Stockfessor

2009 Oct-Dec, Daily Insights

12/31/09 Thursday

Dow: -120 to 10428, volume 0.68 billion shares.
Nasdaq: -22 to 2269, volume 1.2 billion shares.
S&P 500: -11 to 1115, volume not available.

The last trading day of the year shows the same pattern of low volumes and volatility toward the close. The three major indexes suddenly turn sour in the last half hour. There is no need to worry. The stock market is looking forward to a good new year when the economy is slowly recovering.

Now it’s the right time to look forward to what will happen in 2010 based on what has transpired previously. The first question to ask is, what are the main factors that are driving the market? They are unfolding in the following sequence:

1. Companies started to cut employment and reduce inventories when the economy turned sour in early 2008.
2. Financial meltdown in latter half of 2008.
3. Stocks plunged and reached bottoms in early March 09, thus creating the biggest opportunity for rebound, especially for those who had the cash to buy up very cheap stocks.
4. The Federal Reserve kept interest down to below 0.25% to stimulate housing and the economy. Low interest has the effect of boosting the stock market.
5. The financial meltdown caused investors to flock to gold, thereby pushing up its price and pushing down the value of the US dollar. When such pressures ease for gold and the US dollar later, cash will move out and into the stock market.
6. Stabilization of major banks in March 09 after huge government bailout of $800 billions. Most big banks have paid back the bailout money they took from the government.
7. Major companies are realizing big savings in their retrenchments. Although sales have fallen, profits are rising due to cost cutting. This is enough to boost the stock market initially.
8. Major companies are also flushed with cash, which they are using to buy other companies to consolidate their market shares. This generates a wave of M&A activities (merger and acquisition) that will also boost the stock market.
9. It is reported that billions of cash and tons of small investors are sitting on the fence, waiting to come into the stock market when economic conditions become clearer.
10. The government’s $900 billion stimulus package is beginning to roll into various industries especially infrastructure and green energy.

Please note that all the factors mentioned above that have buoyed the stock market represent only a supply push, because they involve additional cash or investment pumped into the economy. Before this supply push runs out of steam, the demand push will come due to companies hiring more workers as the economy improves. Higher employment will bring more demand for goods, which allows companies to profit from increased sales, rather than from cost cutting as they are doing now.

So how long do you think this bull will last? I have said that it has a long time to run, probably for the next 18 months.

12/30/09 Wednesday

Dow: +3 to 10548, volume 0.64 billion shares.
Nasdaq: +3 to 2291, volume 1.3 billion shares.
S&P 500: +0 to 1126, volume not available.

The three major indexes spend the most trading day in negative territory until the last hour when they turn slightly positive. Today and yesterday mark a consolidation for the end of the year. This may happen tomorrow, the last trading day of 2009.

I happen to think about the Pareto Principle, also known as the 80-20 rule, which is true in many cases. Some examples are worth munching:

• 80% of sales come from 20% of clients.
• 80% of the problems are caused by 20% of bad elements.
• 80% of land and resources are owned by 20% of the population.

The Pareto Principle illustrates the uneven distribution of income, power, resources, and problems, too! It helps us understand more about the existing conditions of the real world.

As far as solving problem is concerned, the Pareto Principle encourages us to focus on the significant 20% rather than the whole. Once we get a handle on the 20%, we will get 80% of the problems fixed. This sounds like a good advice for achieving efficiency in daily work.

Can Pareto be applied to the stock market? Let me try:

• A bull runs 80% but rests 20% of the time. The same is true for a bear.
• During a bull market, 80% of the stocks are trending upward.
• During a bear market, 80% of the stocks are trending downward.

Of course there are cases where a more uneven distribution exists:
• In many countries of the world, less than one percent of the population controls all the resources of the 99%.
• In the US, one out of every 200 citizens is a millionaire.
• You can fill in more examples.

12/29/09 Tuesday

Dow: -2 to 10545, volume 0.64 billion shares.
Nasdaq: -3 to 2288, volume 1.2 billion shares.
S&P 500: -2 to 1126, volume not available.

The six-day winning streak is broken today by a small drop in all the three major indexes. During today’s session, it looked like stocks were on the way up again. Only until the last hour they could not hold and started to fall. There was not much news driving the market.

I happen to think about something that company executives like to say, that is, they act for the interest of the stockholders. Really? Beware of smokescreens in the real world!

All the major decisions of a public company originate from the Board of Directors. The CEO used to be Chairman of the Board also. This gives him more power than necessary. The members of the Board are usually appointed by the CEO or with his consent. No wonder the Board always votes millions upon millions of dollars for CEO compensation and bonus. Rarely does the Board dare to rebel against the CEO. Only under extraordinary circumstances does the Board fire a CEO.

Who are appointed to the Board of Directors? It all depends on the ownership realities and the CEO’s thinking. Major shareholders of the company’s stocks are naturally invited to be Board members. Sometimes a major owner prefers to send a representative rather than personally sit on the Board. After fulfilling the requirements of ownership, the CEO may appoint any person to the Board as long as that person serves his interest. So, the Board can never accommodate the interests of small shareholders.

When a CEO says he is working for the interest of shareholders, he only means for the big ones who are represented on the Board, not you and me. Who says the world is fair? But I know it’s always fairer for the big guys.

12/28/09 Monday

Dow: +27 to 10547, volume 0.71 billion shares.
Nasdaq: +5 to 2291, volume 1.2 billion shares.
S&P 500: +1 to 1128, volume not available.

This is a sixth consecutive day of low-volume advance, one of the longest streaks for the bull-run. Is the market really that good? Or is it some kind of preparation for a correction? I am leaning toward 70% for the bull and 30% for a temporary correction. That is why it’s prudent not to commit all your cash. Save some just in case the market dips.

A stream of good news is trickling in that buoys the market. A survey conducted by Master Card shows that retail sales for this Christmas season increased by 3.6%. Because there is one extra shopping day compared with last year, discounting this extra day still nets an increase of 1%. Retail sales is a good measure of consumer spending, without which the economy cannot move forward. Consumer spending reflects employment condition. If consumer spending continues to hold up, job prospects must be improving.

The laggard in an economic recovery is the job increase. When we begin to see more jobs, the economy will begin to heat up. It will reach a boom when the unemployment is restored to about 5% in the US. By that time, the stock market will have reached its peak or bubble waiting for a big correction. Remember, a big correction always occurs during boom times when everybody seems so optimistic.

How soon will the US economy recover back to the normal 5% unemployment level from the current 10%? It will take at least 18 months, maybe never depending on how the economy adjusts to new conditions. Therefore, as I have said before, the current bull-run will last at least 18 months. Remember, a bull-run by no means excludes any temporary corrections.

12/24/09 Thursday

Dow: +54 to 10520, volume 0.32 billion shares.
Nasdaq: +16 to 2286, volume 0.63 billion shares.
S&P 500: +6 to 1126, volume not available.

This is a fifth consecutive day of advance. The stock market only opens for half a day today in preparation for the Christmas holiday. Once again, the trading volumes are so light.

Something good happens in America this Christmas although many people do not seem to appreciate. It is health care reform finally passed by the Senate early this morning. Although the contents of the final bill depends on the merging of the two bills passed by both Chambers of the US Congress, the main features represent a monumental change in the US health care system. Let me summarize the big changes below:

First, why do we buy medical insurance? We are in fact buying a safety net just in case we get really sick. However, many Americans do not know what kind of insurance they have bought into. When they get really sick, the insurance companies abandon them by dropping them from their insurance with the common excuse of “pre-existing” conditions. This is truly a consumer rip-off ignored by the government for so many years. This bill will rein in the insurance companies by:
• Forbidding them from refusing insurance using “pre-existing” conditions or other excuses.
• Forbidding them from dropping their clients from insurance when they get gravely ill.
• Forbidding them from charging higher premiums for people with “pre-existing” conditions.

Second, the rising premiums have priced out close to 40 million people. This is a disgrace among developed countries with so many medically uninsured. This bill will help insure the uninsured by ways of government subsidies for low-income people.

Third, the root of the problem is the fast rising cost of health care. This is a very complex problem that cannot be easily solved by legislation or by price control. The new bill must address efficiency, wastes, competition, disease prevention, cost incentives, attitudes and so on. The new bill will do the following things:
• Improve efficiency by digitalizing all medical records.
• Encourage transparency and competition by requiring all health care companies to publish their prices on the Internet.
• Re-align existing incentives by emphasizing better results for the patient. At present, doctors and hospitals are paid by the quantities of drugs, tests, and medical procedures prescribed. As a consequence, over-prescribing is the norm, pushing up prices greatly and unnecessarily.
• Cut down fraud in government-run programs such as Medicare and Medicaid. An estimated saving of billions of dollars per month can be realized just by clamping down on fraud.
• Increased emphasis on prevention and health maintenance.
• Increase competition in the health care industry. The “public option” has scared people away because of its name that implies government takeover of health care. Somehow a new name needs be used to convey the idea of a new health care provider to compete with the existing ones.

Fourth, people have a legitimate worry that the reform will increase the federal deficit. Well, President Obama has insisted that the new bill has to be deficit neutral. The Congressional Budget Office has already estimated that the new bill will incur no new expenditure, but will reduce the deficit by about $130 billions over ten years.

For those who are still in doubt, what fears do you still harbor? The new bill will enhance the insurance benefits for the majority who has it. It will protect you from insurance rip-off. It will provide access for the 40 millions who are uninsured. It will try to improve the delivery of health care in the system. It will not require additional government spending but will save billions in the years to come. And finally, it’s not a government takeover of health care as advertised by the Republican Party. It’s better government supervision of the health care industry. All in all, it can be considered a patients’ bill of rights that many presidents have tried to achieve but failed since 1920’s.

12/23/09 Wednesday

Dow: +1 to 10466, volume 0.79 billion shares.
Nasdaq: +17 to 2270, volume 1.6 billion shares.
S&P 500: +3 to 1121, volume not available.

This is a fourth consecutive day of advance in light trading volumes. It seems that the Dow is running out of steam judging from its decreasing momentum for the past few days.

However, the Nasdaq looks especially strong where most of the high tech companies are listed. This shows that the high tech sector, especially computer chips, is among the first benefactors of the slowly recovering economy.

Sales of new homes in the US for November registers an 11% decline today, but the sales of used homes shows a contrasting increase of 7%. This leaves a conflicting picture as to the state of the housing market. In any case, it is safe to say that it will require more time for the housing market to recover from the bubble burst that occurred last year.

12/22/09 Tuesday

Dow: +51 to 10465, volume 0.96 billion shares.
Nasdaq: +15 to 2253, volume 1.7 billion shares.
S&P 500: +4 to 1118, volume not available.

This is a third consecutive day of advance with light trading volumes. The reporters call it a Santa Claus rally. Whatever it means, the fact is, it is a rally with narrow participation. It may not last for more than a few days before a profit taking takes place.

