Category Archives: Stock Market

The Consequences of Debt

The US government is in the process of learning one of the key lessons of the debtor.

The Creditor calls the tune.

The Chinese who hold trillions of dollars in US are not happy, and they are not afraid to let the US know that they need to shape up and fly right. Let’s hope that this credit downgrade is treated as a wake-up call, and the US uses the opportunity to get their fiscal house in order.

But don’t count on it.

The disfunctional houses of congress are too busy stabbing each other in the back in a pointless and self defeating series of internecine battles.

If the US doesn’t sort this out, expect more dire consequences in the future.

In the meantime, use this dip in the Dow to snap up any high quality blue chips while they are on sale. Just make sure you go for quality, look for income in the form of dividends to  tide you over until the markets recover.

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Filed under Dow Jones, Economy, Finance, How It Works, Inflation, Investing, Recession, Stock Market, Uncategorized, US Debt

Changes to Flash Crash Rules

On Thursday Canada’s investment industry regulator, IIROC, proposed new safety measures intended to prevent future flash crashes like the one that happened on May 6.

Existing “circuit breakers” halt trading when the entire market rises or falls extremely quickly within a short period of time, but trading in individual stocks must be reviewed manually. This new proposal would allow trading to automatically be halted for a five minute period on any stock that appears to be subject to a “flash trading” scenario.

The plan is to prevent the extreme investor losses we saw in May, when some stocks lost up to 99% of their value in minutes.

IIROC has invited public comments on the proposal during the next 60 days. Read the press release here.

 

 

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Filed under Investing, Regulation, Securities & Exchange Commision, Stock Market

Financial Train Wreck

Stephen Roach, chief of Morgan Stanley’s Asia unit, says that Asian economies will not be able to withstand the “Tsunami” of American cash which Bernanke is flooding into the financial markets.  http://www.bbc.co.uk/news/business-11756677

American fiscal policy is a train wreck that is set to sideswipe the rest of the planet. The little guys are likely to get squashed.

I see inflation becoming a threat before the global economy has had time to fully recover from the recession. We could be facing a period of stagflation which would be as bad or worse than what we have seen so far. It would most certainly drag out the jobless recovery in the US for a very long time.

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Filed under Economy, Employment, Finance, How It Works, Inflation, interest rates, Recovery, Stock Market, Uncategorized, US Debt, US Dollar

ETFs Took a Pummeling During May 6 Glitch

Reuters is reporting that no one knows exactly what caused last week’s crazy market gyrations, although there are plenty of weird theories to go around. Personally I kinda like the space alien theory, although the fat finger theory has a certain lyrical quality too.

Approximately 10,000 trades were cancelled, but many traders were left on the hook for trades that were considered within bounds. The complaints from those left out in the cold will probably continue for some time. It appears a large number of people were caught by automated stop-loss orders that sold their positions out at or  near the bottom. According to former SEC Commissioner Roberta Kemel, there may be little recourse for those investors. Lawyers say that claimants would have to show “gross negligence” in order to have any kind of case.

SEC Chairman Mary Schapiro told the House Committee on Financial Services that ETFs were particularly hard hit by the chaos for reasons that “are still unclear”. More than 25 percent of all such funds lost at least half their value. One ETF sponsor told the SEC that 14 of its funds briefly traded for less than 15 cents a share.

This is the type of circumstance which highlights the downside of  index tracking passive management. It also exacerbates the issues surrounding leveraged investments and the narrow focus of some industry specific ETFs.

I think ETFs have been mischaracterized as a buy and hold investment, when in fact they were originally designed for active traders who wished to track an individual index or basket of stocks. They were always intended to be sold if the markets trended downward.

And heaven help anyone who was involved in any leveraged products, and didn’t understand what they were getting themselves into. I don’t think the industry has done a very good job of explaining these products to the average retail investor, and yet everywhere you see advisors pushing them as a low cost substitute for mutual funds and recommending ETFs for inclusion in buy and hold RRSP accounts. Not good.

Today’s lesson – a little knowledge can be an expensive thing.

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Filed under Dow Jones, ETFs, Nasdaq, Securities & Exchange Commision, Stock Market, Uncategorized

Computerized Mayhem on the Dow Jones

A thousand point drop in the Dow Jones is stomach wrenching enough to make the toughest investor queasy. A thousand point drop in moments is just mind numbingly inconceivable. How many of us just stood in front of our tv screens like we had just been smacked upside the head with a board?

Although it now seems likely that the excruciating market gyrations we watched today were probably as the result of human error and/or a technical glitch, it really begs the question, How could we not have systems in place to guard against this type of thing?

Our stock markets have become so globalized that any news in any part of the world impacts decisions at trading desks everywhere. We have reached the point where turmoil in Greece impacts the price of oil in Alberta, and the rising price of gold affects the softening Euro.

Then some guy wearing his tie too tight hits the wrong button, and the Dow Jones tanks in moments.

I have to admit it made for great visual theatre, but the whole fiasco does call into question the degree to which we now rely on automated computer algorithms, and how unstuck things can become before real humans can step in to reassert manual control over the system.

Perhaps we need a rethink about the glories of technology and it’s ability to run our lives. Or should that be “ruin our lives.”

