Wednesday, October 28, 2009

The second wave: defend yourself

The second wave: H1N1 and DJII

Canada is on red alert: the swine flu is back with vengeance. The so-called “second wave” is upon us. Children have died. Vaccinations are being distributed. Everyone is paying attention and trying to defend against the attack of this virus.

The H1N1 virus was first detected in Canada earlier this year. Then it went away. Medical professionals predicted that it would come back, perhaps in a more deadly form: this phenomenon was referred to as “the second wave.”

Why do they call it “the second wave?”

Doctors who follow the spread of disease through a population observed that it sometimes occurs in two surges or waves with an intervening period when the disease seems to abate. The sequence is: Wave #1, abatement, Wave #2. And the second wave is the deadly one.

This wave phenomenon was first observed by an accountant in the late 1920s in the stock market. Ralph Nelson Elliott noted that stock market sell offs, bear markets, often occur in two waves too. [In fact, Elliott outlined his Wave Theory before medical scientists observed the same wave phenomenon in the spread of disease.] From an investment point of view, here’s how the waves look: this is a chart of the Dow Jones Industrial Average.

Note: this site does not support my stock charting program: you'll have to imagine a chart of the DJII going back 2 years.

The first down wave started in October 2007 and ended in March 2009. The market dropped just over 50%. The abatement wave started in March 2009; when it ends, the second wave of selling will begin.

The same thing happened earlier this century. The US market dropped 45% in the two years from 2000 to 2002. Wave one went from February 2000 to Oct 2001; the abatement ended in March 2002 and the second wave of selling ended in October 2002, shortly after 9-11.

Canadians are seriously alert to the health risk, the second wave of H1N1. But we seem oblivious to the economic risk, the second wave of sell off in the stock market. Why isn’t Canada on red alert about our investments?

The answer to this mystery lies in the law of cause and effect. In the H1N1 wave count, viruses are the cause of the disease: human beings [our sickness] are the effect. In the stock market, human beings are both the cause and the effect. Our selling causes the stock markets to go lower and the effect is the declining value of our investment portfolios. When physicians advise us to wash our hands and get inoculated, they are trying to prevent the effect: trying to curb the spread of the disease by neutralizing the cause. When investment professionals tell us not to sell, they too, are addressing the cause: trying to prevent the selling that drives the stock market lower. If they succeed in preventing a serious sell off, the effect [lower portfolio values] will be avoided.

In the medical profession, the spirit is that we should all cooperate, wash our hand a lot and get the inoculation. Cooperation will help us all.

In the investment profession we have proof that cooperation doesn’t work. In 2007/9 the US stock market dropped over 50% in 17 months. In 2000 to 2002, it dropped 45% in 2 ½ years. Cooperation doesn’t work. The effect – a sharp drop in portfolio values, cannot be avoided by not selling. In my book, Beyond the Bull, Taking Stock Market Wisdom to the Next Level, I try to help investors understand the importance of this concept. Investment industry leaders sincerely try to keep the financial markets stable. 45% declines are not good for anyone. But the stock market is not a co-op formed for the benefit of everyone. Big declines do happen. And when those big declines occur, whoever sells first wins. There are winners and there are losers. It’s like a pandemic: not everyone survives.

The investment world is more like a theatre of war. In order to win, we have to behave like generals, conserving our resources, avoiding high risk times, retreating and fighting another day. In the financial world, we have to act like the physicians are telling us to act in the medical world. We have to defend ourselves.

The irony is that our financial defence [selling off our stock portfolio] will help cause the demise of those who do not sell. It really is like war. Massive selling drives stock prices down. The cumulative effect of many investors selling in a short time is what causes the down wave. But, if you sell early in the decline, other investors selling later will drive the stock market down to where it will be a bargain – time for you to buy back. There are winners and there are losers.

Defending against the H1N1 second wave helps you and it helps the rest of us. Defending against the DJII second wave helps you, but it could hurt the rest of us. It’s a tough decision for an individual investor.

But imagine how tough it is for a giant financial institution like Royal Bank’s mutual funds or the Teachers’ Pension Plan. They are so big that they can’t sell off all their stocks. Their selling [the cause] depresses the stock market and results in lower values for their portfolios [the effect]. Because they are so big, they are stuck. They can’t get out of the market. In big sell offs like the 2007-9 decline, they are doomed to experience portfolio loses. They can’t win.

What kind of advice do you think comes from the managers of these large pools of money? For them, defence is futile. Why should they advise you to defend yourself by selling off your stocks when they can’t sell theirs.

Our advice? Go to red alert. Defend yourself and your family against the second wave of both H1N1 and DJII.