Although the economy looks fragile, a string of good news is slowly trickling in. Recently, it was improved retail sales. Today comes an improvement in housing sales for November.

Like retail, US housing sales were depressed since November 08 that continued to July this year. Therefore, the next few months will likely look good when compared with the depressed levels of the previous year. So we can count on an improved picture of both retail and housing sales to stimulate the stock market for the next few months.

12/21/09 Monday

Dow: +85 to 10414, volume 1.0 billion shares.
Nasdaq: +26 to 2238, volume 1.8 billion shares.
S&P 500: +12 to 1114, volume not available.

The market advances for a second consecutive day in light volumes. If the behavior of the past week is taken as a guide, this surge will continue for a couple more days before a profit taking sets in.

For the next two weeks, the momentum of the stock market will be significantly influenced by the retail sales during the Christmas shopping season. People are concerned about the record snowfall on the US East Coast that may dampen retail sales.

But don’t you worry too much. As I mentioned a few days ago, retail sales from November 08 up to June of this year have been dismal every month. The November figure for this year is unexpectedly good compared with November of last year. Chances are the figures for December will be better because last December retail sale was extraordinarily slow. So will retail sales for the next few months when you compare them with the same period of the previous year. This will lend optimism to the stock market.

12/18/09 Friday

Dow: +21 to 10329, volume 2.7 billion shares.
Nasdaq: +32 to 2212, volume 2.8 billion shares.
S&P 500: +6 to 1102, volume not available.

Yesterday I mentioned about the seven-day profit-taking cycle just completed. When you see the market turns positive again today, especially for the Nasdaq, it looks like another up-down cycle is in the wings. Also note the exceptionally high trading volumes. This is due to the so-called quadruple witching when most stock options expire on the same day. The high volumes, though significant, do not tell much about future trends.

You may be interested in the non-binding agreement reached in Copenhagen on climate change. Despite criticisms, I think this agreement is the best we can hope for at the present time. An agreement represents a willingness of all parties to come together and work out their differences. It’s an honest effort based on trust. If the parties trust each other, a non-binding agreement is as good as a binding one. If not, even a legally binding agreement will result in cheating or falling apart. You may like to compare this with a marriage agreement. You may also recall that several years ago the arrogant Bush pulled out of the Kyoto agreement using the excuse of protecting American jobs.

A long-term climate agreement is very difficult to achieve because of so many different interests existing in the world. I would think that on the issue of climate change, 50% of the world population don’t know what’s happening, 30% earn their incomes from existing polluting industries such as oil, coal, deforestation, and other associated industries. 5% are active environmentalists, 5% are willing to destroy the world as long as they get rich. 5% are visionaries who see this monumental crisis coming. And mind you, the remaining 5% may still live in a dream that the earth is flat like their ancestors thought in the 15th Century, so why bother?

It all depends on the enlightened leadership in various countries to raise human consciousness about the real dangers of climate change which people don’t quite see them coming right now. Reaching an agreement is a political process where the leaders have to persuade and organize the majority to fight against the entrenched interests. In other words, it takes years and years because the entrenched interests are the most powerful minority, who control the existing polluting industries.

We should feel good that the world’s biggest polluters, China and USA, are coming together to address the climate problem. Their leadership will encourage other big countries like India, Brazil, Russia, the European Union, Japan, Indonesia, etc. to do more. If they trust each other to reduce CO2 levels as promised without resort to cheating, we will see better days ahead and the world will be saved. Why fuss about a binding agreement with loopholes and thus so hard to enforce?

We should also look at the positive side regarding clean energy now developing in various countries:
• Germany is a leader in solar energy despite it has less sun.
• France is a leader in nuclear generating 70% of its electricity.
• Japan is a leader in hybrid cars.
• Denmark is a leader in wind energy.
• Brazil is a leader in ethanol based on its sugar industry.
• China is making significant changes away from coal/oil and into solar/wind.
• The US is still dreaming, because its political system is controlled by entrenched earth-polluting interests. Hope they will see the light. Else, they will miss this great opportunity.

We should also note the tremendous potential of alternative energy that will eventually eclipse the current one based on oil, coal and gas. Just think about the computer chips, the dotcom business, and the Internet. They came out of nowhere and suddenly they are everywhere. Do you remember we are having an oil crisis once every few years due to the dwindling supply of oil? The increase in oil prices after each crisis will push us toward the threshold of eventual commercialization of alternative energy. Just wait and see. It will happen in your lifetime.

12/17/09 Thursday

Dow: -133 to 10308, volume 1.6 billion shares.
Nasdaq: -27 to 2180, volume 1.9 billion shares.
S&P 500: -13 to 1096, volume not available.

This is the third consecutive day of profit taking, today showing the biggest declines for the three major indexes. You may remember that prior to this there were four consecutive days of increase. The swing of the pendulum back and forth more or less returns the indexes to the levels reached on December 8. In other words, this up-down profit-taking cycle took seven days to complete.

You’ve probably noticed that the shares of major US banks are dropping in recent days. This is due to their raising money to pay back the government bailouts (TARP), which they took last year. They raise money by issuing additional shares into the stock market. This leads to an increased supply of their outstanding shares and the drop in share prices. As a result, the outstanding shares for Citigroup have jumped to a whopping 28 billions, while those for Bank of America and Wells Fargo to 5 billions each.

Regarding Citigroup, the US government now owns 34% of its shares after the bailout. The government has said that it will retrieve the money by selling Citi shares in an orderly manner over the next 12 months. If this happens, we can expect Citi shares to come down further from the current $3.2 per share.

A huge outstanding share number exerts real pressure on the price. I think Citigroup would probably go the AIG route. That is, it would do a reverse split. For instance, a 5 for 1 reverse split would reduce the outstanding shares from 28 billions to 5.6 billions. At the same time, the share price will be raised from $3.2 to $16.0, a more respectable level instead of approaching penny stock status. A reverse split could be achieved anytime by just an announcement.

After the reverse split, Citi shares would come down as the government sells its holdings. The big guys would be watching to see how low the bottom goes. Once they determine the bottom to be good price, they would rush in to buy. The Citi share price would then be restored to the same status as any other big bank. That is, from a near penny status to the teens with an outstanding share of around 5 billions. How do you like this kind of money game to save a giant who has lately come close to being insolvent through its own fault?

12/16/09 Wednesday

Dow: -11 to 10441, volume 1.2 billion shares.
Nasdaq: +6 to 2207, volume 2.0 billion shares.
S&P 500: +1 to 1109, volume not available.

The market rises in the early hours but winds up with small changes at the close. There is a lack of direction even though some important announcement comes out from the Chairman of the Federal Reserve about interest rates.

As before, interest rates in the US will be kept low under 0.25% for an “extended period of time” due to the fragile and slow economic recovery now taking place. The stock market is inversely affected by the changes in interest rates. When interests rates are kept low, it provides a good environment for the bull.

Inflation picks up unexpectedly at the wholesale level due to increases in oil and material costs. Luckily, the wholesale increase has not been passed on to the consumer level as shown by a flat consumer price index. Why? This is due to a weak job market. When people feel insecure about their jobs, they spend less, forcing retailers to keep prices low rather than suffering sales loss.

Furthermore, labor cost constitutes more than 60% of total production cost. When fewer jobs are available, workers cannot demand higher wages. As a consequence, the goods produced tend to have flat or lower costs that will be passed on to consumers by the retailers.

12/15/09 Tuesday

Dow: -49 to 10452, volume 1.2 billion shares.
Nasdaq: -11 to 2201, volume 2.0 billion shares.
S&P 500: -6 to 1108, volume not available.

As I predicted yesterday, the four days of winning streak is broken today due to profit taking. For the rest of December, the stock market is likely to wander up and down without much direction. Come January when companies begin to publish their quarterly earnings, we may see a surge again to surpass the December high.

You may wonder why I continue to insist on an upward trend for the stock market. One reason is the overall big picture where the world economy is recovering from the deepest recession since 1930s.

Let me quote a Pulitzer winning book entitled, “The Price of Loyalty” by Ron Suskind, 2004, Pages 193-194. A conversation between Paul O’Neill and his colleague is recorded as follows:
O’Neill: “…. If you look at the data points over the past forty years when the market has fallen sharply, it has risen within a year and a half.”
Colleague, dumbstruck. “You actually got that from a factual analysis? Why didn’t you say that?”
O’Neill shrugged. “No one asked.”

Paul O’Neill was US Secretary of the Treasury for two years from 2001. Prior to that he was CEO of Alcoa for many years. He may be a big player too because he owns millions of Alcoa shares by virtue of his position in the company.

Does O’Neill’s analysis apply to the current deep recession? You’d better believe it. When the financial meltdown started around August 08, most stocks plunged like a rock. By March 09, they began to recover. May I add that they have a long way to go in the upward trend.

12/14/09 Monday

Dow: +30 to 10501, volume 1.1 billion shares.
Nasdaq: +22 to 2212, volume 1.8 billion shares.
S&P 500: +8 to 1114, volume not available.

Stocks continue to surge for a fourth consecutive day. The trading volumes are light as usual. In this kind of situation, I’d advise to exercise caution when you buy. The market may suddenly turn sour due to profit taking. However, if a retreat comes along, it would be only temporary lasting for a week or so.

I‘ve heard a piece of interesting news lately about fund management. In Dayton University, Ohio, a group of business students is managing a student fund of $11 million for the school. The fund has performed better than the major stock indexes consistently every year. The university is so pleased with the results that they are considering increasing the amount of the fund for the students to manage.

You may rush to judgment that the students must be smarter than the professional fund managers, most of whom have delivered dismal results especially for 2008. I don’t think the professionals are less smart, maybe less ethical. I think there is more to it than what you see with the naked eye.

When the students manage a student fund. They know full well that the results will affect their own wellbeing and the student body as a whole in the form of scholarships or financial aids. They take full responsibility as guardians of THEIR own fund. They don’t charge a management fee. They consider it an honor and an opportunity to take charge of the fund.

Do the professional fund managers work the same way? Once you have been seduced into buying a fund, you are in effect letting other people play with your own money. I’d refuse to be a sucker to do that if I were you. I never let other people play with my money. It’s mine to make it work or throw away. If I don’t know how to play with my money, I’ll try to learn how.

When the value goes up for a fund you have bought, you are encouraged to stay put and not to cash out because of more gains promised in the future. When the value of the fund drops, you may cash out anytime with a loss, plus paying the management fees. It may seem fair to you but not to me. The fund managers should not get paid if they fail to deliver good results. That’s the risk and cruelty of running a business. Why should you, the customer, bear all the burdens of loss?

When you buy into a fund, you never know how much profit they make in the stock market on a daily basis using your money. What you get is a periodic report that ties the value of the fund to the special index they invented. When the stock market crashes, they always blame the “bear market” for your losses, thereby escaping from their responsibility as guardian of your money. You may want to accept this kind of scheme as fair but not me.

In short, I don’t know about you, but I never want to buy into any fund because I don’t want to be a sucker.

