Thursday, September 25, 2008

DO NOT SHORT !

Here is the revised list (949 and counting), of IFIs (Identified Financial Institutions), based on the SEC revisions of 09/23/08:

AAME
AANB
AB
ABBC
ABCB
ABCW
ABK
ABNJ
ABVA
ACAS
ACBA
ACE
ACFC
ACGL
ADS
ADVNA
ADVNB
AEG
AEL
AET
AF
AFFM
AFG
AFL
AFSI
AGII
AGM
AGMA
AGO
AGP
AGX
AHD
AHL
AIB
AIG
AINV
AIZ
ALD
ALL
ALLB
ALNC
AMB
AMCP
AMFI
AMG
AMIC
AMNB
AMP
AMPH
AMRB
AMSF
AMTD
ANAT
ANCX
ANNB
AOC
APAB
ARCC
AROW
ASBC
ASBI
ASFI
ASFN
ASRV
ATBC
ATLO
ATLS
ATN
AUBN
AWBC
AWH
AXA
AXG
AXP
AXS
AZ
BAC
BANF
BANR
BARI
BAYN
BBD
BBNK
BBT
BBV
BBX
BCA
BCAR
BCBP
BCH
BCP
BCS
BCSB
BDGE
BEN
BERK
BFBC
BFED
BFF
BFIN
BFNB
BFR
BFSB
BGCP
BHB
BHBC
BHLB
BK
BKBK
BKCC
BKJ
BKMU
BKOR
BKSC
BKUNA
BLK
BLX
BMA
BMO
BMRC
BMTC
BNCL
BNCN
BNS
BNV
BOCH
BOFI
BOFL
BOH
BOKF
BOMK
BOVA
BPFH
BPOP
BPSG
BRKA
BRKB
BRKL
BSRR
BTC
BTFG
BUSE
BWINA
BWINB
BX
BXS
BXXX
BYFC
C
CAC
CACB
CADE
CAFI
CAPB
CAPE
CART
CARV
CASB
CASH
CATY
CB
CBAN
CBBO
CBC
CBIN
CBKN
CBNJ
CBNK
CBON
CBSH
CBU
CCBD
CCBG
CCBP
CCFH
CCNE
CCOW
CEBK
CFBK
CFFC
CFFI
CFFN
CFNB
CFNL
CFR
CHC
CHCO
CHEV
CHFC
CI
CIA
CIB
CINF
CISG
CIT
CITZ
CIZN
CJBK
CLBH
CLFC
CLMS
CM
CMA
CME
CMFB
CMGI
CMSB
CNA
CNAF
CNB
CNBC
CNBKA
CNC
CNLA
CNO
CNS
COBH
COBK
COBZ
COF
COLB
COOP
CORS
COWN
CPBC
CPBK
CPF
CPHL
CRBC
CRFN
CRMH
CRRB
CRVL
CS
CSBC
CSBK
CSE
CSFL
CSHB
CSNT
CSWC
CT
CTBC
CTBI
CTBK
CTZN
CVBF
CVBK
CVCY
CVH
CVLL
CVLY
CVS
CWBC
CWBS
CWLZ
CYN
CZFC
CZNC
CZWI
DB
DCAP
DCOM
DEAR
DFG
DFR
DFS
DGICA
DGICB
DHIL
DLLR
DNBK
DR
DRL
DSL
DUF
EBSB
EBTC
EBTX
ECBE
EFSC
EGBN
EHTH
EIG
EIHI
EII
EMCI
EMITF
ENH
EPHC
ERIE
ESBF
ESBK
ESGR
ESRX
ESSA
ETFC
EUBK
EV
EVBN
EVBS
EVR
EWBC
F
FABK
FAC
FAF
FBC
FBCM
FBIZ
FBMI
FBMS
FBNC
FBP
FBR
FBSI
FBSS
FBTC
FBTX
FCAL
FCAP
FCBC
FCCO
FCCY
FCF
FCFL
FCLF
FCNCA
FCSX
FCVA
FCZA
FDEF
FDT
FED
FFBC
FFBH
FFCH
FFCO
FFDF
FFFD
FFG
FFH
FFHS
FFIC
FFIN
FFKT
FFKY
FFNM
FFNW
FFSX
FHN
FIFG
FIG
FII
FISI
FITB
FKFS
FLIC
FMAR
FMBI
FMD
FMER
FMFC
FMR
FNB
FNBN
FNF
FNFG
FNLC
FNM
FNSC
FPBI
FPBN
FPFC
FPIC
FPTB
FRBK
FRE
FRGB
FRME
FSBI
FSBK
FSGI
FSNM
FSR
FSTF
FTBK
FULT
FUNC
FUR
FVE
FWV
FXCB
GABC
GAN
GBCI
GBH
GBL
GBNK
GBTS
GCA
GCBC
GE
GFED
GFG
GFIG
GFLB
GGAL
GGP
GHL
GIW
GLBZ
GLG
GM
GNW
GOV
GRAN
GRNB
GROW
GS
GSBC
GSLA
GTS
HABC
HAFC
HALL
HARL
HAXS
HBAN
HBC
HBHC
HBNC
HBNK
HBOS
HCBK
HCC
HCII
HDB
HEOP
HFBC
HFFC
HFWA
HGIC
HIFS
HIG
HMN
HMNF
HMPR
HNBC
HNT
HOMB
HOME
HRZB
HTGC
HS
HTBK
HTH
HTLF
HUM
HWBK
HWFG
IAAC
IBCA
IBCP
IBKC
IBKR
IBN
IBNK
IBOC
ICE
ICH
IDC
IFC
IFSB
IHC
IMP
INCB
INDB
INDM
ING
IPCC
IPCR
IRE
ISBC
ITC
ITG
ITIC
ITU
IVZ
IX
JAXB
JEF
JFBC
JFBI
JLI
JNS
JPM
JRJC
JXSB
KB
KBW
KCAP
KCLI
KENT
KEY
KFED
KFFB
KFS
KRG
KRNY
L
LAB
LABC
LARK
LAZ
LBAI
LBBB
LBCP
LEGC
LEH
LFC
LION
LKFN
LM
LNBB
LNC
LNCB
LPHI
LPSB
LSBI
LSBK
LSBX
LTS
LUK
LYG
MAIN
MASB
MBFI
MBHI
MBI
MBR
MBRG
MBTF
MBVA
MBVT
MBWM
MCBC
MCBF
MCBI
MCGC
MCO
MCY
MER
MERR
MET
MF
MFC
MFG
MFLR
MFNC
MFSF
MGYR
MHLD
MHP
MI
MIG
MIGP
MKL
MKTX
MLVF
MNRK
MOFG
MOH
MORN
MPB
MRH
MROE
MS
MSBF
MSFG
MSL
MTB
MTG
MTU
MVC
MXGL
NAHC
NAL
NARA
NASB
NATL
NAVG
NBBC
NBG
NBN
NBTB
NBTF
NCBC
NCC
NDAQ
NEBS
NECB
NEWS
NEWT
NFBK
NFP
NFS
NFSB
NHTB
NICK
NITE
NKSH
NLY
NMR
NMX
NNI
NOVB
NPBC
NRF
NRIM
NSEC
NSFC
NSH
NSUR
NTQ
NTRS
NVSL
NWFL
NWLIA
NWSB
NXTY
NYB
NYFX
NYM
NYX
OB
OCFC
OCN
OFG
OKSB
OLBK
OLCB
ONB
ONFC
OPHC
OPOF
OPY
ORH
ORI
ORIT
OSBC
OSBK
OSHC
OVBC
OXPS
OZM
OZRK
PABK
PACW
PBCI
PBCT
PBHC
PBIB
PBIP
PBKS
PBNY
PCAP
PCBC
PCBI
PCBK
PCBS
PEBK
PEBO
PFBC
PFBI
PFBX
PFED
PFG
PFS
PGC
PGR
PHLY
PICO
PJC
PKBK
PL
PLBC
PLCC
PLD
PLFE
PMACA
PMBC
PMI
PNBC
PNBK
PNC
PNFP
PNSN
PNX
PPBI
PRA
PRE
PRK
PROS
PROV
PRS
PRSP
PRU
PRWT
PSBC
PSBH
PSEC
PTA
PTP
PUK
PULB
PVFC
PVSA
PVTB
PWOD
PZN
QCRH
QNTA
RAMR
RAS
RBCAA
RBNF
RBPAA
RBS
RCBK
RCKB
RDN
RE
REXI
RF
RGA
RGA A
RIVR
RJF
RKH
RLI
RNR
RNST
RODM
ROMA
ROME
RPFG
RVSB
RWT
RY
SAF
SAFT
SAL
SAMB
SAN
SASR
SAVB
SBBX
SBCF
SBIB
SBKC
SBNY
SBP
SBSI
SCA
SCB
SCBT
SCHW
SCMF
SEAB
SEIC
SF
SFG
SFNC
SFST
SGB
SHBI
SHG
SIEB
SIFI
SIGI
SIVB
SLF
SLG
SLM
SMBC
SMCG
SMHG
SMMF
SMTB
SNBC
SNFCA
SNV
SOCB
SOMH
SONA
SOV
SRCE
SSBI
SSBX
SSE
SSFN
STBA
STBC
STBK
STC
STD
STEL
STFC
STI
STL
STSA
STT
STU
SUAI
SUBK
SUFB
SUPR
SUR
SUSQ
SVBI
SWIM
SWS
SYBT
TAMB
TAQ
TAXI
TAYC
TBBK
TBHS
TCB
TCBI
TCBK
TCHC
TD
TDBK
TFIN
TFSL
TGIC
THFF
THG
THRD
TIBB
TIL
TMCV
TMK
TMP
TNCC
TOFC
TONE
TOWN
TRAD
TRH
TRMK
TROW
TRST
TRUE
TRV
TSBK
TSFG
TSH
TWGP
TWPG
UAM
UB
UBB
UBCP
UBFO
UBNK
UBOH
UBS
UBSH
UBSI
UCBA
UCBH
UCBI
UCFC
UDR
UFCS
UHAL
UMBF
UMPQ
UNAM
UNB
UNH
UNIB
UNM
UNTY
USB
USBI
UTR
UVE
UVSP
UWBK
VALU
VBFC
VCBI
VIST
VLY
VNBC
VPFG
VR
VSBN
VYFC
WABC
WAIN
WAL
WASH
WAUW
WAYN
WB
WBCO
WBK
WBNK
WBS
WCBO
WCG
WDR
WF
WFBC
WFC
WFD
WFSL
WGNB
WHG
WHI
WIBC
WL
WLP
WM
WPL
WRB
WSB
WSBC
WSBF
WSC
WSFG
WSFS
WSH
WTBA
WTFC
WTM
WTNY
WVFC
XL
Y
YAVY
ZION
ZNT