Ken Norquay, CMT Oct 28, 2009.
Financial Philosopher
Chief Market Strategist,
CastleMoore Inc.
Ken@CastleMoore

Links to Beyond the Bull.
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Tuesday, October 27, 2009

Financial Swine Flu Shot

In 1918 millions of people died because a serious flu spread throughout the population. A similar pandemic happened over 500 years ago in Europe when the Black Death wiped out millions. More mass deaths occurred when the earliest immigrants from Europe spread deadly diseases among the native population. Pandemics are serious.

But it’s the false alarms that help us think clearly.

Remember the avian bird flu? Apparently it had the potential to kill millions.
[http:www.who.int/csr/disease/avian_influenza/en/index.html] But so far this threat has not materialized.

We never know ahead of time whether a flu warning will be really important, or just another warning. This article is taken from a Los Angeles doctor’s article for her patients:
The swine flu and its vaccine are not new. In 1976, an army recruit based in Fort Dix died following a mysterious illness. In addition, four of his fellow soldiers were hospitalized. Health officials disclosed to America that the illness was swine flu. Without knowing much about the details of their medical history and why they were susceptible to severe reactions to this illness, people became anxious that this could lead to a flu pandemic similar to 1918, and a vaccine was quickly prepared to be given to the masses. In the end, the illness never transpired. It came to be known as the swine flu fiasco of 1976 after twenty-five people died and five hundred became paralyzed all from the vaccine. In other words, more people suffered from the effects of the vaccine than the illness itself. [www.DrFeder.com]
Dr Feder recommends that we learn the facts and make a responsible decision about defending ourselves against disease. Good advice.
But it’s not the reaction we are seeing right now, is it? Right now, swine flu 2009 [H1N1] has hit Canada again. Government health organizations are scrambling to do the right thing. There is a huge campaign in the media to persuade us all to wash our hands a lot and get a vaccination. It’s in the news every day. Some say it’s serious, some say it’s not. Some advise getting vaccinated, some advise not. What should we do?
Let’s revisit Dr Feder’s advice: learn the facts – then decide on your course of action.
The problem with the swine flu media blitz is that no-one is trying to teach us – they all want to persuade us. And, as we know, when someone is trying to persuade us to take a certain course of action, the truth is the first thing to go. That’s why there are so many confused people in Canada. They’re getting the old razzle-dazzle. Politicians and civil servants are posturing to promote their own careers by doing “the right thing;” shills and mountebanks are taking advantage of people’s fear to build up their own egos. And relentless reporters are documenting the confusion with great aplomb. All this makes it difficult to learn the facts.
Normally the medical world is not this confusing.
Not so, in the investment world. Ego and persuasion are the norm in the realm of high finance. In my book, Beyond the Bull, Taking Stock Market Wisdom to the Next Level, I point out that all “facts” are suspect because they are always presented by some salesman trying to convince you to buy or sell. Salesmen’s “facts” are presented in such a way as to persuade you to do what the salesman wants. The typical investment professional does not present the pros and cons about a certain investment and ask you to make a decision. He presents the “facts” that will persuade you to do what he recommends.
Confused investors should take their cue from the current swine flu conundrum. Follow Dr Feder’s advice: learn the facts, make a decision.
And what might that decision be?
Last year at this time the stock market was in a full fledged sell off. From top to bottom, most equity mutual funds lost 45%! Most investors wish they had sold out in spring 2008.
And now that the market has rallied and most mutual funds have regained over half the loss, what do you think the mutual funds salesmen are saying? Are they be presenting the reality that mutual funds investors can lose 45% in 9 months? Or do they emphasize how well the market has gone up since the bottom in March?
Ordinary people really do want to make an informed Dr Feder decision when it comes to their health. But when it comes to their wealth, they prefer not to decide. Why? Health and wealth are important parts of our human lives. Why we are so anxious about the second wave of the swine flu and so oblivious toward a possible second wave of the stock market sell off?
Ken Norquay, CMT
Financial philosopher,
Ken@castlemoore.com

Links to Beyond the Bull:
Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Wednesday, October 14, 2009

97 cents and rising

The Big Three auto manufacturers stuck it to Canadian consumers in 2007 and they’re sticking it to us again. 2007 was the last time the Canadian dollar rocketed toward par; and it was the last time the auto industry stiffed Canadian car buyers.

There is a fixed cost to manufacture a car. Car dealerships sell it for cost + their mark up. And that’s how business works. But in 2007 things changed fast. The Canadian dollar went from just under 85 cents in March to just over $1.10 in November, 8 months later. That’s 30% in 8 months!

The Canadian dollar had 30% more buying power. Or did it? Did GM reduce the Canadian dollar price of a Chevy by 30%? Not a chance! They kept the Canadian dollar price the same and pocketed the extra profit. Ford and Chrysler did it too. And if an adventurous Canadian tried to buy a car from an American dealership, he soon found it was forbidden. Toyota and Honda did the same thing. Canadian consumers did not receive the benefit from the rise in buying power of the Canuck-buck because big auto manufacturers forbad their US dealerships from selling to Canadians. The American auto business stiffed Canadian consumers in 2007.

