Stockfessor

2009 Jul-Sep, Daily Insights

Archives of Daily Insights
2009 July-September

9/30/09 Wednesday

Dow: -30 to 9712, volume 1.7 billion shares.
Nasdaq: -2 to 2122, volume 2.6 billion shares.
S&P 500: -4 to 1057, volume not available.

Today’s movement is marked by volatility. In the early morning, the Dow drops by as much as 130 points. But it recovers to a 30 points decline at the end. The other two indexes also follow the same path. The volumes of transaction have also picked up.

Volatility makes many people nervous. However, in a bull market, volatility presents a good opportunity to buy when the stocks suddenly dip by a wide margin for a short while. In this morning for instance, the dip only lasted for a couple of hours.

Yesterday, I talked about the elimination process for selecting stocks. Since there are also one thousand and one reasons when to buy, you must know when it’s a good time to buy a certain stock. Here’s what I do:

I seldom follow the advice of other people because they may not have done as much homework as I did. So I rely mainly on my own observation and reasoning.

I never buy a stock on the downtrend because I can never know when it will hit bottom.

I hesitate to buy a stock because of a hyped product. I prefer to wait until the product is proven to bring up the price.

I never buy when everybody says the market is good. On the contrary, I stay out or cash out.

I never worry about missing a chance in the stock market. There are countless of them coming by everyday.

I never buy a stock if I have not tracked it for a few weeks.

I never buy a stock if I cannot tell when was the previous record high, and when was the previous record low.

I’ll be careful to buy a stock more than half way between the previous record high and low, because the risk is much greater from there.

I buy when I see that the stock has fallen to the record low and is on its way back up for a few weeks. This is the beginning of the recovery or uptrend.

When I see that the stock is on the uptrend after passing the record low, I continue to buy and sell frequently, taking advantage of the countless ups and downs on the way.

9/29/09 Tuesday

Dow: -47 to 9742, volume 1.2 billion shares.
Nasdaq: -7 to 2124, volume 2.1 billion shares.
S&P 500: -2 to 1061, volume not available.

The market consolidates after yesterday’s big gain with relatively light volumes of transaction. As I said, a bull market does not have to go up everyday. The bull usually dances 3 steps forward and one step backward. Alternatively, it may dance 3 steps backward and one step forward. It’s still a bull if the magnitude of the one gain is more than the total of the three losses.

A friend of mine asks me today if drug stocks are good because they are safe. Drug stocks are safer than the rest because all drug companies are big ones flushed with cash. Why? Selling drugs (both legal or illegal ones) is a very profitable business because millions of people are hooked on them. There is no record that a drug company has ever failed. My question is then are you in the stock market just for safety? If yes, then buy some drug stocks and hold them until you want to cash out.

There are one thousand and one reasons to buy stocks. You must know exactly what you want. There are more than 4000 US public companies and countless investment funds out there. You also must know which ones you want. Thus, it all boils down to eliminating most of them to arrive at a few stocks that you can handle.

Here’s my own process of elimination:

I never ask people for advice because they may not have done as much homework as I did.

I never let other people play with my money although they claim they are experts. Therefore I rule out all the funds.

I also rule out risky industries such as airlines, travel, retails, and novel unproven products.

I don’t buy any stock worth over $20 because the higher the price, the greater is the risk.

I don’t buy penny stocks because I never bet on a dead company.

I buy when I sense that it is the beginning of a bull market. How? when many people still have doubts after a recent big downturn. Now is the time. I cash out when the market seems red hot when taxi drivers, janitors, housewives, doctors, dentists, lawyers, engineers, teachers, and stock analysts all say that the stock market is good.

I buy when I see a stock rebound for at least two weeks after hitting bottom. Those stocks are everywhere if you care to look, especially at this time.

I only buy a stock after tracking it everyday for at least two months. I make sure I know when was its previous peak and when was its previous bottom. I also make sure I buy near the bottom, not at the mid point. Lastly, I make sure that the company can survive and that its business is improving even though it is still losing money right now.

In this way, I manage to narrow down thousands of companies to a dozen or so that I can manage. From there, I pick a few to play. Because stocks go up and down frequently, I rotate from one stock to another. I cash out at a high point and go back in at a low point. I cash out the higher-cost ones and switch to the lower-cost ones, thereby limiting my risks.

My goal is to make some profits every week if not every day, and to replenish my cash in order to play again as the bull market progresses. At some time in the near future when the bull is in full swing, I’ll say goodbye to the market. But I look forward to enter the market again after a big downturn or a cruel slaughter.

9/28/09 Monday

Dow: +124 to 9789, volume 0.98 billion shares.
Nasdaq: +40 to 2131, volume 1.9 billion shares.
S&P 500: +19 to 1063, volume not available.

You may describe today’s movements as a jump. But don’t get too elated because the volumes are not high. Today’s stimulus comes from a number of merger announcements, the most significant of which regards Xerox wanting to buy Affiliated Computer Services for $6.4 billion.

News about mergers and acquisitions used to provide a boost for the stock market as a whole. Why? Because they give the impression that the financial market is stable and sound where a company can raise enough capital to buy another one. At this particular time when the financial market has just gone through a period of near collapse, this is great welcoming news. We may also see a similar boost later when some new companies are going public, especially in the new energy sectors like biotech, solar and wind.

Since the stock market is influenced by impressions, rumors, and emotions, a few conclusions can be drawn regarding news about mergers and acquisitions (M&A):

• M&A tends to boost the whole market, especially the financial sector because it is instrumental for its successful execution.
• The industry where M&A occurs is stimulated most. In the Xerox case, it has special reference for the computer services or management industry.
• One actual M&A may lead to several rumored ones, and the rumor may feed upon itself for a while.
• Although small companies are struggling in the current recession, big companies are reported to be flushed with cash due to their cutting expenses like laying off workers. What will they do with the cash in the months ahead? They will try to solidify their market shares by M&A.

• Stimulating news like M&A is good for use as a safety test for the stocks you hold. When your stocks don’t respond to relevant M&A news for a couple of times, you should take a hard look at their market or financial positions. Maybe the companies are not doing well. In that case, you may consider if you want to dump them.

9/25/09 Friday

Dow: -43 to 9665, volume 1.2 billion shares.
Nasdaq: -17 to 2091, volume 2.4 billion shares.
S&P 500: -6 to 1044, volume not available.

This is the third consecutive day of retreat for the market. To those who are afraid, let me offer some consolation. First, the retreats are only temporary. Second, most of the declines occur only in the last hour of the trading day instead of during the whole session. Third, after each drop in the recent past, prices recover and break through the previous highs. Fourth, prices are generally very low compared with 2006 and 2007, and a bear market never occurs when prices are low. Why? The purpose of a bear is for cashing out with a profit. How much cash can you get if prices are already low?

Let me venture into thinking what will happen in the months ahead.

No matter how bad you feel about your income and job prospects, the economy is on the mend. Business is recovering albeit in a bumpy fashion.

Why do I think it’s a bull market? When stock prices hit bottoms in early March this year, it automatically set the stage for a bull market. The question is how far will the bull run and how fast.

This bull will move far because it starts from a very low price level where many businesses have been devastated and unemployment is at a record high. It will take at least a couple of years for things to gradually return to normal. In addition, it will take time for all the government stimulus packages to work through the economy. By that time, with luck, we may even see the beginning of a boom for the new green industry, just like we saw the dot.com and the Internet booms.

This bull will move by fits and starts, being interrupted so very often by negative news such as layoffs, company failures, home foreclosures, and rising oil and material prices. Already, the volatility of oil prices is leading the market up and down for many weeks now. Furthermore, there is always the fear of inflation and huge government deficits leading to depreciation of the US dollar. This bull will eventually get exhausted when stock prices reach a high level at the height of the boom a couple of years from now.

You will be playing catch-up if you are not in the market soon. The best time to buy stocks is when prices are low, business is recovering, and a mix of good and bad news are floating around. I strongly advise you not to get in at the height of the boom when stock prices are high, everything seems rosy, and everybody says it’s a good time to buy.

9/24/09 Thursday

Dow: -41 to 9707, volume 1.4 billion shares.
Nasdaq: -24 to 2108, volume 2.6 billion shares.
S&P 500: -10 to 1051, volume not available.

What causes the slide today is the 2.7% drop in August existing home sales as reported by the National Association of Realtors. This is unexpected because this figure had been rising for the previous four consecutive months.

Does that mean the housing market starts to dip again? We’ll see. One month’s interruption does not mean much. It may as well be a hiccup because most economic signs point to a positive gain. It’s only a fear that things may get worse. You may also say that it’s an excuse for the market to take some short-term profits.

Talking about fear, you may be surprised to find out how much the fear factor has influenced your life. In most cases, fear is not warranted. You fear because you don’t understand the situation. Also, you fear because somebody induces you to.

Fear due to Misunderstanding or Ignorance
• Panic sales of stocks. This happens at the depth of a recession because people think that the sky is falling or the recession will last for a long time.
• Sitting on the fence while stocks begin to pick up from the bottom, due to the fear of worse things to come.
• Fear of change. Life is always an uncertainty. You never know what will happen tomorrow even though you try to keep things the same. On the other hand, you will miss all kinds of new opportunities if you fear change.

* Fear of making mistakes. If too many of us fear making mistakes when required to do something differently, the world will never see any progress at all. For any window that is not yet opened, there are countless possibilities waiting to happen before our eyes.

Induced Fear
• All kinds of good examples can be found on Fox News regarding induced fear about government policies: health care reform, financial reform, education reform, green energy development, etc.
• US invasion of Iraq after 9/11 terrorist attack. The majority of legislators supported the invasion because they feared that if they did not, the public would vote them out of office. In fact, the public was confused as always. Many of them could not even locate Iraq on the map. They feared because the top leaders induced them to. So they wanted the government to do something, anything, that later cost the US over 3500 lives and more than 1 trillion dollars.
• Have you ever wondered why people had long believed that the earth was flat until the 1500’s when the explorers proved them wrong? Because few people dared to challenge existing teachings, traditions and rules. Whoever dared to do that would be pronounced as heretics and would be executed.

9/23/09 Wednesday

Dow: -81 to 9749, volume 1.3 billion shares.
Nasdaq: -15 to 2131, volume 2.7 billion shares.
S&P 500: -11 to 1061, volume not available.

The market gets a boost when the Federal Reserve announces keeping the present low interest rate. However, the boost only lasts for a few minutes before the market slides back during the last hour of the trading session. It’s just another day of profit taking.

The movement of interest rate controlled by the Fed is one of the most sensitive for the stock market. But that does not mean the impacts are always large. Sometimes the low interest rate is ignored like today. Normally, the continuation of low interest rate serves as a stimulus, while increasing interest rate depresses the market. Today, the result is just the opposite.

A stock player should understand the implications of interest rate movements. As the economy is currently recovering from a deep recession, the Fed is expected to keep the present low rate unchanged. Any announcement to this effect should not produce much impact on the stock market.

The time of biggest impact is when the Fed begins to raise interest rate. That will happen several months down the road if the economy is heading toward full employment. When the Fed raises interest, it ignites the fear of inflation that will have a negative impact on the stock market. It may turn a bull into a bear.

The worst situation is that after raising interest a few times, inflation does not subside still, and the economy seems to be sputtering due to the corrosive effects of inflation. Then fear will turn into alarm. Everybody will want to cash out and run.

9/22/09 Tuesday

Dow: +51 to 9830, volume 1.3 billion shares.
Nasdaq: +8 to 2146, volume 2.5 billion shares.
S&P 500: +7 to 1072, volume not available.

The market resumes its advance after pausing for just a day. Have you noticed that all three major indexes rise together in recent weeks? It means that the advance is broad-based, which is a good sign.

I have been talking about the bull market recently, and urging people to take a dip. Today let me offer some warnings about the bear market.

It is true that we are in a bull market right now that may last for as long as 2 years until full employment is restored. That does not mean there will be no temporary setbacks. In fact, you will see many temporary retreats on the way up. The bull market will eventually reach a peak where a downturn suddenly occurs. If the downturn continues, it will be called a bear market. Many small players get caught in the bear market because they got in too late near the peak.

A bull market does not mean that every stock will go up. If you happen to own one that does not advance, you’d better make sure that it survives through the current recession. Many companies die as the economy recovers. Why? Because they have used up their cash reserves, and are unable to pull through the last stage of the recession. That is why I prefer big companies because they can obtain finance much easier to help them pull through.

A stock riding the bull market seldom goes up everyday. Instead, it dances the Waltz or the Tango. That is, two or three steps forward and one backward. It is not difficult to discover the rhythm if you follow its movements for a few weeks. The best way is to sell on the advance and buy back on the retreat several days later. The sell will bring immediate profit while replenishing your cash. The buy back will ensure that you still own the stock to take advantage of more upward movements later.

As the stock goes higher, the risk increases correspondingly. You must decide when you want to cash out before the bear comes. Some stocks reach their peaks before the bull market ends, while some others move rather slowly. That is why you need to have a short list of stocks moving at different speeds. As you exit the fast movers, you switch to the slow ones to continue riding the bull. Eventually, you will cash out of every stock you own. With this cash, you can always wait for a downturn and play again when stock prices hit a low level.

If you play this way, you will be pleasantly surprised how much cash you will own eventually, because they all add up while you are riding the bull.

9/21/09 Monday

Dow: -41 to 9779, volume 1.2 billion shares.
Nasdaq: +5 to 2138, volume 2.4 billion shares.
S&P 500: -4 to 1065, volume not available.

The market is mixed today with only the Nasdaq rising showing continued resurgence of the high tech sector. Trading volumes are light by comparison.

For those who are sitting on the fence wondering if the economy is good enough to take a dip, let me say that in a few months’ time you will be playing catch up. Here are my reasons:

The stock market is always looking ahead several months. The point is not whether the economy is good right now. It’s whether the economy is improving. No doubt it is.

There are always good and bad news everyday. The most important news for the average person is the employment situation, which is not good at present. However, for the stock market, the most important news is whether companies are recovering from the deep recession. Most of them are, especially the big ones.

Since the big players control the market, they have already arrested the big declines in early March, and are quietly positioning themselves near the bottom for an uptrend. You should not miss this fact no matter what you think. The big players have a big plan when they move in. You’d better follow them closely, rather than when the market is hot when they will be cashing out.

How long will this bull run last? This is the best situation where things are improving but not fast enough to get the millions of small players excited. Interest rates are low, so is inflation. The economy will take at least several months to recover. Full employment will not be reached until 2011 because the job market is the last to recover. By that time, the stock market will turn hot because it will be attracting all the small players into the game. That is the time when the big players will start to cash out. Do you want to move in at that time when everything appears so rosy?

9/18/09 Friday

Dow: +36 to 9820, volume 2.3 billion shares.
Nasdaq: +6 to 2133, volume 3.0 billion shares.
S&P 500: +3 to 1068, volume not available.

After taking a one-day pause, the market continues its upward path. Today’s high volumes are attributable to the expiration of options and futures rather than a big push in stocks.

Debunking Myth #7:
Is there a vicious circle for the small investor?

Yesterday I talked about the physical aspect of a vicious circle. Now let me focus on the mental aspect. Have you ever noticed that sometimes it’s very difficult to improve or turn things around even though you are always trying? The reason is that you are trapped in a mental vicious circle. Your vision, attitude, approach, and methods still have not changed for the better. You are doing the same old things using the same old methods. No wonder things don’t improve.

Most small investors suffer from the following misconceptions about the stock market:

• The stock market is perfect competition where supply meets demand to give you a fair price. It’s absolutely not the case.
• The big players buy and sell like small players do. They don’t and you don’t even bother to find out.
• Obtaining insider information is illegal. Yes, but big guys do it all the time in a discrete manner. So what?
• The laws automatically protect the small investors. You wish.
• When a company makes more profits, the stock will automatically rise. This is only a textbook case.
• The more closely you follow the investment news, the better investor you will be. Yes, but you must know how to distill the small precious amount of relevant news from all the rest.
• The more technical details you know, the better investor you will be. You should take a hard look and see if it is worth your efforts.

Success in the stock market depends heavily on second chances because you tend to make mistakes. The important thing is that you know how to learn from your mistakes rather than repeating them over and over.

Big players have an inherent advantage due to their huge resources. They can afford to buy many times and gradually unload. Small players exhaust their resources after one purchase or two. They cannot sell at a profit if they make a mistake in the first round.

How can you avail yourself of a second chance? Well, think about your opponents in the stock game. Think about recovery just in case you’re not lucky. Open your eyes and ears to reasonable and logical advice. And lastly, do not repeat the things that don’t work for you.

9/17/09 Thursday

Dow: -8 to 9784, volume 1.5 billion shares.
Nasdaq: -6 to 2127, volume 2.6 billion shares.
S&P 500: -3 to 1065, volume not available.

