Thursday, February 23, 2012
Online brokers and easy access to financial data make investing your money as easy as starting a savings account, but in a world where the Internet has made do-it-yourselfers out of many, is investing a do-it-yourself activity and if it is, why not just fire your financial advisor or pay less fees to your mutual funds and set up a portfolio of your own?
The Internet has changed the way we live our lives. Not long ago purchasing stock was not as easy as it is now. The order went through a complex network of brokers and specialists before the execution was completed. In 1983, that all changed with a dentist in Michigan who made the first online stock transaction using a system developed by what is now E*TRADE Financial.
That one trade changed how investment products are transacted, researched and discussed. Computerized trading has resulted in highly liquid markets making it easy to buy and sell most securities quickly. The do-it-yourselfer now has access to the same free financial data that the professionals use, and websites like Stocktwits set up entire communities of investors and traders who exchange information in real time.
But just because it's possible, does that mean that managing your own money is a good idea? Professional investors have a saying, "The stock market is an expensive place to learn how to invest." They understand that it's easier to lose money than it is to make money, and because of that, some argue that the wealth of information available to people with little financial background may offer a false sense of security.
Tools are only as good as the knowledge and experience of the person using them. Does a high priced software package used by the world's best composers result in beautiful music? Does the newest innovation in surgical technology make a person with no prior training in medicine a top performing surgeon?
There's no doubt that the Internet has given the retail investor the tools that they need to effectively manage their own money, but what about the knowledge and experience to use the tools effectively? For an investor who wants to manage their own money, what types of fundamental knowledge should they have before firing their financial adviser?
Modern Portfolio Theory
First, understand modern portfolio theory (MPT) and gain an understanding of how asset allocation is determined for an individual based on their individual factors. In order to gain a true understanding of these principals, you'll have to dig deeper than the top level Internet blog articles that tell you that MPT is simply understanding allocation. MPT is not just about the allocation but also its efficiency. The best money managers understand how to position your money for maximum return with the least amount of risk. They also understand that efficiency is highly dynamic as the person ages and their financial picture changes.
Along with efficiency comes the dynamic nature of risk tolerance. At certain points in our lives, our risk tolerance may change. Along with retirement, we might have intermediate financial goals like saving for college or starting a new business, the portfolio has to be adjusted to meet those goals. Financial advisors often use proprietary software that produces detailed reports not available to the retail investor.
Academic Understanding of Risk
In the plethora of free resources, risk is treated too benignly. The term "risk tolerance" has been so overused that retail investors may believe that they understand risk if they understand that investing may involve losing money from time to time. It's much more than that.
Risk is a behavior that is hard to understand rationally because investors often act opposite of their best interests. A study conducted by Dalbar, Inc. showed that inexperienced investors tend to buy high and sell low, which often leads to losses in short-term trades.
Since risk is a behavior, it's extremely difficult for an individual to have an accurate, unbiased picture of their true attitude towards risk. Day traders, often seen as having a high risk tolerance, may actually have an extremely low tolerance because they're unwilling to hold an investment for longer periods. Great investors understand that success comes with fending off emotion and making decisions based on facts. That's hard to do when you're working with your own money.
Efficient Market Hypothesis
Do you know how likely you are to out invest the overall market? What is the likelihood of any one football player being better than most of the other NFL players, and if they are better for a season what is the likelihood that they will be the best of the best for decades?
Efficient Market Hypothesis (EMH) might contain the answer. EMH states that everything known about an investment product is immediately factored into the price. If Intel releases information that sales will be light this quarter, the market will instantly react and adjust the value of the stock. According to EMH, there is no way to beat the market for sustained periods because all prices reflect true or fair value.
For the retail investor trying to pick individual stock names hoping to achieve gains that are larger than the market as a whole, this may work in the short term, just as gambling can sometimes produce short-term profits, but over a sustained period of decades, this strategy breaks down, say the proponents of EMH.
