, not new investments.

The correction - much anticipated - will come. I also suggest that we are near a short turn "relief". But "a bearish sentiment" means to me to expect a mid term market top followed by an extended bear market or pronounced weak period in stocks. And I do not see this coming: correction - yes, please, but this is not the top of this bull run.

In my humble opinion, of course.

An interesting study on productivity

2007-02-15T06:53:00.001-08:00

The Federal Reserve Bank of New York publishes a new study on tracking and evaluating of productivity trends in the economy.

In the summery of the research is stated:

Authors James Kahn and Robert Rich conclude that long-run productivity growth, also known as trend productivity growth, continues to be nearly 3 percent per year, based on a new model designed to track underlying national productivity trends.

Kahn and Rich developed their model to facilitate more timely and accurate assessments of evolving productivity trends. These trends have important implications for living standards and the nation’s overall economy, and hence for the decisions of economic policymakers.

According to the authors, their model identifies changes in productivity trends within a year or two of their onset. They observe that the model would have been especially revealing as productivity began to increase in 1996 in an early manifestation of what became known as the "new economy."

Kahn and Rich also conclude that their model, had it been in use, would have given clear indications to policymakers that despite cyclical moves in data linked to the nation’s 2001 recession, long-run productivity growth was unaffected during that period.

The authors’ model incorporates additional labor market and consumer spending data to help screen out transitory movements in productivity related to business cycle conditions.

James A. Kahn is a vice president and Robert W. Rich a research officer in the Macroeconomic and Monetary Studies Function of the Research and Statstics Group.

Tracking Productivity in Real Time

Hedge Funds do not bear just risks

2007-02-15T02:12:00.001-08:00

The G7 summit put hedge funds on its agenda and caused additional uncertainty about the health and stability of the financial system. Especially the Yen carry trades, the vast volume of the managed assets as well as the often involved leveraged trading positions were a main source of concern and were widely covered by the mass media.

Though, looking in some details one could suggest, that the G7 politicians do not understand the role of the hedge funds to the full. For example Fed chief Bernanke made more cautious statements on the need of regulations and pointed some important "positives" of the hedge funds activity:

"I would be very reluctant to get involved in heavy-handed, direct regulation of hedge funds," Bernanke told the Senate Banking Committee in response to a question during semi-annual testimony on monetary policy.

"One of their key characteristics is that they are very nimble ... and that is good for the economy, because they help to create liquidity in markets, they help to spread risks around more broadly, and a regulatory regime that inhibited that flexibility and nimbleness would eliminate a lot of the economic benefits," he said.

Reuters.com, Fed's Bernanke - don't over-regulate hedge funds

Much ado for what?

2007-02-12T03:42:00.001-08:00

Hedge Fonds have under management ca. 1% of all world's financial assets, but represent up to 20-30% of trading volume. This is the result of a recent industry report as Vincent Fernando points on SeekingAlpha: Hedge Funds Manage 1% of Global Assets, 25-60% of Global Trading.

In the abstract we read:

On the latter score, U.S. hedge funds shoulder two-thirds or so of worldwide margin debt, or something in the neighborhood of $300 billion. Truly staggering, furthermore, is the Dresdner Kleinwort estimate that hedge funds account for between 25% and 60% of the trading in global major markets. And, we're reminded, it's the marginal trader that makes the market.

And transaction costs sum up to 4%-5%, which is actually much. So no wonder, the hedge fonds have a tough game to play - and given their recent growth even harder in the future.

But why not ask: so much ~~action~~ trading - what for? Is the performance good? No, no. But they just can't sit still.

Still cheap money

2007-02-10T11:51:00.001-08:00

The interest rates - are they the key to today's financial markets? If you can understand the forces behind them you should be in a very good position to predict the direction of the stock markets.

The striking point viewing the interest rates development is - they are permanently so low. Yes, beside an uptick in the summer 2006, the long-term bonds yield remains quite stable, low, moderate...

In the BusinessWeek.com we read:

When the rate on the 10-year Treasury bond plunged from 6.5% in early 2000 to an average of 4% or so in 2003, the explanations were easy: tech bust, recession, weak capital spending, low inflation, steep rate cuts by central banks around the world. The low rates seemed perfectly normal—and sure to reverse on a dime when conditions changed.

Since then, plenty has changed. The Fed has hiked short-term rates by more than four percentage points. The global economy grew by 5.1% in 2006, the second-strongest performance in 25 years. Europe and Japan have recovered. Even tech spending seems to be on the rise, judging from Cisco Systems Inc.'s (CSCO ) strong earnings report on Feb. 6. And yetand yet!—10-year Treasury rates have risen only three-quarters of a percentage point. Real rates, which adjust for inflation, have barely budged.

It isn't only a U.S. phenomenon. Ten-year euro bonds are yielding around 4% today, no higher than in 2003, despite much faster growth in the region. Real rates in the euro zone are up only a bit.

BusinessWeek.com, It's A Low, Low, Low, Low-Rate World

Good news for inflation outlook

2007-02-07T07:25:00.001-08:00

The inflation outlook should be more favourable for the investors' community after the good data provided today:

U.S. worker productivity grew at the fastest rate in almost a year last quarter and labor costs rose at a slower pace, suggesting wages may pose less of an inflation threat.

The 3 percent gain in productivity, a measure of how much an employee produces for each hour of work, followed a revised 0.1 percent decline in the third quarter, the Labor Department said today in Washington. A measure of labor costs increased 1.7 percent after rising 3.2 percent.

Bloomberg.com: U.S. Economy: Productivity Accelerates, Cost of Labor Slows

Wait for the market reaction. Normal mode is UP. And if the data flow goes further this way - not only for today...

Sentiment Charts - do not trust them

2007-02-07T04:32:00.001-08:00

Always be sceptical when you see statistics. With graphs it can get even worse:

In the investment world, this takes the form of scores of misleading systems, charts, and tables, all purporting to show a relationship that does not really exist. The process of extracting information from data, or data mining, requires great skill if the results are to be meaningful. Since the untrained analyst takes all of the data and examines thousands of different possible relationships, something will always turn up. Statisticians call this "data dredging".

Sometimes it is not obvious that hundreds or thousands of combinations have been tested. This is particularly true when the result is a graph showing what appears to be a compelling relationship. In the investment world, these graphs appear all of the time.

Via: SeekingAlpha, Homebuilder Sentiment and the Stock Market

I have studied statistics long enough to at least know that reading them properly is not that easy. Variables can appear to be in a relationship, but in fact there is some other factor which determines those variables, and so on... In the financial world, unfortunately, just few investors care about proper analysis. The mass of them just takes a look on some constructed chart or relationship and makes decisions. It's ridiculous.

Payrolls and Wages increased less than expected

2007-02-02T08:30:00.001-08:00

Via seekingalpha: U.S. Payrolls, Wages Increased Less Than Expected in January:

U.S. employers hired 111,000 workers in January, lower than the 170,000 economists forecast, and unemployment unexpectedly rose 0.1% to 4.6%. It is the first time in three months unemployment rose.

Nice point on oil

2007-01-24T05:20:00.001-08:00

In the blog capmarketline I read a good point on the oil development:

In short, the market has begun to return to balance, and because new supply comes on in size and not in drips and drabs, there may be a moderate build up in spare capacity over the next few years, even as demand grows. These developments have led to a groundswell of comments by industry observers about how low the price of oil could go over the next year or so. I'll have none of that. With demand now over 85 million bd worlwide, the industry needs a higher margin of excess capacity to provide

assurance to economic growth. Moreover, I could be on the low side with my cost estimates, as new supply will come on with

higher finding, development and lifting costs embedded. So, oil at $45 bl. is fine by me as a working assumption.

Source: Oil Market

With a price correction of ca. 40% (with a quite favourable background for global growth actually), the price of oil should have seen the worst. I have been sceptical during all that oil-bull-time because of very similar position as capmarketline. Now, seeing the market go that rapidly down - hey, some will call it a pure bear market! - its supposedly time to be more balanced: Oil is down, thats good news for all of us, who are bullish on stocks. The economy has shown, it can manage huge price increase without major problems; inflation pressures are to calm, production costs sink. World is better...

Real estate worries

2007-01-15T07:35:00.001-08:00

The real Estate market outlook plays an important role for assessing the general financial markets trend in 2007. There appears to be a large chorus of worried voices. For example:

A Dozen Reasons To Worry (Forbes, Jan.10th): "Unlike earlier U.S. housing booms and busts that were driven by local business cycles, such as the rise and fall of the oil patch along with oil prices in the 70s-80s, this [housing bust] is national and, indeed, global. And since houses are much more widely owned than stocks, the bubble’s likely demise will shake the economy more than the earlier bear market in stocks. A major housing prices decline will precipitate a full-blown U.S. recession, sending corporate profits down… China will suffer a hard landing due to domestic cooling measures and U.S. recession."

Fund managers once again disappointing - but why this time?

2006-12-18T06:28:00.001-08:00

Everytime there is an excuse for the weak performance of the professional fond managers - unforeseeable events, political tensions, unexpectedly high oil prices or the unlucky action of the fed, and many more of course.

Why this year? - quite simple, as it seems: they were too cautious, holding too much cash since the cold shower from (early) summer. This at least suggests TheStreet.com columnist Brett Atends in All-Star Managers Fail to Make This Year's Cut.

There is something true about it.

Marc Faber points at bubbles

2006-12-12T09:03:00.001-08:00

Marc Faber in The Dow Jones all time high and the coming correction! :

Bubble trouble

I hope that everybody understands that this is in the long run a suicidal monetary policy because it leads to one asset bubble after another. So, after the NASDAQ in 2000 and housing in 2005/2006, where is the next big bubble going to occur? In my opinion, two asset classes stand out as asset bubble candidates: grains and Asian assets.

Wheat and corn have led the grain and agricultural commodities price advance over the last two months. But now, it is very likely that the entire sector including especially soybeans, sugar, coffee, and cattle, will follow. Other 'bubble candidates', are Asian currencies, stocks, and real estate prices.