The market pauses for a second time only in the past ten sessions. All three major indexes register small declines. The volumes continue to stay a little higher than normal, showing increasing activity.

Debunking Myth #7:
Is there a vicious circle for the small investor?

There are all kinds of vicious circles in life, most of which are not obvious. When you have little money or resources, it is much harder to succeed than when you are well off. Just imagine a kid born in the ghettos. He tends to be trapped in a vicious circle of poverty unable to break free. That is why poor people have to try harder and deserve more help.

How can you break your vicious circle if you have one? First you have to understand what that is. A vicious circle has two aspects: physical and mental. The mental aspect is the most difficult to recognize and to break. Have you ever wondered why so many countries receiving foreign aids for so long are still immersed in poverty? They cannot overcome their mental vicious circle despite all the material help.

Today I only want to focus first on the easier physical part. Let’s suppose a small investor has $2000 to play in the stock market.

How much can you buy? Not much really. Most good stocks are much higher than $10 per share. Those under $5 are struggling to survive, thus increasing your risk. What about those penny stocks under $1? Well, they carry even more risks. But with $2000 capital, there is not much choice, is there? In fact, penny stocks are a really bad choice destined for failure.

You must understand that a penny stock does not get there from zero. All penny stocks got to their present status from a higher price because the companies fail to survive. They are officially dead. Only their worthless stocks are traded on the market. Why worthless? Even assuming the best scenario where the company comes back to life, its stocks will be reconstituted. That means the old penny stocks will be zeroed out and a new stock issued at a much higher price. There will be no exchange from the old stock to the new. Buying penny stocks is like betting on a dead person.

A second disadvantage of a small $2000 capital is that you can only buy one time, and hold the stock until you can make a decent gain by selling it later. For those who don’t have luck on their side, it’s an agonizing experience to wait for months. With little capital, you must rely on a one-shot luck because you have no resources left to maneuver or recover.

On the other hand, suppose your initial capital is raised to $20,000. You can buy different batches of stocks at different prices. You may be unlucky some times but lucky some other times. During those lucky times, you sell at a profit and replenish part of your capital. This enables you to play again. Moreover, when you buy the same stock at different prices, a cost average yields a better price for your total holdings, thus lowering your risk.

Even with a big amount of money as initial capital, a person can lose it all if he doesn’t know how to play, follows a wrong method, or is not willing to embrace a new approach to improve things. These are the mental aspect of a vicious circle. I will talk about this tomorrow.

9/16/09 Wednesday

Dow: +108 to 9792, volume 1.6 billion shares.
Nasdaq: +31 to 2133, volume 2.7 billion shares.
S&P 500: +16 to 1069, volume not available.

Are you aware that the three major indexes have risen for eight days out of the past nine? May I add that they have broken their highest September levels for the past three consecutive days. The volumes have also increased steadily. Does this seem like a bull run?

Debunking Myth #6: What do they mean by rotation?

If you buy stocks and hold them for a few years before considering cashing out, you may not be interested in the term “rotation”.

Rotation is the short-term movements of huge amounts of cash from one group of companies to another by the big players for various reasons. The purpose of course is make profits based on the situations current at the time.

Big players commit their cash in two portions. One portion is to buy sufficient stocks near the bottom price to qualify as a major shareholder for the dual purpose of control and insider information. The other portion is used to buy up the price to boost the values of their shareholdings for eventual cash out. The first portion can be considered as long-term investment. The second portion produces the ups and downs in stock prices we see every so often.

The circumstances creating a rotation can be anything that makes significant news:
• Sudden rise or fall of the prices of oil, gold, aluminum, food, and the general inflation rate.
• New developments in economic conditions such as interest rates, employment, consumer spending, industrial production, productivity, trade deficits, government spending, etc.
• News regarding influential people such as Bill Gates, Warren Buffett, Steve Jobs, which may cause a rotation of cash into or out of the company stocks.
• The talk of health care reform whose uncertainties cause the rotation of cash out of the drug and insurance companies.

Cash rotation usually occurs on an industry basis. It results in the rise and fall of all major company stocks within the same industry and some associated industries, too. Since the rotation is temporary depending on the current circumstances, a few days’ rise is followed by a fall that may last just as long, and vice versa.

In the wake of the rotation, the big players replenish their short-term cash from selling the stocks they have recently rotated into. Now they have the cash required to plough back into the stocks they have previously rotated out of. You may consider this rotation cash their working capital, without which, the stocks cannot move.

9/15/09 Tuesday

Dow: +57 to 9683, volume 1.5 billion shares.
Nasdaq: +11 to 2103, volume 2.4 billion shares.
S&P 500: +3 to 1053, volume not available.

The market rises again with the three major indexes achieving their highest levels for this year. The volumes also pick up.

A mixture of news, good and bad, still lingers. This will persist for a couple of years until full employment is restored. Today, the Chairman of the Federal Reserve pronounces that the recession is technically over. In addition, retail sales for August show a plus as opposed to previous months of declines. Inflation appears to be tamed.

For those of you who cannot decide between a bull and a bear, I’d like to remind you that the stock market is always several months ahead of the real thing. The turning point away from the worst has already occurred in early March this year. You are playing catch up from now on.

One warning you must heed. A bull market does not mean that every stock will rise. Companies rise and fall all the time. Even when the recession is ending, some companies run out of money and must fold. That is why I have tried to advise you to buy the big ones whose stocks have been beaten down. Big companies have a much greater chance to survive the recession.

9/14/09 Monday

Dow: +21 to 9627, volume 1.2 billion shares.
Nasdaq: +11 to 2092, volume 2.2 billion shares.
S&P 500: +7 to 1049, volume not available.

The market starts out in negative territory but later recovers to show some moderate gains in all the three major indexes. The volumes remain light. Have you noticed that the market often bounces back after falling? This looks like a sign of the bull.

Today marks the anniversary of the US financial meltdown when Lehman Brothers fell, followed closely by the near collapse of AIG that forced the government to pour in $85 billions to bail it out. This financial crisis triggered a worldwide recession inflicting a lot of pains to millions of people.

One year later, the US financial sector seems to be on the mend. Some major banks have already paid back the bailout money (with interests) to the government. Most financial stocks have risen significantly from their historic lows six months ago.

Debates are still going on as to whether the government should bail out the banks. Nobody wants to talk about the possibility of an economic collapse had the government not intervened. After all, what is the role of government if it does not intervene in a major crisis? Should the government just sit there and watch the show?

Besides intervention, the role of government should also be a regulator. Last year’s financial meltdown is mainly a result of the government getting too cozy with big business. The banks were not restrained for being reckless in sub-prime mortgage lending, which created a housing bubble. The respected rating agencies were not required to uphold their professional standards in assessing the securitized loans packaged by the banks. This results in the spread of this problem to overseas banks and other sectors of the economy that bought these securitized loans as investments.

Legislations to reform the financial system are now being written in the US Congress. The purpose is to prevent this kind of situation to happen again. The lessons from last year’s financial meltdown raise several important questions:

• Some financial companies like AIG have become too big to fail. Is this a good thing for the overall economy? If a company is too big to fail, it is also too big to exist because its failure will bring down the whole country, and force the taxpayers to bail it out.

• Can big corporations police themselves? Nobody can because there exists such thing as greed, and greed knows no bounds. There ought to be some checks and balances to ensure healthy and fair competition. The government is the only entity that has the power to regulate big corporations.

• Should government be pro-business or anti-business? Government should be neutral and work for the common good, and for the good of the country.

9/11/09 Friday

Dow: -22 to 9605, volume 1.3 billion shares.
Nasdaq: -3 to 2081, volume 2.3 billion shares.
S&P 500: -1 to 1043, volume not available.

The market takes a pause and reverses its 5-day winning streak despite all the good news about consumer confidence and continued global economic recovery. This demonstrates the prudence of selling into the good news. The declines for the three major indexes are relatively small and the volumes are normal.

Debunking Myth #5: Is the stock trading system invented for you or somebody else?

A consumer market develops naturally in the capitalist system when people come together to buy and sell, such as food, cell phones, PC’s, autos, furniture, etc. There are always some sellers who try to monopolize the market or engage in predatory practices. What puts the brakes on them? It’s either competition from other sellers or consumer protection regulations set up by the government.

The stock market does not resemble a consumer market even though it attracts millions of consumers from all walks of life. It is the most manipulated market where big players exert most control. It is also full of technicalities where most consumers do not know what they are getting into. The irony is that, when consumers lose all their fortunes, they blame the mysterious market forces but seldom those people who control the market.

Neither is the stock market a true retail market where sellers and buyers meet face to face to make deals. Consumers put in their bets through middlemen such as brokerage firms, which submit the orders to the exchange floor where “market makers” finalize the deals with prices they have to accept. The price of a stock is determined by auction, rather than by supply and demand as you may think. That means, a big guy can set a price and hold it there as long as he has enough cash and stocks to beat his competitors.

There exist all kinds of rules of play. Superficially, it means more choices and convenience for the consumers. In fact, it is a goldmine for the big players to obtain a clear picture of the anticipations of the small guys. When you are playing a game, letting your opponents know what you plan to do is most foolish. But most consumers do not recognize this. They are too immersed in learning how to play with the detailed rules without bothering to ask what is good for them. The following illustrate the dangers inherent in the rules of play:

The Dangers of Options
The attraction of options is less cash required to bet. On the other hand, the danger is that it encourages you to bet more, and hence lose more.

The second danger is that you have to limit yourself to a specified time period for the stock to hit a target price. Things being uncertain, what makes you so sure that the stock will hit a target price within a specified time? Even if you know the direction of the price, specifying a time is just too much risk. But the consumers do it anyway. Most of them lose as a result.

The third danger is the presence of sharks out there, which are the big guys who see clearly how consumers bet in aggregate through their connections with the brokerage firms, which possess all the options records. The big guys simply need to figure out the price and time set by the majority of the small players in their options. Then they proceed to hold the price from the target level until after the options expire.

The Dangers of Short Sales
Short sales are just the opposite of longs where you sell a quantity of stocks without owning it first. When the price drops, you’ll buy it back and pocket the difference as gains. So when you long, you gain if the price goes up. When you short, you gain if the price falls.

Betting a stock to fall is a dangerous proposition unless a crisis is imminent. Why? Stocks tend to go up given enough time because the global economy tends to expand. Stocks fall from time to time, but they have a tendency to recover. Even during the current global economic crisis, stocks are recovering after falling for several months. Doing a short sale should be betting on a short-term event only, unless you are sure that the company will eventually go bankrupt. Some consumers are so confident that they think they know a certain company is going down. This usually proves to be wrong.

The second danger is, again, the presence of sharks out there. Short sales records reside with the brokerage companies that may share them with the big players. The aggregate records show how big the volumes of short sales that the small guys are betting. There lies a profit opportunity. The big guys just need to buy up the price to scare the short sellers into surrender.

The third danger is that short sells are not cheap because you have to short a stock at a higher price in order to make sense. Besides, the brokerage company charges a fee for they have to “borrow” the stock from somebody else since you don’t own it. Also, for the total value of the stock you short that causes them to “borrow”, an interest will be charged.

The Dangers of Margins
The margin system allows you to buy more stocks without sufficient cash. When stocks rise, your margin limit will increase based on the value of your holdings. It gives you the feeling that you are richer with more buying power. On the other hand, it also encourages you to buy more, and hence lose more. In the meantime, you have to pay margin interests to the brokerage company because they are lending you the cash to buy more stocks.

What if stock prices fall? You will be subject to a margin call. You are given a day or two to pay back the margin loan your brokerage firm lent you. A margin call is an urgent demand for cash by your brokerage firm. If you don’t have cash, you are forced to sell part of your stock holdings even if the price has gone down.

Again, there are sharks out there. The big players can see the margin situation by looking at the aggregate margin records. When margins are high, that means the small guys are optimistic and confident that stock prices will rise. The big guys will bring the price down to win at their expense.

The Safety of Cash
Donald Trump used to stress that cash is king because he is a big player and he knows exactly what it means. When you buy stocks with cash, you can hold them for as long as you want. You can also sell them as soon as you want, even within the same day. The big guys cannot know your anticipations or intentions. You just keep them guessing all the time. This is the wisest way to play a game.

9/10/09 Thursday

Dow: +80 to 9627, volume 1.5 billion shares.
Nasdaq: +24 to 2084, volume 2.5 billion shares.
S&P 500: +11 to 1044, volume not available.

This is the fifth consecutive day of advance following the previous four consecutive days of retreat. The Dow breaks through its August high today while the other two major indexes have already made it yesterday. The trading volumes have increased to a level considered to be moderate. It becomes more apparent now that we are on a more solid upward trend, even though a temporary correction remains a constant danger.

For those who have heard the news today about the lousy investigation of Bernard Madoff’s great scam, you should be convinced by now that the laws cannot offer you automatic protection. The laws are there all the time, but they need to be enforced, which have to be carried out by humans, who are always corruptible.

According to the testimony in the US Congress, the investigators of the Securities Exchange Commission (SEC) performed badly in following up the complaints filed by many individuals about Madoff’s questionable investment schemes. They talked to Madoff several times but were overpowered by his cunningness. As a consequence, they could not uncover any unlawful deeds. And Madoff ran away with billions of swindled money over a period of several years.

We may conclude that the investigators are incompetent. The SEC puts up an excuse that they lack sufficient funds to train their staff to enforce the laws. This matter should not stop here. Congress should investigate whether there is any corruption involved. When a scam as big as this one robs many people of their lifetime savings, you cannot simply conclude that the investigators are incompetent. You have to think about the possibility of devious motives. Did the investigators deliberately try to be lax on Madoff so that they may get some kickback from him?

The job of the government is to protect the public from predatory practices. The worst combination is a corrupt government colluding with big business to scam the public. This happens in most developing countries. That is why their ordinary citizens are so poor, while their high officials and top businessmen are so rich. Therefore I constantly try to remind you that you have to rely on your own smarts to protect yourself from being swindled, not on the laws or your government.

9/9/09 Wednesday

Dow: +50 to 9547, volume 1.2 billion shares.
Nasdaq: +23 to 2060, volume 2.5 billion shares.
S&P 500: +8 to 1033, volume not available.

This is the fourth consecutive day of advance following another four consecutive days of retreat. Today’s increase in the Nasdaq volume shows higher activity in the high tech sector. Note that both the Nasdaq and the S&P 500 have broken through their August highs achieved in the latest rally. The Dow is only one step away from doing the same. When will the rumor materialize about a major correction?

Debunking Myth #4: How do you explain short-term price fluctuations?

The conventional wisdom is that if the company performs well, its stock price will go up. True, but when will that happen? For how long will the price keep on rising?

The conventional wisdom cannot explain why prices fluctuate so often. Neither can it explain why there exist a bottom and a peak. Until you recognize the power of the big players in moving the price, the stock market always remains a mystery.

To put it simply, the stock of a company bottoms out when the big guys decide to move in and arrest the bottom by buying large quantities of shares. Conversely, the stock peaks out when they decide to unload and invest in some other stocks. From bottom to peak, you may say that the big guys are investing for the long term. At least they have kept their large holdings long enough until they determine it’s time to get out.

What happens in between then? Once the big players have invested tens of millions in a stock near the bottom, it’s foolish to sit there and hope for the price to go up. They have plenty of cash left over and they know they can make things happen. They must play with this surplus cash to boost up the price thereby raising the values of their large holdings. However, this cash must be replenished so that they can play repeatedly on the way up. That means they have to buy and sell frequently along the way. Since they deal in large volumes, a small margin, say 20 cents, between buy and sell yields a handsome profit. Besides replenishing the surplus cash, the frequent gains they make will all add up nicely at the end of each month. This pretty much explains why stock prices fluctuate all the time.

If the big guys conspire together, and do some planning and publicity timed according to the current economic events, their effects on prices will be much more pronounced because the small guys will be drawn in to play the stock game, too.

The big guys like to look at the options market. It presents a clear picture of what the small guys are anticipating as they put in their bets. What the big guys need is an aggregate of all the brokerage firms’ options betting records. Then they move the price against the majority of the options players to maximize profits. In this way, they gain at the expense of the small guys. Do you think the brokerage firms will share their aggregate data? If there is money to be made, they will. There is no law forbidding them to share the aggregate data. The small guys see the aggregate data too, but they only see the volume, not the price. The big guys see them all because they have the connections.

Another place the big guys like to view is the aggregate short sales by the small guys. In the same way, they move the price up against the short-sellers causing them to scramble for cover, thus they win at the small guys’ expense.

In conclusion, as the small guys bet on the market everyday influenced by all the news created for them to consume, the big guys view the aggregate data of their bets, and take appropriate actions to win. You will see prices move so very often. You may see cycles whose durations range from one day to a couple of months. These are happening according to the economic circumstances unfolding everyday.

