Noteworthy:

2/20/09 - Swing Batter, Batter, Batter ... You're comfortable and balanced in your stance. You're in position and you're waiting for the next pitch. The pitcher throws; but you freeze! This is where we all are in the stock market. The SP500 is approaching its previous low of 741.02 set on 11/21/08. The news is terrible and there is nothing out there at the moment that is sparking hope. Even the holy manna from the Federal Gov't (the stimulus package) didn't inspire the stock market. So what's an investor to do?

As the metaphor above presupposes, if you're an investor who's in control and waiting for the next opportunity to strike, then your time maybe approaching, or at least you think so. The next clue to an entry point is when the previous low of Nov 2008 is broken. In terms of swing trading, it's simple. If the volume increases as the previous low is broken then lower prices are forecast. However, if the volume is anemic, then a bottom should be in the offing. But what if the rule doesn't apply in this case? What if there's an exception?

Swing traders of course would argue that there are no exceptions. But everywhere you look these days, there is an exception. And in particular, Wall Street isn't playing by the same rules it once did. So why would these rules still apply especially when Gov't intervention is rampant?

The obvious guess is that trading volume will be anemic because there aren't many investors who are in control and waiting in the wings for the next opportunity. The fact is if you didn't lose money the old fashioned way on Wall Street, then others scammed you out of your savings. Back in Dec 2008 the Madox scheme exposed how many of the "rich-and-famous" were wiped out. And now another multi-billion dollar scheme was exposed this week involving R Allen Stanford. Simply put, investors are "bleeding-out" and gun shy. The public has finally realized that Wall Street can't be trusted, and corporations have also shared in breaking this trust (here's a short list of recent memorable bankrupcies: Enron, MCI/worldcom, Lehman Brothers, Bear Stearns, Refco, Global Crossing, Pacific Gas & Electric, Tyco, Sunbeam, Adelphia, Donald Trump, etc.). It's so bad that the only surprise left on wall street is a company that makes money, and shares it with its investors (how crazy is that?).

Money is what drives "Wall Street" and there isn't much of it to go around anymore. So where's the money going to come from to lift prices off the lows? It isn't going to come from the average investor. It's not going to come from retirees. And it certainly isn't coming from venture capitalists. Even companies have stopped buying back their own stock. Oh, and let's not forget about foreign investors; they have left the USA broke. So who's left?

Well, the Federal Gov't, namely the Treasury Dept., was the biggest player, but that party is over. And as for the new stimulus package, well let's just say the that stock market is showing us that these new funds aren't going to Wall Street (thank goodness). They're doling out trillions and hopefully it will do what the President intends it to do - create jobs and put money into the hands of millions of spenders (rather than corporate raiders).

This still doesn't change the supposition that anemic trading volume is expected, but it could alter your interpretation. Swing traders typically don't care why events unfold as they do, they just care about the time honored rule that lower lows on lighter trading volume triggers a buy signal. When this happens, they will jump on this and swear the bottom is in. But, what they don't realize is that the pyschology and behavior is different. There aren't that many people willing to "get into" the market again. Retirees and those near retirement have witnessed the wildest swings in prices since 2000 and have lost plenty of money. They're done. Homeowners have no home equity anymore, and therefore they can't play the game of borrowing their home equity to buy stocks. Employees are losing their jobs, and besides the obvious consequences of losing income, this has repercussions on Wall Street in ways not typically considered. These job losses reduce the automatic transfer of money into pension funds. So Wall Street feels another loss of funds. Less money, means less to drive stock prices higher.

The simple truth is that financial assets as a whole are done. The paper the stock certificate is written on is worth more that the share in the company and now everybody knows it. Confidence is broken and nobody trusts anybody. Business to business deals on which country depends on are drying up as everyone demands immediate payment for goods and services. The only thing that is real are hard assets and they are in a state of declining value. Deflation is still with us as real estate, commodities, and energy prices show us. The only hard asset showing any positive trend is gold and that's because of the massive currency devaluation that's happening around the globe. The fiat currencies of the world are being inflated so fast in an attempt to stop the banking and credit crisis that they all are becoming worthless at the same time. And the only measure of this lies with gold prices.

So when the stock market makes a lower low with lighter volume, watch the impotent rally fizzle out because there just isn't anyone left to drive prices higher. And swing traders, who are known to use protective stops (a good til cancel order to exit a trade) religiously, will quickly exit the market once their stops are hit. Ironically, the swing traders themselves will be repsonsible for the next downdraft because they will be forced to sell in a vacuum.

10/9/08 - Fibonacci 101 - Art or Science. It is just a "bottle of Snake Oil"? Let's analyze the recent price waves for the SP500 using Fibonacci expansion ratios:

	A	B	C	COP (1.0)	OP (1.38)	XOP (1.62)
Wave 1 - intermediate trend	1585	1255	1440	1110	984	906
Wave 2 - recent trend	1440	1200	1318	1078	986	930

As evident by the congruency of the two 1.38 Expansion ratios, the market reaction has reached a turning point. It appears that the target zone has been reached, and the market is free to rally higher.

Now for those of you unfamiliar with fibonacci expansion ratios, here's a quick explanation (Click here for more details). Every price move is marked by their extreme prices, which is then followed by a reaction to these extremes (high/low). The first extreme price is point A and the second extreme price is point B. The reaction price represents point C, which is the largest price move opposite to the primary price move defined by point A to point B.

Once the wave's extremes have been identified, specific ratios are applied to the price range defined by AB. These ratios are 1.0, 1.38, 1.62. They are called the contracted objective point (COP), the objective point (OP), and the expanded objective point (XOP). After the price range (AB) is muliplied by these ratios, these new price ranges are either added or subtracted from point C depending on the direction of the primary wave AB. The premis is that the price move will continue in the same direction as the primary wave from point C. So in this instance, the objective points (OP) for Waves 1 & 2 cited above conjugate near 985.

The ratios used are simply the result of applying nature's "golden ratio" as described by an Italian mathematician Leonardo of Pisa, a.k.a Leonardo Fibonacci back in 1202. The use of these ratios isn't very scientific, meaning that these ratios aren't reliably predictable, but they occur often enough that traders use them. Simply put they are the simplest method to estimate the size of the next move and should be used with extreme caution - nothing in finance/investing is guaranteed. However, despite this warning, traders get more confident with these ratios when they "line-up" with other waves. Such is the case with the current low price in the SP500.

There appears to be congruency between two different waves from two different time frames which adds credence to the validity of the target zone of 985. Basically, when two or more wave expansion targets agree, the price can be considered as resistance. And hence, a rally would be expected from this target.

Please bear in mind that the fibonacci target of 985 doesn't imply that this is an annual low or a multi-year low. It simply is used by traders as a short term target to either lock in profits or evaluate new positions. It doesn't imply that the SP500 will now shoot for point C (1318) and completely retrace the current downward move, but it is possible.

The point being made there is that traders are expecting a bounce, and honestly, nobody knows how high it will go. However, if you want an educated guess, you could start by analyzing daily highs and lows and applying fibonacci expansions to these until the next intermediate price wave (ABC) can be identified.