Will we soon have to talk about oil?

2006-09-07T10:57:00.000-07:00

Signs of cooling off? For most of the investors not really unexpected. In all the course of this bull market (still a bull market, isn't it?) investors have worried about a weakness in economic growth, in profits growth and so on. On every little soft spot they have thought "This is now the end". Ok, at some point it will be an end. And we are probably approaching it now.

But in the meantime, all this worries have hold stocks back. They didn't raise a lot to spark a speculative cycle, they did not went ahead of earnings - just the opposite - measured by earnings stocks became cheaper and cheaper.

Yes, I will not "teach" you EPS is all you need to know. EPS is misleading very often. But the market sense is a "approximation of approximations". All the public has been so "cautious" and "wise" to not expect an ever growing business and earnings, to be prepared for a downturn, that it seems to me it may be time to just bet on the "pure facts of earnings power".

stocks bourse supply demand

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Not bearish?

2006-08-14T14:42:00.000-07:00

The Big Picture titles a recent post "Mirror, Mirror on the Wall... Who is the Most Bearish of Them All?" and, astonishingly to me, states there are just few bearish voices in the market.

I see it definitely other way: the bearish argumentation is making its way through the public. It may not be that convincing yet, though all recession-inflation-high energy-collapsing dollar concerns are well known and massively discussed.

The still mainly positive news counteract the psychology somewhat and I will suggest that there is some more way of (some) pain ahead. If more signs of cooling economy appear and at the liquidity situation, which can't change that rapidly, the downward pressure could increase.

But sentiment is maybe cooling off more rapidly than fundamentals. I do not see more optimistic voices than pessimistic (which of course call themselves realistic).

stocks bourse sentiment

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Could you play different tightening cycles?

2006-07-26T10:36:00.000-07:00

One more article I just read on SeekingAlpha: How to Play the Current European Tightening Cycle.

There is some "food for thought" with taking a view on the demand and supply balance for goods. It seems to me to "economical", but ... well ...

The point of the author Dr Enzio von Pfeil is that European tightening cycle is lagging behind of the US (right!) and should go considerably further that widely anticipated (maybe!). Currently there is excessive demand for goods in Europe, which is providing a stable basis for business. In the USA he sees this phase of monetary environment (almost) over. So his bet is stay in Europe as long as the conditions are like this, and avoid America (have I understood right?).

I have to think it over a little.

Of course, as I have said many times, we go now through a sensible phase on the bourse. The tightening cycle of the Fed went so far, that the markets had to response. My guess from the beginning of the year was so far right, that the US stocks will provide a more safe investment in the months ahead. For a final assessment of this call, we have to wait a little more...

This was all said with the believe (still unchanged) that one should stay in that bull market (which I think is far from being over). But - and this is a special "but" - the monetary policy (in combination with other factors as oil prices etc.) became much less favorable for stocks. This was my main concern to say: one should stay, but please ensure to stay in possibly safe market.

The thoughts of different tightening cycles do of course make some sense. But simple experience shows, that the stock markets go up and down quite in a synchrony. I would not bet on Europe thinking Wall Street will perform poorly. If one believes some fundamental and monetary conditions now favor European stocks, it will just make them this "more safe" investment place to stay until we go through this flat phase (or may be phase of some correction).

After the recent declines in stock prices (Europe more than US) I see the chances now almost equal.

stocks bourse supply demand

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

The cross-sector P/E ratios of S&P500

2006-07-26T10:04:00.000-07:00

As we have talked recently about Graham's Margin of Safety and hence the valuation of stocks (by at least the one parameter P/E ratios), here is a nice colorful graphic of the current development across sectors:

S&P 500 P/E Ratios by Sector

For I have always stated that P/Es do not provide a sufficient basis for valuating the stock market, but merely a - say - starting point, one should be careful of talking only about that figures. Though the overall conditions are at least a good "starting point".

stocks bourse valuation price earnings

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Look Back on Market Forcasts for 2006

2006-07-07T04:55:00.000-07:00

Is it good when analysts expectations do meet the market performance? This is rather soldomly the case, but in this year so far the half-time consensus is prety close to reality.

I think this could add some confidence in the market. The last time analyst were pretty good was 2004. The strategies will not change a lot - they were from the beginning conservative and now as the correction has let some hot air, they will further position carefully for slight gains. It's sound.

The forcasts for the rest of the year:
Business Week Market Survey

New Economist: Inflation: a rational phobia?

2006-06-23T06:58:00.000-07:00

New Economist is posting some interesting research on the inflation estimations and on the current fears:

New Economist: Inflation: a rational phobia?

Everyone is looking at the matter in his own way. Some argue, that inflation figures are underestimated due to hedonic measurement, others say statistical effects such as "owners equivalent rent" makes inflation rate looks higher than in real life...

It's not an easy issue. What I tend to is: inflationary pressures should come down to confortable levels after those long run in rising interest rates. From the corportae site there are still no worrysome signs. If inflation is in tendency lower than statistically shown, the real interst rate is higher and should lead to a harder landing.

Grahams Margin of Safety for the US Stocks

2006-06-16T13:04:00.000-07:00

A nice view on the valuation of the US stock market through the eyes of the investment classics - the US Market Blog (link below) reminds us of Graham's Margin of Safety model.

It it surely not the first time to compare earning of stocks, hence stocks earnings rate, with the interest rate on long term bonds. Though, I think the investors tend to oversee or forget this important ratio especially in times of uncertainty and volatile movements.

The article provides a nice graph of the Margin of Safety Model (explained there - a relative figure of stocks and bond earnings) calculated for the time since 1988, and ... well both bulls and bears will find their arguments on it:

The US stocks have traded since 1988 almost all the time with "negative" margin of safety. If you have followed Graham's model, you may have missed some of the greatest bull markets. But there is also that point: the best time to buy was in retrospect when stocks had positive margin of safety (even if slightly, or if you don't want to be that exact - when margin of safety was around zero) - e.g. 1994-1995 and 2003, and on the other side: it was mostly very bad time to buy stocks, when margin of safety was strongly in negative terrain. (Chart is provided as well).

Now we are strongly positive, considerably positive...

The author ends up suggesting, like I do, that this circumstances do provide us substantial "safety" in the current situation. When the earnings of the US companies do not collapse, even with decreasing earnings and slowly raising interest rates and (suppose: slowly) falling stock prices, the market remains very well grounded with enough inner safety.

And, for I do not believe we have had or have an extreme phase at the stock markets (so that additional factors have to be considered), I suppose, the logic of finance, of relative attractivity of investments, of capital as a whole have to take overhand.

US Market Â» The Current Graham Margin of Safety for the US Market

stocks bourse marging safety Graham

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

The Big Picture on Inflation

2006-06-14T15:43:00.000-07:00

The Big Picture Blog has some interesting thoughts on the inflation: current figures and concerns, implications on the fed policy and on the overall pattern of development.

The Big Picture: Articles on Inflation

Inflation figures indicate some more trouble

2006-06-14T10:46:00.000-07:00

The inflation figures came in today a bit higher than anticipated. I have mentioned already my general view, that liquidity situation is now worsening, and - more important - can actually not be "discounted", i.e. you should not think of it as of corporate news which are now priced in.

Though the fundamental valuation and prospective for the world stock exchanges and economy remains sound. We do not have the 2000 environment.

Of course, one could be concerned about earnings development - with business cycle moves, sales move and earning fluctuate. It's very natural. But I've always stated, that not the underlying economic conditions is what should make you scary at the bourse - it's the people, the mass, with their emotional and from time to time irrational behavior.

I can't recognize any exuberance in the recent past, any striking cause of disappointment. And - if you don't trust (like me) the earnings estimations, think for a moment this way: the companies have made large restructuring, have focused on core business, there were - my opinion - no business or financial "adventures" in recent years. So we will stay firm. Even if there is a cooling off economically, the earnings should not behave as after the stocks mania of late 90s. And any further decline in stock prices brings the valuation to even more favorable levels. Do not forget the fundamentals...

Anyway, the liquidity problem should make some troubles in the coming weeks. So I would expect trouble and prepare for buying. Slowly... don't rush... (if you have good portfolio positions; if not I suppose you should run to make some...but first look at the disclaimer...)

stocks bourse supply demand

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

The Payroll Figures from Now and the Past - how do you think about it?

2006-06-03T13:43:00.000-07:00

There is a nice chart I've seen on The Big Picture Blog - it shows the development of the payroll recovery after some equivalent recessions in the past:

Source attributed: Contrary Investor

The author is - to say it politely - concerned about the outlook for the bourse and the economy by this comparatively weak recovery of employment. And he has not overlooked the fact, that we start this jobs recovery from quite low unemployment levels and that the recent recession in the USA was a rather small one. Though there is concern, and "the bill" for the very supportive monetary policy (as main reason to do relatively smooth in the real economy despite the second biggest stock market collapse in history) is still to be paid...

So, it's surely not easy to get the right view on those complex developments. I can't do it as well. Anyway, what I thought about is, that the pressure on prices (i.e. inflation) coming from the employment increase should remain weaker than currently feared. Ok, before the last report...

A smoother recovery (and the smoother recession before) provide - in my view - one more indication about the effects of globalization, more stable and ripe financial markets and capability of the world economy (and of course of the US-economy). It just does not shake that much as it used to. And the business cycles turn smoother and longer.

And I do expect this stock cycle will turn out to be longer than anticipated.

The free market economy is more capable than ever to absorb shocks, deterioration than ever before. As mentioned - we absorbed very well the severe bear market after 2000. The few of a budget deficit and slowing real estate markets will (hey - probably, I'm not an oracle) not get us so easy out of track.

So, if the economy is to stay relatively robust, how about the shares? They can nonetheless go down? Yes, if there were "hot air" and "hot speculation" and the prices are not in trace with the fundamentals. But I can't see none of that at the recent levels.

stocks bourse employment business cycle

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Is this a good time to buy Asia?

2006-05-30T05:06:00.000-07:00

Some good stuff on New Economist Blog:

Is this a good time to buy Asia?