And now that our Loonie is flying high again, we see the same outrageous profit grab! So far in 2009, the Canadian dollar has moved from 77 cents to 97 cents in 7 months – that’s 26% in 7 months. And if we check a few auto import websites, we see that we can save 10% to 30% by buying from the Americans, even after paying the extra shipping, duty, conversions etc. Why don’t we try calling a few American car dealerships and seeing if they will sell us a new car? Don’t forget to tell them you’re a Canadian. Will they refuse to sell a car to us again in 2009?

Now think back to March 2009 when the Canuck-buck was 77 cents. What other big news event was making headlines? Auto company bailouts? Canadian consumers and tax payers forked up a couple billion Canadian dollars to help these guys stay in business.

And now that the auto industry REALLY needs to sell a lot of cars, and now that Canadian consumers have picked up 26% in buying power in 7 months, you’d think they’d open the flood gates! American car companies should funnel those high priced Canadian dollars to buy new cars from American dealerships. Capitalism: it’s the American way. Isn’t that why American exporters like a lower US dollar – so their domestically manufactured products are more competitive in foreign markets? Isn’t Canada a foreign market? Isn’t this the perfect opportunity?

This is an example of how economic theory and reality don’t match: the currency exchange has moved favourably for the American auto industry and the Canadian consumer. But, somehow, American dealerships won’t sell cars to Canadian consumers. Neither is capitalizing on the big move of the Canadian dollar. And it’s the big car companies who are stopping it.

Ken Norquay, CMT
Financial Philosopher

Thursday, October 8, 2009

Newfoundland gets it right!

Newfoundland’s Government Finally Gets It!

The citizens of Buchins NL found out that their town is contaminated. It appears that the old mine wasn’t closed down properly and there could be a lead poisoning problem. Dirty business.

But at least the provincial government did the right thing this time. Two cabinet ministers made public statements about the problem shortly after it was discovered. The town folk are being asked to get blood tests: they’re trying to find out how big this problem really is.

Good for them.

These past few years there was a scandal in Newfoundland because of a cover up in the detection and treatment of breast cancer. Government officials kept secret the fact that there were problems in the diagnostic testing in Newfoundland’s medical labs. Those delays caused unnecessary problems for the women who were improperly diagnosed.

It looks like they learned from their previous mistake. In the previous cover up, they put their shame and embarrassment about the labs’ mistakes ahead of the health of the women who were worried about having cancer. This time the government saw fit to put the health of the Buchinsians ahead of their own political interests.

Good for them.

Politics is a dirty business, isn’t it? Our elected representatives take great pains to insult and blame each other for the most unlikely things. Lab technicians in Newfoundland screwed up in a big way. We don’t know how many women died prematurely because of faulty cancer testing. Then the government, in complete denial of the seriousness of the problem, delayed correcting the error. They would surely have many embarrassing questions to answer in the provincial legislature. Their delay and cover up decisions were all done to protect their own best interest.

Most Canadians are well aware that they are being deceived: they know the representatives they elect will say anything to get elected again. That’s how it works in a modern democracy. It’s all about staying popular: ranking high on the polls. We have learned to live with it.

The same thing is true in the world of commerce. We all know advertising is a form of deception. It’s all about selling your product. Customers expect to be lied to, to be told that this product is better than that one. Modern advertising is not about producing quality products; it’s about selling products. We have learned to live with it.


In my book, Beyond the Bull, I discuss this “deception” component of our lives. The book talks about how deception is a natural part of our lives in modern societies. It offers advice about investing in a world of deceit.

The first important fact we need to know is: deceit is a huge part the typical Canadian’s life. Bull is part of politics, medicine, commerce, advertising and investing. So relax! In today’s Canada, we get lied to. Wake up to it.

My second offering to Canadian investors is to stop being so judgemental about the lying. Relax! Politicians lie. Salesmen lie. People try to cover up their mistakes. So quit complaining about it. Just wake up to it.

By far the most important attitude we need to adopt in this world of bull is responsibility. Who is responsible if we re-elect a liar or buy from a liar or lose our money by trusting a liar? We are! And who is responsible for letting the lies continue? We are!

So, what should the women of Newfoundland have done when their test results said they were OK when they, in fact, had cancer? What should the Buchinsians do now that they realize they’ve lived in contaminated land for thirty years? What should Ontarians do when they see massive corruption in the E-health, Cancer Care and Lottario?

Lets do what Newfoundland’s provincial government just did. Come clean. Tell it like it is. And get it fixed.