12/11/09 Friday

Dow: +66 to 10472, volume 1.5 billion shares.
Nasdaq: -1 to 2190, volume 1.7 billion shares.
S&P 500: +4 to 1106, volume not available.

Stocks advance for a third consecutive day this week. A piece of significant news comes out related to the improvement of retail sales and consumer confidence. It looks like the coming Christmas will not be as bleak as last year for retailers.

Since consumer spending is an important pillar of the economy, today’s retail figures reflect one more sign of an ongoing economic recovery, albeit slow. Let me present the monthly US retail sales as follows:

Year 2008
Month—N—-D
$Bn—–345–335

Year 2009
Month—N—-D
$Bn—–352—not yet available

When you go back to October this year and beyond, you will find that retail sales have generally improved since the lowest level recorded in December 2008.

Year 2009
Month—J—-F—–M—-A—-M—–J—–J—–A—–S—-O—–N
$Bn—-342—343—339—338—340–342—342—350—344—347–352

What do the numbers tell you? Since retail sales are pretty low for the first half of 2009, it is easy to beat those numbers from now on. That means for the next few months, we are likely to see better monthly figures compared with the same month of the previous year. This will create a persistent improvement picture for retail sales. This dose of good news on a consistent monthly basis will help boost the stock market. By how much? We’ll see.

12/10/09 Thursday

Dow: +69 to 10406, volume 1.0 billion shares.

Nasdaq: +7 to 2191 volume 1.9 billion shares.

S&P 500: +6 to 1102, volume not available.

The market advances again with about the same magnitudes as yesterday, although the trading volumes are light.

I want to share with you about the “misalignment” of health care incentives in America as described by an expert on TV. Being the champion of capitalism, the American industrial system has taken us to great heights through innovation, intense competition, and price reduction. However, in the area of health care, everything seems messed up with the exception of technology innovation. This is due to the wrong incentives prevalent in the industry.

Health care in the US is for profit. Does it make sense first of all? Hospitals, doctors, drug companies, insurance companies, even lawyers all converge into this huge market to make a fast buck. The cash sources are: companies which pay for their workers’ health insurance, the government who pays for its health care programs for the poor and elderly, and individual consumers who buy their own health care insurance.

There is little competition in this industry. Prices for hospital stay, seeing a doctor, going through a test, and having a surgery are not published. As a result, a hospital stay can easily cost thousands of dollars a day. You are more likely to die from a heart attack than from your disease after the hospital bill comes. In America, you can easily go bankrupt if you are really sick even though you are insured. This is a society with no safety net.

The law allows the following to happen:

· Hospitals and doctors perform services first before they charge you any amount they want.

· Doctors are paid by how much service they perform on you rather than how much good results are obtained. As a results, doctors tend to over-prescribe for testing and drugs, and authorize unnecessary operations.

· Because of the above, insurance companies constantly increase premiums to cover the risks, or just pay a partial sum forcing the insured individual to pay the rest. Furthermore, insurance companies cherry pick the healthiest individuals to minimize risk and deny insurance for all others.

· Widespread abuses occur in government programs where some hospitals, doctors, and companies routinely bill the government for services not rendered, or rendered to fictional individuals, even dead persons.

· Consumers want to have the best of medical care but fail to recognize that it is their own responsibilities to maintain good health, not the doctor’.

For those who want to do health care reform, I sincerely wish them good luck and have fun. For those who think there is nothing wrong with the existing system, I ask them to prepare for a big implosion that will eventually bury them.

12/9/09 Wednesday

Dow: +51 to 10337, volume 1.1 billion shares.
Nasdaq: +11 to 2184, volume 1.9 billion shares.
S&P 500: +4 to 1096, volume not available.

As usual, a significant retreat on one day produces a rebound on the next. What we see in the market today reflects the natural rebound of something like a suppressed spring. It is not attributable to any good economic news.

Warren Buffett, the legendary investor, once said that the insurance business is one of the best money machines. That is why he owns Geico Insurance. What he says makes me think twice about buying insurance because it is so true and scary.

He says the insurance business brings in money regularly every month through premiums paid by customers. But it pays out a much less amount as compensations due to risks incurred. They calculate the percentage of risks, plus a profit margin they want. This forms the basis for the premiums they charge. It’s a cost-plus business producing a sure win, unless a great disaster strikes.

The thing that scares me is that the insurance business does not have to pay even when a disaster happens. There are laws that allow them to delay payments or pay partially. They have plenty of experts to craft the insurance contracts in such a way that few consumers can understand. Furthermore, they have a big team of lawyers to defend their policies if a customer sues.

As a result, the consumers are seduced to buy into something not beneficial for them. Many people come to know the truth only when a disaster happens. Therefore, an insurance policy is good only when it takes care of you AFTER a disaster strikes. It seems like a bad product, doesn’t it? When I buy a product, I want it to satisfy me right here and right now. An insurance product is not a good choice for consumers because you cannot realize the benefits.

No wonder for health insurance, you find the following scandals:
• People are denied insurance for pre-existing conditions that will cost the insurance companies more money.
• When you are really sick, your insurer can drop you from insurance, pay only partially, or charge you higher premiums.
• Insurance companies cherry pick the least risky people to insure.
• If you don’t believe in the above, just wait until you are facing a disaster.

That is why we need the government to rein in the insurance industry. However, this industry is very powerful because they are flushed with cash gouged from consumers. They are corrupting politicians and legislators to act in their favor. So consumers wake up!

12/8/09 Tuesday

Dow: -104 to 10286, volume 1.2 billion shares.
Nasdaq: -17 to 2173, volume 2.0 billion shares.
S&P 500: -11 to 1092, volume not available.

The market retreats broadly today. On a day like this, the media and the analysts bring out a host of bad news as an explanation. When the market turns positive, all the bad news will be hidden in the closet for later use, and the good news are paraded instead. That is why I often refrain from picking a piece of news to explain the market, except for some real pertinent ones that have a definite impact.

This temporary retreat today may occur a few more times for the rest of December. According to my observation regarding previous months, the Dow may have to drop to about 10000 before turning around to make a new high of 11000 in early January. This is the way the stock market dances. You have to get used to and take advantage of it.

12/7/09 Monday

Dow: +1 to 10390, volume 1.1 billion shares.

Nasdaq: -5 to 2190 volume 1.9 billion shares.

S&P 500: -3 to 1103, volume not available.

The market rises in the early morning hours but later cannot sustain. At the close, the three major indexes wind up little change. The trading volumes are light.

Living in California, I am amazed to find that the utility companies are encouraging the public to consume less electricity and gas. It is contradictory to the business model where more consumption means more profits for the suppliers. Don’t they want to make more money?

The fact is that California consumes 40% less electricity per capita than the rest of the country as a consequence of government policies. Several other states now want to follow California’s lead. Why? Keeping the economy moving while saving fuels at the same time is a concrete demonstration of efficiency. In other words, you waste less to get more things done.

The utility industry is heavily regulated in California. In the early 1980’s, the government came up with a policy to ‘”de-couple” profit from consumption. How? By negotiating with the suppliers for a reasonable profit at a proper level of consumption. If electricity consumption overshoots the target, the suppliers are forced to return the extra profits to the consumers in terms of rebates. If it undershoots, the government will pay the suppliers half of the profit shortfall. In this way, the private utility companies have no incentives to encourage public consumption of more electricity.

In order to lessen in impact of climate change, the government’s energy policy is notched up to “de-coupling plus”, that is, to encourage electricity generation by solar or wind instead of the regular burning of oil or coal. This provides incentives for suppliers to invest in alternative electricity production. As a consequence, California leads the country in solar and wind investments.

Although the US lags behind Europe in solar and wind, California stands out as the only state pursuing alternative energy under a visionary government policy.

12/4/09 Friday

Dow: +23 to 10389, volume 1.5 billion shares.
Nasdaq: +21 to 2194, volume 2.3 billion shares.
S&P 500: +6 to 1106, volume not available.

The US unemployment figure for November unexpectedly dropped from 10.2% to 10%. This causes a stock rally in the early hours. But it cannot sustain for long. Still, all the three major indexes close with some good gains. The volumes are also higher than usual.

Since the beginning of the recession last fall, the US has lost about 5 million jobs. It will take a number of years before the employment situation returns to the normal 5% again.

While the employment condition slowly improves, the bull has longer time to run before it gets tired. This is good news for the stock market although it sounds contradictory. The following are the reasons for a bull.

You have to ask, when will the bull turn into a bear? When the economy has reached a full boom or a bubble. That means four conditions have to take place: First, the economy has reached full employment when wages start to rise. Second, consumer spending has reached a peak because jobs are secure. Third, inflation and interests rates begin to rise faster. Fourth, the stock market is red hot because the public (or the herd) has been rushing in to buy due to optimistic conditions.

Are we in that situation now? Not at all, far from it! That means the bull is waking up and kicking. What are driving the market right now? First, the bottoms have been reached for most stocks in March 2009. Second, companies are producing more by replenishing their inventories. Third, companies are flushed with cash due to layoffs and other cost reductions undertaken during the recession. With the surplus cash, they will go out to buy other companies to consolidate their market shares. Fourth, inflation is tamed and interest rates are low. Fifth, the public is worried about their jobs. They are afraid to get into the stock market. The low volumes of stock transactions give evidence to public apathy. However, the big players are buying heavily because they have the cash and stock prices are low. They are preparing and organizing for an eventual full bloom when they will sell their stock holdings to the public at much higher prices. So don’t be a sucker!

One more reminder: A bull market does not mean stocks are rising everyday. They dance up and down all the time. If you have a longer vision, you will see that the trend is up since March this year.

12/3/09 Thursday

Dow: -87 to 10366, volume 1.1 billion shares.

Nasdaq: -12 to 2173 volume 2.0 billion shares.

S&P 500: -9 to 1100, volume not available.

The fall of the three major indexes at the close masked a strange phenomenon today. During the first half hour, the indexes shot up, only to fall back and oscillate for most of the session. During the last half hour, the indexes dropped significantly to conclude the day with a loss.

During the first and last hour of trading, stock movements tend to be magnified because of fewer traders, especially the public (or the herd if you will). The opening hour is too early for those living on the West Coast, while the closing hour sees more people ready to exit the market.

Given this situation, the big players who want to influence the price can do so much easier. For instance, during the early hour today, pushing up the price requires less cash because the public who want to sell have not come to the scene yet. On the other hand, during the late hour, selling less stocks achieves depressing the price significantly because many buyers have left. In other words, it requires less investment on the part of the big guys to influence the price.

What does that mean for small players like us? Well, there is nothing significant that leads to real action because we don’t know their motives, that is, whether they want to sell or to buy some more tomorrow? It is sufficient to say that the price movements for today are magnified due to early and late hours manipulations, which serves a purpose but we don’t know what.

12/2/09 Wednesday

Dow: -19 to 10453, volume 1.0 billion shares.
Nasdaq: +9 to 2185, volume 2.1 billion shares.
S&P 500: +0.4 to 1109, volume not available.