The short answer is "no", according to Bloomberg columnist Andy Mukherjee in today's piece, Asia's Growth Is No Foil for Vanishing Money. In the wake of a global liquidity squeeze, the risk of further falls in equity markets cannot be discounted...

Read on here.

stocks bourse Asia liquidity

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Do they got it? - There will be no inflation...

2006-05-25T13:49:00.000-07:00

When I shortly thing about what recently happened on the stock markets - all in all a quite gentle set back as long as the major markets are concerned, - I think, the core message is: folks, there will be no inflation!

That's on the first view exactly the opposite of what all the media and comments are screaming. Everybody points on the "inflation fears", which send stocks down. Well, they are down - in some hotter markets down considerably, in the established down a little.

Though, not "inflation is coming", but "inflation will not be" is the message. The Fed is vigilant, and if necessary it will drive the rates into recession-highs. The financial system, speculation inclusive, is highly dependent on debt, on credit, on interest. There are no shortages of any nature, not even commodities. The global production capacity is sound and capable to meet all the real demand. And it will be hold back from generating inflation. The only source of concern are virtually the commodity markets. I don't know, if I could say it properly: first, commodities are the only big threat for increasing inflation; second, Fed will crush inflation, be sure; hence, commodities will not go up that far to generate inflation (above the Feds target, defined by numbers and a certain time window), be sure as well.

The question is, how much of the commodity prices is "hot air", speculation and how much is fundamentals, i.e. real companies ready to pay real prices because they though make sound profits out of it?

If there is "hot air" - a bubble - it will burst. If not - so what? The corporations will make money, the fed is happy (inflation target kept), and stocks... well, stocks should adapt to the preferences of the investors - and in the long term their earnings yield will get closer at least to the prevailing capital market interest rates. With current valuations, and prospectives, stocks are most likely to perform good in the next time.

So, when will they got it? I think we'll see it in the commodities.

stocks bourse commodities inflation interest

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

The sell off in commodities is still only in the headlines

2006-05-24T12:13:00.000-07:00

A little bit astonishing all that headlines about sell off in commodities. We haven't seen anything yet. Oil is still trading at about $70, and the REUTERS CRB FUTURES PRICE INDEX ist still not far from its high.

We'll have to wait.

But all this screaming without an actual massive correction, is a little bit suspect. I feel, there is more to come - for the commodities and stocks. Downwards. But while the commodities seem to be a dangerous game, stocks are well founded. Think twice before you trade stocks short. And for a while the commodities could even surprise on the upside.

stocks bourse commodities correction

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

"Three of the scariest words in economics used to be inverted yield curve"

2006-05-24T11:59:00.000-07:00

The 10-year treasury yields fell for the first time below the Fed funds rate since long time. Precisely since short before the great bear market in 2000 began.

Here is an article in CNNMoney: Yields throw the Fed a curve

But what is it about? - Are the investors not afraid of coming inflation? This was the most prominent explanation (excuse?) for the drop in the stock markets, wasn't it? If inflation is to come, the yields should point higher, right?

Maybe the investors are seeking a "safe heaven" - and I suppose first they will redraw some funds out of the more volatile and "insecure" markets as Emerging Markets and maybe commodities.

And by the way - in a globalized world the global yield curve matters more and more. And it is not inverted.

stocks bourse yields yield curve

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Some thoughts on the current stocks situations

2006-05-23T12:51:00.000-07:00

Finally, the long awaited correction of the stock prices has come, and all the "don't go too aggressively" statements (which I have made - or not have made in this English blog, but in my German) have "paid off". It is not funny to imagine how it looks like in the aggressive portfolios.

But, to make it sure - I am of course still bullish on this market. And today's rebound is the very last source of such optimism. I just do not use to change my opinion overnight.

In the last few days/weeks nothing really has changed. They say, the investors have suddenly got very scared about inflation and interest rates. But every investor and speculator with some understanding should always be vigilant about inflation and interest rates. There was virtually no news to be "suddenly" scared of.

No, I do not believe we will see any serious inflation. The Fed is watching closely. Globalization pressure, international competition, strong productivity gains and best opportunities for optimal allocation of labor and capital ever, will hold down inflation tendencies. This all hasn't changed.

The favorable valuation of stocks hasn't changed as well. Still the real interest rates are not an attractive alternative to stocks. Though, here I should give a "little" warning:

It is possible, that at some point in near future, a situation occurs, when climbing interest rates coincide with slowing in the economy, housing market, hopefully in commodities as well, hence decreasing inflation. Then you'll have at least temporary gains in the real interest rate, which could take liquidity from the stocks and from the economy. This will lead to a somewhat prolonged consolidation phase, especially when the economy outlook darkens. Remember: the stocks do not suffer under inflation. They are favored by inflation. Stocks suffer under the measures of the central bank against inflation, i.e. higher interest rates.

Anyway, I suppose stocks are solidly founded and will stand. I am more optimistic for the US markets in terms of less volatility and less sharp downturns. Europe is hotter. And the hottest is the case of the Emerging Markets and commodities.

I watch now for following developments:

US idexes to stay less volatile than rest of the world.

Commodities to set for a major downturn (probably not immediately)

Dollar to gain strength later this year.

Interest rates on the capital market not to go up considerably.

We will see.

stocks bourse consolidation inflation

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Mark Mahorney now at Stockblog.com

2006-05-21T13:54:00.000-07:00

One of my favorite authors on stocks and investing, Mark Mahorney, has left Blogginwallstreet.com and now has (his own) blog - Stockblog.com. Good luck with the new beginning...

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

The sentiment is ambivalent

2006-05-19T10:38:00.000-07:00

How did the recent declines affected the sentiment of the stock investors?

My observations provide an ambivalent picture:

At least in Germany the mass media responded quickly with quite negative reports and statements. All the newspapers and online media give voice to the warning and skeptical analysts. Suddenly all are not that convinced in the sustainability of the stock markets and - yes and - the global financial system.

My personal impression of the German public is though, that the sentiment two weeks or so ago, was very "enforced" optimistic. The overall psychological state of the country (and the investors are not the exception) is relatively dull, but the strong performance "forced" the public to believe, what they can or do not want to believe: things get better. The bourse once again created its own facts.

You should of course consider that the European markets have performed recently and in the last years very strong. In the USA, the stocks didn't get that hot (but also didn't suffer that great much as the European counterparts in the bear market).

Anyway, the latent pessimism was pushed just very temporary aside and now is coming rapidly back. That's good and healthy.

But, I suppose not all positions, which might have been opened in a "just not to miss the opportunity" manner, are closed now. The long term oriented investors will not sell that easy. What for? - interest rates still do not provide an attractive alternative, especially with the inflation-fears background; the dollar is meant to fall further hence many are "locked" to euro alternatives, and the valuations are still - and getting even more - astonishingly favorable.

The rest is trading, often without any deeper sense and highly dependable on technical conditions (which are short term nature). But on the trading side not few are seeing a short term opportunity. They are now cautious, but not scary. Secretly many hope to go again in plus on the recent buys. This wasn't a sell off so far.

But I am not sure, if we need a sell off at all.

If you close your eyes and forget about the charts, stocks are ok. You want them more ok? - well, may be. But don't get too gready. I suppose there are some other gready men outside, who can take them sooner as you think.

stocks bourse sentiment

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Derivatives activity linked to share falls

2006-05-19T10:06:00.000-07:00

Worth to read - the sharp declines are, as often, provoked also (or to a great extend) by the hedging and derivtive products used by the big institutional investors:

In particular, some banks and big investors appear to have been forced into selling large amounts of equity futures because they have been acting as counter-parties to large, leveraged bets on the direction of stock market volatility in recent months - and these bets are now unravelling because volatility has increased sharply.

Read on here...

stocks bourse volatility derivatives

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Venezuela 'may swap oil currency'

2006-05-17T14:28:00.000-07:00

I wanted to write some words about the dollar, but here first this message from Venezuela:

Venezuela 'may swap oil currency'

After the announcement of Iran to create an oil bourse traded in euro, this is the second large oil exporter to consider such option.

All the analysts and comments look in quite the same direction: this move may bring the central banks (especially in Asia) to shift greater parts of their currency reserves out of dollar into euro.

We'll wait and see...Probably, if large quantities get moved around, it will have impact on the exchange rate, though the central banks will be cautious with their re-positioning and will (try to) do it delicately.

But, what I want to point at, is: the value of a currency is not that much implied by the quasi monopoly role in the world or certain markets as suggested by the comments. We do not trade any commodity in euro or Swiss francs, nor any central bank has reserves in Swedish crones...

If there is to be some down-drift in the dollar's value, it very well may be a overshooting by speculation and will not mirror the strength of the American economy and investment attractivity.

PS: Oh, yes, there was something more: the stocks are falling somewhat... Don't care too much. Although I suppose, we haven't seen the end of the correction now, I will say this: if stocks get cheaper, they get more worth to buy. Don't forget it as sooo many, who do exactly the opposite.

stocks bourse oil currency dollar

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Short Input : Ken Fisher's "Three Questions That Count"

2006-05-17T10:45:00.000-07:00

Ken Fisher has recently talked again about his investing methodology, and in his typical manner has reduced the "investing universum" to "three questions that count":

1. What do you believe thatÂs actually false?
2. What do you know that others donÂt?
3. What the heck is my brain doing to blindside me now?

The honest and right answer to them will surely provide you an important advantage on the stock markets. But it seems to be not that easy to be honest and right!?...

Some help is provided by Fisher himself and on this posting.

stocks bourse ken fisher investments strategy

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Something from the Business Scene

2006-05-15T14:46:00.000-07:00

I have read several days ago in the German Newspaper Die Zeit (Print Edition) two interesting articles, which I’d like to mention here:

The first one was an interview with the Head of DaimlerChrysler, Zetsche. The keynote, which attracted my attention, was: “Focus on core business!”, “Focus on core business!” and “Take care of rentability!”. I believe this attitude is predominant in the German business scene nowadays, and maybe to some great extend in Europe and America as a whole.