Lastly, as is shown in the table above, there is still another set of target prices that are lower than the OP price of 985. If the XOP prices are the target then lower prices are still to come. The problem is nobody knows which fibonacci expansion applies. As you can now see, using Fibonacci expansions is more art than science. There's no guarantee that the recent low is the bottom, and the current low for today is 965 (11AM) exemplifies this lack of precision. The current low is not 985. But if prices don't stabilize near 985, then the next stop is 906-930. Again, nobody knows for sure, but at least you now have a "road map" showing the major intersections and/or exits.

PS - Swing traders that rely on Fibonacci expansions know how to use them, and understand their pitfalls. This means that they prepare to be wrong and stick to the plan. They use stops and re-evaluate their positions at each objective (COP, OP, and XOP) because they're not sure which zone will actually stop the slide. As you can see, Fibonacci is more art than science. Nobody is clairvoyant. It's always a best guess scenario, so you need to prepare a plan to protect your money before using Fibonacci ratios.

The next intersection/landmark is the 2003 low of 788.9 or a complete retracement of the 2003-2007 rally. This could get ugly if you didn't already think it was.

9/22/08 - Will the real trading volume please stand up? For those of you that track the stock market and collect data, Friday's trading volume is a real mystery. This shouldn't be a problem, but with all that's going on this week, just add data collection to the list of shocking changes that occurred this week.

Here's a summary of the total trading volume being reported on the internet as of this morning for Friday 9/19/08:

Website Reporting	Total NYSE Volume
nasdaq.com	7.988 bil
nyxdata.com	2.933 bil
nyse.com	9.422 bil
quote.com ($TVOL)	0.214 bil
yahoo.com (^TV.N)	9.533 bil
yahoo.com (advances webpage)	5.2 bil
msn.com	2.954 bil
wsj.com	2.830 bil

To be blunt, it's no wonder the financial system is in disarray. Everybody is shuffling the same money around so many times that everyone's lost track. Apparently, the same problem exists with the number of shares traded.

8/25/08 - An Anatomy of a trade. Last week's post told you that "week 34" had the highest probability of rising. Had you read the details posted in our 2004 highlights, you would have read that week 34 had the highest probability of posting the following pattern: first the low for the week then the high. So the question remains, how do you trade such a pattern? Secondly, how you to make money even when the pattern fails to appear (note: the pattern failed to appear this past week)?

Well, if you're chasing tics, then this isn't for you. But if you have a little longer time horizon and a little more money in your account, then this was the easiest way to trade week 34 using the S&P E-mini futures contract:

Buy Monday's close: 1283

Buy Tuesday's close: 1269

Buy Wednesday's close: 1274

Sell Friday's close: 1292

Profit from the three trades was +9, +23, and +18. The total was +50 points for a total of $2,500. Now subtract the cost of 3 trades @$10 each, your net is $2,470. Now this is only part of the equation. This was the easy part.

Notice that part of the answer to trading such a pattern included trading multiple contracts and holding them overnight! Had you traded only one contract at a time, and you bought one new contract on the close every day this past week and sold the previous day's trade on the close, you would have still made money, but your total would have only been only +9 points ( from four trades: -14, +5, +1, and +17). So trading muliple contracts clearly made a big impact. However, this also requires you to understand another part of futures trading which is can be more difficult to grasp.

When trading multiple contracts, the second part of the equation that you need to be aware of is to answer the question regarding how much money you need to execute these trades. For this we need to bring in two more terms: initial margin and maintenance margin. These are the exchanges limits which can change daily that insure that those who participate in futures trading have enough money in their account to cover their trades. In order to trade one S&P E-mini futures contract you need to have enough money in your account to cover the exchanges initial margin requirement. This amount is $5,625. So when you place your buy trade on Monday's close, your account immediately puts $5,625 in escrow for that trade. It's still your money, but this amount is now unavailable for other purposes. So if you had $10,000 in your account and you placed one S&P E-mini trade, you would now have $4,375 in your account as reserve funds or money to trade other contracts. Unfortunately this means that you do not have enough to place another S&P E-mini trade using this example. So if you wanted to trade 3 S&P E-mini contracts you would need to start with at least $16,875 in your account.

The next important fact to know is that if your trade goes against you, you need to have enough money to cover this loss and this is where the maintenance margin applies. It's important to understand that for accounting purposes, all futures exchanges settle their books daily. So you are obligated to have enough money in your account by the start of the next trading day to keep your trades when you're losing money.

Currently the maintenance margin for one S&P E-mini contract is $4,500. Notice that it is lower than the initial margin but still is a substantial amount. This means that when your trade goes against you and you have less than $4,500 in your account. The exchange is going to ask your broker to call you for more money. Hence, you get the dreaded "margin call" from you broker to "ante-up" or get out.

The good news is that the difference between the initial margin and the maintenance margin is $1,125 which at $50 per point equates to a 22.5 point difference between your entry price and the loss. So if the price moves more than 22.5 points against you'll get a margin call. It doesn't matter when this happens, so at anytime throughout the day if the price goes against you more than 22.5 points, you'll get a margin call. This margin call means that you will need to transfer more money to your account overnight or else you'll be forced to close your position on the open of the subsequent trading day. So the lesson here is that the margin requirements are not solely based on closing prices but on intraday prices.

Now back to our example, to trade three S&P E-mini contracts you need $16,875 in your account. So you buy Monday's closing price at 1283. Your account has $5,625 in escrow for this trade and still has $11,250 remaining in reserve for other purposes. On Tuesday, the intraday low was 1263, which is 20 points against you, but it was still within the 22.5 cushion before the maintenance margin applies.

Now on Tuesday's close you buy another contract at 1269. This ties up another $5,625 and leaves $5,625 in your account available for additional trades.

Now on Wednesday, the intraday low hits 1261 which means that you are losing -22 points for Monday's trade and -8 points for Tuesday's trade. This -30 point loss is substantial for anyone but what is important is that your trades are still within the initial margin requirements and you do not get any margin calls. However, by the time Wednesday's close approaches the market rallies and you buy your third contract on the close at 1274. Now your trades look much better. Monday's trade is only -9; Tuesday's trade is +5; and Wednesday's is 0. You net position is now only -4 points! From your worst position when the intraday low hit you were losing 30 points, but by Wednesday's close your loss was trimmed down to -4 points. You could of course close out everything and consider yourself lucky, but remember that your are not trading on luck, you're trading with a plan and goal this week is to trade the week with the highest probability of producing a Low to High price pattern out of any week throughout the year.

By Wednesday it appears that the low is in and now you're expecting the high price to come. You might ask, what is that price and the answer is we don't know. But we do know that on Monday the intraday high was 1305. So we are expecting any price higher than 1305. This is the target.

Thursday comes and the intraday low returns to 1263 which is still above the "margin call" levels and closes near 1275. This means that the three trades are netting -8, +6, and +1. Our net position is now only -1 point. Again, you could close out these trades but the market retested the lows and recovered, so you stay "long" the market going into Friday. Friday turns out to be a strong up day and a 20 point rally appears. The market closes at 1292 and you close all positions going into the weekend. The weekly trade for week 34 has run its course and you were rewarded for executing the plan. You made +50 points for executing the plan and added $2,470 to your account.

