Stock market analysis is a brain-power business. It’s not at all touchy-feely. At least, that’s what the analysts would like us to believe.
They love to grind the facts and figures of the latest news stories through the discipline of logic. Right now, the main focus of analysts is on Europe. A cloud of volcanic ash has played havoc with the tourist industry and a sovereign debt crisis is rocking the credit markets. Logically, none of this news is good for the world’s complex economy: the financial world is a riskier place than we had thought. On the other hand, the once bankrupt General Motors recently announced refits for several of its factories. Corporate profits seem to have rebounded from the depressed levels of one year ago. Logically, this is good news for the stock market: the economy is not as sick as we had thought. To what investment conclusion would our logical brains come, based on this analysis of current economic events?
Right now just over 70% of investment managers are bullish on the stock market. That’s the conclusion they came to. (The other 30% are either bearish or neutral.)
What should we do?
For every good-news story, there is an equally compelling bad-news story. And the Canadian stock market has gone sideways for the past month, reflecting the inconclusiveness of logical stock market analysis. So what should we do? Should we invest in the stock market right now? Logic doesn’t help much, does it? Instead of relying exclusively on our intellectual brain for guidance, let’s try another faculty: our instinctive gut feel.
Remember how we felt in the winter of 2008-2009? The market had utterly collapsed, down almost 50% in nine months. Our guts were in knots, growling over the losses. That’s the mysterious thing about gut feel: in the investment world, it’s a contrary indicator. When we feel least confident (as we did in the winter of 2008-2009), it’s the best time to buy. Contrarily, when we collectively feel most confident, it’s the best time to sell.
Determine your gut feel ― and act against it
In my investment book, Beyond the Bull, I explain how the Theory of Contrary Opinion works: the best time to buy is when everyone is negative and the best time to sell is when the crowd is optimistic. This is the irony of using gut feel to make our investment decisions. Once we determine what our gut feel is, we should act against it. When we feel most bullish about the market, we should sell. When we feel most bearish, we should buy. No wonder so few successful investors use gut feel in their buy-sell decisions. It’s like betting against ourselves.
How do you feel about investing in the stock market right now? Remember, about 70% of investors believe the market will be higher in six months than it is now. Logically, this is a time to be thinking ‘sell,’ not ‘buy’. But logic is not what we are being asked to use right now. The question is: How do you feel about investing in the stock market? Feel ― not think. In the investment world, it is difficult to separate our feelings from our thoughts. It is hard to separate our brains from our guts.
Let the Computer Do the Thinking
In the stock market, money is made by buying and selling, not by thinking and feeling. To assist in the buying and selling process, we use objective investment models ― an objective way of determining whether the stock market is going up or down. Once we have found that objective model, we let the computer do the thinking and feeling. We do the buying and selling.
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).
Contact Ken directly at ken@castlemoore.com.
Friday, April 30, 2010
Thursday, April 22, 2010
Price Tag on a Viking Curse
It feels like some ancient shamanic curse has been unleashed on the descendants of the Vikings!
In the 2008-09 banking crisis, the Icelandic government guaranteed huge bail-out loans from Britain and The Netherlands. But the bank failed anyway and so the people were suddenly on the hook for the government’s loan guarantee. On March 8, Iceland held a referendum: taxpayers felt cheated and did not want to honour the government’s guarantee on the defaulted bank’s bad debt. The people overwhelmingly agreed not to pay back the loans to Britain and The Netherlands. Then last week, a giant volcano erupted and spewed ash all over Iceland and Europe! The Norse god Odin must be getting restless.
Imagine how it must feel to be an Icelander. First, it was financial disaster, then a natural disaster. Neither of these two curse-like occurrences will go away soon.
Volcanic eruptions can last for months. And ash is not like snow; it won’t just melt away in the April sunshine. It’s not merely affecting one tiny island nation; Northern Europe has felt the reverberations too. Financial journalists are currently adding up the damages for Iceland’s volcano. Isn’t it interesting how we like to attach economic cost to natural disasters? Haiti’s humanitarian relief efforts all came with a well-publicized price tag. It shows what we think is important in life: how much does it cost?
The effect of bank failures and loan defaults can last for years too. I admire the spunky Icelanders for not accepting their financial fate. In the March 8 referendum, they told the Europeans they would not pay the price of the Bank of Iceland’s folly.
In my book about investing, Beyond the Bull, I comment that, in the financial world, everything is connected to everything else. Iceland is a case in point.
We all realize that volcanoes and earthquakes are connected. They mostly occur on tectonic fault lines around the world. Small earthquakes occur every day. But lately we have been hearing about some really big ones. Haiti, Chile, and China have been hit by huge earthquakes these past few months. And then the volcano in Iceland erupted. Mother Earth is restless.
And now it appears there are financial fault lines in the banking world. It might be more accurate to call them financial default lines. And it looks as though Iceland is sitting right on a financial default line. In fact, their defiant refusal to make good the bad debts of the irresponsible Bank of Iceland might be the triggering force for the next series of financial after-shocks in the banking world.
Greece is currently unable to make payments on her national debt. Some that think Spain, Portugal, Italy, and Ireland are on shaky ground too. Will the taxpayers of those nations follow the example of their Icelandic brothers and sisters? Will they hold referenda too? Will they defy bankers’ rules too? Will it spread to North America? Remember how angry Americans were in early 2009 when the bailed-out banks tried to pay big bonuses to their traders and deal makers? Remember how frustrated they were when the big three auto executives flew to Washington in executive jets to plead for the taxpayers to bail them out? Will Americans follow the lead of Icelanders and refuse to pay for the foolish debts of an obsolete capitalist system?