Especially in Europe, a more rigid job market, a weaker growth of the national markets and the fact, that the bigger companies are mostly involved in “classical” industries, imply a more cautious and lean management. At present.

That “classical industries” point is surely more pure subjective opinion of mine, and certainly does not mean that the prospectives for the European stock markets are bad. Warren Buffet has also always had a pronounced affinity for “classical” stocks. With innovations and (risky) business expansion one can also loose money - much money.
Supporting the view of very good outlook for the leading European companies should be additionally the fact, that these have managed to increase substantially their profitability and have reached now the international level. Because, historically, particularly the German enterprises have always had a great business, great products, but lacked strong record on profitability.

Some people argue, that it would be normal if we come back to the historical averages, but I think, in the globalized world and with more flexible structures (implemented mostly due to the economic and bourse weakness in the years after 2000), the German companies will hold approximately the world level. And in this case the valuation (which is partly derived by historical standards) will appear seriously low.

But back to the interview: I assume, that enterprises, which focus that much on their core activities will much less surprise with negative profit development. The profits may somewhere be disappointing, but not “surprising”. This will add stability to the stock exchanges.

The second article treated the new internet developments, ever often referred to as “Next Economy” (oh, my dear!) or Web 2.0. This blog is by the way part of those Web 2.0 story...

In short, there are numerous new success stories, which developed out of the more intensive and personalized usage of the world wide web - prominent exsamples are Youtube, Facebook, OpenBC etc. etc. All in all profitable companies, which grew up from “a garage” and show very stable and prudent financial picture (not the hot air of the New Economy, HOPEFULLY).

But the new boom (if there is one) takes place “behind locked doors” for the investors. The companies are not listed publicly and for the investors remain only the old, established shares. Interesting: the supply of stocks in that growing industry is now relatively clammy...

stocks bourse business europe

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Every Breath Bernanke Takes

2006-05-12T14:18:00.000-07:00

Ain't they cool!?

stocks bernanke fun

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Anti-cyclical speculation

2006-05-12T04:40:00.000-07:00

Anti-cyclical investment is actually the key to the stock market success, and many (especially the “children of the 90th boom”) have understood it. The greatest speculators have often stressed it and have raised it virtually as a “dogma” of speculation. This also appears anyhow the "more uncomfortable", riskier and more difficult way to act on the stock exchanges, because the considerations from which an anti-cyclical investment is done, are extremely unpopular at the respective time. And it is also quite a risk: not only that one can be anyway wrong on speculative decisions, one must also take into consideration the old sentence that "the market can remain longer irrational, than you solvent ".

Now if I think a little bit courageously, I discover, actually, only two big areas which look after a perhaps favorable possibility for a anti-cyclical speculation: commodities, especially oil, and the dollar. Very briefly: Short oil, Long dollar.

If you are somewhat "frighten" now, you can see that the both are the most unpopular bets under the bigger investment classes or speculation markets (and if you do not, fancy please, I am your asset manager...).

Some days ago, when the oil price shot up, I had the intention to write something under the title (which I even still found as quite funny): "One more step and I will shoot, pardon … short". Well, maybe I do not have it with humor on it - and hopefully I will also not receive the possibility to prove my courage (i.e. we have seen the peak in oil). But, I have of course not forgotten that I haven’t expected such a rise in prices. I held the oil market already before fairly long time for too high and it was only good that I have simply kept away. And now it would be no big surprise if the oil climbs even further upwards. But maybe is sometime time? Sometime soon?

And, in addition, I think anyhow, that a Short in oil could be a good hedge of stock positions. Actually, this contradicts every common sense and learned correlations. Actually, one says "oil up, stocks down " and vice versa. The reasonable hedge would be: Long in oil, because with further raising oil prices the stocks might go down.

But I say the following to myself: the basic economic situation is rather stable, the valuations rather ok. It can be that this is delusive anyhow, but for bigger losses on the stock markets it requires quite a trouble. Should it come from the real economy (steep declining economic growth and/or profits, consumer's expenses collapse etc.), I want to see those oil speculators who will still hold on their futures contracts.

And if the high interest rates (due to inflation, thus above all due to high energy prices) press down on the stock exchange, they will press twice as strongly on commodities, which are now twice as more speculative to me. The save interest of bonds is the biggest competition of all speculative arrangements.

In brief: if the stocks go down, oil will also go down. And this will catch up the stock declines somewhat, while the oil price could go in a speculative downward spiral.

And about the dollar I write later.

stocks bourse oil hedge

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Air Berlin IPO in Germany stumbles

2006-05-09T12:51:00.000-07:00

The IPO of Air Berlin, a popular discount airline company, was (and actually is still) supposed to be one of the major IPOs this year in Germany. But it stumbled somewhat. The initially targeted market capitalization was ca. 800-900 Mio. Euro, now after difficulties to attract enough investors and very critical voices from the funds managers, the price building range and the number of offered stocks were reduced considerably. In two days the company will finally be launched on the Frankfurt Stock Exchange and capitalize at about 400 to 600 Mio. Euro. (second number after full Greenshoe).

Why am I talking about it?

First it is quite an issue in Germany. Though secondly, more important, I consider the IPO market can often give some valuable hints on the overall conditions of the stock market.

My personal opinion is supposedly not exactly the common "wisdom" on this issue:

The analysts and stock market observers use to see in increasing IPO activity positive signs for the bourse climate. I am at least not that definite: IPOs are contrariwise unfavorable, because they take off the liquidity. Liquidity that otherwise could have been invested in the listed stocks.

They tell us, IPOs indicate the demand capability of the market. I don't love great demand indications - for the present moment it is of course good for the stocks as a whole; but it indicates also strong gear and investor activity. Demand now does not indicate demand tomorrow.

Of course there is a very fine edge, where positive interpretation can turn negative.

After this concrete story, I am more reassured about the market conditions than concerned about demand weakness. The investors do obviously some due diligence, do not buy blindly, there is no euphoria.

The time to be cautious will come, when all IPOs are 20fold oversubscribed and double digit gains on the first trading day are called disappointment.

stocks bourse IPO air berlin

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Warren Buffett comments on real estate, commodities

2006-05-07T13:08:00.000-07:00

Warren Buffett's comments on some hot (or "problematic") areas in the global financial markets on the annual meeting of Berkshire Hathaway: the real estate and commodity markets.

In brief:

The real estate market was a bubble to some degree, and we may see continuation in the slowing observed recently. Especially in the high-end of the market and where homes were purchased as investments "significant downward adjustments" seem possible.

Probably even more speculative is the situation on the commodity markets, where prices have risen quite above the fundamentals and more and more traders get involved only for speculative reasons.

Nice to read the summary at marketwatch.com

stocks bourse commodities buffett

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

The second try...

2006-05-07T10:46:00.000-07:00

As you easily can see, I have neglected this blog for some long time. Now I am willing to give it a second try. I wasn't away from the bourse and from the blog writing either, but I couldn't find enough time to maintain two blogs. You can see on my German site, I am still writing regularly and observing the stock exchanges and the financial markets closely.

So let try it for the first (or for the second) with this funny and ironic observation, I read about in Blogginwallstreet (one of the best investing blogs I've found):

All the world is talking about commodities as a hedge against inflation. The speculators (hedgers) buy massively all futures and derivatives and this way force the spot prices (especially of oil) to go up. Then - if we believe Blogginwallstreet - the oil producers themselves do not hedge the high prices via selling futures. But isn't it ironic - they want to hedge against inflation by pushing up the prices of the only thing where currently inflation dangers come from...

stocks bourse commodities inflation

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Soros' Boom-Burst-Sequence

2006-02-02T05:22:00.000-08:00

I'd like to publish now the Boom-Burst-Sequence of stock markets I have once read about in George Soros books and interviews. It is an interesting pattern to look at the development on the bourses.

So I have once copied a graphic from his book "The Alchemy of Finance" and now tried to draw it again. Here is the outcome and the phases model of the self-reinforcing process which Soros considers most essencial for the stock markets:

Here is the way George Soros introduces and describes the logic behind the picture:

First, we must start with some definitions. When stock prices reinforce the underlying trend, we shall call the trend self-reinforcing; when they work in the opposite direction, self correcting. The same terminology holds for the prevailing bias: it can be self-reinforcing or self-correcting. It is important to realize what these terms mean. When a trend is reinforced, it accelerates. When the bias is reinforced, the divergence between expectations and the actual course of future stock prices gets wider and, conversely, when it is self correcting, the divergence gets narrower. As far as stock prices are concerned, we shall describe them simply as rising and falling. When the prevailing bias helps to raise prices, we shall call it positive; when it works in the opposite direction, negative. Thus rising prices are reinforced by a positive bias and falling prices by a negative one. In a boom/bust sequence, we would expect to find at least one stretch where rising prices are reinforced by a positive bias and another where falling prices are reinforced by a negative bias. There must also be a point where the underlying trend and the prevailing bias combine to reverse the trend in stock prices.

Let us now try to build a rudimentary model of boom and bust. We start with an underlying trend that is not yet recognized - although a prevailing bias that is not yet reflected in stock prices is also conceivable. Thus, the prevailing bias is negative to start with. When the market participants recognize the trend, this change in perceptions will affect stock prices. The change in stock prices may or may not affect the underlying trend. In the latter case, there is little more to discuss. In the former case, we have the beginning of a self-reinforcing process.

The enhanced trend will affect the prevailing bias in one or two ways: it will lead to the expectation of further acceleration or to the expectation of a correction. In the latter case, the underlying trend may or may not survive the correction in stock prices. In the former case, a positive bias develops causing a further rise in stock prices and a further acceleration in the underlying trend. As long as the bias of self-reinforcing, expectations rise even faster than stock prices. The underlying trend becomes increasingly influenced by stock prices and the rise in stock prices becomes increasingly dependent on the prevailing bias, so that both the underlying trend and the prevailing bias becomes increasingly vulnerable. Eventually, the trend in prices cannot sustain prevailing expectations and a correction sets in. Disappointed expectations have a negative effect on stock prices, and faltering stock prices weaken the underlying trend. If the underlying trend has become overly dependent on stock prices, the correction may turn into a total reversal. In that case, stock prices fall, the underlying trend is reversed, the expectations fall even further. In this way, a self reinforcing process gets started in the opposite direction. Eventually, the downturn also reaches a climax and a reverse itself.