Ken Norquay, CMT
Financial Philosopher
ken@castlemoore.com

links to Beyond the Bull:

Canada
http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1

US
http://www.amazon.com/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246055&sr=8-1

UK
http://www.amazon.co.uk/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228245979&sr=8-1

Tuesday, October 6, 2009

Christmas in October

It’s a Wonderful Life…NOT!

Every Christmas I like to watch Jimmy Stewart in the movie It’s a Wonderful Life. The story is set in the 1930s during the depression. Jimmy plays a young business man trying to protect the financial interests of his small town at a time when the stock market had plummeted, real estate had collapsed and the banking system was in trouble. Somehow he had to persuade the town’s citizens to hang in there and not trigger their own financial disaster by withdrawing all their money from Jimmy’s little savings and loan company [that’s an American term: in Canada we call them trust companies]. The movie focused on the every day human emotions of the 1930’s banking crisis and the tireless work of Jimmy Stewart trying to fix it. Today the role of financial hero has fallen on the broad shoulders of the various government officials and central bankers. Our citizens have faith that these highly educated and highly paid economic professionals will somehow get us through the crisis. I recommend you watch this movie: it’ll be part of the usual Christmas build-up. It’ll help you understand some of the human dynamics of a depression, a real estate crisis and a banking crisis.

Observation: it is now the first week of October – doesn’t this seem a bit early to be thinking about Christmas movies? Apparently not. Several retail stores started their Christmas selling season last month. I wonder why.

The normal sequence of sales promotion is: [1] back to school, [2] fall fashions, [3] Halloween, [4] Christmas, [5] Boxing Day and January sales. A few years ago I noticed some stores started their January sales in December. And now they’ve moved Christmas to September. Something seems wrong, doesn’t it?

Are there too many stores? Are too many consumers tapped out? Are there too many stores in deep financial trouble and are they so desperate that they need Christmas sales now?

Is Jimmy Stewart’s Wonderful Life of the 1930s closer than we think? If America’s auto industry and America’s finance industry had to be bailed out, maybe her retail stores are in trouble too. Maybe they shouldn’t have opened all those box stores. After a ten-year binge of building more and bigger stores, have they gone too far? Big new stores have big mortgages or big leases… big monthly expenses. We can imagine how financially stretched out retail stores might be; and if sales are below their projected levels, maybe they need to move Christmas to September to survive.

Government officials and central bankers saved the financial system and the American auto industry. Can they save the retail industry too? How would they save it? They provided money to the banks and car companies: will free money help the retail stores?

In the 1930s movie It’s a Wonderful Life, Jimmy Stewart tried to persuade the town folk not to take their money out of his little business. Now-a-days we tax payers are being asked to put our money in. Jimmy talked directly to the people: and the people decided what they would do with their money. Obviously we tax-paying town folk are not foolish enough to put our own money directly into failing companies: our governments do that for us. Now-a-days politicians do what they want with our money, claiming all the while that what they do is in our best interest.

Ask yourself this:
1. Would you have loaned your own money to General Motors?
2. Would you have bailed out Smith Barney or Citibank?
3. Will you do your Christmas shopping in October?

It’s a Wonderful Life showed us how the economic problems of the 1930s were solved by business people talking directly to consumers to sort out their problems. Now-a-days, we seem to want others to do that for us. We want the government to fix it.

What will you do? Will you buy your Christmas decorations in October? Is that what it will take to avoid the next business crisis?

Seems ridiculous, doesn’t it?

The modern re-make of Jimmy Stewart’s classic movie would be It’s a Ridiculous Life: the story of a small town business man who borrowed his way to prosperity. He has the big house, the great car, the trophy wife and he’s done it all on bank loans. He bought a house in 1980, rented it out and used the cash flow to buy a second house with almost no down payment. As real estate prices went higher, he kept on borrowing and buying more real estate and renting it out. Soon he had the biggest real estate holdings in town, the biggest personal income in town and the most mortgage debt of anyone in town. Then they closed the factory at the edge of town. 300 workers were laid off and our hero’s empire came all undone. The tenants couldn’t pay the rent. Our hero couldn’t pay his mortgages. The bank foreclosed on his properties and his high maintenance wife left him.

The ridiculous part is that this story is true. This is how the long term rise in real estate prices was maintained: the up trend was financed by the banks.

The 1930s It’s a Wonderful Life problem was resolved by the town folk acting reasonable and conservatively. Is this how our remake will be resolved?

Apparently not. In our modern movie, It’s a Ridiculous Life, aren’t we being encouraged to do the opposite? Aren’t they suggesting we borrow even more money and spend even more? Buy a new car – buy a house. And now, buy our Christmas presents in October.

Ken Norquay, CMT.
Chief Market Strategist,
CastleMoore Inc

ken@castlemoore.com