There are people whose job is to predict earthquakes and financial disasters. What difficult jobs they have! And how futile are their efforts!
Geologists can predict volcanic eruptions as they draw near. They issue warnings to people living in the area that she’s going to blow! Residents have the opportunity to leave. But strangely, some people continue to live at the foot of the volcano, even though they know an eruption is coming. What strange creatures we human beings are. Even though we are warned, we ignore the warnings.
Economists and investment advisors can predict economic disasters as they draw near. But for some reason, they don’t warn the people. Did they warn investors to sell equity mutual funds before the 2008-09 stock market implosion? Did they warn us in the year 2000 to sell our stock portfolios before the high-tech implosion? But strangely, some people continue to follow the advice of those who never sell, even though they know an economic shake-up is coming. What strange creatures we human beings are. Even though they didn’t warn us, we continue to listen to them.
The Viking curse that’s rocking Iceland these days is more widespread than we think. Natural disasters and financial disasters are just normal parts of our lives. The curse is that we pay so little attention to the warnings.
Ken
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).
Contact Ken directly at ken@castlemoore.com.
In the 2008-09 banking crisis, the Icelandic government guaranteed huge bail-out loans from Britain and The Netherlands. But the bank failed anyway and so the people were suddenly on the hook for the government’s loan guarantee. On March 8, Iceland held a referendum: taxpayers felt cheated and did not want to honour the government’s guarantee on the defaulted bank’s bad debt. The people overwhelmingly agreed not to pay back the loans to Britain and The Netherlands. Then last week, a giant volcano erupted and spewed ash all over Iceland and Europe! The Norse god Odin must be getting restless.
Imagine how it must feel to be an Icelander. First, it was financial disaster, then a natural disaster. Neither of these two curse-like occurrences will go away soon.
Volcanic eruptions can last for months. And ash is not like snow; it won’t just melt away in the April sunshine. It’s not merely affecting one tiny island nation; Northern Europe has felt the reverberations too. Financial journalists are currently adding up the damages for Iceland’s volcano. Isn’t it interesting how we like to attach economic cost to natural disasters? Haiti’s humanitarian relief efforts all came with a well-publicized price tag. It shows what we think is important in life: how much does it cost?
The effect of bank failures and loan defaults can last for years too. I admire the spunky Icelanders for not accepting their financial fate. In the March 8 referendum, they told the Europeans they would not pay the price of the Bank of Iceland’s folly.
In my book about investing, Beyond the Bull, I comment that, in the financial world, everything is connected to everything else. Iceland is a case in point.
We all realize that volcanoes and earthquakes are connected. They mostly occur on tectonic fault lines around the world. Small earthquakes occur every day. But lately we have been hearing about some really big ones. Haiti, Chile, and China have been hit by huge earthquakes these past few months. And then the volcano in Iceland erupted. Mother Earth is restless.
And now it appears there are financial fault lines in the banking world. It might be more accurate to call them financial default lines. And it looks as though Iceland is sitting right on a financial default line. In fact, their defiant refusal to make good the bad debts of the irresponsible Bank of Iceland might be the triggering force for the next series of financial after-shocks in the banking world.
Greece is currently unable to make payments on her national debt. Some that think Spain, Portugal, Italy, and Ireland are on shaky ground too. Will the taxpayers of those nations follow the example of their Icelandic brothers and sisters? Will they hold referenda too? Will they defy bankers’ rules too? Will it spread to North America? Remember how angry Americans were in early 2009 when the bailed-out banks tried to pay big bonuses to their traders and deal makers? Remember how frustrated they were when the big three auto executives flew to Washington in executive jets to plead for the taxpayers to bail them out? Will Americans follow the lead of Icelanders and refuse to pay for the foolish debts of an obsolete capitalist system?
There are people whose job is to predict earthquakes and financial disasters. What difficult jobs they have! And how futile are their efforts!
Geologists can predict volcanic eruptions as they draw near. They issue warnings to people living in the area that she’s going to blow! Residents have the opportunity to leave. But strangely, some people continue to live at the foot of the volcano, even though they know an eruption is coming. What strange creatures we human beings are. Even though we are warned, we ignore the warnings.
Economists and investment advisors can predict economic disasters as they draw near. But for some reason, they don’t warn the people. Did they warn investors to sell equity mutual funds before the 2008-09 stock market implosion? Did they warn us in the year 2000 to sell our stock portfolios before the high-tech implosion? But strangely, some people continue to follow the advice of those who never sell, even though they know an economic shake-up is coming. What strange creatures we human beings are. Even though they didn’t warn us, we continue to listen to them.
The Viking curse that’s rocking Iceland these days is more widespread than we think. Natural disasters and financial disasters are just normal parts of our lives. The curse is that we pay so little attention to the warnings.
Ken
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).
Contact Ken directly at ken@castlemoore.com.
Wednesday, April 14, 2010
Trudeau was Right!
Years ago Prime Minister Pierre Elliott Trudeau said the twentieth century belonged to the USA and the twenty-first century belonged to Canada.
And now, as the Canadian Dollar (CD$) flirts with the US Dollar (US$) on equal terms, it looks like his prophecy is coming true. Canadians have become economically smug these days. Here’s why:
1. Our banking system has held up better than the American’s.
2. Our economy suffered less in the down turn and has expanded more in the up turn.
3. Our real estate market is still in an up trend; theirs is in a hopeless down trend.
Canadians are not used to being smug. In international circles our citizens are know as polite and unassuming people. Our soldiers are well trained and fierce fighters. We have a good reputation. But, if Mr. Trudeau was right, Canada will soon be stepping up to the plate as a world leader.
Could this be real?
