Dow Jones for the end of the year?

http://www.ritholtz.com/blog/2009/02/dow-jones-industrial-average-long-term-chart/

Check out the link above!

I was considering the argument that there will be stabilization/recovery at the end of 2009. On a fundamental analysis, that is probably the most ridiculous thing Ive ever heard, however for some Dow theorist the bullish argument does hold some weight. Look at the chart in the link posted above. I was actually looking at the same exact chart earlier in the day before that blog post came out. I was thinking the same exact thing! Considering long term support, maybe the end of the year will see bounce off support. However, as I have been studying the ways of a historian recently, Ive decided to back test all the way back to the great depression on the Dow. A few things popped into mind as to why the bullish scenario won't pan out.

Bearish Reasons:

1. The financial markets in late 20's and early 30's were not as complex as ours. Our current crisis has many more systemic problems that the great depression could have had.

2. Based off the Dow chart, prior to June 1929 up up until September 1929 you have a bullish trend followed by an approximate 3 year period of a downward trend. If this recession is just as bad as the depression then we will should see 2009 as a another year where Dow will continue its slide.

3. Fundamental considering the job markets, investment, housing etc... all fundamentals are still crap... enough said about that point.

4. Sentiment is still uncertain, I have no source for this, but I know a few money mangers who are still all on cash positions waiting for things to be a bit clear before actually investing in anything.

Bearish Counter Arguments:

1. This Great Depression Comparison is not relevant as monetary policy is more advance and fiscal policy (stimulus packages will work...) ...

my response to that=> I think that monetary policy has been crap for 2008, though I do not fully understand Bernake's strategy of keeping rates so low as to spur something (though i recently bought a book on the great depression, will get back to you guys on that later). Last time that happened, the last president of the Fed Reserve (Greenspan) took lots of crap for causing this current recession. Fiscal policy.... look at whose had organzied the past past stimulus plan... a president of a failed oil company, a secretary of treasury who experience were in investment banking!? ... how about getting someone to work on a plan who actually understand how markets work... Lets hope Obama will be a better manager...

2. Mid term support from 1997 to 2009.

my response => I think the author of the link above tried to use volume as a indicator for a bullish argument as he circled it. I always thought that a large spike in volume followed by peaking off volume trends showed continuation of the current trend. Hence support could possibly not hold.



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Summary

Overall I am still bearish for the year. In terms of the Dow. Usually I don't like to consider the Dow do its price weighted nature and its tiny constituents list. However since its been tossed around in the media so much, people watching the Dow might actually affect, so why not talk about it.

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Stay tuned:

My next blog should be on growth prospects and where it will be coming from... The United states or Asia... who will be leading the recovery...

until then... Happy Blogging!

Chinese stock market before & after Spring Festival

The Chinese stock market is getting more and more independent during the financial crisis. The changes in global market does not have direct impact to the Shanghai Stock Index. Nevertheless, most stock prices was falling dramatically for the last two seasons as well as the index. However, the index went pretty strange for the week before Spring Festival (Chinese New Year). The index was going up and down without big changes. It was either open high then falls or open low then rises. Although the K-line graph was keeping a little growing everyday, the index went down on the last day - January 23rd - of the year (according to lunar calender) before the market close for Spring Festival.

The Chinese stock market close from January 24th to February 1st for Chinese New Year. There are a lot of discussion of how the market will move after Spring Festival. Everyone is hoping the market will gets better, since 2009 is the year of ox, which in Chinese is the same as bull, which let people are hoping the "bull market" is coming back. Furthermore, the last week before the market close, the Shanghai Stock Index was doing horizontal price movement, which is usually a sign of changing directions. The index has been going down dramatically in 2008, everyone is hoping this is the sign of going back up. However, considering the financial crisis, it is hard to believe the market will get better in early 2009. Besides, the scary depreciation last year has killed everyone's confidence completely; the market will not get better without people start investing again.

Investors in China are hoping the government can save the stock market by put more money in, and announce new policies. However, because of the global effect of the financial crisis plus the huge expense during 2008 (Olympic Games, Sichuan Earthquake, Snowstorm, and other disasters), the Chinese government is really lacking of money for the stock market. Moreover, new policy will not work that well as well. There was a Tax cut on stock exchange in September, 2009. It only creates a positive effect for couple days, then the market went back down again. Investors realized that the market will only warm up again if the global market gets better. Therefore, the Chinese stock market will get better in the year of ox is really doubtful. 