9/8/09 Tuesday

Dow: +56 to 9497, volume 1.3 billion shares.
Nasdaq: +19 to 2038, volume 2.0 billion shares.
S&P 500: +9 to 1025, volume not available.

This is the third consecutive day of advance following a retreat of four consecutive days. The volumes have picked up but are still considered light. The market does not seem to succumb to the rumors of a big correction.

Let’s continue to explore the many myths of the stock market.
Myth #3: Do big players buy and hold like you?

If they play like you do, they are no big players. They lead the market and you follow. They belong to the big league, and you belong to the little one.

One thing for sure, the big players buy and hold a huge quantity of stocks near the bottom. This gives them the power advantage as a major shareholder at minimum cost. Will they hold the stock permanently? Of course not! It all depends on how the company performs and the economic circumstances.

What do they do in the meantime? You’re very naïve if you think they sit on the shares like you do waiting for the price to go up. With plenty of cash, they do all kinds of short-term trading for two purposes: One, to buy up the price thus increasing the value of their stock holdings. Second, they sell their recent buys to make short-term profits. You’ll be surprised that their short-term profits will add up to a large sum of money when they do it frequently. They must buy and sell frequently to replenish the cash they used to buy up the price.

Have you thought about the fact that you little league are helping the big league? When they buy up the price, the herd sees it and rushes in to buy up some more.

Another way the herd is helping is through the system of short sells invented by the big players. When a small player short sells a stock after hearing some misinformation, the brokerage company records the transaction in the computer with the short-sale price. What do you think they will do with the records? They aggregate all the data to determine how large is the total short sale volume. This represents a gold mine for them. Your brokerage company may use this data, or share it with the big players. Remember they are pals or business partners. The big players then buy up the price some more to make the small short-sellers scramble for cover and lose.

Besides the short system, the options system is also invented to seduce the small guys. In the options system, a small guy agrees to buy or sell a certain stock at a specified price within a period of time. These are all recorded in the computer of the brokerage company. The big guys look at the aggregate data everyday to assess the total volumes of options. Since they have the power to move the stock price, they can hold or move the price long enough until the options expire, causing the small guys to lose.

By virtue of being a major shareholder, a big player has the connection to obtain insider information. They are always a few months ahead of the herd. Furthermore, big players also include the big retail banks, investment banks, and brokerage companies. Nearly all stock analysts are employed by them. They may feed misinformation to their analysts for them to trumpet or talk down a stock. This will be communicated to the herd for them to act according to the big guys’ wishes.

In conclusion, big players buy and sell for both long and short term to create a constant stream of cash income. They do many other things that small guys can hardly imagine. So beware, be smart and don’t be a sucker.

9/4/09 Friday

Dow: +97 to 9441, volume 1.0 billion shares.
Nasdaq: +36 to 2019, volume 1.7 billion shares.
S&P 500: +13 to 1016, volume not available.

The market advances again but the volumes have decreased steadily over the last few days. Can the rally continue with less and less volumes? I don’t think so. One explanation is that traders are optimistic but they are leaving for the Labor-Day long weekend. Let’s wait until next Tuesday. I hope they don’t come back with a vengeance, because the rumor of an impending correction hangs in the air.

If you accept Myth #1 put out yesterday, you will be interested in exploring with me the second myth today.

Myth #2: Can a small player win in the stock market? If so, how?

First of all, are you truly a stock investor? Honestly, you are not. You and I are just free riders wanting a fast buck. There is nothing wrong with that. After all, it’s a perfectly legal stock venture. The fact is you are a true investor in your family, your job, and your future because you work on them everyday, hoping to build a better life. Your stock venture should only be considered a hobby, and a bonus if you’re lucky.

If you accept the fact that you want a fast buck, why listen to people telling you to buy and hold for the long term? You should buy and cash out when you can make a reasonable profit. Then come back and play again. Why? Stock prices move up and down everyday, and also in cycles over weeks and months. You come back in when the price comes down lower again. You may want to switch to another stock, too. When you make some reasonable profits on a weekly basis, they will add up handsomely over time. This is what I mean working short term in order to build the long term.

You also have to accept that you’ve got herd instincts. That means you tend to buy when everybody buys, and sell when everybody sells. This is a fatal mistake in the stock market. You should be sensitive to the actions of your opponents (big players), rather than those of your peers (small players).

Do you believe that bottoms and peaks are the results of pure market forces? If you still do, you’d better stop here because I don’t want to waste your time. When the big guys move in, we see a bottom. When they cash out, we see a peak. You have to see it to believe it. Don’t let your illusion take over the truth.

After you’ve seen a peak, is it too late to sell? It all depends on where you bought. If you buy near the peak with your herd instincts, you will suffer a long agony on the way down. If you buy near the bottom, you have plenty of time to cash out with a reasonable profit.

A stock does not fall to zero in a couple of days unless the company suddenly collapses. However, one thing is sure. The way down is several times faster than the way up. Why? The way up is a process of big guys’ accumulation, followed by the seduction of small guys to participate. The way down is the great urge to take profits. Besides, the big guys no longer need the small guys’ help. They have already shorted the stocks near the peak since they determine the peak. All they need is to unload their holdings to drive down the price. Two pipes of cash will be flowing into their wallets: one from cashing out their stockholdings, the other from profits made on the short sales.

After you’ve seen a bottom, is it too late to buy? No, it’s the only best time to buy. A true bottom is where the big guys move in to accumulate most shares. The accumulation process takes a few months, longer for bigger companies with more shares out there. Why? If they do it too fast, the price will shoot up, raising the cost of their accumulation. Besides, it will wake up the herd, who will rush in to buy low when they are not supposed to.

A crisis drives down all stocks until it’s over. Crises come and go. Most of their comings are obvious if you pay attention to the economic environment out there. The crisis you should beware is the slow degenerative kind such as the decline of the US auto industry over a long period since the first oil crisis of 1970s. The moment of truth belatedly arrived in early 2009 when GM and Chrysler went bankrupt and the stock price of Ford was reduced to $1. Other similar degenerative crises include: the declines of major US newspapers and record companies due to the Internet revolution, the weakening of the US dollar due to large borrowing, and the negative consequences of health care inflation on American competitiveness.

A crisis always brings opportunities. The current financial crisis and worldwide recession is the opportunity of a lifetime. Nearly all stocks came down to their historic lows in early 2009. The big players’ accumulation process takes longer time simply because there are so many stocks near bottom prices for them to buy. Furthermore, the economic recovery is slow and bumpy. That means there is not enough good news to boost prices even when they are accumulating.

Have you seen any bottoms out there? They are everywhere if you care to compare the stock prices between early March 09 and the present. The big players will continue to accumulate. Stock prices will move in an upward trend until the economy fully recovers. It will take from one to two years to reach their peaks.

9/3/09 Thursday

Dow: +64 to 9345, volume 1.2 billion shares.
Nasdaq: +16 to 1983, volume 1.9 billion shares.
S&P 500: +8 to 1003, volume not available.

The market finally breaks its four-day losing streak with a broad advance. But the volumes are light as usual. It remains to be seen whether the recent retreat is over or just a short pause.

Today, I want to talk about stock market myths. There are tons of them when I try to explore. Let me begin with the first one.

Myth #1: Is the stock market a really competitive market where supply meets demand to give you a fair price?

You may think or wish so. A competitive market requires three things: First, the product can be produced in large quantity and delivered to the buyers with little hindrance, e.g. bread, milk, cell phones, PCs, autos, etc. Second, there are many producers, sellers and buyers out there. Third, if one producer or seller raises the price without a corresponding quality upgrade, a decline in sales will follow that will discourage the price rise.

Let’s apply these requirements to the stock market:

First, a company produces only a limited quantity of stocks known as shares outstanding. The Board of Directors determines how many shares the company should put out based on price, sales, profits, and commitments to major shareholders and employees. There is no such thing as ramping up production of more shares when the demand is high. In fact, when demand rises, all the shareholders want the price to go higher without increasing the shares outstanding.

Second, there are many buyers and sellers out there, but only one company that produces its own shares. In addition, there exist quite a few big players with plenty of cash to buy and plenty of shares to sell. As a consequence, the big guys can move the price easily. Furthermore, buyers and sellers come together in a stock exchange to trade. There is only one, sometimes more than one exchanges in each country instead of countless retail outlets for a regular product. The price of a stock is determined by auction at the exchange. That means, if one guy has enough cash to pay a higher price for a large quantity of stock, the price of that stock will go higher. Conversely, a big guy dumping his huge shareholdings will cause the price to fall. All the other buyers coming in later have to accept the new price. Hoarding often takes place in the stock market in anticipation of higher prices. If you try to hoard autos, cell phones, or milk, you will lose both your shirt and pant.

Third, when a big player continues to buy up a stock, it will generate a lot of good publicity about the company. People assume that the prospects must be good. The price rise seduces more people to jump in and buy up the price further. This is what we call the herd reaction that eventually will lead to a bubble. Conversely, a big player dumping a stock also causes the price to drop, resulting in an eventual panic sale by the herd.

I want to add one more factor. How a company will perform in the future is in fact a myth because people can only guess. Only the top officers of the company know a little more about the future because they see the amounts of customers’ orders coming in that reflect prospects several months down the road. This is what we call insider information that is restricted to the Board and other major shareholders. The ordinary people outside never know what is happening. However, they like to hear information provided by expert analysts. So the analysts are handed the job to trumpet or talk down a stock to influence public buying decisions. When people want something, even trash, the businessmen will find a way to give it to them.

No, the stock market never resembles a free and competitive market. The market can best be characterized as “big fish eat small fish”. It is in fact the most manipulated market you can find that is open to everybody. How come people never want to believe this? The reason is they want to make a fast buck and take a chance. After all, this is the capitalist system where you do things at your own risk.

9/2/09 Wednesday

Dow: -30 to 9281, volume 1.4 billion shares.
Nasdaq: -2 to 1967, volume 2.0 billion shares.
S&P 500: -3 to 995, volume not available.

This is the fourth consecutive day of decline for the market after about 6 weeks of run up. As usual, the trading volumes are light for the three major indexes. It is clear that stock prices are retreating as people take short-term profits.

How long will the retreat last and how far will it go? Let’s take a look at the previous retreat to get some clues:

————June High—July Low—August High—Today
Dates——-(6/12)——-(7/10)——–(8/27)——–(9/2)
Dow———-8799——–8147———–9581———9281
Nasdaq——1859——–1756———–2028———1967
S&P 500——946———879————1031———-998

As shown in the above table, the market took a few weeks to retreat from mid June to early July. Then it picked up from 7/10 to reach the August high on 8/27. Take the Dow as an example, it retreated 652 points in four weeks, only to climb 1434 points in six weeks immediately after that. This is what I call an uptrend punctuated by short-term profit taking.

What will happen next? The market is currently retreating. The retreat may go as long as four weeks like last time. The Dow may fall as far as 1000 points to test the July low. However, I think that is the worst scenario. It is not likely to happen. Why? Look at all those good news that are coming out signifying the economy is recovering steadily. The market ignores the good news for the present because profit taking is the work of the day. After that, it will start to climb back up. When? I venture to guess after mid September.

9/1/09 Tuesday

Dow: -186 to 9311, volume 1.6 billion shares.
Nasdaq: -40 to 1969, volume 2.8 billion shares.
S&P 500: -23 to 998, volume not available.

Today is marked by short-term profit taking despite unexpected good data published by the Institute for Supply Management (ISM) that shows the manufacturing sector expands for the first time in 19 months. The market retreats on many fronts. The transaction volumes also pick up significantly.

Let’s see how low we can go:

Index—July Low (7/10)—August High (8/27)—Today (9/1)
Dow——-8147——————9581——————9311
Nasdaq—–1756——————2028——————1969
S&P 500—–879——————-1031——————998

As you can see from the above table, a bull run has taken us from the July low to the August high within a period of about 6 weeks. The increases are significant. There is a long way for the market to come back down to the July lows.

Is it possible for the market to give back all its gains to return to the July lows? Of course but it’s unlikely. The reason is a stream of unexpected good news coming from the manufacturing sector, the housing sector, and even the retail sector, which is dampened by job losses and falling consumer confidence. The economy has shown many signs of recovery but with a dose of bad news too about additional small bank failures, depressed job market, increasing government deficits, and fluctuating oil prices. Some factors carry more weight than others in influencing the market.

The balance of all these factors will produce the following results. The market will be on a bumpy road up fueled by the slow economic recovery. This uptrend is punctuated every now and then by retreats caused not only by profit taking, but also by fears about the depth of our economic problems and the pace of the recovery. In fact, this bumpy upward movement can last longer until full employment is restored in a year or two.

8/31/09 Monday

Dow: -48 to 9496, volume 1.4 billion shares.
Nasdaq: -20 to 2009, volume 2.3 billion shares.
S&P 500: -8 to 1021, volume not available.

The US market retreats broadly today following significant declines in the Shanghai stock market and fall in world oil prices. The Dow was down by almost 100 points in the morning but recovered half of the losses at closing. The volumes improve from the past two days of light trading.

Today I want to talk about stock splits.

What is the purpose of a split? The purpose is to make the price lower to attract more public participation. At the same time, the number of shares outstanding will be increased by the same factor. For instance, a one-for-three split means the price will come down from, say, $15 to $5, and the shares you hold will increase from, say, 500 to 1500. As a result, the total value of your holding remains unchanged.

All the high flyers have good prospects for stock splits. It all depends on their existing number of outstanding shares. A good candidate must have both high revenues and a relatively small number of outstanding shares. They include: Google, Apple, IBM, Boeing, and Caterpillar. Berkshire Hathaway is unlikely to split because Warren Buffet wants it to remain very high-priced to stand out of the crowd.

Many big companies have high revenues, but their outstanding shares are too large already. Further splitting the shares is not a good idea. These include: General Electric, Microsoft, Intel, Cisco, Exxon-Mobil, Pfizer, and Nokia.

Medium and small companies are good candidates for multiple splits within a few years if their revenues explode. Many successful high tech companies have gone through this experience including Microsoft, Intel, Cisco, and Apple, which have now achieved maturity.

If you own a decent amount of a company stock going through multiple splits, you can easily become a millionaire. The size of the company must be medium to small with a relatively small number of outstanding shares, around 200 millions. The revenue prospect is the most difficult to predict. How can you tell that the revenue is going to explode? Besides, are you patient enough to hold the stock for a few years to realize the multiple splits, should they ever occur? So luck has a big role to play here.

8/28/09 Friday

Dow: -36 to 9544, volume 0.8 billion shares.
Nasdaq: +1 to 2029, volume 2.3 billion shares.
S&P 500: -2 to 1029, volume not available.

The Dow breaks eight consecutive days of increases with a loss of 36 points while the other two indexes change very little. The market has been pausing for the past few days with light trading volumes and showing a lack of direction.

Today I want to leave you with something to think about for the weekend.

President Reagan once said, ”Government is the problem.” As a politician, he had to appeal to his conservative base, which is always against government intervention in our daily lives. However, I wish to add some qualification by saying that corrupt government is the real problem, not government per se.

If you look around the world, all the under-developed countries have one thing in common: corrupt government. Corruption is present in all governments but differs in degrees only. Corruption generally means a small number of people in high places profit greatly at the expense of the rest of the country. We cannot wipe out corruption totally, but too much corruption will certainly destroy the whole society.

In a democratic society, checks and balances exist to restrain government corruption. The most effective sources are individual whistle blowers, dedicated private organizations, public opinion, and the press. The press is especially good in revealing corruption cases that automatically make interesting stories or headlines.

Government corruption can get worse in a democratic society if one political party becomes too powerful. One good example is the Bush years between 2000 and 2008 when the Republican Party controls the White House, both Houses of Congress, and a Republican leaning Supreme Court. They also have a friendly press influenced by a few conservative talk show hosts and religious leaders. In addition, the Republican Party is traditionally a pro-business party championing minimum government regulation and tax cuts for the rich.

In any society, the rich and powerful, especially big business, always succeed in enriching themselves because of the status quo favoring them. How does big business succeed? They make profits from the masses of consumers who buy their products. If their sole motive is profit maximization, what can prevent them from milking us more and more? There is no greater restraining force than the government which is powerful enough to take on big business. The government regulates big business to protect the consumers against predatory practices. Imagine if the government is on the side of big business, will there be any hope for the small common people?

The Bush years have resulted in massive failures, one of which is the financial meltdown that has made the worst impact.

The financial meltdown is mainly a result of insufficient supervision on the financial sector, especially the banks. The relationship between big business and government regulatory agencies such as the Securities Exchange Commission (SEC) and the Department of Energy were especially cozy during the Bush years. The financial sector was emboldened to undertake all kinds of risky ventures such as sub-prime mortgage loans, securitized packaged funds, and whatnot. All those risky ventures finally came to a head in late 2008. As the economy struggles through the current recession, who are suffering through layoffs, mortgage foreclosures, and the depreciation of retirement accounts? The rich and powerful fare much better because they have a large safety cushion. The top officers of financial companies even continue to receive hefty bonuses.