Are the reasons I listed above as to why Canadians are economically smug be the same reasons foreigners are willing to pay the same price for a Canadian Dollar as they are for a US Dollar? The sceptics are saying the high CD$ is temporary, caused by a short term surge in oil and metals prices, and it will cool back down once the current commodities boom is over.
In my book, Beyond the Bull, I discuss the idea of over-analysis. Sometimes we ramble on about what we think we know; we use the same tired old thinking patterns that worked in the past, to sort out what might happen in the future. And, if the rules change, as Mr. Trudeau prophesied, the old ideas don’t help us. If this is Canada’s century, we’ll have to learn to think Canadian instead of American.
Beyond the Bull encourages us to “feel” as well and think. Rather than run in mental circles of out dated logic, just kick back and say: “How does this feel?” Lets try it.
Review: CD$ came into the twenty first century in a down trend. It hit the bottom in the winter of 2002 at 72 US cents. By autumn 2007, it ripped upwards through par to $11.1 – then reversed and dropped back to par within only a few weeks. It fluctuated between $1.00 US and $1.05 US for four months before dropping to 77 cents again, one short year after our glorious run to $1.11.
We Canadians weren’t used to having such a strong currency. Somehow, we felt relieved that CD$ had returned to normal; a CD$ selling at a huge discount to the US$.
But now CD$ has crept back up to par against the US$ again, it somehow feels different. Last time, in early 2008, there was a flurry of Canadian buying of US cars with their high priced CD$. It was as if they wanted to cash in on their short term good luck and buy up those cheap US cars. This time there is no feeling of “temporary” or “short term” around a Loonie at par with a US Green-back. This time it feels different.
What should we do?
Well, let’s do the typical Canadian thing: doubt our new found prowess as world economic leaders and buy a cheap US car with our high priced Canadian dollars… just in case. Feels right, eh?
The Financial Philosopher
Ken Norquay, CMT
President, Market Street Investment House
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). Contact Ken directly at ken@castlemoore.com.
And now, as the Canadian Dollar (CD$) flirts with the US Dollar (US$) on equal terms, it looks like his prophecy is coming true. Canadians have become economically smug these days. Here’s why:
1. Our banking system has held up better than the American’s.
2. Our economy suffered less in the down turn and has expanded more in the up turn.
3. Our real estate market is still in an up trend; theirs is in a hopeless down trend.
Canadians are not used to being smug. In international circles our citizens are know as polite and unassuming people. Our soldiers are well trained and fierce fighters. We have a good reputation. But, if Mr. Trudeau was right, Canada will soon be stepping up to the plate as a world leader.
Could this be real?
Are the reasons I listed above as to why Canadians are economically smug be the same reasons foreigners are willing to pay the same price for a Canadian Dollar as they are for a US Dollar? The sceptics are saying the high CD$ is temporary, caused by a short term surge in oil and metals prices, and it will cool back down once the current commodities boom is over.
In my book, Beyond the Bull, I discuss the idea of over-analysis. Sometimes we ramble on about what we think we know; we use the same tired old thinking patterns that worked in the past, to sort out what might happen in the future. And, if the rules change, as Mr. Trudeau prophesied, the old ideas don’t help us. If this is Canada’s century, we’ll have to learn to think Canadian instead of American.
Beyond the Bull encourages us to “feel” as well and think. Rather than run in mental circles of out dated logic, just kick back and say: “How does this feel?” Lets try it.
Review: CD$ came into the twenty first century in a down trend. It hit the bottom in the winter of 2002 at 72 US cents. By autumn 2007, it ripped upwards through par to $11.1 – then reversed and dropped back to par within only a few weeks. It fluctuated between $1.00 US and $1.05 US for four months before dropping to 77 cents again, one short year after our glorious run to $1.11.
We Canadians weren’t used to having such a strong currency. Somehow, we felt relieved that CD$ had returned to normal; a CD$ selling at a huge discount to the US$.
But now CD$ has crept back up to par against the US$ again, it somehow feels different. Last time, in early 2008, there was a flurry of Canadian buying of US cars with their high priced CD$. It was as if they wanted to cash in on their short term good luck and buy up those cheap US cars. This time there is no feeling of “temporary” or “short term” around a Loonie at par with a US Green-back. This time it feels different.
What should we do?
Well, let’s do the typical Canadian thing: doubt our new found prowess as world economic leaders and buy a cheap US car with our high priced Canadian dollars… just in case. Feels right, eh?
The Financial Philosopher
Ken Norquay, CMT
President, Market Street Investment House
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). Contact Ken directly at ken@castlemoore.com.
Consequence of Error
Saturday’s tragic plane crash in Russia took the lives of many important military and government officials in Poland. And now, the obvious questions are being asked: why were so many top officials on the same plane, whose fault was it, what can be cone to prevent this type of national tragedy from happening again? We send our sympathy to our Polish friends.
But we also wonder about human nature. Is there some lesson we can glean from this event that will help us manage our own lives more prudently?
The key lesson from the Polish pilot’s now obvious mistake is to reassess our understanding of risk. What is risk? How can we realistically assess the risk in a situation BEFORE a tragedy? How can we avoid tragedy before it happens?
When I was a young officer in the Canadian Armed Forces, the pilot trainees were taught about the consequence of error. “If I make a certain choice and that choice eventually proves to be an error, what will the consequences be?” So, if a pilot were advised to go to another airport because landing at this foggy airport was too dangerous, the consequence of using another airport would be that all his passengers would have to be bussed to the correct destination: they would all be late. And if he decided to try the landing in the fog, and that proved to be an error, the consequence would be a crash. Canada’s student pilots would have had no trouble making the decision to choose the alternate airport because of the huge difference between the two consequences of error.