Even the brightest investment minds employing teams of researchers all over the world haven't been able to beat the market over a sustained period. According to famed investor Charles Ellis in his book, "Winning The Loser's Game: Timeless Strategies For Successful Investing."
Opponents of this theory cite investors like Warren Buffett who have beat the market for most of his life, but what does EMH mean for the individual investor? Before deciding on your investing strategy, you need the knowledge and statistics to back it up.
If you're going to pick individual stocks in the hopes that they'll appreciate in value faster than the overall market, what evidence leads you to the idea that this strategy will work? If you're planning to invest in stocks for dividends, is there evidence that proves that an income strategy works? Would investing in an index fund be the best way? Where can you find the data needed to make these decisions?
What do you do for a living? If you have a college degree, you might be one of the people who say that you didn't become highly skilled as a result of your degree but instead, because of the experience you amassed. When you first started your job were you highly effective from the very beginning?
Before managing your own money, you need experience. Gaining experience for investors often means losing money, and losing money in your retirement savings isn't an option.
Experience comes from watching the market and learning first-hand how it reacts to daily events. Professional investors know that the market has a personality that is constantly changing. Sometimes it's hypersensitive to news events and other times it brushes them off. Some stocks are highly volatile while others have muted reactions.
The best way for the retail investor to gain experience is by setting up a virtual or paper trading account. These accounts are perfect for learning to invest while also gaining experience before committing real money to the markets.
The Bottom Line
Many people have found success in managing their own money, but before putting your money at risk, become a student in the art of investing. If somebody wanted to do your job based on what they read on the Internet, would you advise it? If you were looking for a financial advisor, would you hire yourself based on your current level of knowledge? Your answer might be yes, but until you have the knowledge and experience as a money manager, managing a brokerage account with money that you could stand to lose might be OK, but leave your retirement money to the professionals.
Its funny to see that the debt crisis has shifted from USA to Europe, or deliberatly shifted to Europe to take the attention away from US debt crisis. US debt crisis is the worst in the world followed by Japan, Italy, Spain. You cant run away from facts, the fact is that Jesuit bankers are the richest in the world and they control Goldman Sachs, IMF, CWB and own the FED. USA will collapse in 2012 as rest of the world It's a "coup d'etat" precisely describes it. while iceland, ireland, portugal, greece, italy and spain get taken down by the IMF, libya, syria, iraq, afghanistan and pakistan get taken down by NATO....different methods for different circumstances but all with the same result: loss of independence.
1) Loss cutting: Trading has this amazing historical footnote: If you study the great traders throughout history, they all share the same statement as their number one rule: CUT YOUR LOSSES! Capital preservation “keeps you in the game.” It is especially important once you understand the math: a 25% drawdown requires a 33% gain to get to break even; Down 33% means you need to rally 50% to get back to square one; As we saw in 2008-08, a -50% loss requires a +100% gain to get back to even. In sports “Defense Wins Championships.” The same goes for stock trading. Most traders need to focus more on defense.
Even Warren Buffett understand the traders credo: “The first rule of investing is don’t lose money. The second rule is don’t forget Rule No. 1.
2) Confidence: There is nothing worse than seeing a great opportunity but not having the courage to “pull the trigger” and execute the trade. Freezing up due to fear does NOT happen to great traders. These thoughts don’t even enter their mind because they are confident in their plan. They know wht they will do if the trade goes their way, and perhaps more importantly, they know what to do if it goes against them. Confidence cannot be taught. It comes from making decisions, taking action, and learning from experience.
3) No ego: Successful traders may have big personalities, but they separate their ego from their trading. They might have serious conviction behind their positions, but when the market proves them wrong, they don’t argue with it. They simply move on and accept it.
Two things I never argue with: the stock market and women. Both of them are smarter than me, and both are always right! (BR: Spoken like a married man)
4) Consistency: The best at anything are the best because they are consistent. Michael Jordan isn’t considered the best basketball player ever because he scored 30 points ONCE in a game. It’s because he averaged 30 points per game over his ENTIRE career.