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Filed under How It Works, Investing, Stock Market, Uncategorized

Investing vs Trading

Are you an investor or a trader? Are you in it for the long haul or the quick fix roll of the dice?

Oops. Was that pejorative? Are my true colours showing? Perhaps I can control my personal biases by admitting up front that I consider trading, especially day trading, a form of gambling.

An investor takes the long view. 5+ years is what I normally see. Many are looking at a very long term 20-25 years. These type of time spans will encompass a number of business cycles. Each cycle tends to be focused on a certain sector or two, and often ends when a sector bubble driven by speculation or an overheated economy bursts, or a general correction realigns the overall outlook for the economy as a whole.

Therefore in order to be successful, a long term investor needs to spread his/her monetary investments across a diversified selection of asset classes, sectors, investment styles and geographical regions. Central to this process is an understanding that we cannot predict the next big thing or hot issue, and so must take the high road, and be ready and in place before the action begins in order to take advantage of growth opportunities in the markets. This also means that we understand that we must sacrifice immediate gratification for long term prospects. It is the sit and wait vision of investing.

On the other hand, a good day trader, who is working “The Next Hot Thing”, knows enough to close out his positions at the end of the day, because untold havoc could occur while he/she sleeps, blissfully oblivious to the carnage being wreaked on the Asian or European markets.

The highs and lows that a day trader experiences are not for those who’s sleep patterns may be disrupted by the goings on of some obscure commodities future exchange in some faraway place which no one you know has ever heard of.

I make only one recommendation to those who are serious about trying day trading. Don’t use your real money. This is not someplace to expose your retirement savings, or your kid’s college fund. If you want to try out the roller coaster ride of the FX pits, or lottery winnings of a diamond mine in the Arctic, please only use money you can afford to lose. Use your play money.

For those who believe that they have watched enough business tv, and have become experts in the lingo, and listened the the pundits propound this or that next hot thing, or come up with some quasi rational explanation for the latest jump/dip or hokey/pokey in today’s market, I leave you with one thought.

By the time a news item makes it onto your screen on BNN or MSNBC, it is already 36 hours old, and all the professionals on the street have already acted upon it, and any profit that was encapsulated within that new information has been extracted and wrung dry. You will always be the last person to know.

 

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Filed under Commodities, Day Trading, FX, Investing, Stock Market

Is it over?

Last night I was meeting with clients, and once again I was asked the big question.

Is the recession over yet?

This is one of those questions where the answer depends on where you are standing.

In the world of economics there are leading indicators, lagging indicators, and current statistics and reality. They may all be very different things. We see patterns in the data, and some people try to make predictions based on past experience. Forecasting can be a deadly game, and you are sure to get shot down by someone who is blessed by 20/20 hindsight. Also all forecasts are subject to bias. Are you a cup half full, or a cup half empty type of person?

What I will say at the moment, is that given the current situation, it looks like we might be on the road to a gradual recovery. The Bank of Canada has declared the recession over in Canada, the EU is optimistic, and the US believes that they are beginning to turn around.

But my client’s unspoken question was “when will I see a recovery”. Firstly, remember that during past recoveries, we have progressed in “two steps forward, one step back” fashion. There will be ups and downs as we wander in a generally forward direction.

So we have to ignore the day to day hysteria of the business channels who spend the day trumpeting some piece of useless news as the stock market rises, only to beat their chests and tear their hair out the next day as the market falls 50 points, and they cry crocidile tears over today’s dire statistics which are an obvious indication that the experts were wrong, and the sky is indeed falling. Hog wash. They need to garner ratings. They need the next breathless piece of news to justify the fact that they are taking up valuable airwaves 24 hours a day.

When the markets began to fall last year, I began to talk about the pattern we normally see in these situations. Usually, you can expect the market to fall to a certain (unfortunately unknowable) point. Then we would expect to see a period of time where the market kind of bounces along the bottom. When things begin to look better, the markets will begin to turn upwards in a two steps forward, one step back dance, as we see a gradual return to normalcy.

TSX Oct 27,2009

So far, so good. But the stock markets are not the real world.

Stock markets are generally a device for forcasting the future profits and profitablity of a company. So a stock price is the assumed future value of the income which a company is expect to produce. The markets will usually be 6 to 9 months ahead of the real economy.

Since the markets began to turn around in April, if history repeats itself, this would indicate that somewhere in the next few months we should begin to see the real economy begin to improve. Business should pick up, inventories will need to be replaced, total sales should improve.

Now employment is a different thing. Employment is a lagging indicator. Companies will wait until their business has picked up, and the order books are full before they begin to hire people back. Many companies delay hiring until they are spending too much on overtime, and hiring new staff or recalling old staff from layoff is more economical. Normally this will be 6 to 9 months after the general economy begins to improve.

So for the average person, the recovery will become a reality when everyone is back at work, and everyday life is back to normal. That is going to take a little while yet.

Barring any horrible setbacks, right now we can say that we are headed in the right direction, and so far things are proceeding according to historical norms. Fingers crossed.

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Filed under Economy, Employment, Investing, Recession, Recovery, Stock Market