In my book, Beyond the Bull, I discuss the use of the military mind in managing our investments. Let’s see if this consequence of error method can be used to help us improve our investment skills.
Financial planners and mutual funds salesmen tell us that we should buy good quality stocks and hold them indefinitely. The problem with this approach is that it hasn’t worked for ten years. Today, the Dow Jones Industrial Average is approximately the same as it was ten years ago. The Standard and Poore’s 500 Index is about 15% lower than it was ten years ago. Canadian investors did better: we made an average of about 2% per year for those same ten years. The investment industry’s “buy-and-hold-for-the-long-term” choice has turned out to be an error. And the consequence of making that error has been a sub-standard rate of return for ten years.
But, what about the future? What would the possible consequences be if continuing to hold stocks for the long term proved to be an error? What if we simply sold our mutual funds and kept the money. What would be the consequence of that approach, if it proved to be an error?
Choice #1
If we continue to hold our equity mutual funds, and that proves to be an error, we run the risk of losing our retirement nest egg. The stock market dropped over 45% twice in the past decade. It could happen again: and if it does, the consequence of holding our stocks through that period is losing half of our retirement savings. (NOTE: this is not only a problem for small investors: big pensions lost many billions of dollars of retirees’ money in the two monumental stock market declines of the past ten years. It’s not just about your RRSP – it’s HUGE. If the stock market drops again as it did in 2008-9 or 2001-2, it will seriously affect the retirement plans of almost all Canadians.) This is the consequence of error of holding stocks when the stock market falls.
Choice #2
What if we sell out; and selling out proves to be an error? Selling out would be an error if the stock market went UP and we were not invested because we had sold. And the consequence of that error would be that we would earn only 2 or 3% on our cash instead of a much large return if we had stayed in the stock market.
This consequence of error exercise helps us develop judgement. In the case of the Polish airplane crash, there was an error in judgement that killed too many people. In the case of the stock market crashes, an error in strategy will impact the retirement plans of millions of Canadians. But the goal of the consequence of error exercise is valid: to help us assess risk properly and to reduce the effect of the errors in our lives.
Obviously we have more than just two choices in the investment world. I encourage investors to take advantage of the errors of other investors and to limit the effect of our own errors. Try to do what the mutual funds industry tells us can’t be done. Try to invest in securities that are rising in price and not in securities that are falling in price. Then we should plan the type of errors we want to make.
And what type of errors do we plan to make? (Obviously, we are trying to NOT make investment errors.) But, when we DO make an error, we’d like it to be the type of error illustrated in choice #2 above: an error where we earn a lower rate of return that we could have. And what type of errors do we plan NOT TO MAKE? The error shown in choice #1: holding investments in down trends and losing our capital.
In a perfect world, we wouldn’t make errors. But we live in this world. And in the investment world, we spend a lot if time flying in the fog. So we need to plan our actions in full awareness of the consequences of possible errors – and then be prepared to live with those consequences.
Ken Norquay, CMT
President, Market Street Investment House
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). This article and others by Ken are also available at http://kennorquay.blogspot.com. Contact Ken directly at ken@castlemoore.com.
But we also wonder about human nature. Is there some lesson we can glean from this event that will help us manage our own lives more prudently?
The key lesson from the Polish pilot’s now obvious mistake is to reassess our understanding of risk. What is risk? How can we realistically assess the risk in a situation BEFORE a tragedy? How can we avoid tragedy before it happens?
When I was a young officer in the Canadian Armed Forces, the pilot trainees were taught about the consequence of error. “If I make a certain choice and that choice eventually proves to be an error, what will the consequences be?” So, if a pilot were advised to go to another airport because landing at this foggy airport was too dangerous, the consequence of using another airport would be that all his passengers would have to be bussed to the correct destination: they would all be late. And if he decided to try the landing in the fog, and that proved to be an error, the consequence would be a crash. Canada’s student pilots would have had no trouble making the decision to choose the alternate airport because of the huge difference between the two consequences of error.
In my book, Beyond the Bull, I discuss the use of the military mind in managing our investments. Let’s see if this consequence of error method can be used to help us improve our investment skills.
Financial planners and mutual funds salesmen tell us that we should buy good quality stocks and hold them indefinitely. The problem with this approach is that it hasn’t worked for ten years. Today, the Dow Jones Industrial Average is approximately the same as it was ten years ago. The Standard and Poore’s 500 Index is about 15% lower than it was ten years ago. Canadian investors did better: we made an average of about 2% per year for those same ten years. The investment industry’s “buy-and-hold-for-the-long-term” choice has turned out to be an error. And the consequence of making that error has been a sub-standard rate of return for ten years.
But, what about the future? What would the possible consequences be if continuing to hold stocks for the long term proved to be an error? What if we simply sold our mutual funds and kept the money. What would be the consequence of that approach, if it proved to be an error?
Choice #1
If we continue to hold our equity mutual funds, and that proves to be an error, we run the risk of losing our retirement nest egg. The stock market dropped over 45% twice in the past decade. It could happen again: and if it does, the consequence of holding our stocks through that period is losing half of our retirement savings. (NOTE: this is not only a problem for small investors: big pensions lost many billions of dollars of retirees’ money in the two monumental stock market declines of the past ten years. It’s not just about your RRSP – it’s HUGE. If the stock market drops again as it did in 2008-9 or 2001-2, it will seriously affect the retirement plans of almost all Canadians.) This is the consequence of error of holding stocks when the stock market falls.