Traders should not obsess with their day-to-day profit & loss. Rather, they should shoot for consistent positive months, quarters, and years with minimal draw downs. You do not want to be the “boom and bust” trader who does well in a strong market but gives it back during market corrections. These guys are a dime a dozen and typically get blown out of the market at key pivot points (Last cycle, I knew a few who became mortgage brokers — how is that for timing?)
5) Students of the market: Successful traders NEVER get complacent. They are always eager to learn, constantly looking to improve their skills.
One way to improve is through post analysis of your trades. It is important to look at your numbers and make sure your losses are smaller than your gains.
For technical traders, studying your entry points and looking at charts that worked (and didn’t work) is part of the constant learning experience of becoming a confident and consistently profitable trader.
1. Has enough been done to keep Greece within the Eurozone?
2. A new twist on the dollar losing reserve currency status
3. Does a precipitous decline in US equity values lie ahead?
Reference Links: Leap 2020 and Alan Newmans Cross Current Website
The Fed telling us there is no QE3 is like a vegetarian eating short-rib ravioli or pork eggrolls. Just because you can't 'see' meat doesn't mean it's not there.
True, there is no QE3 (yet) in the form of QE1 or QE2. QE stands for quantitative easing and quantitative easing happens when a central bank buys financial assets to inject money into the economy.
Even though it's not called QE3, the Fed is right now making billions of dollars available to buy financial instruments. We're not talking about Operation Twist here; we're talking about a covert operation that's essentially a U.S. bailout of Europe.
Covert Doesn't Mean it Doesn't Exist
You probably heard of the 'temporary U.S. dollar liquidity swap arrangement.' This arrangement, which the Federal Reserve has with the European and other central banks, sounds innocent enough.
Before we go on, keep in mind that the European Central Bank's (ECB) constitution does not allow the ECB to print money and use it to buy government bonds (such as Greece, Italy, Spain, Portugal, etc.).
The dollar swap agreement with the Fed however, allows the ECB to circumvent its constitutional prohibition to buy extensive amounts of European debt. The Federal Reserve acts almost as a money launderer and helps the ECB to keep face. The 'benefit' of buying bonds from struggling governments is that it keeps interest rates low and manageable.
How Does it Work?
Why doesn't the Fed just lend money directly to U.S. branches of foreign banks? For one, the Fed's gotten embarrassed by the 'secret' files showing its prior largess with foreign banks. Also, it doesn't want the debt of foreign banks on its books (at least not officially).
Which European government wouldn't want the ECB to bail out Europe? The ECB covertly does what political leaders want it to do and political leaders won't cry foul. It's easy to look the other way when there's a unanimous consent.
Instead of engaging in an official version of euro-QE, the ECB borrows money from the Federal Reserve and lends it to euro banks. Banks in turn are urged to buy European government bonds.
It's a great deal for European banks (at least at first) because they pocket bond returns north of 4% and get the loan on the cheap (1%). The ECB or Fed will no doubt cover any defaults, so it's a risk free margin.
What's the Scope?
In addition to the money shipped to Europe from the U.S., European banks can count on unlimited three-year, 1% loans from the ECB. In December, banks borrowed $638 billion from the ECB.
The dollar swap agreement doesn't get much attention here, but Germany's Frankfurter Allgemeine newspaper reported that euro banks took three-month credits worth $33 billion, which was financed by a swap agreement between the Fed and ECB.
In the fall of 2008, the Fed had more than $600 billion of currency swaps on its books. By January 2010 those draws were largely paid down, but in mid-December it jumped back up to $54 billion.