Tuesday, June 3, 2008

Banks are for Asshats



[Pictured: Doug Kass says buy bank stocks, as he gets ready to jump into a pool of sharks at his home in Florida.]

Thursday, May 1, 2008

Wednesday, April 23, 2008

Today's Sector Buys

Todays sector buys:

Energy:

Stone Energy (SGY)….$65.85

Fording Canadian Coal(FDG)….$62.88

Industrials:

Genco Shipping(GNK)…$70.16 (short term trade)

Materials:

Gerdau S.A.(GGB)….$38.19


Disclaimer: This information is for educational purposes only. The stocks listed in this post are those purchased by the author and are not necessarily appropriate for all investors. This information should not be construed as a recommendation to buy stocks, as it is not sufficient enough to be used as the primary basis of investment decisions. Please consult your personal investment advisor.

Tuesday, April 22, 2008

Focus on Stocks

Update on current Focus stock portfolios. My Focus Portfolios consist of ten stocks that are for aggressive to very aggressive investors. These stocks require a cast iron stomach, as the volatility is high. However, the rewards can be commensurate.

On 04/14/08, I bought:

Agrium [[AGU]] @ $74.95
Apache [[APA]] @ $133.70
Cleveland Cliff [[CLF]] @ $146.59
Companhia Siderurgecia [[SID]] @ $39.88
Devon Energy [[DVN]] @ $111.69
FMC Technologies [[FTI]]@ $63.39
Murphy Oil [[MUR]] @ $89.25
Lindsay Mfg [[LNN]] @ $108.76
Mosaic [[MOS]] @ $123.08
Permian Basin Royalty [[PBT]] @ $25.22

From the names you see, this is a concentrated portfolio of stocks.


Yesterday, 04/21/08, I bought seven stocks:

Apache [[APA]] @ $141.71 (adding to position)
China Mobile [[CHL]] @ $85.16
CONSOL Energy [[CNX]] @ $88.13
Flour Corp [[FLR]] @ $160.60
Mechel Open [[MTL]] @ $155.54
Monsanto [[MON]] @ $128.52
Rio Tinto [[RTP]] @ $497.28

These stocks were selected from different sectors and industries to achieve more diversificaton.

Disclaimer: This information is for educational purposes only. The stocks listed in this post are those purchased by the author and are not necessarily approppriate for all investors. This information should not be construed as a recommendation to buy stocks, as it is not sufficient enough to be used as the primary basis of investment decisions. Please consult your personal investment advisor.

Thursday, April 17, 2008

Pull The Damn Trigger

I've been having fun picking targets out. It's almost getting ridiculous. Lots of stocks starting to give me buy signals. This market is about to bust loose and shoot some bears in the balls.

Here's what I've been buying for short term trades:

[[APA]]...still a buy under 142.

[[CLF]] ...it still looks good to buy up to 152.

[[SID]]...buy it up to 44.

[[FTI]].. bought around 66. Buy up to 69.

[[MUR]]..looking real good. Bought under 90. Good still up to 93.

[[MDR]] looks interesting here under 60. I may pull the trigger on that one tomorrow.

[[GHM]] is another candidate. It closed at 52. A breakout to 54 would propel it up to over 60 in no time.

There are many more: [[DVN]] closed at 116.63; [[MOS]] at 136.82 still looks good; [[OXY]] at 83.19 is going higher; if you don't mind paying $500 a share, look at [[RTP]]; [[TNH]] @143.45; [[ATW]] under 109, etc., etc., etc... See? It's starting to get ridiculous.

So many stocks begging to be bought, and not enough money to fill the orders.....

Tuesday, April 8, 2008

Bullish Ideas

For those of you in the Bullish minority, here are some trading ideas for the near term:

GILD closed at 52.00 yesterday.