Choice #2
What if we sell out; and selling out proves to be an error? Selling out would be an error if the stock market went UP and we were not invested because we had sold. And the consequence of that error would be that we would earn only 2 or 3% on our cash instead of a much large return if we had stayed in the stock market.
This consequence of error exercise helps us develop judgement. In the case of the Polish airplane crash, there was an error in judgement that killed too many people. In the case of the stock market crashes, an error in strategy will impact the retirement plans of millions of Canadians. But the goal of the consequence of error exercise is valid: to help us assess risk properly and to reduce the effect of the errors in our lives.
Obviously we have more than just two choices in the investment world. I encourage investors to take advantage of the errors of other investors and to limit the effect of our own errors. Try to do what the mutual funds industry tells us can’t be done. Try to invest in securities that are rising in price and not in securities that are falling in price. Then we should plan the type of errors we want to make.
And what type of errors do we plan to make? (Obviously, we are trying to NOT make investment errors.) But, when we DO make an error, we’d like it to be the type of error illustrated in choice #2 above: an error where we earn a lower rate of return that we could have. And what type of errors do we plan NOT TO MAKE? The error shown in choice #1: holding investments in down trends and losing our capital.
In a perfect world, we wouldn’t make errors. But we live in this world. And in the investment world, we spend a lot if time flying in the fog. So we need to plan our actions in full awareness of the consequences of possible errors – and then be prepared to live with those consequences.
Ken Norquay, CMT
President, Market Street Investment House
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). This article and others by Ken are also available at http://kennorquay.blogspot.com. Contact Ken directly at ken@castlemoore.com.
Wednesday, March 31, 2010
Your house’s last hurrah: setting up the top
The final upsurge of the 1996 to 2010 real estate boom is at hand. Sometimes history repeats itself. Readers who are investing (speculating?) in the real estate market should review this carefully . . .
In February, I wrote an article describing how the 1987 stock market crash set up the 1989 real estate market top (http://kennorquay.blogspot.com/ ― Friday, February 5, 2010.) House prices declined from 1989 to 1996. Tough times.
Then I pointed out that the 2008 stock market crash seemed to have been followed by an identical series of financial events and wondered if perhaps a real estate market top is at hand.
What Happened the First Time
1. After the 1987 stock market crash, many investors became fed up with the stock market. They turned to real estate for something more stable, less risky.
2. The 1987 crash was followed by a US ‘Savings and Loan’ crisis. (In the USA. they refer to trust companies as ‘savings and loan’ companies.) And that crisis was followed by a junk bond crisis. Those crises triggered a huge drop in interest rates, including mortgage rates.
3. These two factors caused an increase in both volume of sales and house prices.
4. In late 1988/early 1989, there was an up-tick in interest rates, including mortgage rates. This triggered a rush to buy houses, which resulted in an even greater flurry of home sales and house price increases.
5. In April 1989, a hush settled over the Canadian real estate industry. The top of the cycle had arrived.
6. House prices dropped and did not start up again until 1996. The world’s biggest real estate company, the Reichmann brothers’ Olympia and York, went broke. Construction was stopped on the monolithic office tower between Bay and Yonge Streets in Toronto (just south of The Bay); the unfinished building stood there for years. The game was over. It took seven years for the real estate down trend to stabilize.
What’s Happening This Time?
1. Many investors were fed up with the stock market after the 2008-09 crash, when market averages dropped 50% in only nine months. Many disgruntled investors turned to real estate for something more wholesome, less risky.
2. The stock market crash was followed by a world banking crisis, a crisis in corporate America, and the continuation of the US sub-prime mortgage crisis. These crises triggered a massive drop in interest rates, including mortgage rates.
3. These two factors combined to create a flurry of real estate activity. Volume of sales is up and prices are up. (Reference: Toronto Real Estate Board, February 2010)
The 1987 crash sequence led to a top in real estate in 1989. I wonder if the 2008 crash sequence is setting up a top in real estate prices now.
The Trigger Has Been Pulled
In 1988-89, the first up-tick in mortgage rates triggered the last surge of home buying. And when that surge of buying ended, the top was in. Earlier this week (March 29, 2010), Canadian banks announced up-ticks in their mortgage rates.
What to Expect
If this pattern is repeated, we should see a surge in home sales starting right now. Buyers who had been holding off will rush into the housing market. Volume of home sales and house prices will rise dramatically in April and May 2010. And once that buying spree is over, house prices will start to fall: the game will be over.
We hear that mortgage bankers are run off their feet this week, locking in today’s mortgage rates for 5 years because borrowers are worried that this is the beginning of many mortgage rate increases. It’s like a financial feeding frenzy to lock in these low rates now.
What to do about it
If you are an owner of investment real estate, you should sell to the surge of buying that lies immediately ahead. If the market does drop, as it did in the early 1990s, investors with lots of cash will be poised to buy at the bottom.
If you have been thinking of selling your too-large house and buying a smaller one, do it now. If you are more venturesome, you might consider selling now and renting for a few years.
If you are an ordinary homeowner who lives in the right size of house for your needs, there is nothing for you to do. You watched the price of your house rise these past 14 years, and now you’ll see it fall for a while. It’s all the same. Home is home, regardless of what you think it’s worth.
How long will Canadian house prices continue to go up when American house prices are going down? My guess: 90 days more. Then the game will be over.
In my book, Beyond the Bull, I talk about what it takes to become a better investor. One of the five keys is knowing when to sell. Another key is learning from your own experience (remember 1989 to 1996?). Another key is learning from the experience of others (think about our American cousins now or the Reichmann brothers in the early 1990s.).
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). Contact Ken directly at ken@castlemoore.com.