And where do we stand now?... All opinions are welcomed...

stocks bourse soros

Disclaimer - I do not make recommendations to buy or sell securities - I just post my thoughts, trades and opinions. Please read the disclaimer text at the bottom of the site

Fed boosts rates in Greenspan's last meeting - Jan. 31, 2006

2006-01-31T11:32:00.000-08:00

So, now we got it. Alan Greenspan has raised rates to 4.5% in his last meeting. CNN Money describes the current situation as follows:

Some economists argue that Bernanke will need to raise rates one more time to show that he is serious about fighting inflation. But others say the Fed has already nipped inflation in the bud and that further rate hikes could unnecessarily hurt the economy.

So, what do you believe? With the raising oil price I am not that confident about the inflation picture. But otherways the economy has prooved very resistent to the inflation pressures (which went for some years: 2004 oil and dollar depreciation, 2005 mainly oil, and all the time sinking unemployment, strong real estate and consumption and robust overall economic stance).

I would prefer to wait for the end of the rates raising cycle before opening up more offensive positions. Will the market also wait? We'll see.

Fed boosts rates in Greenspan's last meeting - Jan. 31, 2006

Charts of the Week - Unempoyment Claims; Inflation Measurements

2006-01-27T02:12:00.000-08:00

The discussion about the sustainability of the US labor market has faded somewhat. Some time ago they could not stop talking about the jobless recovery and all the dangerous things implied by that. Now the focus changed to other issues: commodity prices and inflation, for example. In some ways this is reassuring observation: the market is looking again and again for sources of concern. As long as something appears to be on the right track, they loose interest...

But how does it look like on the "labor front" in the "meantime":

And the more complete picture:

The labor market sees (present time!) gradual improvements. All in all it is may be not that rapid, though the development is robust. There are new jobs, the unemployment rate decreases, and it will surely provide support to the further economic growth and consumption.

And how about the inflation?

The fearing is not over yet. Yes, I am not overly concerned about inflation peak and even less about uncontrolled development. The forces of technology, globalization and competition combined with the solid grip of the Fed will prevent it. However, the picture does not show yet much of easing. Or may be though: if that tendency in the core PPI is sustainable...

But I ask myself - what do the bond investors do with interst rates almost below the inflation rate? This irrationality - in my humble opinion - will either be paid with losses (raising interest rates in the long end) or they are though right, and the inflation comes down (probably together with the economy).

The first will may be provide a more difficult environment for the stock markets. There is a chance to see a rush out of bonds and - at least partly - into stocks. But a raising interst will then surely mean some throuble for the shares.

The second way is the smoother one, because I do not expect big problems with the stock markets even if the economy cools off. The valuation (and the valuation basis then - the interest rates) are and will (hopefully) still be favorable.

So, economy and labor go nice, and consumprion may be more robust than expected. The inflation is still a concern and will decide on the way how we move the way up - more calmly or more volatile. In my humble opinion.

PS (to whom it may concern): I appreciate exchange of thoughts and information between the blogs, though please link properly to Bourse Diary and do not use complete postings without permission and reference.

stocks bourse inflation empoyment

Investing with Leverage - Some Thoughts

2006-01-24T15:43:00.000-08:00

Following the post “Lets Talk About Leverage” in the blog MillionDollarGoal, I would also like to share some thoughts on that issue. I consider the process of investing with leverage is actually well known (and if not, you should at least read the above mentioned post). The essence is probably best described like this: it is an investment through secured borrowing.

But first may be some more basics:

There are generally two ways to get leverage on investment: through buying on margin (or via the currently very popular knock-out products, futures etc., but its all more or less the same principle) or buying a stock option (warrant).

After all, it all can be derived from “borrowing money” but there are some important differences in the practice.

The first is limited through the margin (price), the second through a time-limit. One of this limitations must be given, other-ways I am a millionaire in just few years.

So, it is time or volatility that kills you.

In the first case the borrowed money is secured by the margin, hence if the underlying falls (or gains) to a certain level (the margin), the investment turns worthless (formal logic is - the whole investment with the borrowed money is executed and the borrowed sum is payed back to the borrower, whereas the rest remaining for you is zero). So you can not decide free on how long you can hold on the investment - you depend additionally on the market moves.

A stock option can be hold to the settlement date independently of the development of the underlying during this time period, but it is typically losing value with time progressing.

For example a leverage of 10 for the DOW is provided currently via buying on margin at 10% (ca. 9.640) and something like strike at 13.000 expiring Dec. 2007. I am quite sure the DOW will gain over time and will pass the 13.000, but will it not first go under 9.640 (which kills the first investment) or will it happen not until Dec. 2007 (which kills the second investment)?

The investment in leveraged products is not very “prudent”. A prudent investments I aways consider such with long time-horizon. As the leverage is provided (directly or indirectly) by borrowed money, there is interest to pay (besides the market risk). This is also the point on which Loi Tran from Investing Guide comments as follows:

“I would not use leverage such as buying on margin when investing in the stock market. The interest paid on the borrowed money eats into the returns and there is no guarantee that you'll make money. So when investing in the stock market, I'd only invest money that I can afford to lose.

Real Estate is a different and most people buying real estate use leverage.”

This comment includes the first points I’d like to stress:

The investment in the stock markets is risky enough still without the leverage effects. The investor should consider very carefully, if he/she can bear the additional risk. Though the sentence “So when investing in the stock market, I'd only invest money that I can afford to lose” is not fully correct. By selecting an appropriate relative investment capital and leverage I can have just the same overall exposure to the market risk and just loose the money “I can afford”.

The main effect of leveraged investment is clear: the percentage gain (or loss) of the invested capital is a multiple of the development of the underlying. But this way you can reduce by the same multiple the capital investment to achieve the same gain. This can free up liquidity. For example, you have a portfolio of $1.000 solidly invested with actually no intention to sell - to come what may... But suddenly you need $500 for something else. You can shift your investment into $500 on margin of 2 (50%) and $500 cash. The market may do what it wants, the next month you can go back to your solid investment at the value it would have, if you stayed in the market (subtracting small interest). Its like a credit card. And you have bridged a liquidity problem.

But there is the temptation to put irrationally much money on margin - that can ruin you of course. You have to be disciplined. You take over much risk (from the borrower), so you should have a very good sense of the risk priced in the market. In a word: you have to be good.

stocks bourse leverage risk

BlogginWallStreet

2006-01-23T14:08:00.000-08:00

There is an interesting article on the BloggingWallstreet
on "Financial Myths" about the sensitivity of financial companies to the interest rates. I must admit that I was stopped to buy some financial stocks just out of the same concerns as described there. But I can follow the argumentation and I should think it over once again.

Worth a view in any case: BlogginWallStreet

Investing Guide: How risky is your portfolio?

2006-01-23T13:57:00.000-08:00

On the Blog Investing Guide a tool from RiskGrades is presented, which helps investors to track the risk scope of their investments. The site requires free membership and sounds interesting. For example Loi Tran from Investing Guide states:

"You can enter your portfolio of stocks, bonds and mutual funds and look at the riskgrade of each individual holding as well as the riskgrade of the portfolio. Then you can see the benefits of diversification within your portfolio.

There are many useful tools on that website. There is a simulator that shows how much your portfolio could lose in adverse market conditions. You can also run your portfolio through events like stock market crashes to see how much it would have lost."

If you are interested you can read further here: Investing Guide: How risky is your portfolio?

Consolidation at the stock exchanges? - opinions, tendencies

2006-01-23T12:17:00.000-08:00

The sharp corrections on the international stock exchanges in the last week were and are topic of many comments and financial columns. The German as well as foreign stock exchange observers show themselves so far confident or describe the situation at least with a "calm" rationality.

My impression is, that the facts alleged responsible for the weak performance are:

On the one hand, the company reports from the USA are partially disappointing and all in all seem to confirm the fear, the profit and economic development loses clearly dynamics.

On the other hand, in particular the oil price has risen again (particularly by the political tension around Iran) and is a further source of the uncertainty.

Naturally the interest rates policy offers some open questions and also a set of "open" interpretation possibilities as well. From the ECB (European Central Bank) there were some disconcerting voices in this week to increase rates because the economy gains pace (which is now not indicated fully by any analysis).
On the part of the Fed the problem is rather long-known: will the Fed possibly stall the US economic situation by further interest rates steps? The positive outlook of the beige Book did not provide many help at that point: a robust economic development could let the Fed go on with the rate hike to a level which would be too high in the case of economic cool off later on.

Thus - all in all - the usual crowd... The sharp drop of the stocks in Japan appears rather just as impulse for the whole consolidation wave (and in this manner it signals somewhat excessive speculation and gains that mounted over the last months).

The media comments are really ambiguous. I could note for me that both nervousness and the optimism rather stay in balance. The big rally in the large indexes had to stop logically at some point in time and this was also expected. When the correction sets now in, it cannot really surprise. Still it concerns more or less "shrinking (paper) profits" and not real (and many more painful) losses.

I guess, the investors will take some more profits, so that in the next time we'll rather see lower prices. On the part of commercial news I would be surprised, if we got greatly support - simply robust economic data do not have the potential to give clear impulses. The situation at the interest front will remain probably the same in the coming weeks. The political developments will possibly not disappear that suddenly. From a fundamental point of view, the markets appear to be not overvalued, and although speculation and profits accumulated over the last weeks and months, I can not see excessive allocation of capital into the stock markets (above all in the USA and Europe). Therefore in the case of an unfavorable development the losses might be limited. Rationally the market is a Hold. In the case of the Emerging Markets, the development was much too steep and the emotions probably much too euphoric. I already stated my reserved opinion in relation to exotic stock exchanges. The losses here threaten to be greater, if we have troubles.

stocks bourse consolidation prospectives

Forget Cheaper Oil in 2006?