If you are a pro-business regular person, beware of brainwashing by all those anti-government rhetoric. You don’t have to be anti-government in order to be pro-business. All you need is to be anti-corruption. You need a fair and just government to be on your side, to protect the common people. Do you truly want a less corrupt government, or a government colluding with big business to milk the regular guy? The facts are out there for you to see.

8/27/09 Thursday

Dow: +37 to 9581, volume 0.7 billion shares.
Nasdaq: +3 to 2028, volume 2.1 billion shares.
S&P 500: +3 to 1031, volume not available.

Stocks come down in the morning but recover to small gains for the three major indexes. The trading volume is abnormally light for the Dow. I am a little nervous to see gains made in light volume trading. I hope you’ll be cautious in the weeks ahead. Remember, September is generally not a good month for stocks.

Yesterday I talked about big players strategy. Let me illustrate today with a hypothetical mid-size company:
Company XYZ is determined to be a good candidate for investment by the big players.
Stock price: $5 down from a high of $30.
Shares outstanding: 200 million.
Average daily trading volume: 5 million shares.
It is obvious that a single player buying or selling 1 million shares a day can easily move the price. When two or more big players play in unison quietly and discretely, each one will spend less money to move the price.

Accumulation
The scheme involves accumulation at minimum cost. The big players have arrested the price plunge to a low of $5 by quietly buying 20 million shares. Owning this big amount automatically gets the attention of the Board of Directors as a major shareholder to be treated with all kinds of privileges. One of them could be a direct phone line to the CEO for company performance updates.

Push Up
Owning 20 million shares does not get you anywhere if the price does not move up. The next move is to push up the price by buying more shares, maybe 1 million shares a day. Is that worthwhile? Yes as shown below:
Day One: Buy 1 million shares to push price to $6. Cost: $5.5 million.
Day Two: Buy 1 million shares to push price to $7. Cost: $6.5 million.

Total holding value based on cost: Mn$112 as shown below:
Mn$100 (20 million shares at average $5 per share)
Mn$5.5 (1 million shares at average $5.5 per share)
Mn$6.5 (1 million shares at average $6.5 per share)

Total holding value at new price of $7 = $7 x 22 million = Mn$154

So the portfolio appreciates by Mn$42 million in just two days! This is what we call snowballing your money when you have plenty.

You’ll be surprised that they may not need this push up for long if they do it noisily with their analysts trumpeting the stock. Why? The small guys will be seduced to come in around $10 onward after they’ve seen the price rise. This is analogous to flying a kite. You spend some energy up front and the wind will take care of the flying.

Cash Out
The big guys want you to “invest for the long term”. In fact, they want you to invest in the stock long enough for them to cash out. That’s why you have to be smart to see through their scheme.

Since they can move the price, they have the power to determine the peak and how soon to get there. Normally, it takes several months from the bottom depending on the economic circumstances and how fast the small players respond. After they totally cash out, they may return to the same stock again, or play another company depending on the opportunities available at that time.

Do you think they take profit only after several months until the peak is reached? They take short-term profits whenever there is a chance, even on a daily basis, because the stock price fluctuates all the time. The scheme is to maintain two pipes: one to sell some shares when the price gets higher, another to buy some more at lower prices. In this way, they have a constant stream of profits while maintaining a sizeable holding. This is how to use money to generate more money.

Shorting the Stock
Big players used to short the stocks to make additional profit. Shorting for them is a sure winner because they hold plenty of stocks. The scheme is to short the stock at a higher price, sell some of their existing holdings to force the price down, then buy back the shorts to take profit. They may buy back more shares than they shorted to replenish their original holdings, force the price up again, and repeat another short.

Company Size
The initial investment for big players varies with the size of the company. A big company with a large outstanding share of 1 billion and a large daily turnover of above 20 million shares requires more capital to play. It also requires more big players to coordinate their selling and buying to move the price. For a medium-size company as illustrated above, one or two big players can control the whole game.

How to Respond?
You are very naïve if you think that people with money and power cannot do the things as I have just described. In fact, this is the essence of the stock game. As a small investor, you are being seduced all the time to buy and sell. The fluctuation of the stock price is a result of the game plan that big players execute. By no means the fluctuation depends totally on the change in company performance, which is only reported on a quarterly basis. The only requirement is that the company does not die so that the game can continue. Therefore, you must try to be smarter and follow the big players closely. You should stay ahead of the herd of small players.

8/26/09 Wednesday

Dow: +4 to 9544, volume 1.1 billion shares.
Nasdaq: +0 to 2024, volume 2.0 billion shares.
S&P 500: +0 to 1028, volume not available.

Despite today’s good news about production of durable goods and the housing industry bottoming out, the stock market seems without a direction. Share prices move up and down and wind up almost unchanged for the three major indexes. The trading volumes are also light. The market is taking a break and may retreat for a short while.

Yesterday I talked about the behavior of the big players. Today I want to explore what small guys should do in order to win:

Remember your opponent has the power to move prices, to influence the laws in their favor, and to make news for you to believe. You are playing against incredible odds. You are lucky if you win, but luck cannot stay with you all the time. You should not behave like a member of the herd of small players. You should make yourself smarter and stay ahead of the herd.

If you think about big players’ actions, you will notice that they need two things to make their schemes work: time and economic conditions, which are beyond their control.

First, they need to arrest the bottom of a falling stock where the company suffers currently but will not die. They continue to buy quietly and accumulate for at least a few weeks. In this way they build a major share holding with minimum cost.

After enough quiet accumulation, they will noisily buy up the stock to organize a bull run. As they buy up the stock, their holdings increase dramatically due to large accumulation near the bottom. Their stock portfolio looks like a pyramid with large holdings bought at low prices, and lesser holdings bought at higher prices for pushing up the stock.

The time to push up the stock to the peak takes several months. Why? Because the herd has inertia. It takes time for them to respond after seeing the significant increases and reading the news trumpeting the stock.

Besides time, the big guys also need the economic environment to be on their side. Currently, the economy is struggling to recover, with good news mixed with bad ones. This is an excellent condition for accumulation because the herd of small players is reluctant to come in. Most of them believe that the economy is no good. If you move in right now, you make yourself a smarter member of the herd.

When the economy turns out better, especially in employment and consumer spending, the big guys will buy up the stock noisily. The herd will start to move in only gradually. This process takes several months.

When the economy reaches almost full employment around 3%, everything will look rosy. The herd is fully into stocks, including homemakers, janitors, taxi drivers, even professionals like doctors, lawyers, engineers, and dentists. While the herd is frolicking in the economic boom, the big guys make a determination as to whether the peak can be sustained. If not, the process of cashing out begins. Cashing out takes less time than building up. It may last as short as a month depending on the economic condition at that time.

Do you know now when you should get in and when to get out?

8/25/09 Tuesday

Dow: +30 to 9539, volume 1.1 billion shares.
Nasdaq: +6 to 2024, volume 1.9 billion shares.
S&P 500: +2 to 1028, volume not available.

After all the good news that buoys the major indexes for a few consecutive days, the market seems to exhibit some exhaustion. Besides light trading volumes, the big increases early in the day cannot be maintained toward the end.

Today I wish to bring out some basic ideas that a small player must understand and accept. Else, it will be very difficult to win in the stock market.

The stock market is a zero-sum game where one group profits at the expense of another. You must know your opponent group. Who are they? They are the big players.

The big players have plenty of cash to buy and plenty of stocks to sell. This gives them the power to move the market whenever they want. The rest have to accept and adjust. You are mistaken if you think that the market is free competition. It is free competition between you and another small player, but it is not between you and the big player.

You may think that you are an investor. You are just a free rider like all small guys. You’d better be a smart free rider and stay ahead of the herd. There is nothing wrong being a free rider. The stock market has been invented for free riders. Can you guess who invented it? The big free riders of course.

Let me give you some ideas about what big players do. Don’t assume that the laws automatically protect you. Bear in mind that the rich and powerful can always bribe and influence the laws. If you cannot accept what I say, I wish you at least give it some thought because it benefits you.

Big guys win by planning and organizing the market for a particular stock without you being aware of it. Their actions consist basically of the following;
• Depress the market by selling their stock holding when times turn bad.
• Buy up a fire-sale stock when the small guys eventually panic.
• Determine the bottom for a stock and accumulate as much as possible near the bottom.
• Continue to buy up the stock when times turn good, thereby also boosting their own holding value.
• Determine the peak to prepare for cashing out.
• Short sell near the peak to prepare for a price drop.
• Start unloading the stock to gradually cash out, and also profit from the short sale as the price drops.
• Continue to unload while planning for the bottom.
• Repeat the same process all over again, or move on to play another stock.
• Discuss and synchronize with other big players who happen to own the same stock. Why? They don’t want to negate each other’s plans.
• They keep two pipes open: one to buy and the other to sell. This enables them to keep on buying and selling at the same time to earn short-term profits. This explains why a stock fluctuates, some within significant margins.
• Remember the age-old principle of buy low and sell high? The price does not matter when you buy as long as you can sell higher. Even with a small profit margin, the more you do, the bigger the profits add up.

8/24/09 Monday

Dow: +3 to 9509, volume 1.2 billion shares.
Nasdaq: -3 to 2018, volume 2.0 billion shares.
S&P 500: -1 to 1026, volume not available.

The market cannot keep up with the bull run lasting for the past four consecutive days. The early morning gains quickly disappear. The trading volumes for the three major indexes are light.

If you still have doubts, let me assure you that the market is on an uptrend. This uptrend has two characteristics. First, it is bumpy with temporary retreats. Second, it will last longer, perhaps as long as two years. My reasons are as follows:

The temporary retreats are due to fear of the following:
• Rising oil prices causing inflation.
• Some small banks are still failing despite the recovery of the big ones. People fear about a second financial crisis.
• Rising mortgage defaults due to people losing their jobs.
• Unemployment does not seem to improve.
• Restrained consumer spending further weakens the economy.
• Huge government deficits.

The fears are reasonable. But they may not materialize due to the following:
• Rising oil prices cannot go too far because of the weak economy.
• The failure of some small banks does not amount to systemic risk like the failure of Lehman Brothers.
• The big banks can handle the rising mortgage defaults better compared to the crisis situation last year.
• Unemployment is the last economic component to recover from the recession. We may not see full employment restored until about two years later.
• Consumer spending will improve, albeit slowly.
• The huge deficits incurred by government will improve. When the economy recovers, it will gradually bring in more tax revenues.

Thus the temporary retreats are due to fears while the economy continues with its slow recovery. It will reach the boom stage when full employment is restored. That is, when unemployment is reduced from the current level of 10% to about 3%. By that time, stock prices will have approached peak levels. The time it takes to reach full employment will determine the duration of the current bull run. Usually, it takes about 2 years.

8/21/09 Friday

Dow: +156 to 9506, volume 1.5 billion shares.
Nasdaq: +32 to 2021, volume 2.3 billion shares.
S&P 500: +19 to 1026, volume not available.

This is the fourth consecutive day of up move. After compensating for the big losses on Monday, the three major indexes continue to break their highs achieved so far this year. Regarding the trading volume, there is a significant increase to moderate levels for today.

What are the reasons for the bulls? The Fed Chairman says that the prospects for economic growth later this year are good. In addition, US home sales register a fourth consecutive month of increase, signifying that the housing bottom is behind us.

Have you also noticed that the price of oil has risen too? This will soon resurrect the fear of inflation. The oil-induced inflation, or the fear of it, will give a reason for stock prices to retreat every now and then. If this kind of inflation becomes severe, it may destroy the fragile economic recovery now taking place, and may as well take the stock market along with it.

It looks like the road to recovery is a bumpy one with high unemployment and subdued consumer spending. This will clamp down oil consumption to some extent. However, since China has emerged as a major oil consumer, it all depends on how fast its economy recovers to have an adverse impact on oil prices.

8/20/09 Thursday

Dow: +71 to 9350, volume 1.0 billion shares.
Nasdaq: +20 to 1989, volume 2.0 billion shares.
S&P 500: +11 to 1007, volume not available.

This is the third consecutive day of up move that more than compensates for the big losses on Monday. The only thing missing is the trading volume. Again, the volumes are light for the three major indexes.

In a capitalist society, everybody wants to be rich and successful in business. That is perfectly fine. You should learn how the rich earn their money, but not blindly admire or adore them as many people do. For any business to profit, the owner must sell higher than the costs he pays. The cost components are basically labor, materials, land, and taxes. A business has to short-change one or a combination of the listed cost components in order to stay afloat.

If you are a wage earner like most of the middle class, you’d better make sure that your employer does not short-change you. So business and labor essentially have an antagonistic relationship. That is healthy because each side keeps check on the other.

In one aspect, I find that business and labor generally gang together to short-change the government in taxes. The reason is that nobody wants to pay taxes. The Republican Party, which is built on the political platform of tax cuts, is expert in exploiting this common resentment of taxes and government. Let me pose three important questions for you to think about:

First, it is advocated that cutting taxes will create jobs. Really? At present, the US has one of the lowest business taxes after the Bush Administration has installed the great tax cuts. How come we have lost millions of jobs in the last few months? You may blame the severe recession. Who caused this recession in the first place? The big banks created the housing bubble with their irresponsible sub-prime lending. Who managed the big banks? Those big shots who take millions in compensation and also big tax cuts. Who suffer in this recession? Is it they or mostly you and me, the middle class?

Second, it is advocated that everybody should get the same rate of tax cuts in order to be fair. Only a child believes in this simplistic brainwash. Taxes should be progressive in order to be fair. Suppose your taxable income is $10,000 a year and Joe Rich’s is $1 million. With a 10% tax cut, you get a break of $1,000 and Joe gets $100,000. Do you want the government to receive Joe’s taxes and give them back to you in the form of better roads, education, public transports, health care, and police protection? If yes, don’t support a flat tax cut next time because that will only benefit the rich that comprise less than 5% of the population.

Third, it is advocated that trickle down economics works. If you are rich, do you want to trickle down your fortunes to the less rich? If you are kind enough, how fast do you want to trickle down, 5, 10 or 100 years? For most people, they will probably say they deserve every penny they make. This is just human nature at work. When you are poor, you want to get rich. When you are rich, you want to get richer. It is against your self-interest to trickle down. Only the middle class and the poor get brainwashed into believing the trickle down concept. The rich understand it pretty well. They have successfully worked their way up, by hook or by crook. Only the less rich hope that somebody will be kind enough to take care of them.

8/19/09 Wednesday

Dow: +61 to 9279, volume 1.0 billion shares.
Nasdaq: +13 to 1969, volume 2.0 billion shares.
S&P 500: +7 to 996, volume not available.

The three major indexes respond to another big drop of the Shanghai stock market, but the losses turn to pluses later in the day. The volumes of trading are light. As the quarterly report season draws to a close, there will be less news to stimulate the market until mid October. Note that September is a relatively bad month for stocks. So exercise more caution when you buy.

Today, I wish to talk about tax evasion. Although none of us wants to pay any taxes, it seems unfair when middle-income people like you and me pay their fair shares while the rich engage in tax evasion by putting their millions in Swiss banks or other tax havens in the Caribbean. Furthermore, we earn our money by sweating through our jobs or small businesses everyday. The rich earn theirs through snowballing their money capital. It becomes absolutely unfair when you think that the rich also include casino owners, weapons dealers, drug kings, Mafia bosses, money launderers, illegal smugglers, and what have you. Do you think the government should chase after them for the money they owe? Why not?

An agreement has been reached between both countries for UBS, a Swiss bank, to release the names of some 4000 American big account holders to the US Internal Revenue Service (IRS). The taxes to be recovered from them can amount to billions of dollars.

Everybody worries about inflation caused by huge government deficits. Income tax is a major government revenue that reduces the deficit. How many people worry about the failure of government to tax the rich? To allow taxes to escape the rich means government deficits will grow larger. The middle class and the poor will suffer because government will be forced to cut down on public services such as roads, transportation, education, health care, public parks, police, fire services, etc.

How many people worry about the influence of the rich on government tax policies? The rich have gotten more tax loopholes written into laws than you can imagine. When government cuts taxes, the purpose is to please the rich who will benefit most. The tax cuts that the Bush Administration pushed through Congress a few years ago is depleting the government of one trillion dollars in tax revenues over ten years. It’s like Robin Hood robbing the poor to save the rich. Ironically, the middle class seemed to like it for the little amount of tax breaks as a consolation prize while the rich got billions in tax write off. So middle America, don’t be fooled and wake up to the facts. If you are not smart enough to see the truth, you will be the ones who wind up suffering.

8/18/09 Tuesday

Dow: +83 to 9218, volume 1.0 billion shares.
Nasdaq: +25 to 1956, volume 1.7 billion shares.
S&P 500: +10 to 990, volume not available.