In February, I wrote an article describing how the 1987 stock market crash set up the 1989 real estate market top (http://kennorquay.blogspot.com/ ― Friday, February 5, 2010.) House prices declined from 1989 to 1996. Tough times.
Then I pointed out that the 2008 stock market crash seemed to have been followed by an identical series of financial events and wondered if perhaps a real estate market top is at hand.
What Happened the First Time
1. After the 1987 stock market crash, many investors became fed up with the stock market. They turned to real estate for something more stable, less risky.
2. The 1987 crash was followed by a US ‘Savings and Loan’ crisis. (In the USA. they refer to trust companies as ‘savings and loan’ companies.) And that crisis was followed by a junk bond crisis. Those crises triggered a huge drop in interest rates, including mortgage rates.
3. These two factors caused an increase in both volume of sales and house prices.
4. In late 1988/early 1989, there was an up-tick in interest rates, including mortgage rates. This triggered a rush to buy houses, which resulted in an even greater flurry of home sales and house price increases.
5. In April 1989, a hush settled over the Canadian real estate industry. The top of the cycle had arrived.
6. House prices dropped and did not start up again until 1996. The world’s biggest real estate company, the Reichmann brothers’ Olympia and York, went broke. Construction was stopped on the monolithic office tower between Bay and Yonge Streets in Toronto (just south of The Bay); the unfinished building stood there for years. The game was over. It took seven years for the real estate down trend to stabilize.
What’s Happening This Time?
1. Many investors were fed up with the stock market after the 2008-09 crash, when market averages dropped 50% in only nine months. Many disgruntled investors turned to real estate for something more wholesome, less risky.
2. The stock market crash was followed by a world banking crisis, a crisis in corporate America, and the continuation of the US sub-prime mortgage crisis. These crises triggered a massive drop in interest rates, including mortgage rates.
3. These two factors combined to create a flurry of real estate activity. Volume of sales is up and prices are up. (Reference: Toronto Real Estate Board, February 2010)
The 1987 crash sequence led to a top in real estate in 1989. I wonder if the 2008 crash sequence is setting up a top in real estate prices now.
The Trigger Has Been Pulled
In 1988-89, the first up-tick in mortgage rates triggered the last surge of home buying. And when that surge of buying ended, the top was in. Earlier this week (March 29, 2010), Canadian banks announced up-ticks in their mortgage rates.
What to Expect
If this pattern is repeated, we should see a surge in home sales starting right now. Buyers who had been holding off will rush into the housing market. Volume of home sales and house prices will rise dramatically in April and May 2010. And once that buying spree is over, house prices will start to fall: the game will be over.
We hear that mortgage bankers are run off their feet this week, locking in today’s mortgage rates for 5 years because borrowers are worried that this is the beginning of many mortgage rate increases. It’s like a financial feeding frenzy to lock in these low rates now.
What to do about it
If you are an owner of investment real estate, you should sell to the surge of buying that lies immediately ahead. If the market does drop, as it did in the early 1990s, investors with lots of cash will be poised to buy at the bottom.
If you have been thinking of selling your too-large house and buying a smaller one, do it now. If you are more venturesome, you might consider selling now and renting for a few years.
If you are an ordinary homeowner who lives in the right size of house for your needs, there is nothing for you to do. You watched the price of your house rise these past 14 years, and now you’ll see it fall for a while. It’s all the same. Home is home, regardless of what you think it’s worth.
How long will Canadian house prices continue to go up when American house prices are going down? My guess: 90 days more. Then the game will be over.
In my book, Beyond the Bull, I talk about what it takes to become a better investor. One of the five keys is knowing when to sell. Another key is learning from your own experience (remember 1989 to 1996?). Another key is learning from the experience of others (think about our American cousins now or the Reichmann brothers in the early 1990s.).
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32). Contact Ken directly at ken@castlemoore.com.
Tuesday, March 30, 2010
Financial Olympics
People love athletic competition: there’s something exhilarating about winning. We seem to get a high from Olympic victories.
But there is another international competition going on this year. It’s a friendly competition between two great super powers, China and The United States. It involves currency. Right now, the Yuan is pegged to the US Dollar: it’s a dead heat. But, unlike the Olympics, the goal in a currency race is to lose. America wants to come in second. America wants the Chinese Yuan to become a free-floating currency like the Canadian Dollar. Their feeling is that, if allowed to float freely in the international currency arena, the Chinese Yuan would float upwards. That opinion is shared by most currency analysts. It’s as if the Chinese monetary athletes are taking performance-inhibiting drugs to keep the level of the Yuan low. If the Yuan were allowed to rise against US Dollar, Chinese goods would become more expensive for American consumers, and American goods would become cheaper for Chinese purchasers. A higher Yuan would favour America: the Americans want their currency to finish second. In the international currency Olympics, the winners or losers are the average working people of China and America.
US President Obama has alluded to this problem in some of his recent speeches. He is renewing his pressure on the Chinese to allow the Yuan to appreciate. And if the Chinese do not cooperate, America’s veiled threat is protectionist trade regulations. America could erect artificial barriers to Chinese imports into the USA.
But there’s another way to look at this race. Is America really talking about devaluing her own currency? That’s how it looks to the Chinese.
Right now China holds about 10% of America’s public debt; about $790 billion. Some analysts estimate that China owns approximately double that if they include non- Federal government securities. If these estimates are accurate, and the US Dollar was devalued by 10% vs. the Yuan, the Chinese would lose about $158 billion. Ouch!
And right now our American cousins are running massive government deficits – their country is going even further into debt. In order to finance that debt, they borrow. They sell treasury bonds and bills. And, so far, the Chinese have been willing buyers.
