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The Secret Behind How The Stock Market Works

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For most people the stock market is an enigma.  It is a mystical creature that many have tried to tame, but very few have ever come close to succeeding. When you think you finally have a good understanding of how it works, the markets tends to turn around and slap you in the face. When the news is great it goes down and when the news is bad it surges higher. Only to turn around and repeat the sequence in the opposite direction. Leaving most people frustrated and without any sort of guidance.  

Over the last 200 years hundreds of different approaches and analytical tools have been developed by people from all walks of life to try and predict the market.  Everything from fundamental analysis to studying the planets/astrology, from complex mathematical formulas to technical analysis, from computerized trading  to consulting fortune tellers, witchcraft, etc….  While many have claimed to figure it out, only a few have. Thus far I know of only two people who have been able to break the stock market code.  From what I have seen their work proves it without any doubt.

The most prominent and the most accepted stock market theory today is called “Efficient Market Hypothesis”. The theory basically states that the overall stock market is efficient as it continuously and immediately discounts all available information. Under such circumstances it is impossible to outperform the market over an extended period of time. While loved by academia, this hypothesis is, for the most part, dismissed by true market practitioners.

Even the king of investing Warren Buffett has not only dismissed the theory by making a number of compelling arguments against it, but he has also proved  without a shadow of a doubt that the stock market can be beat over an extended period of time.  His investment returns prove that.  In simple terms, just as the clock is right twice a day, so is the efficient market theory. The market is indeed efficient but only at various points and at various times as the overall stock market continues to oscillate up and down.  

Since there is no real workable theory on how the stock market really works and since so many people have tried to figure it out in the past but have failed, is there any chance for us to understand it?

The answer is  YES.  

Not only to understand it, but predict it with great accuracy. That’s what this section of the book is all about. To take a completely unique look at the stock market from a different vantage point in order to finally understand how the stock market works.  Further, such a view will allow us to understand why the market has behaved as it did in the past and it will allow us to predict what’s coming next.  It goes without saying that having access to such knowledge can be incredibly valuable and profitable.

So, how does the stock market work?

First, you must understand something very important. If you look at any stock market chart you will see price (Y Axis) moving over time (X Axis) in 2 dimensions.  In today’s analyst society all attention is given to the Y Axis or study of the price movements and very little (if any) attention to the study of time. Yet, the TIME is the most important element. .

…….to be continued….

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Fed’s Biggest Crime

AFP Writes: Fed’s Biggest Win? Bailing Out Subprime Companies

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One of the quieter, yet most emphatic, successes of the Federal Reserve’s long-running easy-money campaign has been the way it has bailed out subprime corporate borrowers. It’s almost as if the Fed has made it “too hard to fail” for mid-sized to large companies with lower credit ratings.

By keeping short-term rates at zero indefinitely and exchanging a fresh $85 billion a month for Treasury and mortgage bonds held by banks and investors, the Fed has stoked investor risk appetites, compressed debt costs dramatically and loosened credit conditions for most decent-sized borrowers. 

Junk-bond yields have fallen so far they no longer merit their longtime euphemism of “high-yield debt.” Junk benchmarks now yield around 5.7%, levels that high-grade companies used to be pleased to borrow at. Through most of the 30-year history of the modern junk-debt market, yields were in the double-digits, and in the panic of late-2008 they exceeded 20%.

Read The Rest Of The Article

I am beyond sick of this stupidity.  This is equivalent to saying that the Federal Government has won the war on drugs by artificially lowering the market price of cocaine.  No difference.

When will people learn that there is no free lunch in financial markets or anywhere else for that matter. Yes, the scheme might work for a while but when it eventually blows up the economic fallout from such a destabilization will be far worse than simply letting these “subprime companies” fail to begin with. We do not need to go far to see the outcome.  This has already been tried by Japan since the early 1990’s where they have done anything they could to keep Zombie banks and companies alive by following the same idiotic rationale.