Yesterday’s bear run can be described as a hiccup because the markets snap back today, both in the US and elsewhere. However, this does not justify a big celebration because the volumes of transaction are light. Yesterday, I said the sellers were not out in force. Today, the buyers are not out in force either. So you need to be cautious, take profits where you can, and look at every significant downturn as an opportunity.

As the health care debate heats up in the US, are you surprised to see so many people are ignorant and so many are confused? If you are not living in the US, do you know how your own country’s health care system works? Do you really have to get cancer in order to be curious?

A popular funny story relates to a town-hall meeting where a senior citizen stood up and said, “Don’t let the government mess up my Medicare!” Hello, are you there? Medicare has been a government-run medical program for seniors since 1960’s.

Knowing that the people are largely ignorant, opponents of health care reform, especially from the Republican Party, are employing scare tactics to further confuse the public by spreading untruths and using simplistic descriptions about reform. The following are some examples:

We don’t want socialized medicine practiced in Canada and Europe.
Don’t let the bureaucrats run your health care!
We don’t want a death-panel to make decisions for us.
The public option will ration care and limit choices.
Obama is a Nazi.

As a matter of fact, the US government has been providing health care to seniors (known as Medicare), soldiers/veterans (operated by the military hospitals and the Veteran Administration), members of the US Congress and federal employees, and subsidies to local governments for taking care of the poor (known as Medicaid). Although these programs are not perfect, they exist side by side with private health care as a viable public option. What are people so scared about if not for their ignorance?

The proposed “public option” in the current health care reform is about the creation of a government insurance program to compete with the private insurance companies in order to reduce costs. Before this proposal, the private insurers were saying that the government could not run anything. After the proposal, they were saying that government insurance would drive them out of business. Hello, are you there? If the government cannot run anything as you said, what are you afraid of? We know what you want. You just want no competition so that you can continue to milk the public. No wonder US health care is suffering from high costs, low quality, and lack of coverage.

8/17/09 Monday

Dow: -186 to 9135, volume 1.2 billion shares.
Nasdaq: -55 to 1931, volume 1.9 billion shares.
S&P 500: -24 to 980, volume not available.

The US market starts to decline after opening and does not recover for the rest of the day. It reacts to a precipitous drop in the Asian and European markets. The fear about the depth of the recession still lingers and provides a reason for the retreat. The breadth of decline spreads to nearly all industries. One thing you should take comfort in is that the volumes of transaction of the major indexes are relatively light, signifying that sellers are not out in force.

In view of the recent run-up, it is normal for one or more relatively small corrections to occur for the big buyers to take profit before they come back and push up the market again.

The following table traces the recent upturn:
Indexes—-7/10——-7/13——–7/17—–8/17 (Today)
Dow——-8147——-8332——-8744——-9135
Nasdaq—-1756——-1793——-1887——-1931
S&P 500—-879——–901——–940——–980

As you can see from the above table, the three major indexes have moved up significantly since 7/10, being the date previous to the recent upturn. On 7/17, the indexes broke through the high levels set in the previous oscillation cycle. They may come back down to revisit these levels again. However, it would be far-fetched for them to test the lower levels on 7/10, unless something real bad happens.

We may be in for a few more corrections, but it is still an uptrend. This uptrend will be bumpy but can last until full employment is restored, which will take around two years.

8/14/09 Friday

Dow: -77 to 9321, volume 1.1 billion shares.
Nasdaq: -24 to 1986, volume 2.0 billion shares.
S&P 500: -9 to 1004, volume not available.

The market retreats today, but some late buying cuts the Dow’s loss by almost half. The trading volumes are rather light meaning it’s not a big sell off. The market responds to fear of reduced consumer spending after some bad news about layoff, consumer confidence, and home foreclosures are released.

Today, I wish to present the essence of the health care reform initiated by the Obama Administration as some food for thought.

Why do we need reform? The American private health care system has degenerated to a bad combination of high costs, lower quality, and less coverage for people. It cannot be sustained within the next decade. Individual citizens, private companies, and the government are feeling the pain of high cost except the rich.

Can we wait because there’s always a tomorrow? We failed to do it when times were good. We did not want to do it when times were bad. We cannot keep on postponing. Now it’s the time.

What should we reform? Basically, the cost inflation in health care must be reduced. When costs are lowered, every other problem will be easier to solve. The situation is very complex because there exist many cost components. The majority of the public is confused.

How do we reform health insurance? Powerful private insurance companies are a major factor. When we buy a car or a house, we pay the merchant direct. When we are sick, why can’t we pay the doctor or hospital direct? Why do we allow the insurer to stand in the middle and make all the decisions for us?

Being for profit, insurance companies have the incentives to do the following things: increase premiums, deny reimbursement for big expenses, restrict unhealthy people from coverage, and cherry-pick healthy people to insure. That is why a government option is proposed where an insurance company financed by taxes would be set up to compete against existing private insurers to make them more honest. Why can’t we ban the insurers? Well, the American system is such that people are weary about government interference. Even the proposed public option gets people scared. Opponents of health care reform are employing scare tactics to shoot down any changes to the status quo.

Drug companies are enjoying good profits in the existing system. They use their money to influence legislation in their favor. Recently, they voluntarily agreed to reduce $80 billions of charges over ten years. In view of their profits, the amount being offered is rather small. However, they reason that if they cannot beat the government, they may as well join them. What they fear most is the uncertainties of health care reform driving down their stock prices.

You may be surprised that lawyers drive up the cost of health care too. In the American system, physicians practice in a defensive manner by ordering unnecessary expensive medical tests for patients. The doctors fear being sued for millions of dollars if they did not do enough in diagnosis. We need tort reform where a reasonable compensation limit is set for medical mistakes.

Physicians operate under an incentive system where they are paid by how many procedures performed or ordered, rather than how much they have helped the patients. As a result, we have seen unnecessary and expensive procedures being performed.

The above are the major problems that cause the health care cost inflation in the US. Unless those problems are addressed, the costs will continue to climb.

8/13/09 Thursday

Dow: +37 to 9398, volume 0.8 billion shares.
Nasdaq: +11 to 2009, volume 2.1 billion shares.
S&P 500: +7 to 1013, volume not available.

The three major indexes advance together for a second consecutive day. However, the volumes of trading are light, which shows that buyers are lukewarm. Tomorrow may present some opportunity for profit taking if there is no significant good news. Note that the market has been rallying since July 13, which has taken the Dow from 8147 to the present 9398. It is not unreasonable for the market to take a pause or retreat a little.

Today I wish to give you the big picture that most small investors seem to neglect. Without the big picture, your attitude and strategy will make you focus on the technical details that mostly waste your time and money.

Don’t get the illusion that you invest in the stock market. You and I are just players who want to make a buck there. In truth, we are freeloaders whether we play short-term or long-term. We can be smart freeloaders if we learn something useful. There is nothing wrong with that.

The stock market is a zero-sum game where someone gains at the expense of others. You must have some idea regarding who your opponents are. How can you win if you know nothing about your opponents?

You and I are mutual opponents in theory but not in practice. The reason is that none of us has the ability to buy up or sell down a stock. The real opponents are those big players who have tons of cash to buy up the stock price, and tons of stocks to sell it down. This is the most lethal weapon in the stock market. All other factors will become secondary.

Armed with this weapon, the big guys have all kinds of advantages including insider information, pushing up a stock, depressing a stock, creating news/analyses for you to read, bribing government officials, influencing the laws, and so on. If you think the laws will automatically protect you, think again. You can only protect yourself with your own smarts.

If you view the stock market this way from a practical angle, you will find my materials useful in helping you win.

8/12/09 Wednesday

Dow: +120 to 9362, volume 1.2 billion shares.
Nasdaq: +29 to 1999, volume 2.2 billion shares.
S&P 500: +11 to 1006, volume not available.

The three major indexes advance together today in moderate trading. By now you should be aware of the market’s dancing pattern. It steps forward in some days, but also steps back in between. Note that the forward move is mostly larger than the backward one. The trading volumes on up days are usually bigger than on down days. The indexes are pushing toward the previous highs with the tendency of breaking them. What does this signify? We are on the uptrend. Do you still have doubts?

Today, I wish to discuss interest rates. The interest rates set by the US Federal Reserve is the single most important factor that can cause a turnaround in the stock market. Liquid cash circulated in the economy is the fuel for the stock market. The Fed tightens the cash in circulation by raising interest rates, and vice versa. When interest rates are high, money will flow into bank deposits or other interest-bearing instruments rather than the stock market. As a result, stock transaction activity will be slower and prices tend to fall. The opposite result is true when rates are lowered.

What is important is the implications for interest rate decisions. Raising interest rates means inflation problems are brewing that always worry the stock market. Lowering rates means that the Fed wants to boost the economy by making loans easier to obtain without fear of worsening inflation.

Interest rate changes are usually made in small increments of one-quarter point. On some occasions, the Fed has made an increment as large as a full point. A large increment always produces a big market response up or down due to the surprise factor. It also creates a turning point for the stock market. A small increment sometimes may even produce an opposite response if the stock market has already anticipated the Fed move, and made adjustments before the Fed’s announcement.

8/11/09 Tuesday

Dow: -97 to 9241, volume 1.2 billion shares.
Nasdaq: -23 to 1970, volume 1.9 billion shares.
S&P 500: -13 to 994, volume not available.

The three major indexes fall again today in light trading. It looks like the market will oscillate for a while after having rallied and moved onto a higher plane since mid July. It is expected that the Federal Reserve will keep interest rates unchanged tomorrow. There is little sign of inflation. Wages are heading lower while productivity rises. In addition, the economy is not out of the woods yet. Why spoil everything by increasing interest rates?

Today I want to talk about the dilemma of the small investor. As you know, when you don’t have enough money, everything seems tougher especially in the stock market. Just imagine on any given day you have some stocks to sell for a reasonable profit. At the same time you also have some cash to buy when the prices of some stocks have fallen. This should be your goal. You should aim to make some profits a few times a week. Profit in the short term in order to build the long term, just like you go to work everyday to build your future.

Here are my thoughts:

Avoid penny stocks. A company becomes a penny stock because it is on the verge of collapse. You’d better be sure if it can nurse itself back to health. Most cannot except a few big ones. There are plenty of examples in the current recession: AIG, Citigroup, Ford Motor, and Motorola. They became a penny stock for a short time only before rebounding. That is why a deep recession always presents great opportunities. For those companies that remain penny stocks for several months, it is very dangerous territory.

You buy on the uptrend, not on the downtrend. You have to see the uptrend before you buy. Don’t look at the downtrend and think that this is the bottom. The real bottom is zero. You can never catch the market bottom or peak unless you happen to have tons of luck that day.

You need to have a short list of companies you think can make profit for you. You switch between those companies whenever there is a chance. That is, you sell when one stock rises and buy when another one falls. The ideal situation is that your profits add up everyday while your stock holdings also increase. This is how you build wealth from stocks.

The strategy of buy and hold seldom works. You hold only until you can sell for a reasonable profit, because you can never tell when the peak is reached. It is always better to keep your cash and wait for the stock to come back down again.

Remember there are thousands of public companies out there for you to choose. All you need is to pick a few for your short list according to the economic climate of the time.

You don’t need to know much about the company’s products, market shares, management, and so on. You need to ask if the company is turning around on the uptrend. That means, you must know its price movement over the last two years at least.

8/10/09 Monday

Dow: -32 to 9338, volume 1.1 billion shares.
Nasdaq: -8 to 1992, volume 1.9 billion shares.
S&P 500: -3 to 1007, volume unknown.

The market retreats today but the volumes of transaction are light. The price movement assumes the regular V-shape. That means buyers rush in to provide support when prices come down to lower levels around the middle of the trading day.

If you survey the price movements since last Monday (August 3), the three major indexes advanced together three times and retreated together three times. However, they still wind up significantly higher than when they started. Given the rally sparked by Goldman Sachs’ earnings report on July 13, we are beginning to see some short-term profit taking now, but we are still on the uptrend.

I wish to mention the recent surge of AIG stocks from $13 four days ago to today’s $29. Is this real or a gimmick? My answer is that it was a gimmick to get the price to this level. But it could be real if the surge continues.

Remember AIG announced a 20 to one reverse split on 1st July? On that day the share price became $23.2 (from the original $1.16). Then it dropped to about $8 and stayed there until the recent surge. If you compare today’s price of $29 with the reverse split price of $23, the rise is not that dramatic after all.

I see the gimmick as follows. For a big decision like share split, it must serve a big purpose. The decision was made by the insiders and big shareholders for none other than profit maximization. After the reverse split, the price suddenly multiplied 20 folds, effectively shutting out many small players who cannot afford the price.

At this high price, the big players went in and short the stocks in large quantities. Then they sold their existing holdings to get the price fall all the way to about $8, thereby make a huge profit on the shorts. This again, effectively shaking out many small shareholders who sold on panic because the price dropped so fast.

Then the big players slowly accumulated the stock again at around the low price of $8 for almost three weeks. Then came the big push four days ago. The reverse split is the gimmick used to shut out and shake out the small players in order for the big guys to accumulate as much shares as possible at the lowest price.

Now that the big guys control most shares at low prices. Do you think they will give up? No way. Their plan is to continue pushing it higher in order to sell back to the small guys later. I would think $40 upward is possible. This part is real, not a gimmick. Note that the outstanding shares of AIG now stand at 135 million, a very small amount compared to 2.6 billion before the reverse split. A big company like AIG with such small outstanding shares can multiply in prices. How fast? I don’t know. It all depends on how the company manages to turn around after near collapse last year.

8/7/09 Friday

Dow: +114 to 9370, volume 1.5 billion shares.
Nasdaq: +27 to 2000, volume 2.3 billion shares.
S&P 500: +13 to 1010, volume not available.

After two consecutive days of back steps, the three major indexes advance solidly today in moderate trading volumes. According to official figures, the rate of unemployment slows down for the first time in contrast to previous months. This adds confirmation to the feeling that the economy is finally turning a corner.

Now that the current deep recession begins to recede, have we learned anything from this painful lesson? The following thoughts go through my mind:

The excess of risk taking in the financial sector almost caused the collapse of the US economy last year. The government was forced to bail out the big banks with $700 billion taxpayers’ money. How should we prevent this from happening again? The answer lies in better supervision by the government. During the last eight years under the Bush administration, the government adopted a hands-off policy despite repeated warnings about the risks of sub-prime mortgages and unregulated hedge funds. It became too late to fix when things got out of hand.

The private financial sector cannot supervise itself for its single motive is profit maximization. They will continue to squeeze the public with their profit schemes until the whole system breaks down. How many of you have lost money in your retirement or 401k plans? Where did your money go? If you are still in the dark, you have been swindled by the banks or funds, which invested your money in the stock market. They won’t take responsibility for their actions because they can always blame the stock market for your losses.

Okay, the market caused you to lose, but again, where did your money go? If you follow the money trail, you will see that they took your money to buy stocks at low prices. When the stock market boomed a couple of years ago, they cashed out and pocketed the gains. When the housing bubble finally burst and the stock market collapsed, they reported that you had lost most of your investment.

The game is so simple that you and I know how to play. The complicated thing lies in their non-transparent reporting. They trade in the stock market everyday with your money, but they publish a report for your consumption only at a specified period of time. The report never tells you how much is their turnover and how big is their gain. It only tells you how much the fund index has moved. Do you really understand their index? This is a common practice of using technicalities to short-change you. When the index is up, you are encouraged to stay put and invest for the long term. When the index is down, you are allowed to get out and swallow the losses. I would not give them my money if I were you.

Now it all depends on the government regulators to supervise the banks and funds to protect your investment. However, regulators are wage earners who don’t give a damn about your losses. They only care about keeping their jobs. If the top officers of the Security Exchange Commission (SEC) who supervise the financial sector happen to be friends of the investment houses on Wall Street, you will be put in bad irresponsible hands. When government and business become willing and conspiring partners, who is going to look after your interests? No wonder when some whistle blowers revealed Bernard Madoff’s swindling schemes, the SEC pretended they were deaf and blind.

The lesson you should take away from this recession is that you should never give your money to someone to invest for you. If you don’t know how to invest, please learn. If you cannot learn, put your money in a savings account that guarantees regular interest payments. You are the only person who should look after your own interests. If you want to have a fair and responsible government, go and vote for a politician who shows independence from business manipulation and insists on transparency in business practices. Politicians are not all bad. Some are better than others. In real life, you have to choose the least of evils to run the government.

8/6/09 Thursday

Dow: -25 to 9266, volume 1.4 billion shares.
Nasdaq: -20 to 1973, volume 2.4 billion shares.
S&P 500: -6 to 997, volume not available.

This is the second consecutive day of decline for the three major indexes. The magnitudes are not big and the volumes are only moderate. Furthermore, some late buying occurs as stocks fall to lower levels in mid-session. This is typical of a pause in an upward trend. Have no fear. The stock market likes to dance. At this time, it’s three steps forward and one backward. The trend is up.