Big base breakout. Looking at a target range of 69-70 on a market rally.

—————————————————————————

BNI closed at 95.54 yesterday.



Bullish price objective is 117. Very nice looking chart.

—————————————————————————

CHRW closed yesterday 59.74.



Look at the demand that comes in at 52-53 levels. Huge base breakout from there. The PnF horizontal count puts this stock at a $94 price objective on a longer term rally.

—————————————————————————

and finally….the egregiously irrational MTH, which closed at 21.84 yesterday.



Target: $35. Look at the bottoming pattern. George Costanza, do the exact opposite of what your common sense would tell you.

Disclaimer: Trading stocks involves risk. You could, and should lose money (just to keep yourself humble).

Green Light

In Barron’s they highlighted that on 01/22/08, only 13% of stocks on the NYSE were trading above their 200 day MA. Currently, that number has risen to 30%. This potential rally could take stocks up to the 40% level.

In the Ag sector, I still like MOS even here at the $120 level. New money might want to take a partial position here and then add on a pullback. Look for $150 on a target, with a potential for at least $170 within 12 months. Don’t rule out a special dividend, either. This company is making money hand over fist.

In steel, take a look at AKS currently trading around $63. The price target I’m looking for within 12 months is $92.

I know, I know. Very optimistic.


Disclaimer: Buying stocks involves risk. You can lose money. This info is for educational purposes only. Do your own research before making a trade.

Calculating Price Objectives Using Point and Figure

In a previous post on Point and Figure, I covered the two main trend lines, the Bullish Support Line and the Bearish Resistance Line, and how they come into play. I briefly touched on the subject of establishing a price objective for a stock.

In today’s post we’ll get into the usefulness of determining a price objective, why you must have a price objective, and how you go about calculating it. In PnF, there are two different ways to do this: the “Vertical Count” and the “Horizontal Count”.

Price objectives are important. If you’re trading without a sense of where a stock is going, or where it might be going if the position moves against you, you’re just rolling the dice. You might as well jettison your money into a black hole.

Many investors and traders approach the market like it’s a game. It’s entertainment to them. After all, it’s fun trading stocks, right?

If you are serious about making money in the market, you have to treat your trading just like any business you might own and operate. It’s not a game. It’s a business venture, and it’s full of risk. Most of you already know this, but I’m addressing the newbie or “dabbler” in the market.

If you’re not serious about establishing and using a disciplined system for trading (or investing), you will lose your stake. There are many people in this business that are a lot smarter and experienced than you or me. Just ask The Fly (who I’m sure will wholeheartedly agree). How you go about establishing an effective trading system is a whole different topic. There are many books describing many systems of trading. My advice is to develop or use one that fits your personality, temperment, and style. And keep it simple.

PnF analysis gives us a way to calculate the price objective of a stock, whether we are going long or short. This is critical for when we do a risk-reward analysis (you do a risk-reward analysis before you put on a trade, don’t you?)

Let’s look at the Russell 2000 iShare (IWM: 70.96 0.00%):




From the chart, you can see that the Price Objective shown on the right hand side is 84. Later on, I’ll get into how it’s calculated. Since we are all internets and live in the internet age, we have computers that conveniently do this for us, but it’s important to know how the number is arrived at, especially if you are “low tech” (over 47 1/2), and want to chart your stocks by hand like the “old guys”, circa 1929.

IWM has broken through the Bearish Resistance Line and is above the Bullish Support Line. It has also broken a double top. That is a clear buy signal. So let’s do a quick risk-reward analysis to see if this is a trade still worth taking.

It closed at 71.16 on Friday, April 4. We’ll use 71 for the sake of simple math. So the potential is 13 points. (The price objective of 84 minus 71). What’s the downside? From the chart, the Bullish Support Line is at 65. So if it breaks that, being the disciplined trader that you are, you would close out the position. Maybe you place your stop at 64.

Now you’ve established a downside risk of 7 points (71 minus 64). Is this a trade you might take? Maybe. I typically want to see 2 points upside for every point of downside, at a minimum. The upside on IWM is 13 points. The downside is 7 points. Not quite 2 to 1, but close. Maybe you place your stop at 65 instead, or even higher, thus increasing the reward to risk. Having a price objective comes in handy when making these kinds of decisions.

That’s great, you say, but how are price objectives arrived at? There are two ways. We”ll go over the vertical count and the horizontal count.

The Vertical Count

One of the nice things about PnF is that the math is so simple a fifth grader could to it. No head-exploding calculus or Monte Carlo analysis is needed.

To calculate the vertical count, we’ll look again at IWM to see how the Price Objective of 84 was arrived at.




IWM bottomed out at 65 and began to move up. Then it gave a buy signal . The buy signal came when the column of X’s exceeded the previous column of X’s. This is called a double top breakout. In this case, the buy signal came at 69 (intraday).

To determine the price objective, you count the number of X’s in the column and multiply that number by 3 (since we are using the three box reversal method). Then multiply that figure by the value per box. Since IWM is trading between 20 and 100, the value of each box is 1.

There are six boxes in the column of X’s, so 6 x 3 x 1 = 18.

Take that number and add it to the bottom of the column of X’s at the level where the column began. That number is 66. Now add 18 to 66. What do you get? Using the vertical count will give you a rough idea of of the stock’s price objective on that move.

Keep in mind that this is only a guideline. It is not set in stone. Just because a stock reaches its price objective doesn’t mean that you automatically sell it. A lot will depend on the current price trend, relative strength, trading bands, resistance, momentum, etc.

Vertical Count on a Short Sale

The calculation for the vertical count on a short sale is similar to that of a long position, except that instead of multiplying the move by 3, you multiply by 2 . Take a look at everybody’s favorite short, (FED: 25.97 0.00%).



FED has given a strong sell signal, breaking a double bottom, and is well below any Bullish Support Line. How low can it go? First count the number of boxes in O’s. There are nine. Multiply that times 2, and you get 18. Now subtract 18 from 32 (the price level equivalent to the first box at the top of the column of O’s). FED’s price objective on a short sale is 14. At this point, I would do a risk-reward analysis to determine if it’s a trade I want to put on, and where I would want to place a buy stop to cover if the short position moved against me.

The Horizontal Count

Another way to determine price objective is by using the horizontal count. To do a horizontal count, you would first count the number of boxes across the base a stock has built. Then multiply that number by 3 ,and then multiply that number by the box value. We’ll use (POT: 173.28 0.00%) for our example.




POT has broken a double top (again), much to the chagrin of the “ag shitters”.

The useful thing about a horizontal count is that you can easily tell which stocks are breaking out of a large base. In the case of POT, it gave a buy signal at 166. That is pretty easy to see on the PnF chart. This is another advantage of PnF.

Look at the base of the formation it broke out of. That formation is 11 boxes wide at the 156 through 158 levels. That is a very large basing pattern. Normally, a base might be 6 or 7 boxes before a breakout; often times, only 3 or 4.

Using the formula for the horizontal count: 11 x 3 = 33 x 2 points/box = 66. Now look at the bottom box of the column of X’s. It is at 154.

Price objective : 154 + 66 = 220

If you like the idea of buying (or shorting) a stock that is breaking out of a large base, look at the horizontal count. Going back to the example of ballistics, think of the horizontal count as the powder charge. The bigger the charge, the farther and more power the bullet has.