In addition to the amounts mentioned above, the Fed uses money from maturing securities on its balance sheet to buy Treasuries (NYSEArca: TLT - News) from U.S. banks (NYSEArca: KBE - News). I consider this QE2 light. The chart below compares the monthly inflow of QE2 with that of QE2 light. If you add the amount of unlimited ECB loans and dollar swap loans to QE2 light, you have an almost full grown QE3.
Clearing up QE Misconceptions
When looking back at QE2, most investors will remember a relentless rally, and that's true. However, the QE2 rally wasn't as straight up as many remember.
The chart below shows that the S&P's performance during the November 2010 - June 2011 - when QE2 ruled - was quite volatile. In fact, QE2 was greeted with a pretty nasty decline that took the pattern of a W.
The December 12, 2010 ETF Profit Strategy update forecasted a measured W pattern breakout target of 1,281. We know today that the S&P (SNP: ^GSPC - News), Dow (DJI: ^DJI - News), Nasdaq (Nasdaq: ^IXIC - News) Russell 2000 (Chicago Options: ^RUT) and all other major indexes keep grinding higher.
Nevertheless, starting in mid-February stocks entered a roller coaster period that saw no net gains for five months. Almost a year later, stocks still trade below the February 2011 high.
After successfully navigating the March sell off, the April 2, 2011 ETF Profit Strategy Newsletter stated that: 'Even though odds do not favor bearish bets the first half of April, a major market top is forming. The 1,369 - 1,382 range is a strong candidate for a reversal of potentially historic proportions'.
How To Trade in a QE Market
Even though the strong rally from the October lows makes the May top at S&P 1,371 less 'historic,' it proves that contrarian investing has its place. Based on a slew of confirming indicators, the October 2, 2011 ETF Profit Strategy update said in no uncertain terms that it's time to buy:
'Based on the studies discussed in the August 14 and 21 update, I've been expecting new lows followed by a tradable bottom. I define a tradable bottom as a low that lasts for a few months and leads to a bounce that (in this case) should propel the markets around 20%. From a technical point of view this counter trend rally should end somewhere around 1,275 - 1,300.'
I received a lot of snide remarks and mockery for suggesting the S&P will rally to 1,300, but here we are at 1,370.
Prior to the Fed's and ECB's accommodating money policy I did not expect to see the S&P retest the 1,370 level. But we know what QE2 did to stocks so we had a historic precedent. The January 29 ETF Profit Strategy update referred to two important trend lines and provided this simplified forecast:
'The first trend line cuts through 1,328 next week. The second trend line runs through 1,365 next month. Prices below 1,328 keep the pressure on the down side while prices above 1,328 allow for the open chart gap at 1,353 to be closed and the 1,365 to be tested.'
With the S&P at 1,365, what's next?
The ETF Profit Strategy Newsletter identifies the next resistance level (should the S&P surpass the 1,365 trend line and Fibonacci resistance at 1,369) and the one trading strategy that allows investors to benefit from higher and lower prices with minimal risk.
The Long-Term Fundamental Case for Gold
“No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.”
~ United States Constitution, Excerpt from Article 1, Section 10 ~
A quick glance at most of the headlines over the weekend and the primary focus seemed to be either calling a near term top in domestic equity indices or a focus on the Greek debt situation. Why is anyone even paying attention to what is going on over there? Until the ISDA declares a default where the underlying Credit Default Swaps (CDS) are triggered, it is all just noise.
The ECB has broken the rule of law by placing itself as the senior creditor ahead of private creditors, the Greek government is trying to pass retroactive legislation to trap private sector creditors holding out of the PSI, and the leader of Greece was not even elected by the people of Greece – how much more manipulation and insanity do we need to monitor?
Similar to the price action since 2008, central banks around the world control everything from financial markets to the ascent of political leaders. These same political leaders help central bankers and planners control policy and decision making at the highest government levels in Europe and around the world. It would seem that the United States should change the motto from “We the People” to “We the Bankers.”
However, there is one particular asset class that even the central bankers have a hard time controlling. While they can impact short term price action through direct currency manipulation initiatives, in the longer-term gold is likely to move in only one direction – higher.