Yesterday, I gave my reasons that this is the best time to go in. Let me identify the industries and some companies:

First, avoid the high fliers such as Walmart, IBM, and Amazon.com. Due to high prices, these companies are less likely to run faster than the others when the economy recovers. You may find two exceptions here: Apple (depending on its continued creativity), and Google (due to its small outstanding shares).

I only focus on big companies because of their potential for great rebound. Small companies are much riskier because many of them may collapse before the economy fully recovers.

Bank stocks are among the first to rebound because they have caused the current recession in the first place. Consequently, they are leading the recovery. Avoid the fast runners like JPMorgan Chase and Wells Fargo. They have rebounded quite a bit already. Focus on Bank of America and Citibank. AIG is another one but you have to wait and see.

When the economy recovers, raw material companies are among the first to rebound, particularly oil, steel, aluminum, paper, and rubber. Oil companies have rebounded quite a bit already. Focus on companies like Alcoa, International Paper, and Goodyear Tires.

High tech companies are sensitive to business development. Thus they are also among the first to rebound. Intel, Microsoft, Oracle and Cisco are good, but their potential is limited by high outstanding shares. I would select those well-established companies whose shares have been beaten down such as Applied Materials, Dell, Motorola, Nokia, and Cypress Semiconductors.

The American auto industry is in disarray. But Ford has risen from the ashes while its competitors like GM and Chrysler have collapsed. Ford is the only survivor who is gaining market shares from its rivals in the American market.

I would avoid retail, travel, hotel, and leisure because they are directly related to consumer spending, which is still suffering from the current recession.

Since there are so many companies to choose from, you must focus on those that will rebound first. Then you may switch to other companies later when you cash out. As time progresses, the situation changes and you have to be flexible with your investments.

8/5/09 Wednesday

Dow: -39 to 9281, volume 1.8 billion shares.
Nasdaq: -18 to 1993, volume 2.4 billion shares.
S&P 500: -3 to 1003, volume unknown.

The three major indexes are in the red throughout the whole trading session. More buyers come in toward the closing hours, thus cutting down earlier losses. The volumes of transaction turn from moderate to heavy. This is one of those days when the market takes a break and pulls back a little.

In case you are not convinced, I wish to emphasize that this is the best time to go in for the following reasons:

A bottoming out of the market occurred in early March. The stock market has not looked back since then. This should calm down your fears.

The stocks of most major companies are climbing back up steadily and quietly. The best proof of an upturn is seeing this happening without much noise or euphoria. Why? The big players are accumulating quietly. After accumulating enough, they will make a big noise because they want to cash out and sell their stocks to you.

People still worry about low employment, consumer spending, depressed real estate, government deficits, etc. These always occur during the early phase of an economic recovery. Until these factors are restored to normal a couple of years from now, the market will be approaching its peak. That is the time to cash out, not to go in.

The stock market hates uncertainties. The economy right now presents more certainties than a few months ago that things will improve. This is sufficient reason to drive the market up.

The stock prices of many major companies are still low, less than one-third of their values at the peak not long ago. How often can you find such a good deal?

Most major companies have shown reduction in losses due to aggressive cost cutting. Even though they are still in the red, it is good enough to drive up their stock prices. Several months from now, you will see many of them making good profits. Therefore, this upturn can sustain for many more months before it runs out of steam, especially for big companies.

Why should we pay attention to big companies? In a severe recession like this one, small companies find themselves in a very tough situation. First, they don’t have a lot of cash or assets to help them pull through. Second, they don’t have a lot of expenses to cut because they are small. Many of them will go down even as the economy improves. Consequently, playing small companies carry extra risks at this time.

8/4/09 Tuesday

Dow: +34 to 9320, volume 1.2 billion shares.
Nasdaq: +3 to 2011, volume 2.2 billion shares.
S&P 500: +3 to 1006, volume not available.

Today’s trading can be described as choppy. At the close, the three major indexes manage to edge out a small gain. For a few consecutive days now, the volumes of transaction have risen to a moderate level from light. The pending home sales index for June released today by the National Association of Realtors shows a fourth consecutive day of increase. This should provide some comforts about the depressed housing market.

I wish to elaborate some more on yesterday’s discussion about this second phase of market upturn. What are the risk factors involved?

Will the market drop back down to early March’s depressed levels? No way, simply because the situation now is a lot better than last time when the US economy teetered at the edge of collapse.

A more relevant fact is that the big players flushed with cash have already bought tons of company stocks at fire-sale prices. They have arrested the decline and created the market bottom. Why should they get rid of these huge new holdings? On the contrary, they have every incentive to continue buying to boost up prices in order to raise the values of their holdings. They won’t let go until the time is ripe. In fact, you should consider the phase-one period of bottoming out as an insurance policy for you to go in now.

It’s highly unlikely that the US economy will slide back to the previous crisis once the major banks have stabilized. All the bad news we hear now including high unemployment, reduced consumer spending, depressed housing market, government deficits, etc. are the ripple effects of the financial meltdown that occurred around September 2008. They did not cause the financial crisis. They are considered delayed factors, which will improve gradually.

This of course does not mean that the market cannot slide. It should because people have to take short-term profits every now and then. However, they will go back in after stock prices have come down a little. This is how you play in an upturn. The market may step back once every few days, but it will never look back to where it started from.

Let me point out some wildcard risk factors beyond expectation that may destroy the current upturn:
• A meteor strikes from outer space.
• A huge natural disaster greatly damaging the supply of oil, electricity, water, and crops.
• A major war, especially in the Middle East.
• Anything that greatly reduces the supply of oil and gas, especially in Saudi Arabia and Russia.
• A devastating terrorist strike in a major financial center of the world.

8/3/09 Monday

Dow: +115 to 9287, volume 1.2 billion shares.
Nasdaq: +30 to 2009, volume 2.2 billion shares.
S&P 500: +15 to 1003, volume not available.

The three major indexes are solidly higher. The volumes of transaction remain moderate. The ISM index released today stands at 48.9%, representing a production contraction (under 50%). However, it is an improvement compared to previous months.

Yesterday, I discussed briefly the four phases of stock market upturn as the economy slowly recovers from the current deep recession:
1. Bottoming out at the first sign of financial sector stabilization.
2. Profit turning point as big companies cut their huge losses.
3. Sales or market share improvements following cost cutting.
4. Companies adding payroll as economy starts to boom leading to a stock market peak.

This upturn has a long way to go because the market turned around from a very low base. Besides, it will take many months for the economy to reach full employment or boom time again. What does that mean? It means the window of opportunity is bigger. However, stock prices will not be that low a few months from now.

We are now entering into Phase II of the upturn as most companies have succeeded in their aggressive cost cutting by mainly laying off workers and reducing inventories. Some companies have even turned around to post a profit after months of losses. This profit creation is all based on cost cutting, not sales increase. Consequently, this phase cannot last long.

How long? Probably until the end of September, that is, the end of the current quarterly earnings report season. In the meantime, stocks will oscillate as people take profits and immediately buy back the stocks on a significant price dip.

Phase II is probably the best time to play for the following reasons:
• Phase I clearly shows that the worst is over.
• Stock prices of most companies are still relatively low.
• The economy is on the long bumpy road to recovery before it reaches full employment and inflation returns.

Good luck for now. We’ll talk about the other phases of upturn when the time comes.

7/31/09 Friday

Today’s market activity is as follows:

Dow: +17 to 9172, volume 1.5 billion shares.
Nasdaq: -6 to 1979, volume 2.2 billion shares.
S&P 500: +1 to 987, volume not available.

The volumes of transaction are noticeably bigger for three days now. This shows that the market is becoming more active. The GDP figure published today for the second quarter shows a drop of only 1% as compared with 6% drop for the first quarter. This clearly confirms that the economy is on the mend.

Given all the mixed signals about the economy, which ones are more important and have bigger impacts on the stock market? It all depends on where you are at that time. It also depends on which ones mark a real turning point.

During the period between September 2008 and early March 2009, we were hit by a financial meltdown triggering a worldwide recession. The bad news coming one after another continued to batter the stock market causing most companies to hit record lows in their stock prices.

On March 10, a real turning point occurred in the US stock market. Citigroup announced that they would make the first quarterly profit after months of huge losses. Then Bank of America, JP Morgan Chase, and Wells Fargo announced the same good news. The stock market turned around suddenly and never looked back. You should observe the stock prices of those companies and see how far they have risen.

Now, we are in the second phase of upturn. The market will discount all the bad news about unemployment, consumer spending, mortgage defaults, and falling housing prices, unless they spin out of control. Why? They are no big news anymore because we hear about them everyday. Those conditions are expected to worsen even further because we are still in the middle of a recession. What about huge government spending and inflation fears? Those are real but also no big news anymore.

What the market is looking for right now are the ingredients of a profit turning point such as big companies greatly reducing their losses or turning a good profit. This has been demonstrated recently by Goldman Sachs, Ford Motor, Intel, and Motorola. Therefore, paying attention to big companies turning from huge losses to small losses or profits is the key. Those companies adopting very aggressive cost cutting or restructuring will be rewarded with rising stock prices.

The third phase of upturn is related to market share or production. Many companies have fallen by the roadside during the recession. The survivors will pick up their market shares resulting in higher sales and production. After all the cost cutting to pull through a recession, a company must increase sales or market share in order to sustain its rising stock price. So look for increased sales or market shares when we come to the third phase of upturn, which begins a few months from now.

The fourth phase of upturn is known as the boom period where everything appears to be so rosy. The recession is officially declared over. Employment is rising. Consumer confidence has returned. The stock market enters into a state of euphoria where most stocks have reached record highs. The market is also buoyed by a wave of mergers and takeovers as companies flushed with cash try to consolidate. The ghost of inflation is starting to haunt which may trigger a prolonged downturn. This is the time when the party is approaching the end. The smarter people are cashing out of the game. They will come back when the market hits bottom again. I hope you won’t be the one who is intoxicated by all the good news you hear in the party.

7/30/09 Thursday

A broad rally occurs today but with only moderate trading volumes. The Dow rises close to 200 points in the morning but cannot keep up for the remaining time. At the close, here are the results:
Dow: +84 to 9154
Nasdaq: +17 to 1984
S&P 500: +12 to 987
Note that all the above indexes make new highs for this year.

Yesterday, I talked about getting a short list of stocks on the rising trend, and play short term during this rather uncertain time that may last for another year. Let me elaborate how to look for the good stocks:

• Do not pick the high fliers due to higher risks.
• Select big companies whose stocks have been beaten down to a record low early this year.
• Look for the survivors. How? The best sign is their current stock prices. For a survivor, the current stock price should now be a multiple of the record low struck during the period between September 2008 and March 2009, when the US economy plunged to the point of near collapse.
• Many companies continue to struggle to stay afloat, especially small ones. Their stock prices are still hovering around the record lows. It’s hard to tell if they are able to pull through. You should avoid this kind of risk.

7/29/09 Wednesday

The three major indexes pause for another day, waiting for some more earnings reports to come out. All show slight declines in moderate trading, Dow -26, Nasdaq -8, and S&P -4.

A pattern has developed for the last few weeks where all the three indexes display a V or W shape for most trading days. At the same time, they all show an upward trend as the highs for the current month surpass the highs of the previous month.

What does that mean? It means the following things:

The economy is slowly on the mend, starting with the stabilization of the financial sector. The stocks that have been beaten down are crawling back up if the companies manage to survive.

During this long process of recovery that may last for another year, the situation is far from perfect. There exists a mix of good and bad news everyday. Stock players are very cautious. They sell when they can make some reasonable profits. On the other hand, they buy when the stocks dip in anticipation for the uptrend to continue.

The strategy of buy and hold will take you through many short cycles of ups and downs, even on a daily basis. Playing the short term seems to be in fashion these days. That is why you see the V and W shapes in the daily indexes. A small sell off occurs as soon as the price is higher by a little. Then a buy back kicks in when the price dips low enough. This in turn will set off another sell. This situation will continue as long as the economic picture remains unclear.

What should you do?

Buy and hold always works for the long term. But how long is the long term? Are you prepared to wait that long? You may want to consider playing the short term.

Find a short list of stocks that are on the uptrend. Select those that have a relatively large daily fluctuation. Follow their movements on a daily basis. Buy on the dip and sell on the rise. If you can manage making a few hundred dollars a day, all these profits will add up handsomely for the year.

A sample of some good ones for you to consider: BAC, GE, GT, IP, CY, F, C, AA, AMAT, YGE, STP and MOT. These companies will survive the current recession after their stocks have been beaten down to record lows. When you have a short list of companies to play with, you switch between them once every few days. Buy those that have come down and sell those that have gone up. You will probably hold a stock for just a few days at most.

7/28/09 Tuesday

The market remains as cautious as most days with moderate trading volumes. Again, profit taking is seen during the mid-session when the Dow briefly dips by more than 100 points. At the close, the Dow shows a drop of only 12 points. The Nasdaq rises by 8 points, and the S&P declines by 3.

Most news attribute today’s activity to a lower consumer confidence level being published. In fact, consumer confidence has been on the decline when companies began laying off workers since last autumn. Even with a job, you lose confidence when you are concerned about how long you can keep it. The low confidence level is not something new. It will continue until the employment situation gets better several months down the road. Therefore, consumer confidence cannot explain the stock market activity for today. In fact, there is no single reason to explain today’s market movements.

When you read the news, you have to read between the lines. Ask yourself what is the true reason and what is the convenient one, which could be anything that suits you. Very often, the true reason escapes public attention, whereas the convenient reason rules the day.

Let me give you some true reasons that have an immediate and direct impact on stock prices. Those reasons must carry an element of surprise, shock, or uncertainty:

1. When one company announces a merger with another, both stocks get impacted right away. Usually, the acquiring company’s stock falls while the acquired one rises dramatically. The merger news may generate a merger fever for the whole industry, thus affecting other companies too.

2. When a company gives an unexpected warning about its business prospects, the impact is swift and usually lasts for several days, maybe weeks. The warning may be good or bad. The stock price will move accordingly.

3. The sudden fall of a big company will affect the whole industry for quite some time, e.g. Leyman Brothers.

4. A major terrorist attack, war, or natural disaster.

5. Tight credit ripples throughout the whole economy, such as the current global recession triggered by a financial meltdown.

6. Health care reform casting a cloud of uncertainty over drug companies, insurers, and private hospitals, such as what is happening in the US stock market for the last few months.

7. The increase in oil prices boosts oil stocks but causes a lot of uncertainties for the rest of the economy.

8. An event that signifies a turning point for the company or industry to indicate that the worst is over. For example, Citigroup announced on March 10, 2009 the first profit after months of huge losses. This triggered a huge rally for the whole stock market. Conversely, an event may signify that the party is over. Then stocks will move downhill from there.

In any case, news seldom drives the stock market. News relates to past events while the stock market always looks forward several months ahead. In the stock market, most things are planned, organized and conspired by the big players to lure the small guys into buying something they have accumulated in huge quantities. How can they communicate to the small players that it’s time to buy? Through the news of course.

7/27/09 Monday

Without a boost provided by good earnings reports from major companies, the stock market moves with little direction. Some profit-taking occurs during today’s mid-session. At the close, all the three indexes advance slightly with moderate trading volumes:
Dow———9109 (+15)
Nasdaq——1968 (+2)
S&P 500——982 (+3)

In this kind of situation where the economy is slowly recovering but employment and consumer spending remain weak, the stock market tends to oscillate after settling into a higher plane. The oscillation represents profit taking in the face of both good and bad news. People tend cash out when some reasonable profit can be made.

The rally during the past two weeks has propelled the three major indexes to a higher plane. Let’s see if the market is ready for some oscillations from now on. A look at the June figures gives some clues:
Index——–June High——June Low——–Range
Dow——- —–8799———–8302————–497
Nasdaq———-1862———–1765—————97
S&P 500———-946————893—————53

During the month of June, the three indexes oscillated many times within the range of their respective high and low as indicated. The range is calculated by simply subtracting the low from the high in the above table.

By subtracting today’s level with the June highs, we get:
Index——–June High——Today (7/27)——-Difference
Dow——- —–8799————9109——————–310
Nasdaq———-1862————1968——————–106
S&P 500———-946————-982——————— 36

From the above table, we are not far from the ranges we get for June in the previous table. Therefore, it is clearly possible now for the three indexes to oscillate down and up from today’s level while still remain well above the June lows. That is what I mean by oscillating in a higher plane than in June. Since this is only the beginning of the quarterly reports season, perhaps the indexes can go higher still before they start to oscillate.

7/24/09 Friday

The market pauses to catch a breath again with light trading volumes. Both the Dow and the S&P rise by 24 points and 3 points respectively. On the other hand, the Nasdaq breaks its twelve winning streaks with a drop of 8 points, being weighed down by reported falling revenues of Microsoft a and Amazon.com.