The outcome? Well, almost 25 years of deflation and an economy that went from one of the most efficient and powerful economies in the world to a shell of its former self. That is the outcome of economic stupidity. Now the same outcome faces the US Economy. Thanks a lot for your brilliance FEDs.    

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Warning: Russian Economy Is About To Implode

AFP Writes: Putin’s failure damning Russia to low growth trap

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Moscow (AFP) – Russia’s failure to significantly change its energy-dependent economic model under President Vladimir Putin is consigning the country to potentially decades of low growth and eroding its status as a top emerging economy.

The Russian economy ministry on Thursday dramatically confirmed what was obvious to many, by downgrading its estimate of Russia’s average growth to 2030 to a paltry 2.5 percent, a far cry from over seven percent rates in the early Putin years.

“The pace of Russia’s economic growth will fall behind the global average in the forecast period,” admitted Economy Minister Alexei Ulyukayev.

This year even Russia’s official forecast puts 2013 growth at just 1.8 percent. But most worrying for the Kremlin is that the weakness cannot just be blamed on external factors but stems from domestic shortcomings.

The Russian economy faces a daunting list of troubles –- a declining population, the re-emergence of the United States as a rival energy superpower due to shale gas, and the government’s colossal spending on defense that stretches the budget.

These factors are compounded by Russia’s failure to stimulate private enterprise, reform the judicial system, improve labor productivity and turn the Russian economy into more than a lumbering energy producer.

Read The Rest Of The Article

Russia is screwed. Big time.

The only thing that kept Russia afloat over the last decade or so is high energy prices. Now that energy prices are down substantially and with no indication for them to recover, Russia is standing on the edge of the cliff looking down into abyss. No doubt, there are multiple structural problems in Russia (aging population,  low energy prices, corruption, etc…), however, the biggest problem is psychological/cultural. 

Having lived in both Russia and the USA I know exactly what I am talking about. The difference between the two economies is as follows.  In the USA everyone knows that they have unlimited potential in terms of starting their own business and trying to get rich. Everyone has an understanding that if they work hard, risk, sacrifice and get lucky, there is really no limit to what they can accomplish. As a result, everyone tries to excel at something and you end up with a highly diversified economy benefiting all.

That part of the equation is gone in Russia.  Culturally people do want to get rich, but they don’t want to work for it. They want it to happen overnight and the only way to do that is too steal or take something away from someone or to be corrupt.  That is how most “New Russians” got rich and that is what most Russians aspire to.   

Given this reality, I do not see how Russia will amount to anything anytime soon. The fact that their economy will suffer over the next decade is now a certainty. The only way to fix it going forward is to change the culture or to change the psychology.  Unfortunately, I do not see that happening anytime soon. 

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The Biggest Problems With Value Investing (Part 2)

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I respectfully disagree.   There are two issues to consider.

First, the opportunity cost of capital is real.  What happens if your perfect value investment (Rocket Ship or Waking Beast) hasn’t moved anywhere over the last 3-5 years even though the market is up 60% over the same period of time? What if another stock that you have considered at the same time has appreciated 150% while your stock has lagged behind or worse, declined?  Well, the impact on your capital in real and opportunity cost is significant. An ill timed move over a certain period of time can end up costing you millions in opportunity cost alone. While diversification can help you mitigate the impact of opportunity cost, it can also reduce your returns should you diversify too much.   

Second, while this might not be an issue for individual investors, this is a significant issue for professional money managers who must present their performance and answer to investors on regular basis. As such, most money managers end up under constant pressure to perform. To generate positive returns for their investors while outperforming the competition.  Should they fail to do so, investors will not hesitate for a second to pull their money and allocate it to a better performing fund.

That is true even if the stock picks the manager has generated are well researched and shall provide the investment fund with outsized returns if given enough time. Unfortunately, most investors have a very short time frames and if they do not see immediate results they express their dissatisfaction by turning their back on the money managers and by walking away. 