The stock market lacks direction today resulting in only small changes for the three major indexes. People seem to be waiting for the unemployment figures to be released on Friday.

As the US unemployment surpasses 10%, the availability of jobs becomes a hot and urgent issue. How can we solve the unemployment problem?

High unemployment can persist for a long time because it is a vicious circle. Why? When there are fewer jobs, people spend less because they feel insecure. When consumers spend less, business will cut production, which leads to worker layoffs. This will in turn add to unemployment. The situation then gets worse and worse.

Something must be done to break the vicious circle. If you rely on business only, you have to wait until existing inventories are depleted. Then business will employ some more workers to replenish their inventories first. They won’t raise production until they see an increase in consumer spending. But consumer spending cannot increase due to existing high unemployment.

If business cannot do the job, the government has to come in. Consumer spending can be increased quickly by tax refunds given directly to taxpayers. The issue is how big the refunds should be, and how long will the result last.

A second option is tax reduction to encourage business to invest more. The tax incentives should focus on long-term projects or new industries. Otherwise, misdirected tax incentives will not produce more investments.

A third option is for the government to directly invest more in infrastructure, education, and research projects. Since government is a big bureaucracy, the results may be slow to realize.

It is feared that the government may incur too much deficit spending, which will lead to high inflation. The fact is, high inflation cannot occur when there exist high unemployment and depressed consumer spending. Until the situation starts to improve, the government should reduce the deficit spending. At the same time, more tax revenues will come in when the economy begins to heat up, which will offset the government deficits.

12/1/09 Tuesday

Dow: +127 to 10472, volume 1.1 billion shares.
Nasdaq: +31 to 2176 volume 2.1 billion shares.
S&P 500: +13 to 1109, volume not available.

The market continues to surge after the concerns about Dubai World subside. Furthermore, other positive news help push the market especially improving monthly housing sales and construction. Even the beaten auto companies like Ford and GM show sales increases of over 6% for November. However, it is still a so-called traders’ market due to the light volumes of shares changing hands.

President Obama is sending 30,000 more US troops to Afghanistan “to finish the job” that his predecessor has initiated. The estimated cost is one million dollar per soldier per year, not accounting for the dead and injured. The total cost is over $30 billions per year, not knowing how many years it will take to get out.

The expenses for the Iraq war, now in the process of winding down, have run over one trillion dollars already. What does the US get out of it except Saddam’s head? This shows the US has a tendency to make wars without regard to consequences.

It is really sad that only a few conscientious citizens protest against the wars. But when an important issue such as health care reform comes up, half of the citizens worry about its costs and impacts. What’s the matter with them? The two wars that the US is currently fighting can pay for the health care expenses of every citizen in the country. This makes me think that Americans are either blind or cannot think straight.

11/30/09 Monday

Dow: +35 to 10345, volume 1.3 billion shares.
Nasdaq: +6 to 2145 volume 2.0 billion shares.
S&P 500: +4 to 1096, volume not available.

Today’s stocks do not react negatively to the postponing of debt payments by Dubai World, which is now holding talks with the creditors to restructure its debt. In an effort to soothe fears, the central bank of the United Arab Emirates announces that it will provide supports to other banks in the region just in case they are heavily impacted.

The results of retail sales in the US after the Thanksgiving holiday are beginning to trickle in. The increase was estimated at 0.5% over last year. This is not enough for joy because consumer spending remains weak in view of high unemployment.

The default of Dubai World has created fears about a second banking crisis following last year’s. However, the problem is much smaller compared with that of the US banks. Besides, the exposures of other banks are relatively small, mainly restricted to the Middle East and Asia. European and American banks are less exposed.

11/27/09 Friday

Dow: -154 to 10310, volume 0.66 billion shares.
Nasdaq: -38 to 2138, volume 0.95 billion shares.
S&P 500: -19 to 1091, volume not available.

The market responds anxiously to the postponement of debt payments in the amount of US$59 billion by the holding company Dubai World. This company finances the majority of the debt of the United Arab Emirates, which is going through robust growth especially in the construction sector.

This raises concerns about the reversal of growth the Middle East and the adverse impacts on the rest of the world. The Asian stock markets have already seen significant slide because of this. The European markets did not seem to budge. The Dow in New York went down by almost 240 points early in the morning but recovered partially upon closing.

Given the fact that the US markets open for only half a day today, the impacts may not fully materialize. Let’s wait and see until next Monday. At face value, the amount of postponed debt payment by Dubai World is miniscule compared with the $800 billion bailout of US banks late last year. One thing to be feared is that Dubai World may lead to the collapse of a major bank in the developed world, which will bring back the memory of financial meltdown still fresh in people’s minds.

11/26/09 Thursday (New York Market closed)

11/25/09 Wednesday

Dow: +31 to 10464, volume 0.80 billion shares.
Nasdaq: +7 to 2176, volume 1.4 billion shares.
S&P 500: +5 to 1111, volume not available.

The pendulum swings forward again after yesterday’s loss. The trading volumes are light as usual. It seems that we are facing an up-down market the next few days for lack of direction.

Many small players lose money in the stock market. You may be one of them. Let me offer my thinking as to why.

When you are into stocks, don’t get the illusion that you are an investor. You are not. You are only a player with a goal to win. Once you set yourself in the right mind, you will be able to act correctly.

You have to know what you are up against and what are your opponents. Why? The stock market is a zero-sum game when one group profits at the expense of the others.

Everybody talks about the market as if it is a competitive place where people bring in cash and stocks to trade. Far from it! The stock market is controlled by a small group of big players who have plenty of cash to buy and plenty of stocks to sell for any given day. That means they can make the market go whichever direction they want at any time.

As a small player, it would help if you create a situation where you have some cash to buy and some stocks to sell on any given day. You want to do it like a big shot but in a much smaller scale. While they control the market, you go in sync with them. They create the waves. You hitchhike on them. The worst situation is when you are a sitting duck waiting to cash out.

Most people think that the more they know about the business situation and the companies, the better they will do in the stock market. That is true only to a small extent. For me, I’d rather want to know the insider information, which I know I cannot access because I am no big player.

If I were you, I would follow closely the stocks I hold. Get a feel about their highs and lows. Go in after they have picked up from a low. Cash out when they seem to approach a peak. Think about the waves created by the big players. Dance with them closely and profit a little at a time as frequently as possible. After a few months, I would smile when I add up all the small gains I have made.

11/24/09 Tuesday

Dow: -17 to 10434, volume 0.95 billion shares.
Nasdaq: -7 to 2169, volume 1.9 billion shares.
S&P 500: -1 to 1106, volume not available.

In view of yesterday’s big gains, today’s consolidation does not look bad at all. The trading volumes still remain light probably due to the Thanksgiving holiday on Thursday.

Today, we’ll talk about the fears of health care reform currently being debated in the US Senate. The House has already passed a reform bill two weeks ago. If the Senate bill is passed in a month or two, the two bills will be merged by negotiations between the two legislative bodies to come up with a bill for the President to sign into law. This is perhaps the biggest piece of legislation ever attempted.

Many people don’t seem to fear the fact that America’s health care costs are out of control. Close to 80% of family bankruptcies are due to health care costs. Furthermore, out of those bankrupt families, about 70% have health insurance. What does that mean? This so-called wealthy society has no safety net even with health insurance. Is that a shame? In all other developed countries, people don’t go bankrupt because they get sick.

People fear what will happen if the reform bill is passed. If nothing is done, things will get even worse. The Republican Party advocates doing nothing except some token reforms. Is this Party looking after the public interest?

Seniors fear that they will get less from Medicare operated by the government. The proposed bill aims only to reduce government payments to doctors and hospitals to cut down wastes and abuse. Nothing will change in the medical services provided to seniors.

Most people are not aware that their insurance companies can refuse to insure them when they get very sick. This is a big access problem, which is very unfair to the consumers. The proposed bill forbids insurers to do that. In addition, insurers are not allowed to refuse people having “preexisting conditions”.

Many people fear the “public option” because they think that a public insurance company will out-compete existing private ones. So what? Let them compete and let the inefficient companies die. That’s how things operate in the capitalist system. That’s how we can get the prices down. The “public option” will die too if the government-run insurance agency cannot compete.

Many people fear rationing if the government gets too much involved. Do we already have rationing now? Currently, close to 50 million people are rationed out of health insurance because of high costs. When you get really sick, your insurance company will do the rationing for you by determining what they want to pay and how much. Only the rich are immune from rationing. Remember Steve Jobs paid millions to jump the line for a kidney transplant?

11/23/09 Monday

Dow: +133 to 10451, volume 0.98 billion shares.
Nasdaq: +30 to 2176, volume 1.8 billion shares.
S&P 500: +15 to 1106, volume not available.

Today’s market performance breaks the three-day losing streak for the three major indexes. Judging from the low volumes of trade, this looks more like a knee-jerk reaction than a big rally. The next few days or so could well be a downward adjustment in preparation for a big push usually occurring in December.

This volatile market causes plenty of fear among the public. Let me point out which fears are justified and which are not:

Fear of worsening unemployment: This may get worse before it gets better. But it seldom affects the stock market, which always looks ahead.

Fear of reduced consumer spending: This is a psychological factor that will turn around when consumers’ confidence improves due to various reasons. Reduced consumer spending affects companies in the retail business most such as travel, shopping, restaurants, etc. Other sectors are less affected.

Fear of huge government deficits: Government should spend more during a recession to stabilize and stimulate the economy. This recession is extraordinary, so is government spending now. When things improve, government spending will be reduced. At the same time, government revenues in the form of taxes and fees will increase, which will offset the spending. Remember the US ran a huge surplus for many years during the boom time of 1990s?

Fear of inflation: Inflation usually occurs during boom time, not at this time when the recession is ending. High inflation will kill the bull, but mild inflation during boom time in normal. Wait for the boom time to come and last before inflation reignites.

Fear of inflation caused by high oil prices: This is a legitimate fear. It happened in 1970’s and caused the stock market a lot of pain. It will happen again in a couple of years because the world is running out of oil. That is why developing alternative energy is so important.

Fear of inflation caused by wars: This should be the biggest fear but the American public is misled into believing otherwise. The Iraq war costs the US about one trillion dollars so far. This government spending is done with borrowed money and is not an investment into the US economy. That is why some US senators are calling for a war tax to make the public aware of its costs. The logic is that If the president wants a war, pay for it with new taxes and see if the people will accept it. Don’t mislead the public about national security and patriotism.

Fear of double-dip recession: Nonsense! Why not make it a triple-dip? As long as the financial sector is stabilized, there will be no double-dip recession.

Fear of the decline of the US dollar: The US spends more than it saves for a long time now. The decline of the dollar is inevitable. Why fear? Sooner or later this thing will have to stop.

Fear of market volatility: This is what opportunity is all about. If you cannot stomach a roller coaster, don’t ride it. To take advantage of the market volatility, you should prepare yourself to have some stocks to sell and some cash to buy on any given day.