The price action on Tuesday reminded market participants that actions such as the Greek bailout come at a cost. Quantitative easing and/or printing money (depending on what one wishes to call the practice of producing fiat currency out of thin air) has a direct impact on the price of gold.
Many financial pundits argue that gold has no utility, but what they fail to recognize is that gold is the senior currency to all other fiat currencies. Silver is also a form of currency and is senior to all other fiat currencies as well. While one can draw the utility of gold into question, the idea that gold is the senior most currency to all other fiat currencies is not new.
The Constitution of the United States of America, which is over 200 years old, refers to gold and silver as forms of payment. Looking back thousands of years the Romans used gold coins as a form of currency. The idea that gold and silver are currencies is certainly not a grandiose thought or a stretch of historical concept. Trying to depict gold as a worthless asset depends on your view and consideration of fiat currency.
There are those that would argue that the Federal Reserve of the United States is not actively manipulating economic conditions domestically or abroad. For those that view gold as a poor investment or hedge against currency devaluation need to consider the charts illustrated below. The chart below was produced by Thomas Gresham of Gresham’s Law.
Total Asset Growth of the Federal Reserve System – 1915 – 2012
It is rather obvious by looking at this chart that the Federal Reserve has actively sought to enter domestic and foreign financial markets. The surge in balance sheet assets serves to prove how far the Federal Reserve Bank is willing to go to maintain markets which seemingly are only allowed to move higher over time.
This chart is bearish for nearly any form of paper backed assets. The above referenced chart is long-term bearish for the Dollar and Treasuries and long-term bullish for physical gold and silver. As the Federal Reserve continues to debase the U.S. Dollar in concert with other central banks’ monetary easing programs, gold and silver prices over time are destined to move higher in virtually every form of fiat currency.
During the same time frame that the Federal Reserve has seen its balance sheet grow exponentially, the rapid rise of M2 money supply is staggering. The long term chart of M2 is compared to gold futures in the charts presented below.
M2 Money Stock
Gold Futures Monthly Chart
It is rather obvious what has happened to the price of gold as the M2 money supply has grown. The idea that the Federal Reserve has not already destroyed a significant amount of the purchasing power of the Dollar can easily be refuted by the two charts shown above.
In the short-term, gold and silver could suffer from a pullback, but in the intermediate to longer term it is unlikely that we have seen the highs of this bull market for either metal. As long as central banks around the world continue to print money and expand their balance sheets gold and silver will remain in a long-term bull market. The daily chart of gold futures is presented below.
Gold Futures Daily Chart
As can be seen above, it is not out of the question that we could see gold pullback to test one of the key moving averages in coming days/weeks. However, I expect the key support area to hold in the event of a sharp selloff. Ultimately, I expect to see a breakout over the resistance zone in the days/weeks ahead. However, I would not be surprised to see gold consolidate or work marginally lower from current prices before breaking out to the upside. Right now the primary threat in this fledgling gold rally is a short-term spike higher in the U.S. Dollar. The primary catalyst which could drive a flight to the Dollar involves the sovereign debt situation in Greece and the Eurozone as a whole.
While the short-term price action may be bearish, the intermediate to longer term time frames are quite bullish for metals as central banks will continue to race to debase their currencies. Quantitative easing in the U.S. and around the world will become pervasive and gold prices could potentially soar in value. The data from the Federal Reserve Bank itself suggests that they are indeed increasing the money supply. As time has passed, the money supply and gold have seemingly grown in lockstep with one another. Surely inquiring minds do not consider this mutual relationship between gold and the money supply to be purely coincidental.
As further evidence that the Federal Reserve continues to use quantitative easing to manipulate asset prices through direct entry into financial markets, a chart of the velocity of M2 clearly depicts that the velocity of money is declining. I am not an expert regarding macroeconomic data, but if the velocity of money is declining to 1960’s levels would it be a stretch to say that we may be going through a period of stagflation? The chart below illustrates the Velocity of M2 Money Stock courtesy of the St. Louis Federal Reserve Bank.