Despite the fact that the price pattern failed to appear for week 34 (the pattern was HL rather than the expected LH) you could have made over $2,400 this week. This only serves to illustrate how you can win even if your wrong.

In summary, three trades were placed which required $16,875 and the result of those trades produced $2,470 in profits and you only spent $30 in transaction fees. The tax liability of of course is variable depending upon your own income level, but when you add over $2,000 to your account in a week, the tax consequences are secondary. The first order of business, of course, is to increase your wealth. Secondly, this profit of $2,470 using $16,875 worth of funds implies that you made 14.6% on your money in one week!

Lastly, by sticking to the trading plan when you are executing a high probability trade, you generally will be rewarded. In this case, the price pattern that we were expecting to occur failed to appear. But by managing the position, it was still possible to make a profit.

The only problem this past week was that the account balance was subject to large swings from -30 to +50. This 80 point swing is emotionally difficult for most traders. Therefore you have to ask yourself, can you divorce your intellectual self from your emotional self? If you can, then you are ready to trade. Because you have to ask yourself this, had this trade closed out on Friday -50 points, would you be kicking yourself. If the answer is yes, then your trading emotionally and you're not honestly not ready to trade futures. However, if the answer is no, than you truly understood the risks and you understood that you making an educated and informed decision which is subject to chaotic events beyond your control and you "played" the probabilities which were reasonable and rational. You knew what the risks were, and you understand that being in a business where probabilities rule, there are no guarantees. A 5% chance of loss means exactly that. You can still lose despite the fact that you most likely will not. In the end, you can't kick yourself for not seeing into the future. You can't predict the future. You can only make a informed decision and hope that you have enough money in your account to ride out the daily fluctuations that markets thrive on. Losing in futures trading is expected and part of the cost of doing business. If you need to be right all of the time, then stay away from futures trading because your ego will ruin you.

8/18/08 - The closest thing to a guarantee you'll ever get from Wall Street. Here's a little known seasonal trade for you and another freebie from The Small Investor's Software Co. This week is ISO week 34 which also happens to have the best record of rising out of the entire year. If you were going to "bet the farm" on a rally. This is the week to do it. For more details examine the facts which were originally posted 10/28/04.(2004 Highlights)

PS - It's it fascinating that the most reliable week out of the entire year occurs when most people are not thinking about investing ( i.e. relaxing, pool-side, and/or vacationing)?

5/19/08 Believe it or not, 4.6% is the new investment goal. Investors around the globe are always on the hunt for exceptional returns. But if you're a 401(k) account holder, what are your expectations? As an educated guess, we can assume that you're interested in more than 4.6% per year. Afterall the century's average return for the US is near 6.3% (source: "Triumph of the Optimist " book by Dimson, Marsh, Staunton).

Last week the Associated Press released an article "Study: Retirement savers make costly 401(k) mistakes" Monday May 12, 12:07 am ET By Eileen Alt Powell, AP Business Writer. In it she highlights the results from a study by Financial Engines of Palo Alto, CA. The point of the story was to make 401(k) account holders aware of the fact that their portfolio isn't diversified enough for optimal gains. However, in their analysis they pointed out that the optimal gain over a 20 year period for an account valued at $30,000 with no additional contributions would accumulate to $74,315. This fact was glossed over by the article's writer, but is an extremely important fact for all investors.

If you do the math and determine the APR for this scenario, this works out to be a paltry 4.6% APR. For those of interested in how to make this conversion, here are the steps:

1. Compute the ratio of ending balance to beginning balance: Ratio = $74,315 / $30,000 = 2.47717
2. Take the natural log of this ratio: LN = ln(Ratio) = 0.907115
3. Now divide this natural log value by the number of years to determine the rate: Rate = LN/ years = 0.907115 / 20 = 0.04535

The resulting rate is the annual compounded rate on a continuous basis, which is 4.535%. This is somewhat different from the APR which is approximately 4.63%. But this is a quick and easy way to figure out what your financial planner is using as their investment goal.

We're betting that this goal of less than 5% is not what you're expectations are, but we just wanted you to know that the industry has adjusted their target and so should you. Again, "big media" missed this important detail and failed to report the hidden story that industry expectations are much lower than they were. Say goodbye to double digit gains, and be more realistic and set your sights lower. Remember that for the past century the average equity gain without dividends was around 6.3%. So if you can beat that, consider yourself lucky. Secondly, if you're lucky to make more than 10% in a week, then consider your tax liabilities and seriously contemplate taking your profits to the bank. Anytime your making double the 100 year historical average, you should seriously think about protecting your gains.

If you're not convinced, here's another example from last week. "Tenn. students beat Wall Street in TVA challenge" Wednesday May 14, 3:24 pm ET By Duncan Mansfield, Associated Press Writer. In this article, the Tennessee Valley Authority gave $1 million dollars to ten teams of students out of their $1 billion fund. Overall these students were able to produce $980,000 in gains for the year, which translates into 9.8%. This contrasts with the professionals that managed the $1 billion portfolio and only produced 4.4% gains.

5/17/08 - This week's apparent disconnect. US Equities rose this week despite the fact that negative earnings outpaced postitive earnings every day this past week. So the question remains, what was the market focusing on?

This week's major events included several seismic shifts.

1. China increased its Bank Reserves to 16.5%. (In contrast, the USA's Bank Reserves are only 10%)
2. China increased the value of its currency, the Yuan.
3. Congress approved the Housing Rescue Package, which authorized $800 billion in new lending authority. $300 billion to the FHA and $10 billion in tax-free municipal bond authority to every State.
4. Congress approved a $300 billion farm bill.
5. Wal-Mart revenues are still growing.
6. USA is still number one in being most competitive economy in the world according to the Swiss Institute of Management Development (IMD).

These events speak to different sectors of the economy. While China's motives for their recent actions are self-directed towards controlling inflation, their impact makes increasing US exports more likely. This is positive news for all manufacturers. The housing rescue package increasing lending by almost a $1 trillion. It also doubles the size of the loans that the FHA can approve to $729,750 and assists first-time home buyers. This bill attempts to stimulate the housing market by making more loans available. The farm bill pumps more money into the mid-west, and supports the food producers and processors. Next, the retail sector isn't falling off a cliff and there's hope that consumer spending, while slowing, is more importantly still growing. Lastly, despite the USA's and Europe's economic woes, the USA is still narrowly holding on to its competitive edge.

4/24/08 - Our primary webhost provider is experiencing a major disruption in service, which caused us to switch to a secondary webhost provider. This drastic step creates a delay lasting up to two days as the new nameservers get propagated to all of the DNS servers on the internet. For those of you familiar with the operational challenges in getting a website restored, you can appreciate this mandatory waiting period. For those of you unfamiliar with the mechanics of the internet, let's just say that when the computer that your website resides on breaks and the company that you hired to maintain the hardware experiences a catastrophic failure, (such as a building collapse, a broken utility pole, a flood, a tornado, etc.) they can't switch to their backup servers because they are also broken. At that moment, the only way to get your website up a running is to find another computer that is working and move your website to the new working computer, which can be anywhere in the world. The problem however, is that the name of your website is associated with the old broken computer. Basically, the traffic to your website is still being sent to the old address. The problem is that after you inform the postmaster (your domain registar and the accompanying DNS servers) of your new address, the news of your new address spreads to all of the other computers around the world. This unfortunately takes approximately 24-48 hours. It's funny that computers which operate at the speed of light and process requests in terms of nanoseconds, still take 48 hours to update their databases with the new address. It's just the way it is. So in summary it takes up to 48 hours to notify every computer in the world that you've changed your address, despite the fact that you can physically change your website's location (for example from Orlando, Florida to Seattle, WA) in one minute.