2006-01-18T12:04:00.000-08:00

Forget Cheaper Oil in 2006?

Only this: I am not so sure..

PS: But read the article - it's good to know. We'll see.

And something more: before you believe everything about the commodities story, read this nice article from BloggingWallstreet: My Take on Commodities

Don't Be Afraid of China

2006-01-18T11:24:00.000-08:00

It has been always my point: the emerging economic power of China is good to the world and good to Western companies. The pressure for more productivity and the benefits of lower costs (with all capital and labor allocation benefits involved) will mean under the bottom line a surplus in standard of live, economic expansion etc. In this process there will be of course (relative) winners and losers. I suppose that investing in the globally operating companies will be a pretty sure bet to benefit of the progress driven by the globalization.

A good related article in the Business Week provides also insights on Chinese currency, trade and stock exchanges: Don't Be Afraid of China

Consumer price index rises 3.4 percent

2006-01-18T11:11:00.000-08:00

Consumer price index rises 3.4 percent

Not that good! Albeit the core inflation rate remained relatively tame at 2.2% it is still providing cause for the FED to go on with tightening. Of course one should consider the time-lag of the monetary policy impact, though higher interest rates are generally not good news for the stock market. Fortunately the long term bond yields stay still relatively low. The danger is now, if slow down of corporate results (earnings, sales etc.) will be followed or even conicide with economic slow down (due to time lag of monetary policy and/or normal business cycle) providing both - uncertain outlook on economic and corporate development as well unfavorable liquidity situation.

More information at Business Week: Consumer price index rises 3.4 percent

Some more on that issue in BloggingWallstreet:

Trickle Down Inflation Theory

Overall I'd say that the data does not support the inflation lag theory. There's no historical evidence to suggest that inflation in the headline number, which includes volatile food and energy prices, leads to core inflation in the future. It's another economic myth we can all stop worrying about.

It's worth reading the whole posting.

An amasing story of the power of compound interst

2006-01-15T12:21:00.000-08:00

There is a funny story about the Indians who once sold Manhattan in Personal Finance Advice Blog. I have first read about it in a book of Peter Linch. If you think the Indians have made a bad deal, you are not right. It is the amazing power of compound interest. Go read it and you'll see...

And if you think twice, you must see, it is even logical: Manhattan today is worth that much because people have created it - with the power of the incresing technology, productivity, economic growth. Its worth could actually not grow much faster than that...

interest Manhattan

Interest rates, interest rates, interest rates

2006-01-15T07:24:00.000-08:00

George Soros: U.S. recession may occur in '07

If George Soros warns, one should listen at least. The danger comes from a too restrictive monetary policy in the USA. He sees a Fed discount rate rising to 4,75% this year, which could then strangle the economic situation in 2007.

The fact that the interest rates can have a significant negative effect on the stock markets and the economic situation was already written about. Therefore my earlier position was, despite of my principally optimistic view, nevertheless somewhat cautious considering the still ongoing cycle of interest rates increases. Until the Fed does not stop with tightening, one should act more carefully.

However, the long-term interest remains low. This provides favorable financing and re-financing possibilities and favourable valuation basis to the stock markets.

The other major economies and currencies such as Euro and Pound contribute to the global liquidity situation through relatively expansive (Euro) and probably neutral (Pound) policy. The both important Central Banks - ECB and The Bank of England - have made no restrictive move. Especially in Europe, a discount rate of 2.25% is very stimulative - if not for the economy directly (due to structural and mental (yes, mental) difficulties to grow faster) then for the financial markets.

Does the Yield Curve Matter?

Still, as far as I can see, the yield curve is not inverse. Development under observation. About the forecast quality of the yield curve, here an article of Business Week Online. Hopefully, Alan Greenspan is nevertheless right , with its reassuring words that the observations from the past are less reliable nowadays because of the globalization of the financial markets ...

All in all, the way of the stock markets an the economy will highly depend on the development on the bond markets. In the last sessions bond prices jumped up somewhat and that makes me somewhat more confident - I would fear high interests (long and short) more than cooling off of corporate earnings growth or of GDP.

stocks bourse interest

A whole new year before us ... Good luck to all of us...

2006-01-06T03:04:00.000-08:00

First of all Happy New Year!

I wish much luck, success and health to all readers in 2006.

After more than tree-week break I come again to my bourse notes. During the holidays the stock markets could rise further. A lot of reviews and comments of the past year appeared - all in all it was a pleasing year for all those, who speculated on rising courses and a bull market - especially in Europe, where I am mainly invested, an the most other international markets. The US stocks could not provide substantial performance in the last 12 months (on dollar basis), but the year was all in all positive. And if you have a positive performance on your stocks, you should be happy, right?

How will it be now in 2006? We can be surprised…

Although the broad "market barometers" rose, this development did not exceed the growth of profits and other underlying fundamental data. Thus, the large indices remain at the valuation level as of one year ago and even better. I generally avoid to say the stocks movement is "fundamentally supported" (or “justified”), because the valuation after all is not (that) determinant. Nevertheless this is a "reassuring" fact.

However, much more important to me is the state of the interest rates particularly at the long end, which in this year – “unexpectedly” to most analysts – did not substantially change. Thus, the lack of investment opportunities for the world-wide liquidity (and large savings volumes - mainly from the Asiatic area, and also, from the moderately growing Western European industrial nations such as Germany) remain considerable and the basis for valuation of stocks favorable. The rate cycle in the USA had of course affected and absorbed the (over-) liquidity somewhat. In this environment the American indexes could not go far last year, and - once again "surprisingly" - the dollar was strong. Now they already talk about the close end of the interest rate hikes, and the stock market anticipates already such development with optimism. As long as rates remain low I would count on the continuing of the rally.

However - a whole new year is before us. In any case, I wish much success to everyone...

stocks bourse 2006

Who is the greater fool?

2005-12-16T13:37:00.000-08:00

You have probably heard of that "Greater Fool Theory". I'd like to transform it a little bit - from an exclusively stock market view to a capital market view. Who is now the greater fool - the stock buyers or the bond buyers? Or even like this: the people holding the shares or those holding the money (cash)? Who will first loose the patience or will be forced somehow to sell (or to buy, of course - there are always two sides of a transaction)?

Stocks will not fall if there isn't exceed of supply. Where will this supply come from? Some possibilities:
- the companies need money to finance investment projects and issue new shares
- IPO sector gets more active and fuels the market with new companies (shares)
- the stock-investors get anxious and prefer to park the money in bonds
- the bonds again offer attractive interest (plus safety)

I still can not see any big investment activity that absorbs the (global) money the way companies need to issue shares. Actually the corporations are full of cash and have rather "problems" finding appropriate place/investment for it. The companies seemingly can still manage the existing demand for their products with the existing capacities. They produce still on below historical average levels (although approaching the average). What I see is still concentration on the core business (where the risks are also lower) and on saving costs. There is no substantial rush for expanding business or entering new markets. Also (or therefore?) the IPO activity is not huge. The business does not need money - IMHO - by now. And even if, it's cheaper for them to borrow (and lock in the low interest). The companies rather act as capital provider and together with the global saving activity are still mounting up money in fixed rate and hold the interest rates down.
And there we come to the attractivity of interest. I can hardly consider the interest rates of 4,5% attractive. Even if there would be no inflation (above the targeted 2-3%, who knows exactly?). And adding an even small further inflation peaking makes the investment in bonds a "zero-sum-game". The interest rates in Europe are even lower!?
And finally, how about the anxiousness? Well, it's sentiment, you never know. But beyond the normal waves of optimism and anxiousness, I guess the most investors well know about the bad news possible to come (cooling off of economy, rising inflation, rising oil etc.). But I ask myself, why should you sell now stocks performing not bad, lagging actually behind the earnings growth pace, with price earnings ratios below bond yields and solid dividends? To buy 4% fixed rate? No, thanks, I stay with stocks.

stocks bourse supply demand interest rates

Some More Basics

2005-12-15T15:50:00.000-08:00

I probably must apologize to all more experienced readers about posting some really basic things about the stock market. Though, other ways, I have seen and heard not just a few traders, who of course know this basics, but still seem not have "internalized" them fully.
We talk about supply and demand. And this is the only postulate on the stock market. Prices are the result of supply and demand. Only. Everything else is interpretation.

The quotes coming on the ticker are real trades, and they indicate a real transaction which occurrs only if supply and demand offers meet. Thus, there are two sides of a transaction - somebody has sold and somebody has bought a stock at this certain price. If prices rise, this is only because buyers are willing to pay higher prices now AND there is no cheaper sell offer. And vice versa.
No news, no earnings ratios, no interest rates, no economic indicators actually determine about stock prices. As clear as it is, as often you can observe how people think of the (possible and "logical") way of the market as if it were "something" that must go up or down if the news is good or bad. They often also refer to the stock market as of barometer of the economic state. The bourse is no barometer. The bourse only measures the balance between supply and demand. You should really internalize this other ways you will encounter with countless "illogical" situations and reactions on the stock market. I know it sounds trivial, but this is the very essence of the stock market.