Health care reform is in the news almost everyday. We should stop and think about the following basic questions:

1) Is health care reform the single most important thing as pointed out by US House Speaker Nancy Pelosi?

You’d say no if you are a wealthy person who can afford the best medical care no matter how high the price. The fact is that the US has spent more on health care per person than any other developed country in the world. However, the quality is no better with a lot of inefficiencies and personal complaints and frustrations.

2) What is the real problem?

The real problem is health care cost inflation. During the last decade, the cost of health care has risen at an average of 8% per year, much higher than the general inflation rate. As a result, close to 50 million Americans cannot afford to pay health insurance. They are priced out of the market.

What is alarming is that if health care cost is not brought under control, the US government will go bankrupt due to its ballooning Medicare and Medicaid programs.

In the private sector, American companies will not be able to compete due to the burden of huge health care costs paid for their employees. The surging health care cost is fast eroding the productivity and technological advance achieved for American products. The health care inflation is like a gathering dark cloud that threatens the economic security of the entire country.

3) Should we let the private sector reform itself?

The private sector has been providing for American health care since day one. Look at the situation we are in now. Have they done a good job after so many years?

The private sector’s only motivation is profit maximization. How can you provide quality care when you try to squeeze the patient? Besides, there exists not much competition due to the large capital overhead for the health care industry. As a result, big corporations dominate among the providers such as drug companies, hospitals, insurance companies, and the associations of doctors and nurses. Without competition, prices can only go up and up. The private health care sector is making tons of money right now, why should they reform and change the status quo?

4) Why should the government do it?

If not the government, who? Who has the power and authority to rein in the big corporations? Who is supposed to look after the welfare of the public?

In America, the government is not supposed to take over an industry. What should be done is to find a way to control the runaway costs. Both Houses of the US legislature are now working on a plan to reduce costs. Since 1950’s, a number of Presidents have tried to reform health care with little success. Given the urgency of the problem and the support of the public, the chance appears to be greater this time. However, the opposing forces cannot be underestimated because they have tons of money to buy influence in Washington.

7/23/09 Thursday

The stock market resumes its upward move today. The Dow gains 188 points to 9069, the Nasdaq +47 to 1974, and the S&P +22 to 976.

Three significant facts are worthy of note. First, the trading volumes for the three indexes are heavy compared to most days before, reflecting more buyers’ participation. Second, the rally is broad enough to include most industries. Third, all three major indexes have established their highest points so far for this year. In other words, today represents a milestone for this year’s stock recovery.

Small players should note that on the way up, the stock market must break their previous highs to reach a new plane where it will oscillate for a while. Then it will move on to yet another higher level to oscillate. The peak will finally come when the big players decide that it is time for them to cash out. This step-by-step upward movement lasts for at least several months until the economy runs out of steam. As things now stand, we are only slowly moving out of the recession. Until full employment returns, which signifies the economic peak, the stock market probably has two more years to run.

The same pattern is true on the way down. Note that the financial stocks began to slide as early as November 2007. It took more than a year for some major companies like AIG, Citigroup and Bank of America to come down from above $40 to below $3. Now that they have recovered significantly, it will take a couple of years for them to climb back up.

One major company deserves attention today: Ford Motor. I have talked about Ford’s recovery before in some details. Today’s earnings report shows that the company has reduced its loss to $1 billion in the latest quarter compared with $4 billion loss in the previous one. This is the kind of turning point that the stock market wants to see. As a result the stock price rises by $0.60 to $6.98 in very heavy trading. Ford was on the verge of bankruptcy only a few months ago when its price hit a record low of $1.50 in late February this year. The company has said that it does not need any government bailout while its two American competitors, GM and Chrysler, have already gone belly-up.

7/22/09 Wednesday

After seven days of surge, the Dow and S&P indexes pause to catch a breath today (-35 points and -0.5 respectively). On the other hand, the Nasdaq continues with a gain of 10 points.

Since last week, many big companies have reported better-than-expected earnings, which have buoyed the stock market. Note that their revenues have fallen significantly due to the recession. They have managed to earn profits by cutting costs such as laying off employees, selling assets, restructuring the business, and reducing non-essential expenses.

The stock market likes to see companies aggressively cutting costs. Never mind the hardships of those employees who got fired. It is ironic that during the current recession, while millions of middle-class working people lose their jobs, companies continue to make money and reward their top executives with millions of dollars in bonuses.

In the months ahead, many companies still keep on shedding jobs to reduce costs. When business finally improves, they may not hire as fast as they have fired. Some of the jobs being eliminated may never come back. Therefore the job recovery will be much slower than the business recovery. The business recovery is in turn slower than the stock market recovery. In general, the stock market is approaching its peak when business has fully recovered. So don’t play when the good time has finally arrived.

What are the relevant factors to look for when a company emerges from a recession? This is the best time to play because its stock price has been beaten down to a record low and is poised to recover. Let me start with the most important factor first:
• Company reducing or selling non-performing assets.
• Selling valuable assets to raise cash.
• Aggressive cost cutting and restructuring.
• Depleting existing inventories.
• Quarterly profits improving, especially from a big loss to a small gain.
• Gaining market share over competitors.
• Merger or acquisition.
• Increasing sales when the economy recovers.

7/21/09 Tuesday

The surge continues for the seventh consecutive day with the Dow rising by 68 points, the Nasdaq +7, and the S&P +3 at the close. Incidentally, the stock markets in Asia and Europe have also recorded consecutive increases for several days.

The daily movements of the three indexes share a general V-shape pattern. Short-term selling occurs once or twice during midday. Then buying near the close pushes the indexes back to positive territory. This gives an uptrend impression but the market remains cautious as seen by the light volumes of trading.

Here’s another of my observations: If a stock is due to rise after the announcement of quarterly earnings, the price usually fell or remained subdued in the few days prior, and vice versa. Let’s see if this is true since there are a few important quarterly reports today.

Caterpillar (CAT) oscillated between $34 and $36 a few days prior to the announcement. It shoots up to $39.5 today.

Merck (MRK) remained subdued around $27.7 a few days prior. Today it rises to $29.7.

On the other hand, Coca-Cola (KO) climbed to a high of $51 prior to the earnings announcement. It closes lower at $50.4 today.

If this happens with a high degree of regularity, what does it say about the leak of quarterly earnings report before it is released to the public? Who leaks what to whom? Furthermore, it seems that the price direction on the release date is predetermined by what has happened prior. Then how serious should we be about the earnings report? This is something for you to ponder today.

7/20/09 Monday

Last Friday I said that the three major indexes were on track to break out of their June highs. They have done it today as shown below:

Index—–Today (7/20)————–June High
Dow——–8848 (+104)—————-8799
Nasdaq——1909 (+23)—————–1862
S&P500——-951 (+11)——————-946

What does that imply? The indexes will move on to a higher plane and oscillate from there. Note that the trading volumes are light as usual. The buyers are not out in full force. Profit-taking every few days are likely, which would result in declines as soon as some money can be made.

The three indexes will set their July highs for the remainder of this month. The July highs will depend on how much momentum that can be built from the upcoming quarterly reports of major companies, three of which are imminent: Caterpillar, Coca Cola, and Wells Fargo.

The trend of the stock market can be seen by how many stocks and indexes break their monthly records continuously. Currently, we see many of the major ones break their monthly highs since March. On the other hand, during 2008, they broke their monthly lows consecutively until March this year.

We are definitely on the uptrend even though there exist various worsening statistics such as unemployment, home foreclosures, declining home prices, credit card defaults, and huge government deficits. Those are lagging indicators that do not forecast stock market trends. When you buy stocks, don’t wait for all those data to turn positive. When they do, that would mean the peak of the stock market to be followed by a downward correction lasting for several months.

7/17/09 Friday

The stock market follows the same pattern as yesterday, hovering around the flat line most of the time until closing with a small pick up in light trading. The Dow gains 32 points, the Nasdaq +1.6, and the S&P -0.4 points.

What is significant is that for the whole week the three major indexes have managed to advance substantially. Note that the Nasdaq has already broken out of its June high. The Dow and S&P are within striking distance of theirs as shown below:

Index—–Today (7/17)———–June High
Dow——–8744———————-8799
Nasdaq—–1887———————-1862
S&P———940————————946

What are the prospects of all three indexes breaking their June highs? I think they may next week, and will climb to a higher plane and oscillate from there.

Next Monday (7/20/09) marks the 40th anniversary of Apollo 11 moon landing. Although we may have forgotten this historic human achievement, we should find time to reflect the payoffs from such an expensive investment.

What is the use of a moon mission?
What separates humans from other animals is our never-ending quest for knowledge. A landing on the moon is a necessary step toward discovering the universe of which we are a part. The human hunger for knowledge is much greater than for food. As you may have heard, “Man does not live by bread alone.”

What are the payoffs?
The moon project requires tons of research on rocket propulsion, computer control, communications, composite materials, human endurance, and so on. These form the basis for later advances in various modern technologies such as computer chips, aircraft engines and structure, control software, wireless communication, nano-technology, even the Internet.

So many problems are waiting to be solved. Why go to the moon?
The world we live in is never devoid of problems, big and small. We know that after fixing a big one, another will arise. It’s a matter of priority which problem you want to address. The moon project is a much better priority than many others. For instance, the Vietnam War cost billions and over 50,000 US soldiers killed, not counting the casualties of the other side. The current Iraq War also cost billions and about 3,000 dead so far. Those are disastrous misplaced priorities that US leaders are capable to commit. Do you rather prefer to go to the moon? Even to Mars? It’s investment money well spent.

Why can’t America save the world with its resources?
America cannot save the world. It can only help if it serves its self-interest. Peoples of the world have to save themselves by learning to be self-reliant. Look at the progress made in China for the last 30 years. They have succeeded without American aid. You will find many other examples such as South Korea, Taiwan, Malaysia, Thailand, Singapore and so on. Countries suffering from poverty, hunger and disease, especially in Africa, have one thing in common: corrupt government. The government officials are looting their own people. Have you ever asked how much of the food aids have been pocketed by corrupt officials before reaching the hungry people? How much the foreign volunteers are being hampered by local officials when they try to deliver aids to the people? Giving aids is only a short-term fix to relieve a dire situation. Promoting self-reliance is the key to bring about a better world.

7/16/09 Thursday

The market pauses in the morning trading hours. then continues the upward trend for the remaining day. At the close, the Dow gains 96 points, the Naadaq +22, and S&P +8. This represents the fourth consecutive day of advance, although in relatively light volumes.

Following Goldman Sachs, the quarterly earnings announced by JP Morgan Chase were also better than expected. Citigroup and Bank of America will announce their earnings tomorrow. The share prices of all these three banks dropped today. What are the prospects for the next week or so? I think they are good. Why? The simple reason is that they have all come down significantly during the past three weeks. The strange thing is that stock prices have to come down first before they pick up, and vice versa.

What are the present concerns about the financial sector? The first one is consumer credit risks. Due to rising unemployment, defaults on credit cards are also rising. However, this fear has subsided somewhat after some major card companies reported less than expected losses yesterday.

The second concern is the deterioration of commercial real estate due to lower business activities. As I explained a few days earlier, commercial real estate carries much less risk than the sub-prime loans that fuel the bubble in the residential market. Now that the residential mortgage crisis has largely been stabilized thanks to huge government bailouts, the problems in the commercial sector are much easier to handle by the banks alone.

A third concern materializes today when CIT, a major loan company lending to small and medium businesses, failed to obtain government bailout money. Bankruptcy may be filed as early as tomorrow. The government seems willing to let this company fail because it presents no “systemic risks”. In fact, the stock market has looked beyond this event as the major financial companies are gathering steam for the next push forward.

Let’s see how the next few days will turn out when more big companies release their quarterly reports.

7/15/09 Wednesday

The stock market is rising the whole day due to good news from many sources including: Intel’s earnings report, and the June delinquency rates for credit cards as reported by American Express, Discover, and Capital One. Note that the good news is not actually that good, but rather, “better than expected”. These are the three words that usually make the market go round, not to forget its opposite “worse than expected”. Also note that the trading volumes are moderate, showing that buyers are not out in full force.

The Dow gains 257 points, the Nasdaq +63, and the S&P +27. These are the big numbers we have not seen since the beginning of June.

What are the prospects for the next few weeks of this earnings report season? I think that the major indexes will move to a higher level after breaking the previous highs. Let me use my familiar tables to put you in perspectives:

Index—March Low—Apr Low—May Low—June Low—July Low
Dow——6547———-7761——–8212——–8302———–8147
Nasdaq—1269———-1551——–1680——–1765———–1746
S&P——-676————811———877———-893————879

From the above table, we see that the monthly lows since March for the three major indexes show a steady improvement. That is, the lows for any month are higher than those of the previous month. The only exception is in July this month when the indexes tried to test the June lows by breaking them. However, this did not last long. The indexes bounced back quickly as shown below:

Index—–Today (7/15)———–June High
Dow——–8616———————8799
Nasdaq—–1863———————1862
S&P———933———————–946

From the above table, it looks like we are on track to break the June highs. In fact, the Nasdaq has barely done it today. The Dow and S&P can achieve it within days.

My point is that despite all the daily ups and downs, you can see the market trend by tracking the lows and highs for each month. My conclusion is that the trend is obviously up. However, the pace will not be fast because we are still on the long road to full economic recovery. The market will continue to oscillate for short-term profit taking, but will steadily be moving onto a higher plane.

7/14/09 Tuesday

All of yesterday’s excitement about the huge quarterly profit of Goldman Sachs (GS) has been dissipated today. The company’s stock price advances by a mere $0.22 after yesterday’s rise of $7.6. It only goes to show that anticipation carries the day in the short run. Profit will of course drive the stock for the longer term. On the other hand, it also depends on what level the price started out to climb. When the price has reached a high level, more profits may not cause it to climb.

Today, the stock market settles back to low volume trading as usual. All three major indexes record increases (Dow +28, Nasdaq +7 and S&P 500 +5).

The next dose of earnings news for the financial sector will come two days hence when JP Morgan Chase (JPM) announces its quarterly performance. There are three reasons why JPM is likely to stimulate the market upward. First, the financial sector has largely stabilized. Second, JPM is considered among the strongest survivors of the financial meltdown. Third, its stock price has gone through profit taking during the last two weeks. So there is a potential for short-term up-tick.

The following table listing some major financial companies illustrates my point:

Stock—April Low—May High—Last Week’s Low—-Today (7/14)
JPM—–28.9———–38.9———-31.8——————-34.7
WFC—–16.1———–28.5———–22.1——————24.4
BAC——7.0————15.1———–11.3——————-12.9
C———-2.8————4.5————2.6——————–2.9
GS——–113————143————135——————-150

As you can see from the above, the stock prices of the major financial companies vary between the April lows and May highs. Goldman Sachs has already broken the May high due to large profits just announced. It looks like that JP Morgan, Wells Fargo, and Bank of America will follow suit later this month. CitiGroup appears lagging behind. It even broke the April low last week but has climbed back up. Let’s wait and see the drama unfold. It may turn out to be a sell off if some unexpected news scares the market. However, chances are the financial sector will move on to a higher level of oscillation.

7/13/09 Monday

The financial stocks roar back today after almost three weeks remaining in the doldrums. The reason is due to Goldman Sachs’ impending quarterly report, which is expected by the analysts to show a profit of more than $2 billions. However, the volumes of trade for the three major indexes are light. That means the market is still nervous about the overall economic situation, showing no strong urge to buy. At the close, the Dow gains 185 points, the Nasdaq +37, and the S&P +22.

I am always concerned about any stock rising dramatically one day prior to the release of its quarterly report, as exemplified this time by Goldman Sachs (up $7.6 today to reach $149). There is always the possibility that its quarterly performance as described in the report is not as good as expected, which may push the stock price back down again.

Furthermore, the news about the likely bankruptcy of CIT Group hangs overhead. CIT is one of the largest financial companies providing loans to thousands of medium and small manufacturers in America. The Treasury Secretary says that the US government can rescue CIT, but prefers to wait because the company, although big, does not present a “systemic risk” to the financial industry.

In any case, it is nice to see the financial sector rebound after almost three weeks of profit taking. The stocks of most big banks have fallen significantly. If the profit taking is over, they are ready for another round of up-and-down oscillation. The Goldman Sachs report may happen to be a convenient excuse to lead this upsurge.

7/10/09 Friday

Today marks another uneventful day of light volume trading for the three major indexes (Dow -37, Nasdaq +3, S&P -4).

During this long pause that has lasted for almost three weeks, a major rotation has been taking place. A sell off occurs in the sectors of oil, raw materials, and banking. Where does the money go? A small part of it goes to boost the health care and high tech sectors. The rest seems being parked somewhere waiting for something to happen. Let me examine the situation more closely:

What are the prospects for the economy? Things are still bad, especially unemployment, consumer confidence, and retail sales. However, these are reactive, fear, and delayed factors. They don’t lead the economy on the way to recovery. They are only convenient reasons to be used in news reporting, analysis, and everyday conversation.