If you like the idea of buying (or shorting) a stock that has momentum going for it, look at the vertical count. You can think of the vertical count as the distance the bullet will travel before gravity pulls it back down to the ground.

I like to use both counts to get a better perspective in determining price objective.

Finally, remember that calculating the price objective is simply a guideline. It is useful in helping you analyze risk-reward. Use the “count” as a guide, but don’t get hung up on it.

It is more important to consider the market sentiment, sector, relative strength and chart patterns when initiating long or short trades.

Friday, April 4, 2008

What We Already Knew

The employment numbers came out this morning, and as expected, the U.S. Bureau of Labor Statistics reported job losses of 80,000 nonfarm workers.

However, 64% of that number, or 51,000, came from the construction industry, not other areas like education and healthcare or the industrial base.

Isn't this what we could have intuitively expected? We have been talking about the slowdown in housing and construction for over 6 months now.

In that light, I don't think the number is that bad, actually.

Don't be surprised to see the market hold these levels today, which sets us up for a rally to 13,000 next week.

Thursday, April 3, 2008

The Tide Has Turned

An unfavorable jobless claims report would have normally been expected to sink the market today, effectively wiping out most of the gains from Tuesday. You will recall that during the past several weeks this was the case. Market up, market down. But something has changed. Call it fate, manipulation or asshattery. The fact of the matter is, you can’t make money if you’re not in the game. The position to be in now is LONG. The market should end the week positive. The bulls are back in control. I’m buying the major big cap indexes via DIA, SPY, and QQQQ. Also taking positions in EFA and some IWM tomorrow.

Take a look at the technical evidence:







Look at the small caps:




…and Large cap international…





Finally, gold’s decline is helping to make the case…





Disclaimer: Technical analysis is a lazy man’s way to invest. You can lose money trading stocks on a technical basis. This information does not contain everything you need to know about the market or any particular stocks. In summary, conduct you own due diligence so you can take responsibility for you own results

Recent comments I made on iBC:

Life Takes VISA

Technically Significant Breakouts

Monday, March 31, 2008

Dow Stocks Update 03/31/08

XOM and CVX are bumping up against resistance:








Ascending Triple Top Breakout BUYS: CAT, WMT, IBM








These have broken a double top: KO, GE are potential buys





Shorts: PFE, MSFT, AA, MRK.... SELL!










Potential breakdowns for shorting: BAC, AXP, DD, JPM watch for continuing deterioration....










Disclaimer: This information is for educational purposes only. There is risk of loss when throwing egregious amounts of money into the stock market. Make sure to conduct your one DD.

VISA (V)

I like the VISA story, but am holding off on buying it here. It looks like it is forming a wedge. A break out to over 65 would be bullish, a break below 60 would be bearish. I will buy it or sell it on a break out from either side of the wedge formation.





The pitch for VISA goes something like this:

Offering cash has become as socially unacceptable for high-speed transactions as is writing checks is in the express line of your grocery store. Have you noticed the dirty looks? Have you seen the Visa ads on TV where everything in the store comes to a grinding halt when a customer pulls out cash from his wallet?

The game has changed. Today, 55% of all transactions in the U.S. are cashless.


American Express has its niche, and some people will always carry MasterCard. But large numbers of people will use Visa for cash.

"Life," like the ads say, " takes Visa."

The 1.5 billion Visas out there could very well double in quantity. It would follow that the $2 billion in Visa transactions may double, too. The Visa infrastructure, which has been 10 years in the making, can sustain a huge volume of business without a single dollar being spent on upgrades. Voila, it goes to Visa's bottom line.

Visa first changed the game the day its founder, Dee Hock, created a new type of organization.

He imagined the world's first virtual company in 1970, organizing itself to allow banks to compete for customers while collaborating around brand-building.

His name for this invention: the "chaordic organization." He made up that word by combining "chaos" and "order." Chaordic organizations are self-organizing and self-governing. They operate not through hierarchies of authority, but through networks of equals. It isn't power or coercion that makes them effective, rather it's clear shared purpose, ethical operating principles, and responsibility distributed through every node.

American Express has an (expensive) address: World Financial Center, New York, NY. But Visa's address is in your wallet. That was the brilliance Dee Hock's breakthrough.

Visa's second game changer was to get itself favored over cash. Now remember, Visa itself never extends credit-the banks behind each individual card do
that. Visa simply gets paid per transaction. So it is a riskless strategy to drive down the size of the average transaction.

Key here was to do away with the signature requirement on small purchases. That speeds up the line at Starbucks- and makes it convenient to use a card instead of cash. Visa's business has thrived, much to the chagrin of MasterCard.

Visa's third game changer is a play for Asia's rising middle class.


But milking that opportunity has been a challenge for Western businesses and investors. China plays by China rules, and China rules are very different.

However, scoring on the China retail market is huge. Retail sales in China grew 13% in 2006, 17% in 2007 and will likely top 20% in 2008. During the recent New Year's holiday, spending was up 60% from last year.

And yet most of this spending happens without a credit card. Cash or a complex system of credit notes ("chits")carried by local Mom and Pop stores is the current system.

The stage is set for Visa to dominate Asia and China. It comes in as a global brand, yet it operates as a local, being issued through local banks.

Game over.

Disclaimer: This info is for educational purposes only. Trading on this info is subject to risk of loss.

Point and Figure Charting Basics (Part II)

This is a continuation of the previous post on Point and Figure charting.

Updating a PnF Chart

The basic concept of updating a PnF chart is simple and straightforward: Whichever column the chart is in (X’s or O’s), you will remain in that column as long as the stock continues in that direction by one box or more. Let’s stop and take a look at what I mean.

Here is the chart of JPM:





Currently, the stock is in a column of O’s, meaning supply is in control and price is going down. As long as JPM continues in that direction by one box or more, you will stay in that column. So, in the case of JPM, your first question at the end of the trading day should be, “did the stock decline one full box or more on the chart?”

You will notice that on Friday 03/28, the price closed at 42.71. It didn’t reach 42, so an “O” is not placed in the box corresponding to 42 (remember, on stocks between 20 and 100, the value of a box is 1 point). The low of the day was 42.65. It is common practice to use the intra-day highs or lows to determine if the column of X’s or O’s moves to another box. In the case of JPM, the column of O’s stays at 43. If JPM had an intra-day low of 41.75, you would fill in the 42 box with an “O”, but you wouldn’t fill in the 41, since the intra-day price didn’t actually reach 41 (or lower). Simple enough.

Keep in mind that all you are doing is recording what the stock does on each trading day. That’s it. Nothing more, nothing less. Easy. You don’t have to mess with the chart until the next trading day. Here is the logic you would use for a stock that is falling in a column of O’s, as JPM is:

1. What was the daily low? Did it fall from a previous low? (If yes, put an “O” in the appropriate box(es).

2. If the answer is no, then you have to ask yourself some other questions:

a. Did the stock reverse up (3 boxes) in price on the chart? (If no, stop there. You don’t need to record anything!) If the answer is “yes”:

b. Move one column over and up one box and place X’s in the boxes up to the appropriate place. Then stop there, and move on to another stock you are charting.

Going back to the example of JPM, for you to start a column of X’s tomorrow, the stock would have to hit an intra-day high of 46, which is 3 boxes above 43.