And now the Americans are rocking the boat so their consumers will lose [Americans would pay more for cheap Chinese imports.] and their workers will win [American exports would become cheaper for Chinese buyers.]. They talk about a more level playing field. They want the Yuan to win and the US Dollar to be devalued.
And how should the typical Canadian investor react to the Sino-American Currency Olympics?
As usual, our advice is to be over-cautious. An unnamed Chinese philosopher is credited uttering the curse: “May you live in interesting times.” “Interesting times” means challenging, disruptive times. You can see that his curse has come true: we do live in financially interesting times. In the past ten years, the stock market has dropped in half twice. We’ve had an international banking crisis. The prices of oil and gold have sky-rocketed. American house prices have dropped sharply. We’ve had two recessions. The world’s biggest manufacturer, bank, brokerage firm, mortgage company and insurance company all had to be bailed out by the American government. People have had to re-think their retirement plans. In the same way that the 1980s and 1990s were times of economic growth and stability, the 2000s have been times of instability and economic chaos. And now the Americans and Chinese are squaring off for a currency contest. These seem like good times to be over-cautious.
If financial instability increases this spring, it would be a good time to sell your higher risk investments [stocks, investment real estate] and purchase less risky securities. [Bonds, treasury bills] And how can we tell if instability increases? The stock market will drop. A stock market drop of 13% or more from last week’s market highs could indicate that the current 54 week rally has reversed. The risk is that the decline that began in 2007/2008 could begin again. In the financial Olympics, it’s sometimes best to not enter the race rather than lose.
Ken Norquay, CMT.
Financial Philosopher
President
Market Street Investment House
ken@CastleMoore.com
Links for buying Beyond The Bull:
www.gobeyondthebull.com Bullmanship code: K44N
But there is another international competition going on this year. It’s a friendly competition between two great super powers, China and The United States. It involves currency. Right now, the Yuan is pegged to the US Dollar: it’s a dead heat. But, unlike the Olympics, the goal in a currency race is to lose. America wants to come in second. America wants the Chinese Yuan to become a free-floating currency like the Canadian Dollar. Their feeling is that, if allowed to float freely in the international currency arena, the Chinese Yuan would float upwards. That opinion is shared by most currency analysts. It’s as if the Chinese monetary athletes are taking performance-inhibiting drugs to keep the level of the Yuan low. If the Yuan were allowed to rise against US Dollar, Chinese goods would become more expensive for American consumers, and American goods would become cheaper for Chinese purchasers. A higher Yuan would favour America: the Americans want their currency to finish second. In the international currency Olympics, the winners or losers are the average working people of China and America.
US President Obama has alluded to this problem in some of his recent speeches. He is renewing his pressure on the Chinese to allow the Yuan to appreciate. And if the Chinese do not cooperate, America’s veiled threat is protectionist trade regulations. America could erect artificial barriers to Chinese imports into the USA.
But there’s another way to look at this race. Is America really talking about devaluing her own currency? That’s how it looks to the Chinese.
Right now China holds about 10% of America’s public debt; about $790 billion. Some analysts estimate that China owns approximately double that if they include non- Federal government securities. If these estimates are accurate, and the US Dollar was devalued by 10% vs. the Yuan, the Chinese would lose about $158 billion. Ouch!
And right now our American cousins are running massive government deficits – their country is going even further into debt. In order to finance that debt, they borrow. They sell treasury bonds and bills. And, so far, the Chinese have been willing buyers.
And now the Americans are rocking the boat so their consumers will lose [Americans would pay more for cheap Chinese imports.] and their workers will win [American exports would become cheaper for Chinese buyers.]. They talk about a more level playing field. They want the Yuan to win and the US Dollar to be devalued.
And how should the typical Canadian investor react to the Sino-American Currency Olympics?
As usual, our advice is to be over-cautious. An unnamed Chinese philosopher is credited uttering the curse: “May you live in interesting times.” “Interesting times” means challenging, disruptive times. You can see that his curse has come true: we do live in financially interesting times. In the past ten years, the stock market has dropped in half twice. We’ve had an international banking crisis. The prices of oil and gold have sky-rocketed. American house prices have dropped sharply. We’ve had two recessions. The world’s biggest manufacturer, bank, brokerage firm, mortgage company and insurance company all had to be bailed out by the American government. People have had to re-think their retirement plans. In the same way that the 1980s and 1990s were times of economic growth and stability, the 2000s have been times of instability and economic chaos. And now the Americans and Chinese are squaring off for a currency contest. These seem like good times to be over-cautious.
If financial instability increases this spring, it would be a good time to sell your higher risk investments [stocks, investment real estate] and purchase less risky securities. [Bonds, treasury bills] And how can we tell if instability increases? The stock market will drop. A stock market drop of 13% or more from last week’s market highs could indicate that the current 54 week rally has reversed. The risk is that the decline that began in 2007/2008 could begin again. In the financial Olympics, it’s sometimes best to not enter the race rather than lose.
Ken Norquay, CMT.
Financial Philosopher
President
Market Street Investment House
ken@CastleMoore.com
Links for buying Beyond The Bull:
www.gobeyondthebull.com Bullmanship code: K44N
Passing the Bucket: the Citibank bailout story.
In early 2009, the American government bailed out Citibank, the world’s largest bank, by buying treasury shares. The USA wound up with 25% of the outstanding shares and Citibank got $25 billion of cash in the kitty. (In addition to buying shares, American tax payers loaned Citibank another $20 billion. Citibank has already repaid that loan.) And this week, the US Treasury announced it will start to sell its 25% stake, 7.7 billion shares.
What effect do you think this sale might have on the price of Citibank’s stock?