To get the future direction of the stock market right, you should get right where the future demand and supply (is likely) to come from. A share (or the shares as a whole) could be very "extravagantly" valued, if the shareholders are not willing and not forced by other mean to sale (notice 2 conditions, I'll come to this again) nothing will happen. The prices will stay high. And vice versa. The market could be severely undervalued by any criteria you can imagine, if there are no buyers enough to absorb the supply of the (fearful) sellers, the prices will sink further. Therefore it is often true for the short to mid term periods, that not the quality of the shares, but the quality of the shareholders is the determinative factor.

stocks bourse supply demand

To speak a common language

2005-12-13T08:52:00.000-08:00

A Russian poetess once asked how would she feel about living in exile and with a foreign language around her, answered: "what does it matter in which language you are not understood". The sooner I explain some terms I often use and which are also often misunderstood, the better. It's not a big deal - for the first here are these three ones:
trader
speculator
investor

I consider it important. These are the main characters involved on the bourse:
A trader is the one who tries to exploit the short term, even day-on-day fluctuations of the prices. I also call him a gambler, because the (extreme) short term movements of the chart are a highly hazardous, non-predictable matter. This is my conviction. Anyhow - even if I do not know famous names of traders who managed to achieve some kind of impressive wealth - there should be successful ones. The main point is that the trader acts in a specific way. In the very short term the stock markets are mainly driven by emotions and technical conditions. They also say "a news-driven" market, though the way the public reacts to the news is highly emotional. The same news can produce very different reactions. The public also seldom knows exactly and right away which news is good and which bad. I do not believe in those efficient markets theories. The trader (and even more the so called day-trader) should be very flexible and fast in catching the emotional and technical conditions of the market on every single day. For example: He/she might come to the bourse (or sit down in front of the monitor) with the serious intention to buy, but recognizing the weak opening and the dull sentiment of the day he/she sells short all the shares, which were yesterday considered an excellent buy-opportunity. They also say "to read the ticker" i.e. to feel the immediate reactions of the stock prices. The trader can and should not care about the deep sense and couse for a larger price movement, because he/she trades the small ones in either direction.

The investor is the opposite pole of that. An investor puts his money in stocks for many years, he/she mounts a (someday large) portfolio of shares - bought may be in bad days at low prices and may be also in good periods at high prices. The investor believes in the overall superiority of stocks vs other investment forms in a long term. He does not care about how the market closed today or this week, or even this year. He knows his money good invested and expects in some dozens of years to earn the fruits. If an investor has a good sense of business models, of intrinsic value, maybe a vision about a company or sector, he can get extremely rich, because he does not sell too early. He has the patience to wait and see things evolve. The pioneer investors in companies like IBM, Microsoft or Apple - to mention just very few - who had the patience are surely rich men. The most prominent investor is of course Warren Buffet. As good as I know the average duration of his stock positions is ca. 12 years. But the specific skills of an investor are much more in evaluating a business model and prospectives, to estimate an intrinsic value of a company etc. You need to be much of an accountant, of a businessman, of a financier, not a stock exchange operator. Warren Buffet has once stated, he does not even look at the stock prices on the bourses. There are just a few like him of course, but my point is: investing as described demands skills "from outside the stock exchange", and secondly the investor has one great advantage: the stocks rise in long term - (almost) inevitably, so the very most of the investors win - not excitingly much, but win.

Somewhere in between stands the speculator. His time horizon is not that short sighted (pardon: just short), but not that long like the investor's either. The speculator looks at the cyclical movements on the stock markets, the bigger ones, and does not care about the day-on-day fluctuations. A percentage point or two higher or lower just don't matter. He concentrates on the overall conditions of the market and on the main underlying trend. His considerations are of completely different matter as these of the trader, but also not that business or purely saving-in-stocks related like the investor's. Please make no doubt about it - the job of the speculator is also very dangerous. If he is at a fault, he can severely loose.

As a rule of a thumb I would consider the long term success chances of these three like that:
The investors win in a long term, the traders almost certainly loose, and for the speculators there is no rule of thumb.

I consider myself speculator. And the focus of this blog will be on the issues of relevance for acting in this manner.

stocks bourse investor trader speculator

The risks are still outside the bourse

2005-12-05T13:00:00.000-08:00

At the beginning of this year I noted (in my classic note book in regard of the world markets but focused still on Europe) the following:

I expect strong performance of the stocks, because everything speaks for undervaluation of the market: stable economic development and stable technical conditions.

The fact that the economic situation and moves on the stock exchange do not develop parallel must be here very clearly stated: this is somewhat complicated relationship, which often drives both - stock markets and real economy - even in opposite directions. I have not overlooked it.

Though:

If risks exist - I wrote at that time - they are "outside" the stock exchange, perhaps in the economy, the politics, on other markets (e.g. commodity markets) etc. If something goes wrong there, we will certainly get to feel it at the stock exchange too. But this is not so dangerous, because - after my consideration - with this valuation level (inclusive bond yields) and the other technical and psychological factors stocks are on a relatively firm soil: without exaggerated risk positions, exaggerated speculation, without illusions...

The risks may stay in the economic development, in dangers of the terrorism or whatsoever - as long as they are not "in stocks themselves", nothing is so dangerous. Everyone already made the observation that the discussion (and reality) of the economic cycles goes for about few per cent points growth or decrease; with the profits and other company numbers these fluctuations are carried into a scale higher; at the stock exchanges however the volatility is a multiple of all that. If only the fundamental data would count and the valuations of the enterprises were to some extent consistently, rationally and comprehensively determined, then (logically) the prices might vary not so strongly. But the stocks are subject to something other prniciples. They load up themselves frequently with illusions or skepticism, with emotions and also technical factors, under whose influence the volatility rises disproportionately to the underlying data.

----

I still "would sign" all of this today. The big bullish movement did not come in such a way, as I expected, but it is still some time up to the end of the year (and in addition I find it ridiculous to hold on too much on calendar years).
A little more confidence has build up however - and it's no wonder after all periods of weakness and concerns that we have nevertheless overcome. Slowly, the undetermined get also more confident. Nevertheless: I may not be able to calculate properly or I overlook something very important, but I cannot see even little growth priced in the stocks for a mid-term investment period. Therefore, I suppose: should the world economy (and particularly the USA) cool off, we'll may feel it in the stock prices. But there isn't much air there; if we should fall more sharply, it ought to be not just cooling off. It ought to be a crisis. That risk I can bear.

stocks risk economy

On Stop-Loss

2005-11-25T10:39:00.000-08:00

Particularly beginners are always told to "protect" their trades by "persistently" setting a stop loss orders as if it were a nearly a "miracle weapon" to minimize losses and hence boost overall performance. The second "hint" that very often follows then, is portfolio risk protecting (or hedging) through put options.

I find that one should not protect the risk of stocks. At least not in this way. By the hedging the investor cuts finally his performance. The risk protection (or balance) is to be taken rather by diversification of the entire portfolio on the different investment classes (bonds, shares, real estate etc.). In the class of the shares itself, one should not "protect" - the risk of the investment is "paid" by (possible) higher yield here. The volatility, which can be very substantial, is part of the risk and part of the price. If you consider the risk of holding stocks too high, then buy less stocks and distribute your money more into the other investment classes. To protect the stocks portfolio is quasi to make from shares bonds. From fiscal point of view some hedging strategies can be of course derived (at least in Europe), but this is not the theme. If you come to invest on the stock market, you do have to be able to live with the volatility of stocks, otherwise it's just the wrong place for you...

Risk balancing and protecting strategies conduct for instance banks or funds, but this is not investment in the actual sense, still less speculation. It's other people's money that is hedged e.g. in the structured products (warranty, bonus certificates etc.). The banks in most cases do not speculate, the banks earn at the fees etc. and not at the market, therefore they hedge the market movements.

stocks stop loss portfolio

A Mechanical Bull Market?

2005-11-21T16:18:00.000-08:00

It is a common theory and view (also, so far I correctly remember, shared by Nobel Prize laureates) that the capital markets are "perfect", "efficient", so that they form a "perfect" price on basis of all information available in each single moment in time. One says, the market "discounts" all existing information efficiently, therefore it is actually not possible to outperform the average...

I believe, the truth is just the opposite: the markets are always wrong, the current price is never, where it should be - either is it too low or too high... This is by the way one of the views of George Sorros, on which he develops his investment philosophy.

About, say, 90% of the public do not know at all, where the price is to stand, can not discount information at all, and mostly do not even know what "discounting" means. In that point I like the technical analysts: they admit openly that they do not "discount" at all, do not bother about evaluation, "fair" prices etc.. They observe a chart and that's it. I regard this as nonsense, but at least they are honest...

In this sense: I believe that there is a certain mechanism, which presses the prices upward at the stock exchange. 90% of the public bets on long, on rising stocks. Of them about 90% do not know at all whether the current price is fair or not. Since however no one sells so gladly with losses, most hold their positions into the profit zone (at least). From this massive buying and holding in attitude a mechanical pressure develops upward.

Here it must be underlined very clearly that the upward tendency at the stock exchange is also on a long-term basis fundamentally supported and favors the long speculation.

Not knowing, where the correct price lies, the public buys and waits for higher quotations until something brings this "house of cards" to a fall. This happens rather at the extreme lows or tops of the market. Otherwise, if the situation is not extreme, the stock market wings itself up - one would like to say nearly mechanically. I believe, that bull market mechanism becomes slowly set in motion now.

stocks sentiment casino

The Bourse is not Casino

2005-11-21T15:53:00.000-08:00

The stock exchange is not Casino, although it is frequently compared with it. Yes, of course - there are aspects of gambling, coincidences, not foreseeable reactions and accordingly very personal luck or misfortune, but at the stock exchange there are also very serious non-gambling elements, which make the comparison with the Roulette table completely inaccurate and misleading.

But, if we remain nevertheless with the Casino symbol, I would say, at the stock exchange one has the choice between the one or the other side of the table - to sit down on the side of the players or on those of the bank.

The bank in the Casino wins - as well known - always in the long run. It's simply statistic probabilities. Only enough capital is necessary to "bridge" the possible streaks of losses. The longer the play however lasts, the bank will come to its profit.

This is the long-term investor at the stock exchange. The shares (and here is the general level of the stock markets meant, represented approximately by the large indices) rise on a long-term basis. Behind it stands the progress of mankind. Apart from the pure inflationary development it is also the real growth of the economy. One needs only enough capital, in order to outlast the bear market streaks and not be forced to sell low.

Oddly, the most investors go to the gamblers' side of the table. There certainly is the chance to win much and quickly (in contrast to the bank, which is winning not enormously but constantly and "safely"). But in the long run the gamblers loose. The roulette ball just twirls the money from the one hands into others and in the end into the hands of the bank.