11/20/09 Friday

Dow: -14 to 10318, volume 1.1 billion shares.
Nasdaq: -11 to 2146, volume 2.0 billion shares.
S&P 500: -4 to 1091, volume not available.

This is the third day of consecutive loss for all the three major indexes after achieving a November high on Tuesday. It looks more likely now that a temporary retreat will continue into next week.

What to do in this up-down market? Looking back, we can see that each up or down cycle lasts for about 2 weeks. If you stick with the strategy of buy and hold, you just have to ride out the temporary retreat in order to get to the next high point.

If you want to play the roller coaster, you should think about buying on the dip. One way is to inject some cash into your trading account. The other is to sell some of your existing share holdings (provided you make a profit) to replenish some original cash you have put in.

How far will the market slide? Just look back a little for some indication:

————–Oct Low——-Nov High——-Today
Dates———-10/30———11/17———-11/20
Dow————9713———10437———-10318
Nasdaq——–2045———2204————2146
S&P500——–1036———-1110———–1091

From the above figures, we are still a little bit high relative to the October lows. In a few more days, we’ll be able to see whether the market wants to test the October lows. It does not hurt to have some cash ready to move in.

11/19/09 Thursday

Dow: -94 to 10332, volume 1.1 billion shares.
Nasdaq: -36 to 2157 volume 2.2 billion shares.
S&P 500: -15 to 1095, volume not available.

Today marks the beginning of a temporary retreat as I mentioned yesterday. It may last until the end of the month. During this time, the indexes would be dancing like three steps backward and one forward, or three small steps forward but one big step back. In any case, the result would be profit taking to replenish some cash for yet another big push come December.

How far will the market slide? Just look back a little for some indication:

————–Oct Low——-Nov High——-Today
Dates———-10/30———11/17———-11/19
Dow————9713———10437———-10332
Nasdaq——–2045———2204————2157
S&P500——–1036———-1110———–1095

The indexes would come down to test the previous lows, just as they did many times in the past months. If you happen to have some cash, better prepare for a buying opportunity down the road.

11/18/09 Wednesday

Dow: -11 to 10426, volume 1.1 billion shares.
Nasdaq: -11 to 2193, volume 2.0 billion shares.
S&P 500: -1 to 1110, volume not available.

The three major indexes settle for some losses in light volume trading. I think a temporary retreat is brewing, waiting for some bad news as a trigger. The retreat may last for a week or two before another surge can happen.

These days I’ve been thinking about some powerful ideas for the future. First, individual empowerment comes to mind. Undoubtedly, education is a tool for empowering the individual. A person being denied a decent education tends to wind up being subjugated or enslaved.

Consistent with individual empowerment is the idea of distributed function. The automobile is a prime example. Since its invention, the car driven by an individual has greatly transformed the surface of the earth and the way we live, for better or worse.

The personal computer is another good example. I lately found out how indispensable was my PC when it broke down. I don’t have to tell you how many things I can do with my PC that I could not do before, especially with the Internet connection.

I think the next big thing is definitely the distributed generation of electricity. When the prices of solar cells become cheap enough, individual households and companies will start to install them on rooftops, parking lots, and external walls. The savings are so obvious: zero electricity bills. The real killer is zero gasoline bills too because a plug-in electric car can be charged during the nighttime when you are not driving. As houses, buildings, and companies generate their own electricity in a distributed fashion, we don’t even need transmission lines anymore. Just imagine what the world would be like.

To make it relevant to the stock market, what will happen to the stock prices of those companies that go solar?

11/17/09 Tuesday

Dow: +30 to 10437, volume 0.97 billion shares.
Nasdaq: +6 to 2204 volume 1.9 billion shares.
S&P 500: +1 to 1110, volume not available.

The market starts out under some pressure in the morning, but all the three indexes wind up with moderate gains at the close. The trading volumes are light.

You may have noticed that for the past 10 trading days, the Dow and S&P have registered increases for 9 of them.

This bull is going to pause to catch some breath, as it always does. If the past month is any indication, this surge may have the rest of the week to run. This will be followed by a temporary retreat where profit taking will help recover some cash to be used for the next push. When will the next one take place? I would say starting the second week of December, lasting through Christmas and New Year.

The following figures illustrate:

Dates———9/18——10/2——10/19—–10/30—–11/17

Dow———-9820—–9488——10092—–9713—–10437

Nasdaq——-2133—–2048——-2176——2045—–2204

S&P500——1068—–1025——-1098——1036——1110

————-S———R——— S———–R———-S———-R

The above table shows the surge (marked by S) and retreat (marked by R) alternate like a pendulum. The more interesting thing is that each surge or retreat lasts for about two weeks. That is why I said the current surge, starting 10/30, may have a few more days to run at most.

11/16/09 Monday

Dow: +136 to 10407, volume 1.1 billion shares.
Nasdaq: +30 to 2198 volume 2.1 billion shares.
S&P 500: +16 to 1109, volume not available.

Some of my acquaintances are buying penny stocks. According to them, the percentage of increase is very big, and you can buy a much larger quantity with a limited amount of cash.

Despite the apparent attractiveness of penny stocks, I think it is the riskiest investment if it can be called investment at all. Obviously, none of my acquaintances has boasted any gains, although one has admitted losing big.

Penny stocks generally refer to those that cost less than $1. Since the value is this small, a tiny increase in price like 15 cents will give you a high percentage. This is only a number game, a distorted picture of increase calculated on a small base value. However, you have to ask: Is the number game or the value game that you should be playing with your cash?

The biggest mistake people make is that they forget to ask why has a company become a penny stock, and from where and when it has fallen to this low level.

No company traded in the New York or Nasdaq exchange started out as a penny stock. Why should they if they have the value required to go public? So all the penny stocks traded in these two exchanges have deteriorated badly to this level. They are either declared bankrupt, or heading towards insolvency.

For the bankrupt stocks, they have been assigned new longer symbols, for example, LEHMQ (for once famous Lehman Brothers, symbol LEH). These companies are already dead. There only exists a shady market for their worthless shares for some mysterious reasons. You can buy as many of these shares as you want. Watch out that you may not be able to sell them at the price you want.

The prospects exist that some of these companies may be resurrected if they have a valuable brand name. By that time, they will be reconstituted as completely new companies with new shares issued. The old penny stocks can never be converted to the new stocks. You have to ask why they went bankrupt in the first place. One reason is to legally release them from most of their debts including the old stocks that you happen to own.

Small or medium companies coming down to penny stock status are next to hopeless. Their penny share prices represent a handicap for them to secure any credit from the banks to save them from insolvency. Chances are they will stay in the penny category for a period of time and then just fade away.

If you want to buy penny stocks, you should buy the big companies that come down due to an unprecedented crisis. Last year’s financial meltdown has brought down Citigroup and AIG to below $1 for a short time, Bank of America to around $3, and many others to less than $5. The trick is that you have to see the bottom first. Otherwise, how do you know the bottom is not zero? That means, you still should not try to catch the bottom for you’ll be wrong most of the time. You must recognize that you can seldom catch the bottom or the top. You may as well be satisfied with having seen the bottom for a big company, and go in to catch the great rebound.

11/13/09 Friday

Dow: +73 to 10270, volume 0.99 billion shares.
Nasdaq: +19 to 2168 volume 1.9 billion shares.
S&P 500: +6 to 1093, volume not available.

The three indexes continue their forward march after yesterday’s pause. The trading volumes are light for the whole week. Today is especially so.

It’s time to review how the indexes behaved recently and see what is in store for next week:

————Oct Low—–Oct High——Today
Dates——–10/1——–10/19———11/13
Dow———9509——–10092——–10270
Nasdaq——2057——–2176———-2168
S&P 500—–1030——-1098———-1093

If we agree that the market is on the uptrend, the levels achieved today still have some space to run. Why? An uptrend means that last month’s highs should be broken. By how much? If the past is any indication, the answer can be found between the October highs and lows. Then the differences are as follows:

————Oct Low—–Oct High—–Differences
Dates——–10/1——–10/19
Dow———9509——-10092———-583
Nasdaq——2057——–2176———–119
S&P 500—–1030——-1098————68

If there is no major bad news, we can reasonably expect the indexes to surpass their October highs by the above amounts before a temporary retreat will occur. So we can look forward to the following higher levels in November:

Dow——-10092+583=10675
Nasdaq—–2176+119=2295
S&P500—–1098+68=1166

According to recent records, it takes about 2 weeks for the indexes to set a high for the month after breaking that of the previous month. Then it takes another 2 weeks for the indexes to retreat to a low for the month because of profit taking. The forward march to the November high has already consumed 10 days. So we may have only a few more days before a temporary retreat occurs.

11/12/09 Thursday

Dow: -94 to 10197, volume 1.0 billion shares.
Nasdaq: -18 to 2149 volume 2.2 billion shares.
S&P 500: -11 to 1087, volume not available.

The winning streak for the past few days is broken due to selling pressure. This is not totally unexpected. Selling also occurs for oil and gold today.

Talking about oil and gold, there is something in common between these two commodities. Both are mined from the ground and their supplies are limited because they are not renewable. Unlike gold, oil cannot even be recycled. As a consequence, the prices of these two precious commodities must go up in the long term.

Oil is the fuel for the modern economy although it is slowly being substituted. Oil consumption rises when the world economy is growing. The volatility of oil prices is seldom due to demand push. It’s often the supply that drives the price. Since the major oilfields are located mainly in the Middle East, an unstable region politically, oil prices are always subject to speculation about something that may cut down the supply.

Since the world no longer holds a surplus buffer of extracted oil now, we are in fact living from day to day on just enough oil to keep things moving. As a result, almost anything disruptive can immediately trigger a spike in oil prices, including hurricanes, earthquakes, human conflicts, even refinery maintenance shutdowns.

On the other hand, gold does not fuel the modern economy like oil, although gold serves quite a few industrial purposes. People are attached to gold for a long time as evidenced by its use in jewelry and decorative items. The gold standard adopted before 1970s shows that people have more faith in gold than paper currencies. Although the gold standard has been abandoned by central governments, people still flock to gold when inflation hits, when paper currencies depreciate, or when they lose confidence in the economy.

The recent run on gold is a result of the declining value of the US dollar. When people feel optimistic about the economic situation, the price of gold declines or stays flat. Remember the general optimism between mid 1980s and late 1990s? The world economy went through a relatively long period of growth, with phenomenal developments of electronic chips, the Internet, and cell phones. The price of gold declined and stayed flat. It only picked up when the economy began to turn sour.

11/11/09 Wednesday

Dow: +44 to 10291, volume 1.0 billion shares.
Nasdaq: +16 to 2167, volume 1.8 billion shares.
S&P 500: +6 to 1099, volume not available.

Today represents another advance for the market. The Dow has made six consecutive daily gains, and the S&P has registered eight. Despite the market trending up, beware of a temporary retreat soon to happen. If you have surplus cash, treat that as a buying opportunity.