Stock

I recently joined kaChing virtual stock exchange, a Facebook application, to trade. It's not that professional to trade on facebook, but the appplication is quite user-friendly and datas are quite easy to follow. The markets it trades are US, but it doesn't specify which, which caused me confusions for the last few days. I have invited a few of you to this application, please invite further.
Following the news last week, I decided to go long on Amazon, BP, McDonalds, Tesco and go short on Toyota and UBS. I made not-so-small profits on the first day, however still suffered losses which makes my portfolio underperforming compared to my target achievement, and here are the analysis.
The longs:
Amazon and Mc Donalds both posted high profits in the last quarter, especially Amazon which posted higher than expected profit. The news came in Thursday, and I quoted the long positions right after then, in order to benefit the daily gap of an enormous volume trades of both stocks. However, I wasn't able to trade right when the market open, hence couldn't benefit from this. I was still able to earn 8% of capital gains from the 17% Amazon intraday stock rise. McDonald however ended up 0.2% down, after a day trading in a fairly wide band. The problem of timing was similar here, as the automatic system, like in the Amazon's case, put my sell on when the stock was near its peak of the day, which was very early in the day. I therefore suffered a huge loss on this stock, but I'm hoping to recover the stock soon, selling it after achieving its targetgain. Tesco contributed a 2.2% rise in capital on its own trade, helped me gain over 10000, a reasonable amount for such a small trade, given its quantity was limited when I was buying. BP ended the day with a loss, as oil price went down. I went long for BP following the news Opec would cut supply, which was reannounced a couple of days ago, but I think that the real cut will come later, by then the stock would most definitely rise.
The shorts:
The reports show Toyota was likely to post the first loss quarter ever, which would have a significant impact on stock price. Being able to capture this, I shorted Toyota stock on Thursday and enjoyed its downward slope on Friday, earning over 80,000 on this trade. The short on UBS appeared to be a loss during the whole day, as stock seemed to go up all the time. I anticipated that the financial industry is not ready for a rise, when banks still post losses and, business downscales still exist. The set up of so called bad bank that absorbs toxic assets and insure profitable assets, and the news on bank bonuses being cut down might be the reason for this bullish behaviour, since it promises extra cashflow and a more promising performance.
If the trade was more realistic, I would have used option to hedge again this UBS position, since I quoted it short at risk and I knew it. Fortunately, the rise was not significant, thus I didn't suffer too much loss. But I expect a slight upward gap monday, and maybe I will have to stay in this loss for a little bit longer.
There is a site for UK stock trade www.bullbearings.co.uk . I registered on Friday, and haven't got time to trade on it.

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Are the interventions any effective?

Following a serie of government stimulating packages currently taking place around the world, ranging from the US $825bn following the $700bn package announced earlier, the UK 250bn GBP following the 500bn GBP package announced in October, the German $80bn package, all aiming for tax cuts, loan insurance and buying up shares in the loss-making giant banks. All these efforts, as we all know, aim to cure the effects of credit crunch, which starts from November 2007, results from the mortgage delinquency, foreclosure of assets, the house value deterioration, both US and UK housing market, and later on, the collapse of Equity markets.
The stimulus packages were initially released in the US, then is followed in a large number of countries, but the question is, are they really having the impact the governments want to? Are they targeting the root of problems? Are the governments using the tax payer's money efficiently? Several articles have shown different analysis, which I will be mentioning here, along with my own view. My entry will focus on the UK stimulus package.
Opposition MPs argued that the government's measures were inadequate and too many details remained unknown. While Mr Brown is still throwing massive amount of tax-payer's money to the market, the outcome remains uncertain, as all we can see are the steady fall of house prices, dating from very far last year, low oil price, low sales across all the retailers. Christmas 2008 experienced London's worst Christmas sale in history, the bankruptcy of one of the top retailers, Woolworths, and the CPI in December drops a full percentage point to 3.1%, facing the threat of deflation, has all signalled that demand is very low and is still decreasing.
Meanwhile, unemployment has begun to rise. Last quarter of 2008 showed a 6.0% level of unemployment, up 0.4% from last quarter and 0.7% from last year's quarter. This is understandable, as low demand causes firms to respond, with lower production demand, to cut cost and production scale by reducing the number of employees.
Low demand, high unemployment bring low economic growth. The government's attempt is to boost production by encouraging lendings via banks, therefore, hopefully, increase employment and bring the economy back to the boom. However, there is a big issue here.
High unemployment is caused by low demand, and is also the cause of low demand. With no income to spend, the consumption demand is low, therefore it is hard for firms to expand productions, even with the low interest rate and all the insurance potential bad loans, as the low demand simply means there are little hope in making profit. Firms are therefore reluctant to borrow, even if the banks are offering loans at an incredible rate. In this economic situation, even the firms who invest very riskily, and normally would not borrow will borrow, as the cost of borrowing is too low. This raises the possibility of losses when operating businesses, but even not succeeding, both the firms and the banks face no losses, as the money lent out was insured by the government's huge bail-out budget. This feels like free money, and of course, creates moral hazard, a temptation for banks to just lend without having too much thinking. To prevent this, banks have to make "very specific legally binding agreements to lend more money", quoted Chancellor Alistar Darling, but they are actually causing more troubles to lend, therefore there is a threat to the loan activities from the banks. The close-to-nationalisation of giant banks, most significantly RBS the forthcoming nearly 70% government stake after the 5bn GBP preference share converted to standard share, will result in the banks operating at smaller scale and be more cautious with the tax-payer's money. The most recent result is the RBS's withdrawal of 1.6bn GBP in share from Bank of China, as the tax payers don't want their money invested offshore, even though the Emerging market such as China still perform steady growth within this economic turmoil.
So targeting banks might not be as efficient as the government think it might be. The problem lies with low demand, not the lack of lending activity. It is the tightness of credit that causes the economy to fall, and low demand is the cause of the credit tightness, also the root of all the troubles. The government in an attempt to boost the economy, must definitely boost demand, and the best way is, I think, via tackling unemployment.
In the UK, high unemployment is being tackled, though it is not as in high priority as the insurance on bank lending. The whole stimulating package includes the tax cut and the promise of 2500GBP for every more-than-six-months unemployed person joining the company. However, the tax cut does not apply for everyone before April 2009, especially those on flat rate scheme, and for some, tax cut doesn't apply. The joining of the more-than-six-months unemployed will require trainings before they can get to work, and this might be the reason why unemployment is still high. I think that the government needs to put unemployment a higher priority tarket to tackle the economic downturn, rather than tackling the banks, which are proving to be an unefficient tactic, after the massive bail-out and stimulating funds from the government still results in the 45bn GBP loss of RBS and the repayment of loan to the government from Northern Rock having to extend.