But enough with this casino symbolic...

stocks sentiment casino

Trend = Liquidity + Psychology

2005-11-19T09:34:00.000-08:00

You know Andre Kostolany? His isn't that famous in the USA. Though, Kostolany was a great investor and - more importantly - has very strikingly described what I consider the central mechanism of the development on the stock exchanges. Symbolically it could be written down like this:

Trend (T) = Liquidity (L) + Psychology (P)

The main direction of the stock prices is determined by the monetary conditions (L) and the psychological attitude (P) of the investors (I call them "the public", because not only the directly involved and active stock-holders or investors are meant). A bull market emerges when both factors turn "positive", and there is a bear market if both factors are "negative". If factors are mixed (one positive, one negative) there is a flat or undetermined trend, possibly with a slight bias in the direction of the stronger one.

The market will go up if the public has a positive attitude towards stocks AND has enough (liquid) money to buy and vice versa. The "AND" is crucial: that's why e.g. on the top of a bull market, when sentiment is strongly positive, prices can stagnate regardless of the good news from the companies and the economy. The pace of the real growth and the investment activity, on the one side, absorbs much of the liquidity in the financial system. On the other, such development goes normally with higher inflationary pressure and hence increasing interest rates (on the money market - dominantly due to Central Bank (Fed) rate hikes - and on the capital market (longer durations) due to aversion to fixed income securities). The liquidity conditions turn "negative".

And vice versa: in the bottom of a bear market, when mainly bad news are coming from the economy, the business activity is low and there are no inflation concerns, the Central Bank can ease the monetary supply, the interest rates fall and the market is provided enough liquidity. It is ready for an upturn. When - suddenly - the sentiment of the public also changes, both factors turn positive, the stock market can explode upside. We saw something like this in 2003 - the long bear market and permanently bad news (from Enron and 9/11 to the Iraq tensions) have depressed sentiment (and prices) extremely although the monetary conditions (liquidity) were very stimulating. It was just a spark necessary and the market went up impressively although ca. 6-12 months afterwards the news from the economy still was negative.

From both, unfortunately, only the monetary conditions can be reliably observed. The attitude can change very suddenly, it is very instable and not foreseeable. There are only some indications for the sentiment of the public. Therefore the most crucial parameter for the stock market remains the liquidity situation.

Where do we stand now? The liquidity is narrowing as described in Where is the Threshold? posting, but still not a concern. Everyone seems to fear a cooling down of the economic activity, though this will free up liquidity from the real business and investments and also keep interest rates down. This will prepare the market for a strong up-move. I would expect, that if the economy growth pace decreases a bit, the stocks - astonishingly - will jump up!

fundamental analysis stocks sentiment liquidity

Fundamental Analysis

2005-11-17T04:31:00.000-08:00

May be the previous postings will be better understood in the context of my general view on speculation and stocks. Please be patient. I will post step by step on fundamental analysis of the market - the only one to provide sustainable success, in my view of course... Life will teach us...

My approach is strictly top-down. First one should think about the overall conditions of the market and to decide on the overall trend and perspective. Later then you should consider which sector, stock etc. to purchase or to sell. In a bull market almost all stocks - good and bad - move up, and in a bear market all shift down. The good perform of course better, but you see: the main direction of the market is the more crucial point. And the main direction is to be analyzed at first. How I approach this...well, as mentioned, step by step...

See you...

fundamental analysis stocks

Where is the Threshold?

2005-11-16T11:21:00.000-08:00

Rising interests - both at the money market (Fed) of long bonds - is not good for the stock exchanges. Period. And here forget at first about valuations (no matter how you measure them) - they are not that important. We are confronted and (it is not over by now) with rising interest. If the money supply "narrows", the shares suffer. One should expect some difficulties on the stock exchanges for the coming time.

Now, the situation, as previously said, is somewhat more relaxed due to low interest rates. That why the US markets keep stable. Nevertheless, the increasing yields "endanger" the stocks. Don't get me wrong - no crash, no bear market. Possibly even easily improving Wall Street, but "with emergency brake on".

The danger of inflation is to a large extent well-known and well-considered. The prices reacted accordingly in October (downward). Nevertheless a decrease in liquidity can be hardly "discounted" - when it comes, it inevitably affects the market. However we speak of a tightening of liquidity from a high level. Therefore the monetary situation is not yet causing concern.

Secondly, the danger of inflation mainly comes from the energy prices (and in second place by the strong real estate market). Each easing here could let the Fed to pause with the interest rates increases. In my eyes this would move the fairly attractive valuation of the stocks relative to fixed income immediately into the focus of the investors.

If the inflation , i.e. the energy prices, should persistently stay high, the Fed will the go on for so long until the economy clearly cools down (if necessarily, naturally, until recession).

The question is, where is the threshold at that the commodity prices (energy) plus property market the USA eases (stops): an easy or strong cooling or only with recession?

Since I assume that by the increasing interests the American economy will just a little bit "weaken", i.e. show somewhat lower pace of growth, the real estate market will stop ("but not burst") and the energy prices will more promptly react (downward), the stocks are a Buy (or a Hold respectively). I expect possible corrections but not too sharp.

interest rates stocks energy USA

Inflation Fears (3)

2005-11-16T10:56:00.000-08:00

Compared with 1993-1994 the interest rates, particularly the long duration bonds, are too low now. On the one hand, it shows that the market does not really believe the inflation story in mid to long term. On the other hand, it is obviously too much money out there, that looks for the safety of a fixed interest. America may not save particularly much (although, I would place this under question marks despite a statistical savings rate of 0%), but in the global world there are many which save almost extremely (Germans, Japanese, Asian altogether, etc.).
Low interests actually offer ideal conditions for the financing of investments, thus, for growth. We see good growth rates in some parts of the world, but the investment activity is not quite pronounced. The companies can manage the demand with the existing capacities, especially given the constantly increasing productivity . Thus, they need not much money from the capital market (for instance from the corporate bond market).
In principle that situation should positively affect the stock markets. Nevertheless the large indices did not reflect this by now. To me, we seem to accumulate great potential for a bullish upturn.

The problem, however, is that with arising inflation the abnormally low interests of long duration bonds should rise. That complicates the forecast for the next months: if the money should move toward shares, we will see of course higher stock prices.

However one should also expect that the positions in bonds move only to shorter durations (the skeptical bond investors might not become enthusiastic on stocks over night). With rising long-term interest rates, however, the economic dynamics will weaken somewhat (as I assume - only somewhat) and will automatically worsen the relative valuation of the stocks versus loans.
But will this influence the stock prices?...

interest rates stocks energy USA

Inflation Fears (2)

2005-11-16T10:14:00.000-08:00

In earlier times a large part of the inflation was based on structural "problems" - both economical and political nature. Accordingly, in order to deal with the inflation pressure, the Fed reacted (as normal and as today too) with interest rate hikes.
However, in earlier periods the inflation was only to be stopped by driving the interest rates so high till the economy fell into recession, or at least was strongly cooled down. The reason for this were some structural problems: the much stronger position of the trade unions (and the associated inflationary spiral), the higher state ratio to GDP and the lower intensity of competition, missing production capacities in the developing countries, and also very important - the Cold War with all transfer payments into the geopolitically important regions (official and unofficially, also in form of credits, from which everyone knew they are never going to be paid back). This was then neseccary to simply secure strategic interests (which was quite good and correct considering the danger, which went out from the communist block). The list could be expanded...

Therefore stopping of the inflation was possible only by very high interest rates and finally through strong deceleration of the economy, even recession.

Since Reagans's presidency however much happened in America and in the world weaken or solve many of the structural problems. Much was made for liberalisation of the American economy, for more dynamic and less restrictions on the flow capital and investment. Since beginning of the 90's the capital received even more real possibilities for investments world-wide. Many countries provided (and some of them quite successfully) better investment conditions and political security. Accordingly the production capacities and resource of these countries grew (perhaps Asia and China are the most prominent examples, in addition, many Eastern European countries, some South American ones etc.).

Between 1993 and 1994 we had a similar situation like now. The incrasing inflation rate let the yields on the capital market and the Fed rate go up. The stock markets went down fearing coming recession (which was to be expected by experience). But this time it was not necessary for the economy to fall into recession to coll down the inflation. The growth pace dipped a little which immediatly eased the inflation pressueres due to the changed structural conditions (in the USA and world-wide). What followed was one of the greatest bull markets of the history.

Today we witness very similar situation. The main difference are the very low yields on the bond markets. This could be a couse of some concern...

...to be continued...

interest rates stocks energy USA

Inflation Fears

2005-11-16T09:53:00.000-08:00

In the last weeks topic No. 1 and fear factor No. 1 was the inflation. This was also the main reason for the worse sentiment and coused downward pressure on the stocks in October.

The inflation - and we speak now particularly of the USA, although much can be assigned to the Western European markets as well - the inflation, thus, remained rather moderate to before few months (up to the summer). The American, but also the global economy were exposed to several "inflation tests": rising commodity prices, falling dollar, decent growth rates, until recently extremely low interest rates (money market and capital market), which were actually at first intended to protect "us" against deflation. Besides, a solid development on the stock market (2003 - very strong, since 2004 in America not big profits, but nevertheless: profits) plus rising real estate prices in the USA and in some other parts of the world. One could still extend the list by some. Important is however that the American economy withstood this tests, so that we could not register much of inflation in the recent past. The forces of technologies, productivity, more intensive international competition and the better allocation of capital and work(force) in the course of the globalization (catchword: China) are obviously a very strong counterweight to the inflation forces mentioned above. Even at present the core CPI is on a quite acceptable and conformal level.

The inflation concerns came from the high energy prices, which finally affected the overall inflation rate and also the PPI (Producer Price Index). Obviously energy prices on such price levels cannot be absorbed by productivity increases (or the like) by the economy without inflation. Nevertheless I want to state that the American (in addition, the global economy) has no structural inflation problems.

This was however not always like that... (to be continued)

interest rates stocks energy USA

A Bourse Diary

2005-11-12T11:36:00.000-08:00

The english version of my bourse diary (Börsennotizbuch) will be soon available here.