That is why TIMING must become  increasingly important issue not only for individual investors but for money managers as well.  Just imagine for a second what would happen if you could identify the exact timing of any anticipated move.

What if you could take a look at any given Rocket Ship or Waking Beast value stock and add another level of analysis that would allow you to identify exactly when that stock is going to start going up and at what point it will stop.  What if you are able to determine the velocity of any such move and establish an exit point with great precision and long before it occurs.  

Well, now you can.

That is what the second part of this book is all about.  TIMING.  We will add a level of timing analysis to your typical and well known value approach to investing.  This quantum jump forward in financial analysis shall help you supercharge your investment returns while further reducing risk. We will take an in depth look at my unique method of timing the stock market (and individual stocks) and how you can apply this same type of analysis towards your own research  and investing.

Further, we will take an in depth  look at the overall stock market so I can show you exactly how it works. Through using modern science and mathematics I will show you how and why the overall stock market truly moves.  For the first time in your life you will have a complete understanding that the stock market is neither volatile nor random, but acts exactly as it should by tracing out mathematical points of force in 3 dimensional space.

By the end of the TIMING section you should be able to use concepts discussed here to time the stock market and/or individual stocks with great accuracy. Leading you to amazing results,  market beating performance and a much lower risk profile.

Let’s get to it. 

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Donate To The Philippines Today

 

typhoon

Those who know me personally know that I spend a considerable amount of time in the Philippines. What happened here over the weekend is BEYOND apocalyptic. 

One of the strongest Typhoon on record has essentially leveled a considerable part of the country. While Red Cross is estimating the number of deaths to be around 10,000,  I believe the number will be much higher. 

While the government is doing its best, the livelihoods of millions of people in the region have been decimated. They have nothing left.  Today….right now….there are millions of people sitting in rubble…..hungry, thirsty and cold. 

As you go about your daily life today, please take 5 minutes out of your day and donate anything that you can. Even if its just $5. Every penny makes a huge difference to these people in need. 

PLEASE CLICK HERE FOR MULTIPLE WAYS TO DONATE

Thanks

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Little Known Way To Save Your Net Worth

Bloomberg Writes: Value Fund Managers Go on a Buyer’s Strike

 overpriced

Wally Weitz beat 90 percent of his rivals in the past five years by buying stocks he deemed cheap. Now he says bargains are so scarce that he’s letting his cash pile up. “It’s more fun to be finding great new ideas,” says Weitz, whose $1.1 billion Weitz Value Fund (WVALX) had 29 percent of its assets in cash and Treasury bills as of Sept. 30. “But we take what the market gives us, and right now it is not giving us anything.”

 “We are having a more difficult time finding bargains,” Yacktman wrote in an e-mail.

Romick, managing partner of First Pacific Advisors, took a similar stance in his second-quarter letter to shareholders of the $14.1 billion FPA Crescent Fund. “We find it difficult to invest in an environment that seems manipulated to engineer higher asset prices regardless of business fundamentals,” he wrote.

Read The Rest Of The Article Here

I have mentioned this a number of times before, but  we are now getting confirmations from some of the top money managers in the world.

Given current market environment, there isn’t that much to buy out there.  Most stocks and markets are overpriced. Bullish sentiment is approaching all time highs and the situation is starting to get dangerous. Why dangerous? Well, this market is artificially maintained by massive infusions of cheap credit (QE) and speculation. Basically, there is no fundamental reason for most asset classes to be where they are today.  It is all artificial. All assets are grossly mispriced to the upside and that will have to be corrected, sooner rather than later.

While I do not provide financial advice directly, I would suggest that  people might want to look at the situation from the following vantage point. The market is providing you with an excellent opportunity to start selling and building your cash reserve for the next round of the bull/bear swing.

Can the market go even higher here? Sure, but the probability of a severe bear move in the near future is very high. Well, certain as per my mathematical work. 