The stock market always looks forward several months ahead. The factors that really determine the recovery of the economy are: depletion of company inventories, amounts of new orders being received by manufacturers, availability of short-term financing for company operations, and business confidence about the immediate future. All these data can easily be obtained by a high-level insider. The public seldom talks about those things that they haven’t heard much about. When these data appear as news, they are usually out of date because they refer to things happening one or more months ago.

Here’s my take about the direction of the market. The current sell off in oil, raw materials, and bank stocks are short-term profit taking being conveniently interpreted as signaling a deepening recession. In fact, the economy has turned a corner but not out of the woods yet. It takes time to recover from the severe recession brought on by the financial meltdown. The financial sector has already showed signs of stabilization. The major banks will report their quarterly earnings next week. Let’s see if that is the kind of exciting news that the stock market will react. The oil and materials stocks will bounce back because the world demands more than the quantities available for the long term.

The upside for stocks is greater than the downside from now on. However, we don’t know whether the recent round of short-term profit taking is over yet. If not, we’ll be facing some more days of downward drift.

The news may talk about inflation due to huge government deficits. Inflation can really hurt stocks. However, you should not succumb to this fear. Inflation and recession can seldom coexist. One or two years hence, inflation may present a problem. But it all depends on how much more revenues in the form of taxes that will flow into government coffers at that time.

Should you worry about anything real? Yes.

A major financial company may fail, notably AIG or Citigroup, but I think it’s highly unlikely because the government has already poured $150 billion into the former, and $25 billion into the latter.

We are only beginning to see the bubble bursting in commercial real estate that may hurt the banks one more time. The commercial real estate bubble is much smaller than the residential one that burst last year. Commercial lending is stricter requiring more cash down payment and no sub-prime loans. Therefore, the risk exposure of banks is much smaller. Furthermore, commercial real estate can easily find another buyer in case of default, unlike a house.

As unemployment worsens, we are seeing a wave of defaults on credit cards. The banks report that only about 5% of credit card holders are defaulting due to the bad economy. The credit card business is one of the most profitable due to the interest rate that can go as high as over 20%. The handling of a credit card default involves much less risk for the bank as compared with a mortgage default, where the bank winds up repossessing a vacant house that nobody maintains and makes payments.

There are many wild cards that may torpedo the economic recovery:
• Terrorist attack on a major oil refinery.
• Terrorist attack on a major city especially in USA.
• A war in the Middle East, especially between Israel and Iran.
• China stops buying US treasury bonds. Should they stop buying, the US would have no money to buy Chinese products. This is a case of mutual interest and mutual dependence. Don’t worry.
• China may cause the US dollar to depreciate by advocating the world to switch to other reserve currencies. This may cause a stir but hardly the depreciation of the US dollar. Many countries are holding US dollars as reserves. They cannot afford to let the dollar depreciate, thereby hurting themselves. In due course, some other currencies will be used as reserves because their economies have grown big enough. At present, no national economy is big enough to replace the US dollar as a reserve currency.
• North Korean missile attack. Na. The Chinese will for sure restrain their neighboring puppet state. They don’t mind letting North Korea shoot missiles into the Pacific Ocean so as to pinch the nerves of USA and Japan whom the Chinese view as competitors in many areas. They will never allow North Korea to start a war that will disrupt their hugely profitable trades with US and Japan.

7/9/09 Thursday

The stock market continues for another day of light volumes trading
where all three major indexes exhibit small gains (Dow +5, Nasdaq +5,
S&P +3). There is not much significant news except that the stock
markets in Europe have finally ceased their week-long declines. The US
market is pausing after more than two weeks of declines in the oil,
materials and banking sectors. It is waiting for something dramatic to
happen. Whether it will go up or down is difficult to envision because
there exist all kinds of good and bad signs about the economy.

I wish to bring back the comments I made about the reverse split of AIG
that happened lately. I said emphatically, “If I were you, I’d get the
hell out of there.” After the split, the stock has fallen from $23 on
July 1st to $9.5 today. The carnage is nothing short of dramatic. Only
a reverse split can allow the stock to come down so quickly without
reducing the company to a penny stock.

I suppose there is a purpose behind the reverse split: to deflate first
in order to inflate. The number of outstanding shares of AIG is now
reduced to 0.135 billions from the previous 2.6 billions. It looks
exceeding small for the largest insurance company that the government
said it’s too big to fail. In fact, the US government has poured $150
billions into AIG late last year to save it from collapse. Now the
question is, will AIG fall? The chances are very remote.

Then we have a company that is not likely to fail. It’s the biggest
insurance giant, whose stocks have been beaten down to single-digit
level but not penny status thanks to the reverse split. It has the
smallest outstanding shares, which means great potential for rebound.
What more certainties do you want?

The next question is, what is the bottom price to buy? Some big guys
will determine the bottom when they start to move in. At this rate of
decline, we may see the bottom very soon. In the meantime, we have to
sit and wait until we see the bottom. Don’t worry about missing the
boat. You can never catch the bottom or the top. Even if you buy higher
than the bottom, the rebound will eventually come to several times more
than your original investment in a couple of years.

7/8/09 Wednesday

Trading volumes remain rather light today as the market wanders with no direction. The Dow swings up and down over a range of 100 points before it finally settles with 15 points gain. The Nasdaq is up by 1 point and S&P down by 1.

Alcoa kicks off the earnings report season today with an announcement after the market closes. It incurs a big loss for the third consecutive quarter. Despite the bad news that is expected in this recession, the good news is that the loss is less than what the analysts have expected. So the stock goes up in after-hour trading by $0.38 to $9.84. Let’s pause for a moment to question what has happened.

What is the purpose of after-hour trading? Why are most people excluded from participating? Are we right in assuming that the stock market has fair competition and equal access?

Why did the reality of continued big losses fail to push down the Alcoa stock price? Why was the expectation of the analysts that important? Do the analysts actually control the stock price?

My answer is that the analysts are only mouthpieces for the big players who employ them. The big players must remain invisible because they control the market. The analysts can say whatever they want to mislead the public. The truth is that Alcoa has been dropping for the past three weeks from $12.4 to $9.4. This short-term profit taking appears to be over. It’s time for the stock to go back up to repeat another cycle again.

The profit taking is obviously timed with the release of the quarterly announcement. As I mentioned yesterday, if the stock falls prior to the announcement date, it will likely rise after the announcement, regardless of profit or loss. The analysts are only adding some cosmetics to obscure the real situation. The fact that the stock rises by $0.38 in today’s after-hour trading validates my point.

In this connection, we may as well look at two other sectors: oil and banking. The major stocks of these two sectors have been falling for almost two weeks. These companies may give a preview of their quarterly earnings very soon. If the short-term profit taking has come to an end, these stocks will be timed with the announcements to rise again to repeat the cycle. Then we can predict that the announcements of profit (even loss) will surpass the analysts’ expectations, causing the stocks to rise. What a funny and fake game to play!

7/7/09 Tuesday

The clouds of uncertainties regarding the depth of this recession and the pace of its recovery weigh on the market today. The decline has a broad base with the Dow -161, Nasdaq -41, and S&P -18. The only consolation is that the volumes are moderate, implying that it’s only a limited sell off.

Let’s bring back my familiar table and see how today compares with the lows of the previous months:

Index—March low—-Apr low—-May low—-Today (7/7)
Dow——6547———–7761——-8212———8164
Nasdaq—1269———-1551——-1680———-1746
S&P——-676————811———877———–881

Today’s decline breaks the May low for the Dow only. The other two indexes still have to wait for a few more days.

Will the indexes slide back to the March lows? I don’t think so because the March lows represent the end of the world. Now, the economic conditions are much better than in early March when the financial sector seemed to collapse at any moment.

Will the indexes test the April lows? They may but it all depends on how companies have performed in the second quarter. Tomorrow is the start of the earnings report season when Alcoa (AA) announces its quarterly performance, to be followed by many others. A good way to gauge the short-term reaction to quarterly reports is how the stock has moved for the past few days before the announcement. As for Alcoa, the price has dropped from $10.8 last Tuesday to $9.4 today. The decline in fact started even two weeks earlier when it reached the June high of $12.4. I am inclined to bet that the price will go up tomorrow.

I don’t pretend to know where will the price go tomorrow. However, if it turns out to be an up day for Alcoa, the effort of looking back at the price before the earnings announcement will prove worthwhile. Why? The reason is that this is a good way to predict the reaction to an earnings announcement. Should we conclude that a price decline precedes a good quarterly report, and vice versa, the following questions should be asked:
Is this a conspiracy of the insiders? That is, to deflate before the price goes up, and to inflate before the price comes down.
Who have seen the report before it is announced?
Does the law forbid insider information?
My answer is: When there is a lot of money to be made, people will get very creative. So, anything goes. Laws are made to be broken. People get away with the law everyday until they are caught.

7/6/09 Monday

I have no idea how long the daily oscillations of the stock market will last. Today, the Dow rises by 44 points, the Nasdaq drops 9, and the S&P gains 2, with moderate trading volumes. Until the time comes for a big push either up or down, the market will continue this daily cycle of profit taking, because some people have to make short term gains.

I wish to vindicate what I said last time about the one-for-twenty reverse split of AIG. I explained that it was a gimmick to boost the price by a numbers game. Since the reverse split on July 1st, the price has dropped from $23 to $16 (falling by more than $2 today). This gimmick will allow the price to come down to a low enough level so that the big guys can move back in. Suppose the price comes down to $5, it would be equivalent to $0.25 without the split. The latter price would look ridiculous for a big company like AIG, and would imply bankruptcy status. However, a price of $5 looks not too bad in today’s recession. For this stock, you should follow and see if it rebounds from some low single-digit level. If it does, that signals the big guys are coming back again. That means it will be a great opportunity for you as a small guy.

Have you observed something like stock rotation these few days? You can see it in the oil, materials, and precious metal stocks. Money is flowing out of these stocks resulting in their temporary declines. These stocks fluctuate daily, being heavily influenced by speculations regardless of long-term conditions.

As for oil, it comes under all kinds of speculation that bid up or down the price per barrel in the world market. Inevitably, the movements of oil stocks are tied to the price per barrel worldwide. On the other hand, the long-term condition does not change. The world has already eaten up the oil surplus. We are using oil without the cushion of a surplus against any production shortfalls. The price per barrel will rise beyond $140 again when the global economy fully recovers from the current recession, unless we have found a way to reduce oil consumption.

For materials stocks such as steel, aluminum, paper, rubber, etc., their temporary declines resulted from the short-term fears about the depth of the current recession and the pace of its recovery. For the long term, conditions remain the same. The demands for raw materials will increase especially for emerging countries like China, India and Brazil. Therefore, materials stocks are bound to rise.

The case for precious metals like gold, platinum and silver follows from the oil sector. Part of the long-term demand for precious metals comes from industrial usage, which will increase when the economy recovers. Precious metals are subject to all kinds of short-term speculation about inflation. The fear of inflation during a recession like this one is unfounded because inflation and recession seldom coexist. The fear of inflation because of huge government deficit spending is valid. However, you have to wait until a couple of years from now when the recession is over for inflation to show. By that time, when business begins to grow, government revenues will increase from sales tax, income tax, property tax, and whatnot. The revenues have the potential to offset the big deficit spendings. If you have doubts, look back at the Clinton years from 1996 to 2000 when the US government was running huge surpluses.

Strangely enough, the green energy stocks are tied to the oil stocks although these two industries are supposed to compete with each other. A valid reason is that when oil stocks rise, oil must be expensive, and more investments will flow into green energy. As for the long term, green energy is probably the next big thing especially when the US has solidified its national will to move away from oil. You should never underestimate the thrust of a new vital industry as evidenced by computer chips, personal computers, cell phones, and the Internet.

7/2/09 Thursday

Before the Independence Day holiday tomorrow, the market closes with the familiar pattern of light trading and daily oscillations. In contrast with yesterday, the three indexes fall quite significantly (Dow -223, Nasdaq -49, S&P -27).

Reporters interpret this as a result of increased unemployment for June (467,000 jobs lost in non-farm sector). Note that this figure, although bigger than that of May, is smaller than those of the months before. The job market is always the last to recover from a recession, whereas the stock market is always the first to turn around. However, the big job loss raises the valid question about the pace of the economic recovery granted that it is indeed taking place.

What do we make of the last few days of market movements? Let me bring back my familiar table to give you some perspectives:

Index—March low—-Apr low—-May low—-Today (7/2)
Dow——6547———-7761——-8212———8281
Nasdaq—1269———-1551——-1680———1797
S&P——-676————811——–877———-896

You can see that the market is testing the May lows as the indexes come down. However, they are still far away from the April lows, not to mention the record lows in March. It will take a series of very bad developments to break the April lows.

After reviewing all the mixed signals about the direction of the economy, I think the indexes will turn around and move up to a higher plane where they will repeat the oscillation pattern that we have seen for the past few weeks.

Today I wish to talk about reverse split, as opposed to regular stock split. Why do stocks have to split?

When a company goes public, the number of outstanding shares is always small, in the order of 50 millions. This small number ensures that the stock can fetch a reasonably good price to reward the initial investors, mostly venture capitalists and investment banks. When the company grows, the stock rises with the result that it may price out the small investors. Therefore, the major stockholders decide to split the stocks to attract more public participation, that is, your money and mine.

When a stock split is announced, for instance, a two for one split, the amount of shares you hold will be doubled immediately while the price will be cut in half. Trading starts with the new lower price. As for a reverse two for one split, the opposite happens resulting in doubling the price and halving the amount of shares you hold. Trading begins with the new high price.

We must ask, what is the purpose of a reverse split? It cannot be limiting public participation for it will reduce the potential for upside. I think the purposes are as follows:
• To reduce the amount of outstanding shares.
• To boost the price by a numbers game rather than by good performance.
• To maintain the stock’s current position in an index.
• For prestige because of the higher price.

Let’s use AIG as an example. On July 1st, AIG carried out the one for 20 reverse split. That means, your holding of 2000 shares will become 100, and the stock price will increase by 20 folds. The day before the reverse split, AIG closed at $1.16 per share. After the split, the price became $23.2 for a short time then fell to $18.25 today. The reverse split could not maintain its steady decline. My thought about AIG is as follows:
• As the biggest insurance company, AIG does not need to reduce its outstanding shares. Many companies in the same league have about the same amounts of outstanding shares.
• To boost the share price by reverse split is only a gimmick. It is not real because the company still suffers great losses.
• AIG used to be listed as a component in some major stock indexes. Its fall to around $1 may cause the stock to be de-listed just like what is happening to Citigroup. This has a negative impact on the prestige of the company. A reverse split can solve the problem right away.
• The fact is that a double-digit stock now at $18 has more to lose than a previous $1 price. The reverse split presents greater risk for a current shareholder of AIG. Look at what has happened to Sun Microsystems when it declared a five to one reverse split a few years ago. The price fell from $27 to $3 until it was bought by Oracle a couple of months ago.
• A higher price oscillates with bigger margins everyday. Besides, you can short the stock when it is high, and make a profit when it comes down. These are new opportunities for the big players, not for small ones. I wonder if this is the true reason for the AIG reverse split. If I were a current shareholder, I’d get the hell out of there

7/1/09 Wednesday

The trading volumes for today are light for all the three major indexes. In addition, the same pattern of oscillation remains day in day out. This directionless drift will likely continue for a while until more companies report their quarterly earnings to show where the economy is heading. All three indexes show gains today (Dow +57 points, Nasdaq +11, S&P +4).

Are you interested in penny stocks? Let me offer a big word of caution. Penny stocks represent dead companies. Why bet on a dead enterprise? You have better things to do than that. There exists a market for penny stocks controlled by some invisible hands. It’s easy to buy but hard to sell at the price you want.

Dead companies may be resurrected. When they come out from bankruptcy, their shares will be reconstituted. That means their shares will be a brand new one, with a different symbol, and a different price based on how much the new company is worth. There is no such thing as automatic conversion from the old defunct share to the new one.

Why does a company go into bankruptcy? One reason is that it will be protected from the claims of creditors and investors. That is, they want to zero out the old shares and start a new page. You may want to buy the old shares because they are cheap penny stocks. In fact, they are worthless.

There are plenty of examples of companies emerging from bankruptcy, especially in the airline industry. Take a look to see if their old shares can be converted into the new one. Not a chance!

You may also want to look at bankrupted GM Motors. The penny stock assumes a new symbol, GMGMQ. It is hovering around $1 but is actually worthless. The company even cautions investors that the old stocks have no value. Another example is Lehman Brothers. After bankruptcy the symbol becomes LEHMQ selling at around $0.05. Do you want to buy it at such low price? What’s the use if it is worthless?