The daily highs and lows for a stock are all you will need to set up PnF charts. Fortunately, you don’t need to do these by hand (even though you could if you wanted to). You can easily pull up a PnF chart for most stocks, ETFs, mutual funds and indexes from www.stockcharts.com.

The only record of time in the PnF chart is the replacing of an X or O with the number of the month when a box on the chart reaches the first entry of that month. Placing the month in the chart has no significance other than as a reference point. As the stock moves back and forth in price, it alternates back and forth from one column to the next, X to O, O to X, and so on. At no time will you have X’s and O’x in the same column. As mentioned in the previous post, the month is indicated by it’s respective number (March = 3, Apr= 4, etc.) with Oct, Nov, Dec indicated by A, B, and C, respectively.

Trendlines

Trend lines are one of the most important guides you will have in PnF charts. It is uncanny how a stock will hold to a trend line, either going up or down. And it is easy to see on a PnF chart, whereas on a bar chart, it takes a little more subjectivity in drawing trend lines.

The two basic trend lines used are the Bullish Support Line and the Bearish Resistance Line. There are two other trend lines we will discuss later: the Bullish Resistance Line and the Bearish Support Line. For now, let’s discuss the Bullish Support Line.

The Bullish Support Line

This is a major component in the stock’s chart pattern. It gives us a look at the underlying trend. Think of these lines like brick walls. In general, when using PnF charts to analyze stocks, you would not buy a stock that is not trading above the Bullish Support Line. Drawing the line is very simple.

Let’s take a look at JPM again:






Once the stock has formed a base of accumulation below the Bearish Resistance Line (red) and gives the first buy signal off the bottom, we go to the lowest column of O’s in the chart pattern and begin drawing a trend line starting with the box directly under that column of O’s. Notice the short blue Bullish Support Line just starting at 37, under the column of three O’s. You then simply connect each box diagonally upward in a 45-degree angle to draw the trend line.

Unlike bar charts that connect prices, PnF charts never connect prices. The angle for the Bullish Support Line will always be a 45-degree angle, and the angle for the Bearish Resistance Line will be the reciprocal of the 45-degree angle, or 135 degrees.

Consider the longer blue Bullish Support Line started prior to the more recent shorter one. Since JPM traded significantly higher (up to 49) above this trend line and subsequently gave a sell signal (reversal column of O’s), followed by another buy signal (column of X’s), the shorter term trend line can be drawn.

The prior trend line is still shown to give you a longer term perspective of support. That will always serve to be the long term trend line and may come into play months or even years later. The new short term trend line will now serve as a visual guide. It is valuable in that it can identify the short term direction of the stock. Traders will often initiate a long trade when a stock has declined near the Bullish Support Line because the stock is close to a stop-loss point.

The most important thing about PnF is it’s clear guidelines for whether or not a stock is on a buy or a sell signal, and if it is in an uptrend or downtrend. Just remember, this is art, not science.

Next time….The Bearish Resistance Line

Thursday, March 27, 2008

Point and Figure Charting Basics (Part I)

Picking up on where we left off on my previous intro to PnF, let’s briefly recap:

Review

The PnF chart uses the price action of a stock to measure supply and demand. It’s really a study of pure price movement in that time is not taken into consideration while plotting the price action. Since only price changes are recorded, if no price change occurs (as represented by the boxes and their value), then the chart is left untouched. Price changes are shown by a column of boxes that have either X’s or O’s. The value per box is important, because it can be assigned accordingly to dampen or increase price sensitivity, depending on how you trade. More on that later.

As stated, PnF charts use rising columns of X’s and descending columns of O’s to represent price movements. What you see when you look at a PnF chart is the underlying supply and demand of the security. The columns of X’s illustrate demand exceeding supply (rally), and the columns of O’s illustrate supply exceeding demand (sell-off).

If you are looking for a way to filter out all the “noise” in the market, PnF is a solution to that if all you are interested in is the actual price movement of a stock or index. PnF charts help you observe market activity, and as such, are very helpful in identifying support/resistance lines, buy/sell signals, and trendlines.

By being very flexible, P&F charts can easily be made more or less sensitive to price changes, which can help in determining differences between long term and short term trends. By varying “box” and “reversal” sizes, these charts can be adapted to almost any need. There are also many different ways these charts can be used for entry and exit points. As such, all types of traders and investors can benefit from applying and understanding the basic principles of PnF charting.

The Chart

Let’s talk about the chart itself. How is it set up?




This is a most recent chart of the S&P 500 as of yesterday’s close. Price is shown on the vertical axis and time is show on the horizontal axis. Looking at the price increments on the chart, move up from the bottom from 1250 to 1260, 1270, 1280, etc. From this you will notice that each price increment corresponds to a box on the chart grid. Therefore, each box represents a value of 10 points, or a movement of 10.

As I mentioned before, you can assign an arbitrary value to each box, depending on how you trade. If you are a short term trader, you would want to adjust the box values to a smaller number, thus allowing you to move quicker on price changes. If you are an intermediate term trader, you assign a larger value. A long term investor, may want to assign an even larger value to each box. If effect, what you end up accomplishing is filtering out the volatility of a stock’s price, which many times just represents normal movement and fluctuation in price action. Reduction of this “noise” can help prevent you from taking action when you really don’t need to.

Assignment of box values

Now, let’s get into the mechanics of charting by looking at the values of the boxes used to construct the chart. When I say box sizes, I’m not referring to a specific dollar or point value on the chart. The box sizes will change as the stock price moves through certain price levels. It’s important to make the distinction between “boxes” and “points”. For practical purposes, we will use the conventional “3-box” reversal method. It is not a 3-point reversal method. You will understand why a little later.

When looking at and analyzing PnF charts, it is important to think in terms of boxes rather than prices. Between 20 and 100, the box size is 1 point per box. If a stock is trading below 20 or over 100, we want to use different box sizes.

For penny stocks, those under 5, the convention is to assign each box a value of 0.25. Once a stock reaches 5, the box value increases to 0.50. You can see this illustrated with our friends from MVIS:




Here are the conventional or “default” values that represent the size of each box, based on price:

Under 5……….1/4 point per box

5 - 20…………..1/2 point per box

20 - 100…….. 1 point per box

100 - 200…… 2 points per box

200 - 500…….4 points per box

500 - 1000…..5 points per box

1000 - 2500…..10 points per box

2500 +………….50 points per box

These values can be used for stocks as well as indices.

The reason why we increase the box size is to adjust for volatility as price or value becomes a greater number. By doing this, we can compress the chart and get a normal picture of the supply - demand relationship of a stock. Stocks like GOOG require 5 points per box, (and now more recently, 4 points per box) , while YHOO only 1 point per box.






The key to constructing the chart relates to how the chart switches from one column to the next (moving to the right). When a stock is rising and demand is in control, the furthest column to the right will be in X’s. When a stock is falling and supply is in control, the furthest column to the right will be in O’s.

Reversals

Since we have established that we will use the “3-box” reversal method, it requires a three box change (or more) in the opposite direction to be significant enough to warrant a change in the columns from X’s to O’s when price begins to fall, or O’s to X’s when price begins to rise.

So, for a stock trading between 20 and 100, a reversal would require a move of 3 points, which satisfies the 3 box reversal ( 1 point per box) requirement. In the case of GOOG, currently, it would require a move of 12 points, which is the equivalent of 3 boxes, minimum.