The US Senate today announces new laws to better regulate the financial sector. The big banks, while opposing government regulations, have never shown that they can discipline themselves. In the financial meltdown last autumn, they almost brought down the country’s financial system, forcing the government to come to the rescue with more than 800 billions of taxpayers’ money. The new regulations are in response to the current crisis the big banks have brought upon our society.

The new regulations center around the following issues:

• How to deal with those banks and other financial institutions that are “too big to fail”? Should they be broken up, or severely limited in their financial business?

• How to regulate the constant stream of new products invented by the banks such as derivatives?

• How to better protect the consumers from reckless companies that have caused millions of people to lose their lifetime savings and investments?

11/10/09 Tuesday

Dow: +20 to 10247, volume 1.1 billion shares.
Nasdaq: -3 to 2151 volume 2.0 billion shares.
S&P 500: +0 to 1093, volume not available.

The market pauses to take a breath after yesterday’s big gains. Note that the volumes of trade remain relatively light.

Now that health care reform has been brought to the forefront of the national debate, I wish to discuss the impacts of runaway health care inflation in America. This is the number one issue justifying reform. The following illustrates the magnitude of the problem:

First, US expenditure in health care is expected to reach $2.5 trillion in 2009, accounting for a high percentage of 17.6 of the GDP. On average, health care expenditure rises by 6.2% per year while the GDP grows by less than 3%. This is an unsustainable situation. In about 10 years, most of our money will be spent just to see a doctor.

Second, high cost means high premiums for health insurance. The fast rising premiums have already priced out a significant portion of the population, currently around 37 million people uninsured.

Third, those who have health insurance do not feel safe because insurance does not cover everything. What if you get really sick? A recent study found that 62% of bankruptcies filed in 2007 were linked to medical expenses. Among those who filed for bankruptcy, 80% had health insurance. That means you don’t have a safety net even if you are insured. So you cannot get really sick!

Fourth, since employers in the US normally pay for their employees’ health insurance, higher premiums will eat into the profits of companies. As a result, companies are forced to pay for less health coverage to cut cost, or require employees to shoulder part of this heavier burden. So you can see that the runaway health care inflation severely undermines the competitiveness of American business and industry.

In short, the US is facing an unprecedented crisis of national economic security affecting every citizen young and old.

11/9/09 Monday

Dow: +204 to 10227, volume 1.2 billion shares.
Nasdaq: +42 to 2154 volume 2.0 billion shares.
S&P 500: +24 to 1093, volume not available.

Today is one of those bright days when the three major indexes rise dramatically. If you look at the volumes, they are relatively low, meaning low participation. If you look back a little, there are times when the indexes surrendered nearly all their big gains achieved for the previous day. This quick surrender occurred not long ago on 10/30 and 10/23.

Although the market is volatile, the trend is apparently on the upswing as shown by the following table:

————Oct Low—–Oct High—–Today
Dates——–10/1——–10/19———11/9
Dow———9509——–10092——-10227
Nasdaq——2057——–2176———2154
S&P 500—–1030——–1098———1093

From the above, the Dow has already broken the October high after having receded near the October low during the past two weeks. The other two indexes follow closely. Note that they are now within striking distance of their October highs. You may also conclude that the up-down cycle (temporary retreat followed by upswing) is rather short. It takes about two weeks for each direction, but the up move is significantly larger in order to break the previous high.

This kind of phenomenon has occurred for every month since the great rebound started in early March 09. When you see the indexes continue to break their previous highs, it’s obvious that they are on the uptrend.

11/6/09 Friday

Dow: +17 to 10023, volume 1.1 billion shares.
Nasdaq: +7 to 2112 volume 1.8 billion shares.
S&P 500: +3 to 1069, volume not available.

The three indexes manage to stay on the positive in the face of a worsening unemployment figure of 10%, the highest in twenty years for the US as a whole. The stock market seems to be recovering from the past two weeks of retreat. Does that mean the bull will be ready to go after some rest? Maybe. The only puzzle I have is the abnormally low volumes of today.

As the US House of Representatives prepares a final vote on the historic health care reform bill this weekend, thousands of protesters converged in Washington yesterday to tell the legislators to “kill the bill”. Since the bill tries to lower insurance costs and improve access to those without health insurance, I am puzzled as to why they are against such moves. As ordinary citizens, have they suffered from fast rising insurance premiums? Perhaps some of them have even been denied health insurance, too.

When you look at their banners, you can tell that these protesters live in their own isolated world with unwarranted fears about government power. They fear that health care reform will lead to rationing of medical services. They fear that the bill will create socialized medicine although I doubt if they know what that means. They even fear that the bill will kill their grandmas! They want to be free without government interference.

One thing they don’t know is that if medical insurance keeps on rising, they will suffer rationed medical services anyway because they cannot afford the insurance payments. Their grandmas will die from sickness because they cannot afford to save them except the rich. Their freedom of choice will be reduced simply because they cannot afford the basic necessity of life, which is medical services. As things now stand, the cost inflation of medical services is slowly killing the American society if nothing is done about it.

A free society also means freedom from fear. These protesters should free themselves from the fear of government power. In America, government power is limited by state and federal constitutions, the courts, and the voting power of ordinary citizens. Government power can be turned into a benign force to protect the rights and freedoms of ordinary citizens.

The only thing I truly fear is corrupt government siding with big business. Since the purpose of a big corporation is to make profit, it tends to squeeze its competitors and the consumers to achieve its goal. The consumers must rely on their government to protect them against predatory practices. If not the government, who else?

By protesting against health care reform, these people are in fact siding with big business. As consumers, they are being gouged by big business too, although they don’t know it. Paying high cost for health insurance and protesting against health care reform at the same time, these people qualify for being the best suckers in the world. There is a saying that you cannot fool a person twice. Well, there are certainly people whom you can fool multiple times and they still gladly remain on your side.

11/5/09 Thursday

Dow: +204 to 10006, volume 1.3 billion shares.
Nasdaq: +50 to 2105 volume 2.2 billion shares.
S&P 500: +20 to 1067, volume not available.

Today’s big gains come from a reaction to good quarterly earnings reported by Cisco, and an unexpected drop in unemployment claims. If you remember, last Thursday we saw gains of similar magnitudes for the three indexes, only to be canceled by an equally big retreat the next day.

So what is in store for tomorrow? I’m keeping my fingers crossed. What I see is profit taking over the last two weeks, which has wiped out nearly all the gains made in October. But these are all occurrences for the short term.

For the next few months, the stock market will move higher because the economy is slowly improving, thus providing a good and auspicious environment. The behaviors of stock prices will remain choppy, like dancing the Waltz or the Tango. In a situation like this, it tends to be three steps forward, interrupted by two steps backward. In some cases, they may go one big step forth and three small steps back. Overall, the net result will stay in one direction, that is, the market will move up more than down. You should have gotten used to this kind of nebulous behavior. You cannot see the trend in a few days or even weeks. However, if you extend your vision to a couple of months and more, the uptrend is obvious.

11/4/09 Wednesday

Dow: +30 to 9802, volume 1.3 billion shares.
Nasdaq: -1 to 2056, volume 2.2 billion shares.
S&P 500: +1 to 1047, volume not available.

Today’s trading can be described as choppy and anxious. The Nasdaq and S&P close with little change. On the other hand, the Dow rises by more than 130 points during the day, only to come back down to a 30-point gain in the last half hour. Even though the three indexes are retreating over the past twelve days, it seems that the dust has not settled yet. So it pays to be cautious because the bottom may be lower.

Today’s Fed announcement to keep the current low interest rates for “an extended period” is clear enough, but it has not quenched the anxiety of the market about future growth prospects.

Of all the things that government does, keeping interest rates low has the most direct impact on the stock market and the economy. It makes borrowing money easier and less costly. It also causes more cash to move from deposit accounts to the stock market because low interest earnings make deposit accounts less attractive.

However we reason, the stock market follows its own dynamics. When prices reach an attractive level after a retreat, cash will be moved back in to grab the opportunities. The only thing we don’t know is: What price level is considered attractive by the leading players?

11/3/09 Tuesday

Dow: -18 to 9772, volume 1.4 billion shares.
Nasdaq: +8 to 2057 volume 2.1 billion shares.
S&P 500: +3 to 1045, volume not available.

A wait-and-see attitude prevails in the market today as the major indexes close with some small changes and subdued volumes.

The quarterly earnings reports released today by some major companies are mostly good, but they fail to provide momentum for upward movement. Since October 23, the market has suffered from a retreat that almost eats away all the gains achieved for the month. It remains to be seen if this retreat will continue.

Over the past few days, important macro statistics have confirmed an economy on the mend, such as GDP growth, manufacturing orders, construction starts, and home sales. The stock market has ignored all the good news anyway. This once again shows that the market has its own set of dynamics. It moves when it wants to move. It chooses to react or ignore the news whenever it wants.

However, the market’s intrinsic dynamics are not that hard to understand. You may think of the stock market as a myth guided by an invisible hand. On the contrary, I think that it is the most controlled market manipulated by a small minority of big guys who have plenty of cash to buy and plenty of stocks to sell. The recent retreat can be thought of as a temporary cashing out to pocket the gains as the Dow crosses the 10,000 mark. As always, the best time to cash out is when good news are released. The best time to get back in is when stocks have fallen back to lower levels after the cash out.

What will be the next important news? The first one will come from the insinuations of the Fed Chairman tomorrow as he testifies to the US Congress. Will he keep the present low interest rates or will he raise rates? So far he has not given a clear indication. The second one relates to unemployment to be released on Friday. Let’s see how the stock market chooses to react to the news.

11/2/09 Monday

Dow: +77 to 9789, volume 1.5 billion shares.
Nasdaq: +4 to 2049 volume 2.4 billion shares.
S&P 500: +7 to 1043, volume not available.

Have you noticed that the stock market has alternated between up and down everyday for the past six day? Today’s rise may be interpreted as a knee-jerk reaction after Friday’s dramatic fall. In fact, the three indexes have more or less given up all the gains achieved for the month of October. They are almost back to their October low levels now.

What are the possible causes? I think the major reason is uncertainty regarding the present economic situation in the face of good company profits but bad unemployment. As a result, stockholders tend to cash out for short-term profits. After replenishing their cash, they tend to plow it back into the market because they feel that there is still potential for an upturn. Meanwhile, the huge amount of cash reportedly waiting on the sideline has not come in full force, as evidenced by only moderate amounts of trading volumes.

It seems like the market will continue this way for several weeks until the economic situation becomes clearer. That is, the following have to happen:
* Some major companies start to report a sales increase in addition to profit.
* A reduction of the unemployment figure, down from the present level of near 10%.
* A pick up in sales as reported by major retailers leading to the Christmas shopping season.

If none of the above happens, the uncertainties in the market will drive down the indexes further.