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Stock Market Update, November 8, 2013

daily chart Nov 8, 2013

Summary: Continue to maintain a LONG/HOLD position

Not much has changed since the last market update to alter my opinion. The market continue to push through its daily highs as it marches forward.

While everything I have mentioned before is still in play (Please Click Here To View Previous Market Update), …..here is the difference. 

Since early September of this year I have maintained that the market is topping and will resume its bear market shortly. As of now there is categorically no adjustment to that view.  Yet, I have also mentioned that there were two possible time frames for the bear to begin. September -November of 2013 or March of 2014.  I have argued that if we are too see the bear market now (from September of 2013 top) the market must start its down move in October or early November of this year.  As of now, that window has basically closed.

That leads me to believe that March of 2014 will be the final top (even if its lower than where we are today) before a prolonged BEAR MARKET into the 2016-17 bottom.  My timing work doesn’t show any serious turning points between now and the end of the year.  That means the market is unlikely to experience severe volatility between now and December 31st.  The next inflection point I see is January 1st, 2014. I will discuss that later.

As such, I recommend holding a LONG position until the market tells us otherwise. 

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The Biggest Problems With Value Investing

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Thus far value investing has been a perfect investment vehicle.  After all, what’s not to like. It steers you to buy wonderful businesses at highly discounted prices. That in itself minimizes your risk by creating a margin of safety while maximizing your return potential, creating a highly desirable low risk and high return type of an investment scenario.

At the same time Value Investing is not perfect. While there is a number of shortcomings associated with Value Investing, the most important one from our vantage point is the issue of “TIMING”. Please allow me to explain.

Let’s assume that you have been able to find a value stock of your dreams. Let’s imagine for a second that it falls into either a Waking Beast or a Rocket Ship category.  Let’s further assume that the company is clothe retailer who’s stock is selling at 70% discount to it’s Intrinsic Value. The company suffered over the last couple of years due to various financial and merchandising issues.  Same store sales are down 50% over the last 3 years and the company recently closed 25 underperforming stores.  As a result the stock price has collapsed over 80% in the last 2 years.  

At the same time your in-depth fundamental research shows that things are about to get better. The company recently restructured and brought on a new management team with an excellent track record.  That is already being evident in the companies same store sales and improved cash flow. The merchandise is hot again and the company is also getting ready to start opening up a lot of new stores over the next 2 years.  Based on your research and calculations the stock price should be at least double of where it is today and much higher if the company continues to perform well.  Overall, it’s a wonderful buying opportunity that you believe will make you a lot of money.

Yet, for some reason the stock price hasn’t moved to the upside yet.  The market hasn’t yet recognized the change that you see and hasn’t yet re-priced the stock.  If anything, the stock price continues to go down, on average losing about 1% per month.   The question is….why?

The answer has to do with TIMING. This has always been an issue with value investing.  While we can identify significantly undervalued assets, thus far no one has been able to determine WHEN these assets will begin to appreciate again to reflect their true intrinsic value.  As today’s value investors very well know such appreciation can happen at any time.  As in the example above the stock price can start climbing tomorrow,  a few months from now, a year from now or five years from now.  It can also never climb again.

The old value investing  mantra states that such a scenario is fine and that it shouldn’t matter. For as long as you buy a stock at a significant discount to its intrinsic value and hold it until the stock reaches that value or appreciates significantly enough, you should be fine. Yes, it could take a long time but your eventual capital gain and lower risk profile should make up for your “unknown holding period”.

I respectfully disagree.  (To be continued…) 

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What Everyone Is Ought To Know About This Bull Market

 CNBC Writes: Smart Money: Smart money? Looks like it’s mom and pop

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For the most recent leg of the rally, it seems like the so-called smart money may not be so smart after all.

If that’s true, the smart money has been losing.

Employing even more conventional wisdom, that might suggest the market is forming a top and ready to fall, as retail investors are often thought of as the last ones to a rally.

That thinking, though, is getting challenged.