3/17/08 - Whack! That's the sound of a fly getting swatted out of the sky. And guess who else is getting swatted out of the blue - smaller investors. Today, the first publicized default has hit the markets. Bear-Stearns Companies (BSC) is no more. It was bought out by JP Morgan for $2 a share on Sunday. Just like a fly, this one company "going under" might seem like a trivial event, but in reality it is so much more. Now for those of you who say so what, another company died. Who cares? I say hold on and think about this because what big media is reporting isn't what you need to know. Yes, reporting the event is by itself important, and linking it to the subprime mess is also important, but the larger implication isn't being reported. Here's what you're missing. There are four different sides to this event that big media hasn't shared with you.

Story number 1

Just 11 trading days ago BSC was trading in the $80s! That's right just two weeks ago you would have bought or sold this stock for $80 a share! Then two weeks later you're broke - $78 per share poorer. So in retrospect, ask yourself this. How could you have avoided this calamity?

The answer is you couldn't. Even if you were actively researching this company and doing your due diligence with regards to this investment, there was no official disclosure of their imminent bankruptcy. Despite the rumors surrounding Bear-Stearns, the company was resolute in denying all claims of insolvency, and all public disclosures hid the severity of their financial status. So their you have it. They lied. Rule number one, you still can't trust the documents that are required by law to inform you of a company's financial condition even after the passage of Sarbanes-Oxley.

Story number 2

Did you know that Bear Stearns is a component stock in the S&P 500 index (SPX)? As a component in the SP500, clearly a drop of this magnitude will dramatically affect this world reknown index, and it surely will impact global markets. This widely followed financial benchmark was hit swiftly and came as a total shock to those who administer and shape the index. Had they been made aware of Bear-Stearns' dire situation, they would have implemented a change on Friday to avoid the 25 point drop and 1.9% loss experienced this morning. They would have avoided the $220 billion loss to the value of the SP500 index if they could have, but they couldn't and therefore everyone suffers. Plus in the world of technical analysis, this event couldn't come at a worse time, because the SP500 index is currently retesting the previous low of 1270 set back in August 2007. This implies that the next several days will undoubtedly establish the next trend.

The powers that be couldn't sweep this "under the rug" and protect the index. Generally, when bad things happen to acomponent stock in the index, the index is changed to erase or delete the "bad actor". This serves to protect the confidence of the system and insulates the public from these so called "bad actors". All Joe Public sees is that the index goes up, which is good for Wall Street and serves to disguise the fact that the "poorer" quality companies are weeded out before they negatively impact the index. In this case, Bear-Stearns exposed the index's vulnerability to "bad actors" and now Joe Public is privied to the repercussions of a "bad actor". This is a rare event indeed when Wall Street publicly announces to the world that one of the constituents in the SP500 is bankrupt and they couldn't hide this from Joe Public.

This a warning shot for all investors. S&P will not be blind-sided again. Watch for more index changes to come, which should give us a clue as to which companies are at risk of defaulting.

In addition, notice that this relatively small company ranked 436 out of 500 as of Friday (source: IndexArb.com) and has a index weight of only 0.03% to the total market capitalization of the index created a 1.9% loss to the index and portfolios around the world this morning. This small company in relative terms to the other components within the SP500 had a market cap. of $4.2 billion as of Friday's close (The market cap. of BSC using Friday's close was $4.2 billion, which is computed by multiplying Friday's closing share price of $30.85 by the number of shares outstanding which is 136.16 million.). You could say that investor confidence is really shaken when one of the smaller components in the SP500 can have such a large impact on portfolios around the world. That's the power of fear and leverage when a single company's loss of $4.2 billion translates into the economy as a $220 billion loss in wealth. This indicates quite definitively how scared fund managers are and how quickly they'll pull the trigger to get out.

Story number 3

This is the first major surprise to pension funds in 2008. And they don't like to be surprised. Right now all fund managers are re-evaluating their risks and they will be "selling" stock! Think of it like musical chairs, nobody wants to be last one standing without a chair. So they will all fight to get a chair. So in this case, they will want to be first ones to sell and they will want to avoid another total loss like "Bear-Stearns". These fund managers are all now trying to figure out who will be the next "Bear-Stearns", and since they can't be certain who the next company will be, they will err on the side of caution. So if a company's financial status is questionable, or is in doubt, they will sell it. This will create the first wave of selling. This selling that fund managers will soon initiate is different from the normal garden variety of selling that occurs on Wall Street, which is investor based. This first wave of selling will be self-generated out of fear of potential future losses caused by the circumstances and mistrust surrounding Bear-Stearns. Essentially, confidence in the system has been broken, and nobody is going to say it. They're just going to react by selling stock. Fund managers will now be pruning their portfolios. In particular the mutual fund industry's fiscal quarter ends April 30 and they will be re-adjusting their portfolios by then.

Now please be aware that the first wave of selling will be different from when individual's start selling. After the first wave of selling transpires, companies of poorer quality will be sold. To use a sports metaphor, the second and third "stringers" will be cut from the team. However this wave of selling will produce lower prices that will scare investors into action. They will avoid the losses that they experienced in 2001 because they vowed to themselves to never let this happen again. So this initial wave of selling will trigger the "fear factor" which will set off a chain reaction that will quickly hit "critical mass". A second wave of selling will be forced upon fund managers but for a different reason. This new wave of selling will be externally motivated, which is different from the first wave. In the first wave, selling was inititiated from within. Managers created the sell orders. But in this second wave of selling, investors will be generating the sell orders.

This second wave of selling will force fund managers to sell their "starters", or first "stringers" - the "good" companies. They will be forced to reduce their fund's asset size because they need cash to reimburse those investors that want to redeem their shares. Fund managers will need to respond to the increased volume of redemptions and they will now be forced to sell "good" stocks because they need to raise cash. These forced sales will cause seemingly indiscriminant selling and falling prices will spread quickly to all stocks.

So in summary, the selling will start with fund managers pruning their portfolios in an attempt to reduce risk, but this widespread lack of confidence is so pervasive that the volume of this pruning will precipitate a market decline so deep that it will cause investors to take notice and frighten them to reduce their stock investments. This will cause more widespread price erosion to "good" companies with sound fundamentals as fund managers are forced to sell to keep pace with the increase in the volume of redemptions. This cascade of selling will then undoubtedly affect retirees who will witness a loss of wealth so profound that they won't know what hit them. The tradgedy is that retirees unfortunately can't readily access their retirement funds and protect themselves because they have no control over these accounts. These accounts are "locked or frozen" from daily transactions. Pension funds and other retirement accounts are not easily convertible into cash because the tax laws that envelop them (that's why President Bush has been in favor of private retirement accounts. You gain total control over your money). By definition, these pension funds are immutable and unfungible and therefore will default due to the severe losses incurred by the wrath of "fear". Main street will loose its savings and our defunct Government will be forced to print more worthless dollars to support those retirees that lost their savings.