10/30/09 Friday

Dow: -250 to 9713, volume 1.7 billion shares.
Nasdaq: -52 to 2045 volume 2.6 billion shares.
S&P 500: -30 to 1036, volume not available.

Are you strong enough to stomach this kind of roller coaster ride for this week? True to tradition, October used to register a day or two of big declines for stocks. Today’s rout makes two days of dramatic pullbacks for October. In previous months, declines of lesser magnitudes have happened too, as shown below:

—————–July——–August—-September—-October—-Today
Dates———–7/7———8/17———–9/1———-10/1——-10/30
Dow_______-161_____-186______-186_____-203_____-250
Nasdaq_____-41______-55_______-40______-65______-52
S&P 500____-18______-24_______-23______-27______-30

So what will happen next week? Definitely, the sky won’t fall. After today’s shakeout, there may be a short pause. The bull will continue onward because it has a long way to go. Why? Please look at the table below:

————July Low—Aug Low—Sept Low—Oct Low—Oct High
Dates——–7/7———8/17———9/2——–10/1——–10/19
Dow———8164——-9153———9281——-9509——-10092
Nasdaq—–1746——–1931———1967——-2057———2176
S&P 500—–881——–980———-995——–1030——–1098

If you compare the dates of the two tables above, the big pullback invariably produces the low point for the month. Then what happened? Stock prices rebounded and made another high point within a week or so. Note that the low point for each month is always higher than that of the previous month. This should provide comfort for those hoping to see an uptrend.

What has caused today’s sell off? You can always find a couple of so-called reasons if you want to. I can tell you the following are no good reasons:

The rise of the US dollar today is said to be the culprit. The US dollar has been on a long-term decline because the country spends more than it makes. The dollar may rise for a day or two as a technical rebound. This may cause some excitement for currency traders, but it cannot depress the stock market in a dramatic way like today. On the other hand, suppose one day the US dollar falls precipitously, the stock market will surely come down as well due to a loss of confidence in the US economy and its currency. Thus you can argue both ways.

Weak consumer spending is also blamed for today’s decline. Weak consumer spending is not a new thing at all. They’ve been talking about this since the financial meltdown back in September 2008. While they keep talking about weak consumer spending, the bull continues to run. Don’t they ever get tired of employing the same old tricks?

The fear of higher interest rates, and other kinds of fears are also cited as reasons. Again, these are old tricks brought up from the same bag. Fears have to be substantiated with facts. Before the market meltdown last year, nobody mentioned the fear of collapse of the big banks even though a crisis was brewing. This makes me wonder where are the real expertise and insights.

10/29/09 Thursday

Dow: +200 to 9963, volume 1.5 billion shares.
Nasdaq: +38 to 2098, volume 2.3 billion shares.
S&P 500: +23 to 1066, volume not available.

High volatility marks the stock performance for this week as the three major indexes oscillate dramatically since Monday. This kind of situation is typical of an uncertain environment where good and bad news come out everyday. The best approach is to sell and grab a small reasonable profit, hold onto the cash, and wait for another downturn to buy.

Today’s good news is that the US GDP grows by 3.5% in the third quarter. More significantly, this is the first time of growth in a year. The uncertainty attached to this is how much this growth is attributed to the government’s “cash for clunkers” program and the tax subsidies for first-time homebuyers. In any case, the huge package of government stimulus is only beginning to kick in. Most of it has been targeted for next year. Thus some of the growth for this quarter is real, and some is stimulated.

Another big news lately is about insider information involving the owners of a major investment fund in New York. This scandal has caused the arrest of the owners and liquidation of the fund. This lends support to what I have always said that obtaining insider information is the name of the game for big players. When you have plenty of cash, you can always buy insider information in a discrete manner even though the law forbids. What we have seen is just one violator who gets caught. How many have gotten away that we don’t see?

10/28/09 Wednesday

Dow: -119 to 9763, volume 1.7 billion shares.
Nasdaq: -56 to 2060, volume 2.8 billion shares.
S&P 500: -21 to 1043, volume not available.

Today’s stock performance is especially bad for the Nasdaq and the S&P, which have been sliding for three consecutive days now. To see how low the market can go, please see the following table:

————–Aug Low—Sept Low—-Oct Low—-Oct High—–Today
Dates———8/17——–9/2———-10/1——–10/19——–10/28
Dow———-9135——–9281——–9509——–10092——–9763
Nasdaq——-1931——–1967——–2057———2176———2060
S&P 500——980———995———1030———1098——–1043

From the above, the Nasdaq and S&P have nearly given up all the gains achieved in October. If the slide continues, they will be testing the September lows. They may also test the August lows that are not too far away.

Where do you think are the bottoms? Well, bottoms are created by the big players as well as peaks. One indication is the trading volumes. Have you noticed that the volumes are significantly higher today?

There are only two possibilities. The big guys might have sold some holdings, then buy them back immediately after the stocks have hit the bottoms that they want to create. Both sell and buy back yield profits, and contribute to the bigger volumes for today. If this is true, the next few days will see a price rebound.

The other possibility is that they are selling larger portions of their holdings, and intend to sell some more to replenish their cash for later use. In this case, we have to wait a few more days to see the bottoms.

In either case we don’t know their intentions and we don’t know what they are really doing. The only thing I know is that the bull will continue after a pause or temporary profit taking.

10/27/09 Tuesday

Dow: +14 to 9882, volume 1.4 billion shares.
Nasdaq: -26 to 2116 volume 2.4 billion shares.
S&P 500: -4 to 1063, volume not available.

Today’s market shows little direction as the Dow and S&P move up and down and finally settle with a small change. The Nasdaq is definitely going through profit taking due to earlier boosts by the good quarterly results of Intel and Microsoft a few days ago.

I happen to remember somebody says in a book that life is full of shades of gray like 51/49 instead of 100 per cent. You will be confused and lost if you only care about the absolutes and not knowing how to appreciate all the gray areas surrounding you.

The stock market offers a good illustration. In the face of daily ups and downs, and conflicting signals about good and bad things to come, how can you tell which direction that things are moving? How can you distinguish a trend?

It’s not easy for sure, but I have found great help in the following:

You need to be history-minded. That is, you view things with a historical perspective. When you see a low-price stock, you must ask where it is coming from. When were its previous high and low points? And why? You are subject to great risks if you don’t have a clue.

Whatever you hear or see, you have to ask if it is reasonable to believe so that you can filter out all the noise and illusions.

For all the things that are reasonable to believe, you have to assign a weight to them. Some are much more important than others. Some are just a subset of others.

The stock market is a product of human nature influenced by hope, fear, greed, and willingness to take risks. The latter two human impulses produce a desire to control and game the system. Those who have lots of money to start with certainly have a great advantage over the rest. If you are not one of them, you’d better believe for your own protection that they exist to profit at your expense. Otherwise, you’ll wind up a confused loser.

10/26/09 Monday

Dow: -104 to 9868, volume 1.4 billion shares.
Nasdaq: -13 to 2142 volume 2.3 billion shares.
S&P 500: -13 to 1067, volume not available.

Today’s market can be described as highly volatile. Early in the morning, the Dow rises by almost 90 points for a short while. Then it retreats rapidly. By the end of the day, it records a decline of 104. Today’s performance furthers the loss incurred last Friday. Note that the S&P index is coming close to testing its October low of 1030 although the other two indexes are still farther away.

Do you notice that the three major indexes have been moving in tandem up or down? There is no evidence of a split market. Why?

A split market occurs when there is not enough fuel, that is, insufficient cash available to provide a general boost. As a result, some sectors of the economy that have experienced a bull market for some time have to go through a selling process to generate enough cash to fuel the other sectors with better growth potential. Some people call this a rotation. Actually, it’s robbing Peter to pay Paul. For the big players who are leading the rotation, it’s a logical thing to do, cashing out the high-price stocks and buying the low-price ones.

The point I am driving at is: Are we at the stage where a split market is the norm? Not that soon for the following reasons:
• We are only at the beginning of a bull market where most stocks are still at historic low levels.
• Billions of cash are reportedly waiting on the sideline.
• Only a few high flyers in different industries have experienced a bull market for the past year including Apple, IBM, Wal-Mart, and Amazon.com.
• There is no single sector of the economy that has experienced a bull market for the past year to warrant a cash out.
• All sectors of the economy are in fact struggling with suppressed consumer demands.

The absence of a split market is one more piece of evidence that this emerging bull has a long time to run. The temporary pullbacks will continue to occur quite often across the board due to profit taking for the purpose of generating more cash along the way. Because the price differences between good and less good stocks are not that great, there is no reason to cash out from the good ones to buy cheaper ones, given the huge quantity of cash currently available. Until the bull market has resulted in greater disparities in stock prices between different sectors of the economy, we’ll be able to see a split market taking shape.

10/23/09 Friday

Dow: -109 to 9972, volume 1.3 billion shares.
Nasdaq: -11 to 2154, volume 2.4 billion shares.
S&P 500: -13 to 1080, volume not available.

The market ends the week with a pull back. Looking over the last five days, stocks have shown volatility with two days of significant advance against three days of equally significant retreat. This volatility occurs when the earnings report season is in full swing with most major companies displaying better performance than expected. People tend to sell into the good news and buy back when the prices dip.

Let me bring back my regular table for some perspectives:

————–Aug High—Sept High—Oct Low—Oct High—-Today
Dates———-8/27——-9/22———10/1——-10/19——-10/23
Dow———–9581——-9830——–9509——10092——–9972
Nasdaq——–2028——2146———2057——-2176———2154
S&P 500——-1031——-1072——–1030——-1098———1080

From the above table, the indexes have retreated to levels not far from the September highs. They may come down some more to test the October lows.

Traditionally, October is not a good month for stocks. Do you think a crash is brewing? I don’t think so because the situation is completely different from the crashes that happened before as shown below:
• Stocks are still at historic low levels. You cannot crash at low levels even though you use the term crash.
• The economy is just beginning to emerge from a global recession instead of a full bloom ready for a crash.
• The threat of inflation is in the distant future.
• Unemployment is at historic high.
• Consumer credit is still tight although interest rates are low.

However, the market may still retreat dramatically due to the following factors:
• The rise in oil prices resurrects the fear of inflation.
• Huge government deficits create plenty of worries.
• The depreciation of the dollar undermines confidence.

One wild card: The Chinese may stop buying US treasury bills. Don’t worry. This will hurt their export markets too. They are practical enough to continue financing American debt while warning America to restrain borrowing.

10/22/09 Thursday

Dow: +132 to 10081, volume 1.3 billion shares.
Nasdaq: +15 to 2165 volume 2.3 billion shares.
S&P 500: +12 to 1093, volume not available.

The market rebounds from an early morning loss carried over from yesterday. This rebound nearly makes up for the total loss incurred for the past two consecutive days. The momentum comes from the current earnings report season where most major companies have performed better than expected in profits due to cost cutting, while some have shown better sales as well.