Gold Good for the short?

"http://www.etfexpress.com/articles/detail.jsp?content_id=288633"

I've never been big on following gold, however the past few days I've been noticing the headlines have been quite repetitive like the one above. Obviously with crisis the traditional explanation you will have flight to quality to some safer security. Which is also interesting, arguments of inflation also seem to push gold prices higher. It seems we will always have some justification for gold. At this point, how much of this is speculation? All things considered, if fundamentals of the economy were certainly the cause of gold performing extremely well in 2008, then one should expect the same in upward trend for gold in 2009 as economic condition are not expected to get any better this year.

Correlated to gold:

as stated by David Moore, chief commodity strategist at Commonwealth Bank of Australia. "Gold is influenced by the U.S. dollar making ground against the euro,''

If this correlation certainly holds true for the first quarter, I would have to be short on gold prices as all my bets are short the dollar and long on its pairs (Eur, GBP, AUD, CAD... though the GBP short term is looking worrying, will have to discuss that later).

If I really do expect the dollar to weaken by the end of the first quarter, then I should as well certainly short for gold.



The bullish Argument for Gold:
1. Weak economies
2. Poor sentiment
3. *Treasuries/Bonds become less attractive.
4. Continued upward trend

*I would like to note, I've noticed in an article that many funds are not taking investors money for new investments as the Funds cannot make profits on treasury/bond related funds. Some are even struggling to maintain positive yields.

Scenario for Bears:

In order for a short in gold to happen, I would have to hope that the correlation between gold and the dollar is very strong, and that there is no other exogenous factor that would float the prices of gold.

Technical analysis is still strong in my opinion for the dollar to weaken, I think that the reason the dollar is doing so well currently is to due the relative health of other economies. First many of the Problems originated from America and only showed up later in other economies. Since I do not believe there to be any significant changes in the US economy, we may see a reversion of poor sentiment on the US economy and other economies will instead look relatively better.

Since it hard to see the full picture since the Media can be biased, this argument heavily relies on the technical analysis of currencies and correlation holding true...

Also it is possible contrarian perspective may work here as there maybe too much bullishness going into gold, after all where does the real value of gold lie?




we will see in about 2 months time how terribly wrong I was or how terribly right I was...

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Gold Price: 828.7 off bloomberg
EUR/USD: 1.29615 4:38 AM off FXCM
GBP/USD: 1.39.7 4:38 AM off FXCM
USD/CAD: 1.19231 4:38 AM off FXCM
AUD/USD: 0.66371 4:38 AM off FXCM

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Sources:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=afITL8pSvhaM

http://www.etfexpress.com/articles/detail.jsp?content_id=288633

Excellent Quote

Here is an excellent quote of the day from "The Big Picture" :
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Quote of the Day

"Nothing has been a more reliable indicator for an upcoming recession as the price of Oil. Every major bear market, every major economic decline has been preceded by a large spike in oil prices. The 73-74 recession, recession of beginning 80's and the recession of 2000. Oil prices jumped 80% between 1999 and 2000. Oil prices have been the most important indicator of major economic disasters. Whenever Oil prices rise about 80% from year ago levels, a fair chance does exist that a recession/bear market will follow." —Stephen Leeb —Danish Physicist Niels Bohr was known to have a horseshoe prominently displayed above the door frame of his office. Asked what it was for, he replied that it was a good luck charm that helped his physics equations. "But do you believe in that superstition?" he was asked. "Of course not!" the future Nobel winner replied. "But I have been told that it works whether you believe in it or not..."


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This is an excellent point of why there are divergences in fundamentals and gives weight to many aspects of Dow Theory. Often, I feel that Dow Theory works to the point of able perception and often that is where it fails. Hence the support for fundamental analysis along with technical analysis. Also, This article points out the the self-fulling behaviors and irrational price movements since in today's markets. Which also confirms a need for sentiment analysis, or may give way to contrarians.