Just note that investors now have a "hair-trigger" when it comes to investing after witnessing the loss of their home-equity and the rise in their debt levels. It will not take much to "spook" investors out of the market, so these waves of selling may in fact merge into one massive continuous event. Plus, if you're thinking that company stock buyback programs will continue to support prices, then you'll be in for a shock. The fact is that company redemptions which have been propping up the market for the past two years will no longer be able to do so. The amount of selling will overwhelm these initiatives and companies will abort their stock buyback programs. In short, money, which is the fuel for Wall Street, will evaporate because companies will be hoarding their cash like everyone else.

Story Number 4

The most disturbing aspect to this whole event is that you lost money and you don't even know it. An early estimate is that retirees lost $10 billion. The bad news is that Thompson Financial Reporting Services reports that 77% of the shares were owned by institutions and the remaining shares were owned by insiders. So why is this important? Well, in short, the term "institution" means that Bear-Stearns was owned primarily by mutual funds and pension funds. So indirectly, thousands of smaller investors have been affected by this without their knowledge. You lost money and you don't know it yet! In addition, this loss to these funds will undoubtedly affect the NAV of these funds and therefore this loss will spread throughout the industry.

So if your pension fund, 401k, or other retirement fund invested in Bear-Stearns, your investment returns just took a hit. You are now "behind the eight ball" as the old saying goes. Even if you followed the advice of professionals and diversified your portfolio, this principle isn't working for you. Diversification is supposed to mitigate your risk and theoretically provide you with a mechanism to recover from one bad investment. But what if your one bad investment lost $80 in value! How can you average out an $80 loss? How can you mitigate a total loss? The answer is you can't easily recover from a stock losing $80. Missing a performance target maybe, but a flat out total loss - no way can you recover from that. So in the short span of 10 days, institutions lost $8.4 billion! That's a sizable loss to absorb by anyone's standards, and fortunately, it is limited to only one company today.

(BTW, this is how you compute the loss. The number of shares outstanding is reported to be 136.16 million shares which was reported by the company in their most recent quarterly report. This is then multiplied by the price of the stock, which was $80. This gives you the $10.9 loss to all investors. Then multiply this by 77% and $8.4 billion is the amount that institutional investors lost. Again, this is a rough estimate and simply serves to illustrate the severity of the situation. You'd have to contact your funds affected by this loss and ask them for their purchase price. Unfortunately, they problably bought it at a higher price. In 2008, the high was $93.19 and believe it or not, in 2007 it was $172.30 ! $80 was used because is demonstrates how quickly a high priced stock can fall. Like a magic trick. Now you see it; now you don't. Poof; it's gone.)

Now imagine this, in the near future what if several other stocks tumble like Bear-Stearns; how will you know; which ones will go belly-up? The answer is just use Bear-Stearns as your guide. 1. They lied to the public. 2. They didn't disclose vital information. 3. Their interests are counter to investors. They are only interested in protecting themselves and not their investors. 4. The Federal Reserve is only concerned with the state of the banking system and not with your right-to-know. 5. They stole your money. 6. What will happen to your wealth if another stock in your portfolio doesn't just lose value but it becomes worthless?

If you use this guide, your answer has to be that you don't stand a chance as the little fish in a big pond. So what can you do to protect yourself, well I think it's obvious, but if you're an optimist, call your pension funds and mutual funds to obtain a list of the stocks that they are currently invested in and watch those investments like a hawk. Second, find out what your options are. Find out if you can move money around to protect your wealth. Find out if you can move it from stocks to bonds, or cash. Lastly, find out what penalties if any will be incurred if you decide to move your money around to protect it. Find out about fees, and other transaction costs. Call the IRS to find out about the tax rules that apply to your situation. You must gather these facts so that you can decide if moving your money is worth the increased costs versus further losses due to another market decline. You need to learn is how flexible your retirement funds are to shuffling (that is presuming that they can be moved around); how you can increase your funds fungibility (how easily they can be transferred/converted/transformed); and lastly, learn what steps are needed to initiate and execute these potential transactions on a minutes notice. Think of it as your exit strategy. If you don't have one, create one.

Just remember that the banks already took millions of homes, now Wall Street is going to take your savings. Do all you can to protect yourself! Step one is to gather as much information as you can with regards to what you have and how to protect it. Bear-Stearns is putting everyone on notice - The Bear is back.

2/14/08 - What good is a worthless US Dollar? The decline in the USD against the Euro from 2002 (0.84 Euros:USD) to 2008 (1.49 Euros:USD) has finally brought us good news. The "bright side" of this devaluation is that exports are rising. The latest report Foreign trade data released today shows that exports are up in two of our Top 15 trading partners: Canada and European Union. While this is good news, and sparks hope in a manufacturing revival (key investment sector to watch this week: all export companys), the "beast" forages on.

China continues to dominate and our trading deficit with it is still growing (getting worse). It is still gobbling up capital at a phenomenal rate, and more importantly it is becoming the pre-eminent manufacturing empire of the globe. This implies that countries around the globe now look to China first and the USA second. Even attacking this monster from three perspectives isn't working.

1. Devaluing the USD by 50% hasn't made a dent in China's flows
2. Consumer demand is waning and isn't impacting the flow of imports.
3. China is still unthwarted by our Goverment's feeble attempt to develop free trade agreements with other countries, which would in theory improve USA's exports.

So the good news is that our exports are showing life, and we have maybe won this battle, but the bad news is that we're losing the war on exports. USA is no longer number one, which means that we're no longer the "go to" country of choice. Just consider this; even our waning consumer demand isn't making a dent in the value of Chinese imports to the USA, and if we were to dampen our demand for their imports, they wouldn't care because the rest of the world is knocking on their door. So if their number one customer (USA, Inc.) decreases the value of their orders (consumes less), they have new customers waiting to take our place. Remember China's allegiance is to their 1.326 Billion citizens and not to their largest trading partner of only 300 Million. They will do what's in their best interests because they no longer need us. Our importance to them is dwindling every second and our Government knows this. Once upon a time they needed us to show them the way, and now they are on their way. Along the way, we showed them capitalism and in the end they mastered it because they can claim that they are the most efficient producers on the planet and everyone wants to trade with them.

Commentary:

Our Government desperately needs to create a new economic model for the world to adopt, because it they don't, the one that Europe built centuries ago will crush the West. Many European countries have already made this transition and are finding their place in the new world economy. Germany latched onto Solar Power. The Danes own Wind Power and England is the global financial center. Russia has capitalized on its natural resources. This list goes on.

However the USA's reliance on simply being the world's "end user" / buyer / consumer must end, and it will end. Simply put, the West can't compete against the East because of the big gorilla in the china shop, which is population. It is the driving force behind all economic activity and it can't be ignored.