Well, on the day the sell announcement was made March 29, 2010, Citibank shares dropped 3% with a trading volume of over one billion shares. One billion shares is hightrading volume for this stock, but it has traded over 2 billion shares per day several times in the past two tumultuous years. As a market technician, I judge today’s trading action to be a significant indicator of things to come, but not an outrageously obvious danger signal.
One of the most important influences on any stock’s price is the presence of a large seller or buyer in the market. The sheer size of gigantic buy or sell orders can move the stock’s price up or down. Big institutional traders know this, and use stealth in their buying or selling. But when a shareholder of the size of this one (the US government) sells a stake as big as this one (25%), securities law requires the big buyer or seller to disclose their intention so as to be fair to all the smaller shareholders. That’s why the US Treasury made this week’s announcement. If it wasn’t a legal requirement, it would have been more effective for them to sell their giant stake quietly, with no fan fare. But they couldn’t do it this time. They had to announce their intention.
How do you think potential new investors in Citibank might react to this news that a giant seller will be in the market place until it sells 7.7 billion shares? Would it not be logical for new investors to postpone their purchase in hopes that this mega-sale might push the stock price lower? If it were you, wouldn’t you delay your investment in Citibank for a few months just to see if the price drops? After all, if the share price were to go up, the US treasury would flood the market with its 7.7 billion shares and cool the price back down. The risk that a new investor in Citibank will miss out on a big rise in the price of the stock vanished when the treasury announce their sale. The real risk is that government selling will drive the price lower.
And what about investors who currently own the stock and have been thinking of selling? What should they do? Most will sell now, before the government sells. This week’s announcement has put a lid on the price of Citibank shares until the government’s selling program is complete.
The government bailed out Citibank in the 2008-9 banking crisis: and now they will try to pass the bailing bucket to the investors of America.
In my book, Beyond the Bull, I discuss why stock markets were invented in the first place: to help large investors sell large investment positions. The Citibank saga is a perfect example it. And now we’ll see how efficient today’s markets are at finding liquidity for those really big players.
The Chancellor of the Exchequer will be watching too, because the British government bought a huge stake in Lloyds Bank and the Royal Bank of Scotland. They will be hoping that the Citibank share sale goes smoothly because they have a big investment position to sell too.
What about the Bank of Canada? Does our government have any shares of giant Canadian banks to sell? No. Our banking system came through the 2008/9 crisis in relatively good shape.
And what about you: what should Canadian investors do as big governments distribute their bank bailout bounty to the world’s investors? Follow their lead: sell your bank stocks now, before the longer term effect of the American and British government’s mega-sales takes effect.
Ken Norquay, CMT,
Financial Philosopher
Market Street Investment House
905-847-8511
ken@castlemoore.com
Links for buying Beyond the Bull:
www.gobeyondthebull.com Bullmanship code: K44N
What effect do you think this sale might have on the price of Citibank’s stock?
Well, on the day the sell announcement was made March 29, 2010, Citibank shares dropped 3% with a trading volume of over one billion shares. One billion shares is hightrading volume for this stock, but it has traded over 2 billion shares per day several times in the past two tumultuous years. As a market technician, I judge today’s trading action to be a significant indicator of things to come, but not an outrageously obvious danger signal.
One of the most important influences on any stock’s price is the presence of a large seller or buyer in the market. The sheer size of gigantic buy or sell orders can move the stock’s price up or down. Big institutional traders know this, and use stealth in their buying or selling. But when a shareholder of the size of this one (the US government) sells a stake as big as this one (25%), securities law requires the big buyer or seller to disclose their intention so as to be fair to all the smaller shareholders. That’s why the US Treasury made this week’s announcement. If it wasn’t a legal requirement, it would have been more effective for them to sell their giant stake quietly, with no fan fare. But they couldn’t do it this time. They had to announce their intention.
How do you think potential new investors in Citibank might react to this news that a giant seller will be in the market place until it sells 7.7 billion shares? Would it not be logical for new investors to postpone their purchase in hopes that this mega-sale might push the stock price lower? If it were you, wouldn’t you delay your investment in Citibank for a few months just to see if the price drops? After all, if the share price were to go up, the US treasury would flood the market with its 7.7 billion shares and cool the price back down. The risk that a new investor in Citibank will miss out on a big rise in the price of the stock vanished when the treasury announce their sale. The real risk is that government selling will drive the price lower.
And what about investors who currently own the stock and have been thinking of selling? What should they do? Most will sell now, before the government sells. This week’s announcement has put a lid on the price of Citibank shares until the government’s selling program is complete.
The government bailed out Citibank in the 2008-9 banking crisis: and now they will try to pass the bailing bucket to the investors of America.
In my book, Beyond the Bull, I discuss why stock markets were invented in the first place: to help large investors sell large investment positions. The Citibank saga is a perfect example it. And now we’ll see how efficient today’s markets are at finding liquidity for those really big players.
The Chancellor of the Exchequer will be watching too, because the British government bought a huge stake in Lloyds Bank and the Royal Bank of Scotland. They will be hoping that the Citibank share sale goes smoothly because they have a big investment position to sell too.
What about the Bank of Canada? Does our government have any shares of giant Canadian banks to sell? No. Our banking system came through the 2008/9 crisis in relatively good shape.
And what about you: what should Canadian investors do as big governments distribute their bank bailout bounty to the world’s investors? Follow their lead: sell your bank stocks now, before the longer term effect of the American and British government’s mega-sales takes effect.
Ken Norquay, CMT,
Financial Philosopher
Market Street Investment House
905-847-8511
ken@castlemoore.com
Links for buying Beyond the Bull:
www.gobeyondthebull.com Bullmanship code: K44N
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