There’s no doubt the retail investor has warmed up to the market in 2013 after sitting out much of the gains since the March 2009 lows. The mom-and-pop crowd ripped just short of $300 billion out of mutual funds from the 2009 low point through the end of 2012 even as the market gained more than 110 percent during the span.

Read The Rest Of The Article

As I have mentioned in my previous posts, the overall BULLISH psychological backdrop is now at the extreme and flashing warning signs.

Various metrics aside, I see very few bears.  Even people who used to be bears and now bulls.  All popular media is overwhelmingly BULLISH. Even if the article mentions “a possible drop” such argument is immediately counter attacked by stating something to the tune of “If the market drops it would be a wonderful buying opportunity to add more stocks”.

The article above is no different. It clearly illustrates how bullish everyone is. It’s a well known fact that Retail investors are the last ones on/off and as such could not be considered as “smart money”. Over 200 years of market data teaches us that. Yet, somehow the article twists it to be so.  Simply put, neither the market nor investors can do wrong in this market.

Will this continue? I do remember seeing similar type of prevailing BULLISH psychology before, at 2000 and 2007 tops. We all know how that ended. 

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Are You A Genius -Or- A Delusional Fool? Find Out Here

Yahoo Finance Writes: 3 Reasons to Re-Think Bailing On Stocks at All-Time Highs: Belski

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Uncharted territory is always scary. Whether you’re trekking the nether reaches of the Amazon jungle, or simply trying to time the top of a stock market that is trading at levels never seen before, it’s nerve wracking to be someplace you’ve never been before.

1) Quality, Transparency, Consistency

Belski says he follows the investment axiom of “buying scarcity and selling capacity,” and right now, he thinks the U.S. alone offers what investors want most. In particular, while jokes that Europe may have great coffee, he argues that the structural reforms of the past ten to twelve years have left American companies in a unique – and investable – position of strength. “That’s the U.S.” he says.

2) Way More Bull Market Ahead of Us

“Fundamentally the U.S. is in very sound position, and we think it will continue to lead for the next three to five years,” he says. Broadly speaking, he thinks a lot of new investors fail to appreciate what a bull market really is, reiterating his belief that we are “in the midst of an 18 to 20 year equity bull market cycle.”

3) The Coming CAPEX Cycle

Belski says people not only forget that the U.S. is still the world’s largest economy, and as a result, “is poised to continue to take business away from Europe and the emerging markets as manufacturing capacity comes back here.”

Read The Full Article Here

No offence, but I think even bulls are starting to run out of legitimate reasons of why the market should continue going up. While it could be viewed as a good thing, reasoning presented here clearly shows how delusional most investors are.  Let’s just take a quick look at 3 reasons above.

1. Quality, Transparency, Consistency?  Is this guy being serious. What about looking at the fundamentals and investing in undervalued companies that make sense. Do you buy a $500 pair of jeans that was made in the USA or do you just buy an identical pair of jeans for $50.  His analogy makes no sense. Well, that is unless you like losing money.

2. Way More Bull Market Ahead Of Us? As I have mentioned here before, what bull market? If they are talking about the bull market from 2009 bottom they are talking about a bear market rally. The market has topped in 2000 and has barely moved since.  While the Dow and the S&P are up a little bit, NASDAQ is still down. One should understand where  they are in the economic cycle before saying that the bull market has already started. If you haven’t figured it out yet, we are still in the bear market that will only end in 2017. Read my timing work to find out why.

3.  The coming CAPEX cycle? What CAPEX cycle? He might as well have said that the US Economy will prosper because aliens will land soon and make the USA their home base. Bringing new technologies and prosperity for all along with them. I am sick of this crap. What kind of stupidity is this. What about the fact that the US Economy and its Financial Markets being artificially maintained by huge credit infusions and the largest credit bubble in the history of mankind. What about massive speculation in all asset classes and overwhelmingly bullish stance. No, I guess those things do not matter.

Anyway, if you believe in this nonsense your money and you shall soon be separated. I guarantee you that. 

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