In the USA, the baby boomers are now entering their retiremnt years, and they will now consume their savings/wealth (what little is left that the banks haven't already taken). They will be draining off their assets rather than producing wealth, which will fundamently change the dynamics of the US economy in its own right (there was another investment tip for you). However in stark contrast to the USA's demographics, in which the largest segment of the population is increasingly transitioning from producing to non-producing, India and China with 2.5 Billion of the World's 6.6 Billion in 2008 (Source: Geohive) are now transitioning their societies in the opposite direction. Our meager population of 300 million in the USA, which is growing its non-producing population and draining assets while at the same time attempting to stifle immigration (presumably which increases the population of asset creators), is slowing down in economic activity and has incurred an unprecedented amount of debt. If one were to look objectively at a company with declining sales, poor productivity, and heavy debt (low asset/liability ratio), would you invest in it? So is the picture of the USA to the world, and our Government needs to recognize that it must change this picture.

Our Governemnt needs to focus on finding a new moral imperative which changes the value of simply "making a profit" at the expense of else. It needs to find a "new economy" from which its inhabitants can own and develop using Americans workers on American soil. The last two "new" economies (PC & Internet revolution) are behind us and America needs yet another one. But this time, our Government needs to enact policies to alter the corporate mentality of maxmizing profits above all else.

It's unfortunate that instead of acknowledging our reality, our Government would rather enact a stimulus package that gives away money that they don't own to those who owe it. It's a perfect solution. Let the borrower borrow more money today, before they realize they're bankrupt. Unfortunately, this only makes sense to the politicians, but what the heck, the Government's giving away money - Hurray!

Wouldn't it be great if one of the Presidential Candidates actually had a vision for a "new economy" that employees American citizens on American soil, and simultaeously enacted policies that reward corporate America for doing so? The next Presidential debate should be quite illuminating.

If you're wondering why the stock market is declining, the investor's tip for you is this - look into the future. You already know about the mess we're in, so that's part one. Part two is that the Presidential candidates haven't framed the debate with regards to our future. None of the candidates have a vision other than to tweak the status quo, which makes sense since all of the top contenders are Senators with no executive experience. Investors' looking forward don't see a brighter horizon. In addition, there's no definitive outcome and uncertainty breeds chaos within financial markets. This unsettling climate is against the backdrop of retirees getting nervous with regards to their pensions. They are not about to take another big hit and will head for the exits at the first sign of trouble.

2/4/08 - Believe it or it. It's not your fault - Subprime Mess Explained.

Here's a concise and intelligent account of the mechanics behind the subrpime mess. It's surprisingly simple and demonstrates how the USA's balance of trade (growing trade deficit) is at the root of this mess. Watch out as you may learn something about global markets. (It's only 6 paragraphs, click here Source: The Federal Reserve Bank of St. Louis's publication "Central Banker")

While the link between the USA's trade deficit and the subprime mess is a real component to the cycle of events that have revealed themselves, what's curiously absent is in recognizing the need for personal responsibility and integrity. It's comforting to blame someone else for our mistakes. Just like a lawyer who blames "society" for the defendant's inability to differentiate between right and wrong, and argues that it's not the defendant's fault for breaking the law. In this case, it's not your fault for borrowing.

The fact that individuals don't know how to manage their finances, and that they don't understand the risks involved in borrowing, isn't their fault. We're Americans. We have the right to live large, spend as much as we desire, and borrow as much as we want, and why should we care if we don't pay it back? There's another bank just waiting to lend to us again.

The academians may blame foreigners for this mess, and it may be comforting to many to assign blame. But it's only a denial if they don't include the greedy component from Wall Street; the lack of political will to pressure the Federal Reserve to reign in on unsound lending practices and from allowing banks to buy such questionable assets. And let's not forget the lack of personal responsibility of Americans, who borrow to buy a tank of gas so that foreign oil oligarchs can buy pieces of America with depressed US Dollars.

Remember this, the banks may have lost money, they'll survive. The stock market may crumble, it will survive. But due to ignorance, and the lack of personal responsibility, many will lose their homes and all of their wealth. The question remaining is how will a growing number of homeless Americans survive and how can this be a positive for the the stock market? How will you as an investor survive?

1/24/08 - And a word from our Founder's in response to the recent events ...

Here's an excerpt from Thomas Jefferson's letter to the Secretary of Treasury, Albert Gallatin, 1802:

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and the corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."

This quote is a sobering reminder that 200 years ago our founding fathers predicted the current mess we're in today. And as proof, in 1819 the United States had it's first financial "Panic" 8 years after Congress created the first Central Bank (Bank of the United States) in 1811. In 1837, President Andrew Jackson withdraw the charter (technically he vetoed Congress's Bill for another 20 year extension) for the second Bank of the United States ( It was chartered in 1811 by Congress for 20 years.) because it was directly responsible for the panic of 1819. (click for more details) Essentially, as soon as banks were given power, they abused it.

However, after a series of market crashes and panics that ensued over the next 90 years from 1819 to 1907 (1907 was the worst of 11 disasters), Congress was compelled to react to these calamatous events. The sage advice of Jefferson and the political distrust that Jackson exemplified were now distant memories as Congress intended to provide remedies and progress. So in 1913 under Democratic President Woodrow Wilson and a Democratic House and Senate, they enacted the Federal Reserve Act giving banks autonomous powers once again. But as was predicted from the previous century, in less than 20 years the "great depression" rocked the country. In the aftermath of the "great depression", Washington sought to limit those powers, and in 1933 Congress passed the Glass-Steagall Act to prevent "money trusts" from creating another Wall Street massacre. The 1933 version separated the banking from the brokerage business plus it created the FDIC, the Federal Depositary Insurance Corp. These laws attempted to address the conflict-of-interest between these two businesses and this was accomplished under Democratic President Franklin D. Roosevelt and a Democratic House and Democratic Senate. From 1933 to 1999, there were several amendments to the Glass-Steagall Act that whittled away at the law. But in 1999, Democratic President Clinton and a Republican House and Republican Senate repealed the Glass-Steagall Act of 1933, which restored banks to their former glory days of wreaking havoc and mayhem. Eight years later, here we are.

Click Here for an in depth history of the attack on Glass-Steagall authored by PBS's "Frontline"

5/24/07 - The first chink in the Bull Market is here! What else would cause the Bull to stop? TAXES and mandated pay increases.

1. The threat of a new sales tax on internet sales is gaining momentum. The final form hasn't been decided, but the closed discussions in Washington are serious enough for the market to take a hit. Watch Washington very carefully.
2. The Congress enacted this week the first increase in the minimum wage in a decade. The $2.10 increase will be phased in over two years (this was embedded in the Iraq War funding bill).

1/5/07 - Democrats talk tough. It remains to be seem, but the Democrats are reaffirming their commitment to toughen up on business. First, there's talk in the finance committee to prevent large corporations from buying banks. They want to keep commerce and banking separate. In the energy committee, there's talk to eliminate all subsidies to oil companies and to revisit the royalty stipend. This also is weighing negatively on the sector.