Let’s look at the S&P 500 again:



Here we see that the box size is 10 points. That means that a reversal in supply demand would be indicated by a price change of 30 points or more before we would say that is a significant move, or in effect, change in supply - demand for S&P 500 stocks as a whole.

Time

The charts account for time by showing the number of the month of the year in a box. For example, the S&P chart above shows that supply was in control (price moving down in a column of O’s) and hit the 1320 level March 2008. The exact day is irrelevant for purposes of guaging supply demand. Since then, you can see from the columns of X’s and O’s, that it has been going through a series of reversals, and has recently broken out above bearish resistance (the red line). More on that in a later post. Right now, lets just focus on the chart set up.

Moving back in time, the S&P was at the 1480 level in January (notice the “1″) before it started trading down, and subsequently made seven reversals (count the columns of X’s and O’s by February (”2″).

One last point. If you look back in time on the chart, you will notice that there is an “A” and a “B” at the 1540 level. “A” represents the month of October, “B” November, and “C” December.

That is all for now. I’ve wasted enough time and need to go make money.

Next time….We’ll go over how easily support and resistance lines are established, price objectives and then get a little bit into how you interpret various chart patterns and what they mean.

A’D

Tuesday, March 25, 2008

Point and Figure Charting 101: Intro

If you, the reader, have been observant, you have noticed by now that most of the time, whenever I post a stock or index chart, it looks like some odd ball cross between Chinese checkers and tic-tac toe.



“WTF is that???”, you may have wondered.

Well, thanks to a second request by Jake, I have been reminded to post information on this method of technical analysis. Hopefully, this will prove useful as another weapon you can add to your arsenal of stock market fun. The goal here isn’t to make you an expert (I don’t claim to be one myself), but to simply perk your interest and perhaps point you in the right direction where you can learn more.

Point & Figure (PnF) is somewhat of a lost art in technical analysis. With the advent of the computer age, and the ability to compute complex mathematical formulas in a nanosecond, many traders and analysts dropped this old (over 47 1/2 years) method for new fangled analyses like MACD, Stochastics, Bollinger Bands, exponential moving averages, DMI, RSI, etc., etc., etc.

However, having done this, many have lost sight of the basic principles that cause fluctuations in the prices of securities. Thousands of books, videos, and blogs have been dedicated to technical analysis, but the majority of the ones that I have seen miss the one basic and irrefutable law of the markets: supply and demand. It is this basic law of markets that PnF charting addresses, simply and eloquently. In addition, an advantage to using PnF is that you actually don’t need a computer. All you need is a newspaper that has stock prices (OHLC), a pencil, some chart paper, and the ability to draw X’s and O’s. That makes this method ideal for those over 47 1/2 years of age, especially elderly people like Warren Buffett.

One last point before we get into this: Forget about the quest for the Holy Grail of investing…



You know what I mean…that one killer formula, trading technique, or method of analyzing the market or a stock. It has to be out there somewhere, and if you could only find it, you would bank more coin than The Fly and four time machines. I have news for you. The Holy Grail doesn’t exist. Sorry.

If it does exist, it’s not what you might think it is. In my thinking, the Holy Grail represents hard work, dedication and proficiency in your craft. What drives you to it is your passion for the market and your goal of beating it handily, at will.

Having knowledge certainly helps. However, there are no substitutes for persistence and hard work. That said, don’t look at PnF charting or any other method of analysis as a Holy Grail. They’re not. They’re simply tools. You have to work at being successful in the market.

Way back in the late 1800’s Charles Dow found a way to organize and record information about the movements of stock prices. He was the first person to do this. His method of “Figuring” was the precursor to Point & Figure charting. The PnF method is simply a way to organize information about stock data.

I don’t know about you, but I suffer from information overload. There’s so much out there. Too much….kind of like trying to drink water from a fire hose (which, thankfully, I have never tried). How do you control all that massive overload of information and break it down to something you can use? That is the challenge. PnF is a logical way of organizing and recording the imbalances between supply and demand. This is what makes it so useful as a method of analysis.

When you cut through all the bullshit on the Street, CNBC, brokers, analysts, economic reports and internet resources, what you are left with is raw supply and demand data.

The PnF chart only uses the price action of a stock to measure supply and demand. Volume isn’t a consideration. Why not? Because volume has to eventually show up anyway in the chart patterns because there will be no significant price movement unless there are more buyers than sellers willing to sell or more sellers than buyers willing to buy. PnF is only interested in the net supply and demand forces. So much of the volume today is hedging and derivative related and really isn’t a true picture of a stocks supply and demand profile.

There are two letters of the alphabet that are used in this charting method: X and O. The “X’” represents demand and the “O” represents supply. The key to PnF is how the chart moves from one column to the next, from X’s to O’s then to X’s then O’s, etc. For purposes of the examples, we will use a “3 box reversal” method. You can use other points or boxes, but for my purposes, I use the 3 box method consistently. Keep it simple.

Let’s take a look at the S&P 500 chart again:



As you can see, the chart pattern is formed by alternating columns of X’s and O’s, representing demand and supply, respectively. The only way a column of X’s can change to O’s is by reversing 3 boxes. The same 3 box reversal method applies to the column of O’s. This moving back and forth from one column to the next is what forms the chart pattern. This is where the PnF chart differs from a bar chart or candlestick chart. PnF leaves volatility out of the equation and gives us a clearer picture of supply and demand. On the other hand, a bar chart includes volatility totally into consideration because the chart has to be updated every day no matter how inconsequential a price movement might be. This is what makes bar charts somewhat subjective and difficult to interpret.

Next time….”The Mechanics of Charting PnF”

Developing……

The Shape of the Future

The Shape Of The Future
By Peter L. Bernstein

Three months ago, we wrote, "[T]he economic malaise will not be brief, even though its depth is uncertain. The process is going to be like water torture - drip by drip by drip over an extended period of time until all these excesses are squeezed out of the system and new and happier horizons can open up." This metaphor should now form the basis for all decisions, strategies, and analysis. Recessions matter, but the important features of the problems faced by the American economy are not in the short run. The crucial issue is the nature of the new longer-run environment that we are convinced is now a reality. This environment is still in its infancy, but its principal features are already identifiable.

Too few people are thinking along these terms. The short run always tends to dominate mass thinking in any case, but in an odd way the short run is irrelevant to the current situation....


The short run is a creature of the immediate past. The longer run will be a profound break from the past. Indeed, the longer run in this instance is going to evolve as it is going to evolve whether we have a perceptible recession in 2008 or whether we squeeze by with a minimum of negative numbers.

Why are we so emphatic about this viewpoint? As Goldilocks shreds, we have to start thinking about what kind of long-term environment is going to replace it. Shifts to new environments are always attenuated. They are also rare across time, which means most of us have limited experience with this phenomenon. New environments often tend to sneak up on us and do not announce themselves with a fanfare. Most of us are unaware of what has happened until enough time passes to provide good perspective.