Velocity of M2 Money Stock
For those unfamiliar with the term velocity of money, it is simply the rate of turnover in the overall money supply. The velocity of M2 is expressed as the number of times that a Dollar is used to purchase final goods or services which are included in the total gross domestic product.
The short term technical picture in gold is a bit suspect due to overhead resistance and recent U.S. Dollar strength. However, the longer term macro factors that impact the value of the U.S. Dollar and precious metals are all telling us the same thing.
As time wears on and central banks do even more to prop up the broader economy and failing financial institutions, it is without question in my mind that gold and silver will both benefit handsomely from these decisions being made by central bankers from around the world.
Ultimately, I am very bullish of gold and silver in the intermediate to longer-term, but in the immediate short-term frame gold could consolidate or pullback before breaking out to the upside.
WASHINGTON (AP) -- The housing market is flashing signs of health ahead of the spring-buying season.
Sales of previously occupied homes are at their highest level since May 2010. More first-time buyers are making purchases. And the supply of homes fell last month to its lowest point in nearly seven years, which could push home prices higher.
Sales have now risen nearly 13 percent over the past six months. While they are still well below the 6 million that economists equate with a healthy market, the gains have coincided with other changes in the market that suggest more sales are coming.
"The trend is clearly upward," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
The National Association of Realtors said Wednesday that re-sales increased 4.3 percent last month to a seasonally adjusted annual rate of 4.57 million.
Single-family home sales rose 3.8 percent. And the number of first-time buyers, who are critical to a housing recovery, increased slightly to make up 33 percent of all sales. That's still below 40 percent, which tends to signal a healthy market.
One concern is the market is still saturated with homes at risk of foreclosure, which lower broader home prices. Those increased to make up 35 percent of sales.
But the supply of homes on the market has plunged to 2.3 million, the lowest level since March 2005. At last month's sales pace, it would take more than six months to clear those homes, consistent with a healthy housing market. Fewer homes on the market could help boost prices over time.
Most economists said the January report was encouraging, especially when viewed with other recent positive housing data.
Mortgage rates have never been lower. Homebuilders are slightly more hopeful because more people are saying they might be open to buying this year — and they responded in January to that interest by requesting more permits to construct single-family homes.
"The rise in existing home sales in recent months adds to the indication from housing starts, building permits, and homebuilder sentiment that the sector has improved modestly since the middle of 2011," said John Ryding, an economist at RDQ economics.
Much of the optimism has come because hiring has picked up. More jobs are critical to a housing rebound. In January, employers added 243,000 net jobs — the most in nine months — and the unemployment rate fell to 8.3 percent, the lowest level in nearly three years.
Analysts caution that the damage from the housing bust is deep and the industry is years away from fully recovering. Since the bubble burst, sales have slumped under the weight of foreclosures, tighter credit and falling prices.
Many deals are also collapsing before they close. One-third of Realtors say they've had at least one contract scuttled over the past four months. That's up from 18 percent in September.
Realtors say deals are collapsing for several reasons: Banks have declined mortgage applications. Home inspectors have found problems. Appraisals have come in lower than the bid. Or a buyer suffered a financial setback before the closing.
Sales rose across the country in January. They rose on a seasonal basis by nearly 9 percent in the West, 3.5 percent in the South, 3.4 percent in the Northeast and 1 percent in the Midwest.
Marc Faber Bloomberg Radio - 21 Feb 2012 "The final crisis in Europe has been postponed by monetary intervention , it is not being resolved but it is being postponed and as you know the market is a discounting mechanism and therefor has rallied very strongly in the US , from the S&P low of 1074 on October 1st to now 1360 or thereabout so basically the markets are anticipating a resolution to the crisis "