Basically, uncertainty and chaos is brewing from Washington. The winds of change indicate caution. Condition "Yellow" is in effect.

Commentary -

The long term view is that keeping commerce and banking separate prevents a conflict of interest from developing. Plus it protects the American taxpayer from bailing out corporations if they get into financial trouble.

On the "pro" side of the argument, government shouldn't interfere with market forces. Let the market dictate what's appropriate. Secondly, it's good for consumers. The short term positive is that a corporation could buy a bank and use it to gain a competitive advantage. They could sell goods to customer and make it easier for them to gain credit, or they could offer them lower interest rates, etc. They would increase competition amongst banks. In the end, lower banking costs are good for Americans. Plus why should our government interfere with a companies fiduciary responsibility to persue any and all business ventures. It is every Americans right to start a business to take a risk. Why can't a company take this same risk by entering a highly profitable business sector? Currently, banks are hugely profitable and financial services is hot. Why should government deprive companies with the resources to enter this arena to do so?

This would admittedly be a benefit to consumers initially, and all of the arguments cited above are valid reasons for allowing companies to either buy or create their own bank. The problem is that history will repeat itself.

Over the last decade, we have seen how Wall Street exploits each and every opportunity. In the end, the public investor loses their investment plus the American taxpayer picks up the tab for these momental mistakes/losses.

1. When banks made bad foreigns loans and were near bankruptcy, the spread between long and short term rates was engineered by the Federal Reserve to remain excessively wide so that banks could bide their time in making a recovery. The cost - Americans paid higher interest rates and got lower savings rates.

2. When the leverage buyout era went bust. Those that stole billions went to jail, but this was no consolation to those that lost their life's savings.

3. Long Term Capital Management taught us that there are no certainties on Wall Street. Hedging and arbitrage are risky ventures and that losing other people's money is easy. Management walks away with their million dollar salaries.

4. When the dot.com boom turned bust, common sense reigned in on insanity, but the hype created by Wall Street Analysts cost investors billions. Wall Street's fraudulent and deceptive practices were exposed yet again.

5. The telecom boom to bust fiasco taught investors that you couldn't trust any of the publicly reported corporate information. They lie.

6. Enron, Tyco, Worldcom MCI, Adelphia Communications, Fannie Mae, Sunbeam, Peregrine Systems, iVillage, etc. What else needs to be said? They lie, cheat, and steal.

7. Accounting Firms aren't objective third parties serving the interest of the public investor. Plus they were indicted for actively promoting illegal offshore investing schemes. Again, the stealing thing with a twist - fraudulently abusing tax loopholes.

7. Ask New York's Elliot Spitzer what he's been doing? The mutual fund industry also was implicated in fraudulent behaviours and malfeasance. What a surprise, Wall Street broker's give away large sums of money, and/or stock as bribes. The mutual fund industry does it too.

8. Banks are now allowed to charge customers 25%-35% interest rates. (this is the basis for expanding industrial loan corporations and increasing competition within the banking industry)

9. Energy companies don't pay the government what they owe in royalities, taxes, etc. Their stealing from the American taxpayer while they make huge profits.

10. Falsifying public disclosure statements and giving away billions of shares in the form of employee stock options, created the Sarbanes-Oxley Act.

11. Underfunding corporate pension plans is allowing companies to renig on their promises to their employees, which is enabling companies to steal their employees life savings. Should the company dissolve, employees lose everything while corporate executives keep everything.

12. Catastrophic natural events have strained insurance companies. They now have to pay out thousands of claims and it hurts. So they got congress to help them. This means that the American taxpayer is subsidizing this industry. So the government is now the only insurer for flood insurance and guess what, it isn't solvent. The government spends more than it takes in premiums. This means that taxpayers are subsidizing these insurance claims.

13. Drug companies got their wish. Americans must pay the highest prices for medicine in the world. Thanks to Congressional support for this insanity.

14. The airline industry is in trouble and they need a break. Once again Congress greases the wheels of progress. They've got to keep the planes in the sky despite the fact that these companies are being being poorly managed. Gee, this sounds familiar. Let's bailout the auto industry -we did that. Let's bailout the steel workers - we did that. Let's help our farmers - we did that.

15. Oops let's not forget that when the government handed out billions in reparations to the South for Kartrina and other Hurricane victims, Congress mandated that the inspector general's office audit the releif efforts. Despite Congress's efforts to control fraud, it happened anyway.

16. The lesson here is that if it's other people's money, it's beomces funny money, and it has a way of getting into the wrong hands.

So while some may be inclined to let market forces run their course. Legislators have seen so many problems surface in the last 10 years that they are now interested in the long term implications rather than the short term benefits. If someone could write legistation that only allows those companies with integrity and high moral character to operate a bank; and that they will not make any bad business decisions; and that they will not cost the American taxpayer a dime; and that they will create jobs forever (no layoffs), then let the merriment begin. Until then, commerce and banking should remain separate until someone can craft legislation that limits the downside to the government and the taxpayer, because history has shown us corporations aren't to be trusted to do the right thing. There aren't many "Ben and Jerry's" in the world today, perhaps Congress should focus on writing legislation that molds and steers corporate America forcing them to become more ethical and socially responsible.

11/28/06 - Corporate Stock Buybacks/Dividends = Mega-Trend. Well, the S&P company reported another record breaking quarter for stock buyback and dividend activity for the 500 component companies within the SP500 index. These activities seem to indicate that there is a floor to prices that will not abate until Congress changes the rules of the game. For details regarding these activities you can read the report from S&P, or you can view the charts that are on this website.

11/18/06 - What will Santa bring this year? Prices have crossed another century mark this week in the SP500 closing at 1401. So it is time to reflect on what brings us here. At the forefront of any price rally are the underlying economics of supply and demand and on the charts webpage of this website, you can see just how cyclic the these forces are. Currently, prices have risen dramatically because the supply of stock has decreased dramatically. So what's behind this.

You may have missed this but in 2005,the Standard and Poor's formula for computing the index was changed. The formula now takes into account the supply of stock. This means that the float is now part of the formula to compute the value of the SP500 index. Despite the supply of stock now having a direct impact on price, this also implies that more accurate and timely reporting of these facts is forthcoming and that more transparency and disclosure is a good thing for investors. But as this is occuring, we are witnessing a rapid reduction in shares available to trade which is driving prices higher.

The reasons behind this are that companies have been buying their own stock in record quantities and that more public companies than ever are being gobbled up due to privatization. These trends are all being driven by strategies that produce 15% tax-free gains in wealth when compared to other investment alternatives such as interest rates. When interest rates are as low as they are (2%-6%) and someone offers you as 15% tax-free strategy, you've just doubled your risk free investment opportunity. In summary, while the graph on the charts webpage illustrates the cyclic nature of the supply of stock for the past few years, it appears that companies will be issuing more stock soon. But I am hypothetically proposing to you, what if the supply of stock doesn't increase at this juncture because the trends cited above will continue? Or think about this. Why did prices rise in response to the FED's apparent strategy to hold interest rates steady or lower them? This implies that the value of 15% tax-free strategies is still a huge freebie, and that the relative value of this freebie has increased, or will increase. So companies and private investors have nothing to fear at the moment and they can continue to capitalize on this wealth building risk-free arbitrage that only they can enjoy. We as investors can only participate in the risky part of their behind the scenes (non-publicly disclosed) transactions by buying their stock as the supply of stock disappears. We as investors need to leave the party when 1. the rules for this risk-free arbitrage change, 2. interest rates increases which decreases the value of these strategies, 3. the supply of stock increases, or 4. tax rates change for investors forcing investors to pay more in taxes. This in turn will require investors to liquidate holdings to raise cash causing prices to decline.