Imagine, for example, what would have happened if investors had been willing to think through the powerful positive implications of the disinflationary forces that set in during the early 1980s after Paul Volcker had turned the tide of inflation. Instead, backward-focused investors in fear of renewed outbreaks of inflation ignored the way these new trends would lead to a radical improvement in economic stability and opportunity. The record of long-term interest rates in those years is eloquent testimony to the bias toward the past: although yields on ten-year Treasuries broke briefly below 8% in the wake of the oil price break in 1986, they were back up over 8% in 1987 and averaged over 8% for the next two years. Meanwhile, inflation averaged only 4.3%. Clearly, nobody was willing even to think about what the victory over inflation could produce. Yet it would lead to Goldilocks - a remarkable change in the nature of the whole world - would miraculously emerge from the disinflationary environment.

The discussion that follows begins with a few generalities about when and why old environments fade away and begin to yield to new environments. We analyzed this matter some time ago, but recent events provide a better perspective to our line of argument. We go on to explore how much of the old environment has disappeared, which then leads us to some speculation about how the new régime is likely to develop.

The dynamic process: Familiar facts in a new setting
Economic environments do not have a specified life cycle, like the business cycle. As I have argued elsewhere, economic régimes tend to persist as long as people are still trying to figure out what is actually going on. This effort strengthens the underlying characteristics of the environment and extends its life expectancy. Change, therefore, is unlikely until people finally arrive at the belief they understand what it is all about. Such a process has no definable rhythm. The arrival of understanding could come sooner or later, depending on the circumstances. Furthermore, this process applies to all environments, both prosperous and depressed, to the 1920s as well as to the 1930s, to the years from 1949 to 1969 as well as to the devastating decade that followed.

The 1920s were doomed at the moment when the New Era became a common phrase and Irving Fisher explained that prosperity would last forever. The Great Depression continued until unremitting deflation and waves of bank failures convinced a new administration that the tie to gold at $20.67 an ounce was stifling the economy. In addition, a total reversal of tax-raising fiscal policy and restrictive monetary policy was both essential and urgent. The postwar prosperity of 1949-1969 lasted for over twenty years because it was grounded in doubt as everybody kept waiting for an inflation that failed to show up. Inflation remained low, to general surprise, even though output growth was high. Once people got the idea that high output would not automatically cause inflation, the sense grew that now nothing could go wrong - and so we entered another régime marked by the aggressiveness of monetary policy and war finance in the 1970s. The resulting inflation would rage for ten years before people recognized that a profound transformation of the conduct and targets of monetary policy was essential. The outcome, as mentioned above, was the transition decade of declining inflation in the 1980s, leading in turn to Goldilocks after about 1989.

The Goldilocks environment was so benign it appeared to be a long sequence of happy surprises. Goldilocks was aptly named: low volatility in capital markets and in the real economy, low inflation, central banks in firm control, a healthy appetite for risk-taking in the business world that led to revolutionary technological change, the transformation of the "emerging" economies into "developing" economies, and the resulting boom in globalization.

After the bursting of the dot.com bubble in 2000, the business sector of the real economy resisted the fever for devil-may-care risk-taking that ultimately infused the financial markets. As a result, Goldilocks had remarkable longevity. Its death-knell would wait until the financial markets finally got the message that high risks were not really high risks in a low-risk economy. Then the fundamental stability and growth momentum of the global economic system created a bulging appetite for risk-taking that led investors around the world to gorge on anything that looked risky. A point came when any trigger would justify ever-greater risk-taking. The actual trigger did not have to be housing, but (with hindsight) we can see housing was a logical candidate. No one seemed to doubt that home prices could ever stop rising. Debt had no ceilings. Just to make everything appear even better, housing requires financing, which was like handing a delicious and multi-layered chocolate cake to the world of finance and financial engineering. Professional investors learned how to clothe high risks in a low-risk format for sale to the Great Unwashed, and to a goodly number of the Washed as well.

In the aftermath of the fervor for risk-taking, Wall Street and the mortgage banks have created many deep-seated problems for themselves. As an unhappy side effect, the business sector, a relatively innocent observer, is going to have to absorb much of the pain of curtailed consumer budgets and fewer exports to foreign nations affected by the turmoil in the U. S.

The aftermath: An introduction
Human nature develops odd biases. In terms of the economy, memories of past environments are more heavily weighted by the disasters than by the positive achievements of the period. These disasters linger long in collective memories, influencing public policy and investment practice for extended periods of time.

Fear of the double-digit unemployment rates of the Great Depression dominated economic policy from the end of the depression in 1933 to the late 1970s. As late as 1978, with inflation raging around 8%, Congress enacted the Humphrey-Hawkins Full Employment Act, providing for "the right of all Americans able, willing, and seeking work to full opportunity for useful paid employment at full rates of compensation." Paul Volcker's great achievement (and courage) were in his conviction he would never defeat inflation as long as he had to tread softly in limiting possible increases in unemployment. That constraint had to change. Volcker saw no alternative if he was to win the battle in which he had been put in command. As he carried out his campaign, the unemployment rate soared from under 5% in 1979 to nearly 11% in 1982, but inflation dropped from a peak of over 14% to less than 6% over the same period.

Today's central bankers may make interesting observations about influencing inflation expectations, but everyone knows they must ultimately have the courage to see unemployment increase if their policies to contain inflation are to carry credibility and actually influence expectations. The Fed is in an uncomfortable position at this very moment, because the tradeoff has taken on an unusual complexity, with the job market softening while lingering symptoms of inflation are still visible.

As we now move on into the post-Goldilocks environment, which unhappy memories are going to weigh heaviest? Worries about inflation are not about to vanish, but new elements are going to join in. Clearly, everything that led up to the credit crisis and the problems of home ownership will remain a central focus of attention for a long time.

In addition, as we emphasized in our issue of August 15 of last year ("Memory Banks and Economic Policy"), the increased income inequality generated by Goldilocks has become a widespread popular concern, already making vibrations among members of Congress and candidates for higher office. As Bill Gross himself put it in strong words last August, "So when is enough, enough? Now is the time, long overdue in fact, to admit that for the rich, for the mega-rich of this country, that enough is never enough, and it is therefore incumbent upon government to rectify today's imbalances." The rhetoric of the election campaign is full of such talk. This concern will influence tax policy and spending policy for a long time to come.

The aftermath: The particulars
The repercussions in the financial system are our main concern here. Most of the current flood of analyses of the state of the credit markets concentrate on the problems of the present. This kind of information is little help. We need to develop a sense of how this situation is likely to evolve over time. To accomplish that goal, our primary task is to discover where the roots of the new régime are being planted.

We now set out our own views along these lines. We begin with a few generalities. These generalities will lay the basis for the particulars that follow.

Credit is always and everywhere a matter of trust. Where there is trust, anything goes, as the recent proliferation of so many structured financial instruments vividly demonstrates. When trust vanishes, the revival of the buoyant credit creation of the past becomes extraordinarily difficult. But without credit creation, economic growth and risk-taking are stifled.

Liquidity is also a matter of trust to some degree. But liquidity has another feature that few people notice. Liquidity is a function of laziness. By this I mean that liquidity is an inverse function of the amount of research required to understand the character of a financial instrument. A dollar bill requires no research. A bank draft requires less research than my personal check. Commercial paper issued by JP Morgan requires less research than paper issued by a bank in the boondocks. Buying shares of GE requires less research than buying shares of a start-up high-tech company. A bond without an MBIA (once-upon-a-time anyway) guarantee or a high S&P/Moody's rating requires less research than a bond without a guarantee or lacking a set of letters beginning with "A" from the rating agencies. The less research we are required to perform, the more liquid the instrument - the more rapidly that instrument can change hands and the lower the risk premium in its expected returns.