Currently, none of these triggers are on the horizon, so it will be interesting to see how far north prices can go. Because after all, Santa lives at the North Pole and we should visit him before he really gets busy.

2/8/06 - Why are prices falling? Did you know that Congress is considering a piece of legislation that will affect your access to the internet? Did you know that this legislation will change the way companies compete? Prices fell out of fear that the internet as we know it will no longer exist. It will no longer provide the same level of consumer choice as exists today. Plus, existing business models will be tossed out the window as Congress contemplates altering the communications act, which might include restrictions on internet access. The last time Congress attempted to tinker with the Internet it was in the form of taxes. This too caused a substantial sell-off.

2/5/06 - This week Standard and Poors admits tough sledging ahead. S&P released there fourth quarter and full year operating earnings report for the S&P 500. They acknowledge that after a record 16 quarters of double-digit growth, the odds of companies continuing this streak is waning. In addition, the report states that 1. Corporate Buyback activity is slowing down; 2. Consumer spending is slowing down; 3. Corporate Earnings are slowing down. (For more details visit S&P).

1/8/06 - True intentions emerge. Corporate America has been on a buying binge since the tax rates were lowered for dividends. This single and simple reduction in income taxes has had many manifestations.

1. Investors saw increases in dividend payouts and watched stock price appreciation slow.
2. More companies are paying dividends and have increased their cash distributions.
3. Companies have been buying back their own stock at record levels.
4. These stock buybacks programs are being used to insure that the company gets a bigger piece of the pie when they split up the company.

It is becoming increasingly clear that company spin-offs are going to be the next fad on Wall Street for 2006. Wall Street has found another trend to exploit. After years of Merger & Acquisitions, which resulted in industry specific consolidation, Companies are ready to once again break their companies apart. And why not, stock prices are high. The time is now to exploit high prices, so that investors will part with their money. Secondly, now that these companies own more of their company (through previous stock buybacks), these companies walk away with more money which gives them more cash to burn. Gee, what a surprise it will be when these executives get larger bonuses. (After all they created this value, so they deserve most of the profits. Don't you agree?)

In addition, by spinning off a division into its own company, the newly formed company needs a whole new management team. Eureka, there are more expensive salaries and consulting fees that public investors are expected to pay for.

The question that you as an investor need to ask, is which one of these spin-offs represents a "bargain" and which one has a great future? Ask yourself this, if you owned a truly profitable business in a low interest environment, would you let go of a "cash cow" ( a true money machine)? Second, if you sold your own company wouldn't you sell it at the highest possible price? This by definition doesn't represent value to any investor. Lastly consider this, if their is a bargain out there wouldn't Wall Street Insiders buy it themselves and not share it with the public? As a matter of fact, this has been the case. If you haven't noticed, there has been an increase in public companies being bought by private consortiums. Well, now you know why.

FYI, the diamonds in the rough are already being scoffed up by the wealthy friends of Wall Street, and aren't available to the public. Of course, the scraps are all that's left for the public, and as you can imagine, these candidates aren't likely to be winners.

Here's a provocative thought for you. Suppose we could measure each sale (spin-off/IPO) in terms of value. Let's hypothesize that fair value represents 100%. Statistically speaking, if it assumed that the normal distribution applies, then if you plotted these sales the average would be 100% with 50% of these sales occurring above fair value and the other 50% being below fair value. That's what the bell curve implies. In this scenario, it would be possible for an investor to find undervalued companies as they do exist 50% of the time. The problem is that some would be slightly undervalued while others would be extremely undervalued. Your goal as an investor would then be to find the extremely undervalued prospects. Again, by definition, this only represents 10% of all sales.

However, let's now assume that the variability is zero. This means that all of the spin-offs were sold at full-value, or 100%. In this case there wouldn't be any undervalued sales nor would there be any overvalued sales. In this case, you don't have any chance of finding an undervalued company to purchase. Hypothetically speaking, selling a company to the public is just such a process. An IPO is an opportunity for the sellers to maximize their value, as the company will be sold to the highest bidder - investors. However, anomalies due occur rarely, and an average investor can find a gem.

For example, Google was just such an anomaly. First, Google decided not to use the traditional methods of raising money and decided not to use Wall Street to raise money, and two, that decision cost Google dearly, but created an undervalued opportunity for investors.

Google decided to use the Dutch Auction, and not use Wall Street to raise money. In the end, Wall Street still made millions but they punished Google, the company, for that decision. The consequence of this was two-fold. One, Google didn't give any preferential treatment to insiders and Wall Street cronies. The public actually got first dibs, or at least was on equal footing with heavy-hitters. It was actually the fairest IPO in history! Every interested investor placed a bid and the shares were sold went to the highest bidders. This means that a range of offers were accepted and not just one price. Second, after the auction was complete, the money raised for the company was established. Then the Wall Street cronies jumped in and bought the stock causing it to triple. This tripling however, didn't do the company any good as the money raised was determined by the initial price at the time of the offering. So Google, the company, didn't raise as much money as it hoped, or could of , but stockholders of Google (which includes the founders) did benefit from the after IPO rise in price. So you see, Wall Street taught Google a lesson so that this precedent wouldn't start a new trend - bringing IPOs to market without Wall Street. The point here is that the initial target was $135-$150 per share and Google ended up with $85 per share at the offering. This represented an undervalued price even it is was manipulated by Wall Street. Then the stampede came after the IPO to trade the stock. In the end, Wall Street still made its millions. So who's kidding who? The game was rigged but this time the average investor got an equal chance to play with the big boys.

The point of this illustration is to make you aware of the fact that the process of selling a company isn't in the best interest of the investor. Simply put, consider Wall Street brokerage firms as Real Estate Agents. The board of directors are the sellers and you are the buyer. Who do you think Wall Street represents? The seller, of course, because they pay the fees. So how is the agent going to satisfy their client? Well, how about selling the asset for an obscenely high price? So Wall Street wants to please its customer, and therefore sells the company for the highest price that they can get.

Lastly, consider the current investment climate as a seller's market. This by definition means that buyers will not be getting any bargains.

Think about it. If you're truly a value investor then patience is a virtue. Because if you wait, market forces will enable you to buy the same company for less in the future. Prices always fluctuate. Why not wait and reconsider the company's value when the stock price is 5%, or 10% less?

The problem is that while US companies are interested in spinning-off under-performing divisions, the true long-term growth investments are overseas in India, China, and Brazil. Resource rich countries such as Australia Canada, and New Zealand, have already rewarded investors, so you're late to these parties, but as all things change, new opportunities arise.

2005 Noteworthy comments

2004 Noteworthy comments