This emphasis on trust and liquidity in a well-functioning credit market provides useful insights into what is happening. Trust has vanished in many areas where it was taken for granted just a few months back. And when the ratings of S&P and its competitors lost credibility, paper that had traded on sight lost the liquidity it once enjoyed because now it involved far more research than in the past. These words are just an elaborate way of explaining why credit spreads were so narrow just nine months ago and so wide in today's markets.

This abrupt shift in viewpoints has caused snarls in many areas of the credit markets. Over the longer-run, the most serious of these blockages is the disruption in the process of securitization. Securitization works only in an atmosphere of trust and where the paper involves a minimum of research. Without securitization, and without the lively derivatives markets that developed around the securitization process, the entire credit system loses an immense source of capacity, hindering deserving borrowers in search of financing and, as a result, the pace of economic growth.

Until the system can restore trust and the related willingness to buy instruments on the basis of limited research (or even no research), the credit markets are going function below optimal levels. But restoring trust and liquidity is no simple matter. Securitization broke the old personal relationship between lender and borrower, greatly expanding the market for credit in the process. The old-fashioned way - when lender and borrower were essentially on a face-to-face relationship - was slower, more cumbersome, and, most important, far more limited in terms of capacity.

In my days as a commercial banker, back in the late 1940s, the president of my bank said to me, "Remember this. I much prefer the customer to be angry at you because you denied him credit than for you to be angry at him because he failed to repay when due." That attitude sounds quaint today, but it was very much in the spirit of a time where jokes about bankers' glass eyes were legion. As the market for glass eyes revives - and it is reviving as we speak -new credit creation will inevitably slow down. As Woody Brock recently emphasized, "the combination of diminished bank capital and tighter lending standards could prove fatal to credit creation."

Now, it would be naïve to project this set of conditions into the indefinite future. Trust will regenerate over time, and the burdens of research will lighten. The pace of change in that direction, however, will be slow, a matter of years rather than months. An entire structure has crumbled and has to be rebuilt, brick-by-brick. Nor will that process necessarily be smooth. The impact of unforeseen but inevitable credit problems will loom large, detouring and delaying the pace and patterns of recovery on each occasion.

There could be bright spots as well. Our whole argument rests on the proposition that the demand for credit is going to exceed the supply, which is blocked by lack of trust and an increased burden of research. But a case where supply fails to respond to an excess of demand is rare in our system. People in finance have extraordinary energy for innovation in new products, new concepts, new paths to ultimate objectives. For example, hedge funds and sovereign wealth funds are already functioning as sources of credit, although a bump along the way might turn them off as well.

These widespread and complex problems originated from an unanticipated sequence of shocks involving banking institutions believed to be impervious to losses in the billions and major impairments of equity capital. As we emphasized above, new régimes are colored by the unhappy memories of the preceding régime, and those memories linger on for extended periods of time. The plight of Citicorp and Merrill Lynch reaching for massive help from foreign government investment funds was an event nobody could have foreseen - but few will forget. How the mighty had fallen!

The critical ingredient in the state of distress
The sequence of events that caused the economy to lose its forward momentum over the course of 2007 was unique. This fact is central to our entire argument here. The cause was not too much inventory, not overexpansion in industrial capacity, not a sustained burst of inflation requiring a determined move to tight money and higher rates at the Fed.

The root of today's problems in the financial markets and in the economy as a whole is the household sector. The point needs no elaboration, but its significance cannot be minimized. As we have argued on more than one occasion, the shrinkage in the personal savings rate is not the result of consumer profligacy, as other commentators persist in describing it. Rather, the savings rate has been suppressed by a slowdown in the growth of household incomes. The shortfall between income and outlay has been met by borrowing, and in particular by borrowing against the family real estate. Now the opportunity to borrow has shrunk dramatically, an outcome that will profoundly change the household's spending power and spending patterns. But the impact is not just on the household. A slowdown in the growth of consumer spending has ominous implications for the entire global economy - and, along the way, the U. S. federal deficit, soon to be overburdened by spiraling benefit obligations. This predicament is not a short-run matter, unless home prices abruptly reverse themselves and head back into the stratosphere - which is hardly likely.

The bottom line
The central message of our analysis is not that the origin of today's difficulties is uniquely in the household sector or that the residue of these difficulties has scrambled the whole credit structure in the financial markets. Everybody knows about these troubles.

On the other hand, too few observers have noted how the consequences of these developments are going to require an extended period of time before the blockages they impose have been eliminated. But that is not all they have missed. This extended period of difficulty is going to bring about a new economic régime, different in many aspects from the experience of most people alive today. Along the way, we will have to pass through a transition period that harks back to an unfamiliar past in both the financial system and in the household sector.

But this, too, shall pass. Yes, glassy-eyed bankers, prudent consumers, and a reformulated globalization can keep a lid on economic activity around the world for quite a while. What develops from that transition, however, should resemble what took place over the course of the 1980s. Without anyone realizing it, the errors of the past, drip by drip by drip, were buried and a new and better system took their place.

You can find out more about Peter Bernstein at his website. He has written a number of excellent books: Against the Gods; Capital Ideas Evolving ; and The Power of Gold.

Stock Market Logic

If you have been trading or investing for any length of time, you should have come to the stark realization by now that there are times when the market defies reason and conventional logic.

Success in this business depends on the ability to be forward thinking. Trading based on old information is a recipe for mediocrity at best.

We all know about the bad news. The market sucks, we have a terrible housing market, conspiracy theories are on the rise, and who knows what will happen with the Presidential election? In short, we are on the brink of Armageddon. Everybody and your old third grade teacher knows that.

With a goodly number of traders and investors, including “Joey-bag-of-donuts”, focused on the news (viz. “noise”) from the asshats at CNBC, market recoveries usually begin when a group of market participants know something that the rest of the market doesn’t.

Unless you have the advantage of a time machine, the news you and I get is probably known by insiders at least a day or two before it gets released. However, the one aspect that tends to level the playing field for those of us who are “unimportant, third-tier bloggers” is technical analysis. (Btw, I have to put in a plug for Woodshedder. He is definitely a student of the market and his craft.)

With that said, I simply want to point out that the market is working on a recovery that might surprise the bearish camp. Supply and demand, the most basic of economic principles, is flashing at least a short term buy signal via the P&F charts:

The Dow’s chart pattern has formed a triple top breakout.




S&P 500, a double top breakout:




Naz 100, double top breakout:




Russell 2000, double top breakout:




Check out oil breaking down:




…and gold...




Follow through this week will be key. Right now, I intend to focus on technical analysis, not so much the news and the fundamentals. The bear market, the credit crisis, the banking crisis, a recession—all old news. In addition, everyone is expecting Q1:2008 earnings to be “bad”, especially for the banks and financials. All this is already priced in. Pundits are predicting how long all this is going to last. I like it when they start doing that. The market is ripe. Keep in mind that “the market” and the economy are not the same thing. All it takes is one or two major upside suprises, and potentially, off we go.

Stock market logic.

Trade accordingly.

Disclaimer: Conduct your due diligence concerning matters related to your money. You can lose your entire stake in the market. Should that happen, expect a conciliatory Asshat Award to arrive in the mail shortly thereafter.