Today I’d like to talk about the role of government. It is a fact that a large segment of the American population is against big government. Their simple reason is that government is inefficient. Its interventions in our daily lives would make everything worse and would strip the people of their freedoms. This is true as demonstrated by countries that are run by communists or dictators. Those countries illustrate the most extreme cases of big and absolute government.

However, America is a capitalist country ruled by laws with checks and balances built into the system. Government is made the sole guardian and enforcer of the laws. If government is inert or corrupt, guess who will benefit? Big corporations run by the rich and powerful, not common people like you and me. The question then becomes: Do you want government to be efficient like a business? Or do you want government to protect the common people? I think we can strike a balance between efficiency, fairness and justice.

The worst case for a capitalist country is to have a government that doesn’t enforce the laws. Over the past eight years under the Bush presidency, the US government was almost like the worst case. It even slept with the rich and powerful. The consequences are: more billionaires, corporations gouging the public, and life made much harder for the middle class. Do you want a society where the rich become richer, the poor poorer, and the middle class disappearing? If so, the society will be heading toward a communist revolution like what has happened in Russia in 1917, and China in 1949.

You will be amazed how much a society can degenerate when its government sides with the rich and powerful. The following shows the epic failures of the Bush years:

• The Iraq war since 2003 costing over $1 trillion was supposed to fight the terrorists masterminding 9/11. But it has diverted attention from Al Qaeda, which has been seeking refuge in the border regions between Afghanistan and Pakistan.
• Energy policy has been hijacked by the oil industry.
• Health care policy has been hijacked mainly by the drug and insurance companies.
• Huge federal deficit that is unsustainable.
• The financial sector went wild with no government restraints, leading to a financial meltdown in 2008 that has in turn created the current global recession.

Can big corporations police themselves? If yes, dictators and communists can also police themselves. Big corporations only want to kill competition and bribe government officials to enhance their own interests. There is a saying that power corrupts, and absolute power corrupts absolutely. With government on the side of big business, who else is strong enough to protect the middle class and the poor? If this situation is not reversed, we can only wait for a popular revolt some time down the road when things turn from bad to unbearable.

10/21/09 Wednesday

Dow: -92 to 9949, volume 1.4 billion shares.
Nasdaq: -13 to 2151, volume 2.6 billion shares.
S&P 500: -10 to 1081, volume not available.

Trading is choppy today with relatively high volumes. A sell off came near the end due to a downgrade on Wells Fargo Bank by an influential analyst. Any downgrade or upgrade has a reason or excuse. How the market responds to it is a different matter. Why was the downgrade released near the end of the trading session? Could they have waited after the session closes? Could they have released the downgrade earlier?

I always view the timing of a downgrade or upgrade with suspicion because I think they serve a special purpose. I wonder what purpose it serves for this time. When I look at the performance of Wells Fargo, I see the following:

• The stock has run up from $26 to $31.5 since October began.
• It is among the few banks less exposed to default mortgages.
• Its current profit is about twice that a year ago although sales are flat.

This downgrade will temporarily suppress the stock price as it is supposed to. If the price goes back up again in a few days, what will we make of the downgrade? Chances are we will forget about it because we have a very short memory. That is why the analysts keep on feeding us with all kinds of upgrades and downgrades without fear of contradictions. Strangely, many people are willing to listen and be led by the nose.

10/20/09 Tuesday

Dow: -50 to 10041, volume 1.2 billion shares.
Nasdaq: -13 to 2163 volume 2.1 billion shares.
S&P 500: -7 to 1091, volume not available.

Today’s housing figures show that both home construction and permits issued are disappointingly low for last month. The statistics do not lend support to a consumer revival any time soon. The stock market reacts with some selling pressure. Nevertheless, there are always happenings that distract you from the fact that the economy and the stock market are rebounding, albeit by fits and starts.

Talking about distractions, are you aware that so many of them confuse and prevent you from seeing the facts everyday? Take executive pay for instance. The debate about executive pay revolves around the following distractions:
• Is executive pay too high?
• High executive pay is meant to attract good talents.
• Should the government restrain high executive pay?
• Is it fair for top executives to get billions in bonus while millions of workers are being laid off?
• Are top executives working for the shareholders?

Let me try to respond to these issues with no distractions:
• Executive pays are outrageously high in America. We can criticize them but we don’t run their companies. They carry the risk of alienating their lower ranking workers with high executive pays. Maybe destroying their companies in the process. Let them live and die as they wish.
• Good executive pay attracts talents. Outrageously high executive pay attracts corrupt and unscrupulous talents. It all depends on what kind of talents they want.
• Government has no business in restraining executive pay. Government can profit from high paid executives by raising their taxes on stock options and bonuses. On the other hand, for those companies receiving government rescue money last fall such as AIG, Citigroup, and Bank of America, the government has every right to intervene, including setting executive pays.
• It is always unfair and sad to see people lose their jobs. But who says the world is fair? It is always the rich and powerful who prey upon the middle class and the poor. This is how the world operates in all kinds of systems including monarchy, capitalist, communist, socialist, and dictatorial regimes. That is why we have revolutions every now and then when people are fed up with their regimes.
• It is a hypocrisy that executives say that they are working for their shareholders. They get their share options free or at a great discount. Of course they want to see their share price rise, but that does not mean that they are working for the shareholders. Likewise, I want to see my share price rise too but I have no attachment to the company or the shareholders.

One important question you should ask: If the top executives are working for the shareholders, why have they taken so much unscrupulous risks that resulted in the financial meltdown and the near collapse of the stock market last fall?

The shareholders have incurred tremendous losses due to the irresponsible actions of some top executives. How come there is no shareholder revolt or calling for their firing? I guess the shareholders must be either sleeping or immersed in all kinds of distractions.

10/19/09 Monday

Dow: +96 to 10092, volume 1.1 billion shares.
Nasdaq: +20 to 2176 volume 2.0 billion shares.
S&P 500: +10 to 1098, volume not available.

All the three major indexes have risen to the highest levels for the past twelve months. The advance is fueled by a wave of major company earnings that exceed expectations.

The latest good results come from Apple and Texas Instruments after the closing bell. Their shares have already shot up in after hours trading. It seems that the optimism will boil over when the market opens tomorrow, especially for technology shares. One important thing to note is that both companies beat estimates not only in profits, but also in sales.

Most earnings results released earlier show good profits due to cost cutting, but lack sales increase due to weak consumer demands. The case for Apple and Texas Instrument represent a significant change that the market likes to see. Can we interpret that consumer demand has finally turned a corner? If it is true, we will be able to see a robust climb for the stock market for several months.

10/16/09 Friday

Dow: -67 to 9996, volume 1.4 billion shares.
Nasdaq: -16 to 2157 volume 2.2 billion shares.
S&P 500: -9 to 1088, volume not available.

Today’s market retreat in the face of improvements in most earnings reports seems puzzling. You can easily conclude that investors don’t like the results announced by major companies like GE, IBM, Bank of America, Citigroup, and AMD. Is this true? How do you know that they don’t like the results? On the contrary, I think that the major investors who are capable of moving market prices just don’t want to show their reactions yet, maybe after a few days until this retreat is over.

The evidence is in the price movements of those five stocks. If you look back at the past few days, there was a run up in the prices of those stocks before the release of their quarterly earnings. The logical conclusion is that the time is ripe for some short-term profit taking that may last for a few more days. The best time to take profit is when an earnings report comes out that shows improvements. That is, you sell on the good news.

Does that mean the quarterly earnings reports bear no significance at all? They are important. They actually show that business for those companies is improving. However, the improvements do not have to show in the stock prices immediately. When and how they will show depends on the actions of the big players.

The big players know the results ahead of the public anyway through the insider channel. You can rest assured that they have all things planned out for the next few weeks. Having already invested tons of money in the stock market, they will act when the time is ripe. What we do is trying to figure out when. How? Not by guessing but by following the stock price movements and trying to reason out in what direction will the price go for the next few days.

10/15/09 Thursday

Dow: +47 to 10063, volume 1.4 billion shares.
Nasdaq: +1 to 2173 volume 2.2 billion shares.
S&P 500: +5 to 1097, volume not available.

Following yesterday’s big advance, stocks today come under selling pressure despite improved quarterly results from major companies like Citi Group, IBM, Googles, and AMD. The three major indexes decline for almost the entire session until they turn around to register some gains toward the end. The trading volumes are about the same as yesterday’s moderate level.

In recent months, have you noticed any particular behaviors of the major indexes? Today’s pattern has been occurring frequently. When the market goes down, it usually does so early in the morning, followed by a turnaround, then a couple of more slips. Near the end of the trading day, the indexes pick up again. The whole trading day winds up with a small plus but the price movement can be violent during the day.

When the market slips, the bottom seldom lasts more than an hour. It is more like a V-shape than a U-shape. This may imply that buyers are quick to rush in when prices have come down significantly.

On the other hand, when the indexes reach a high point, they tend to stay there longer. Furthermore, they tend to break it to achieve greater heights. This implies more momentum on the upside than downside.

What does it all mean for you? Well, you treat every significant dip as a buying opportunity. When a stock has dipped consecutively for a number of days, it won’t take long for it to rebound past its previous high. It goes without saying that the stock you look at is on its way to recovery after hitting a very low bottom several months ago.

10/14/09 Wednesday

Dow: +145 to 10016, volume 1.4 billion shares.
Nasdaq: +32 to 2172, volume 2.4 billion shares.
S&P 500: +19 to 1092, volume not available.

Today the Dow breaks the 10,000 mark, widely considered a psychological barrier. The Dow was at this level one year ago before plunging precipitously in the financial meltdown. It has taken seven months since early March for the Dow to recover back to this level.

The recovery of the stock market always comes first ahead of the other markets. A reporter accurately points out that this is a traders’ recovery stimulated by government bailout money to save the big banks. The rest of the investors, especially small ones, are sitting on the fence, wondering if it is a good time to go in.

Without any doubt, I have insisted all along that small players should follow closely what the big ones do. What the small guys think does not matter. What they observe really counts. The big guys have already moved in to occupy the bottom. That means stocks will go up from here because they have to make money.

The first stage of the stock boom has already been set. It is fueled by big companies improving their profitability by cutting down costs like labor and inventories. In the process, many big companies have amassed billions of cash. What will they do with the money? Besides rewarding their top executives outrageously, they will invest in equipments first and labor last. They will also use the money to buy or merge with other companies to advance their market shares.

Thus the next push will come from mergers and acquisitions (M&A). As you know, M&A always results in reduction of workforce due to consolidation of operations. The unemployment figure is expected to go higher still.

Then comes the real recovery, which is sales growth. Companies only start hiring when their sales increase. When they do, more people will be able to find jobs. The consumer market will recover. Retail sales will improve. This will take several months, maybe more than two years for this recovery. By that time, the stock market will be in full bloom. Everybody will say it’s a good time to buy stocks. But I will not advise you to go in because of the great risks and dangers out there.

10/13/09 Tuesday

Dow: -15 to 9871, volume 1.1 billion shares.
Nasdaq: +1 to 2140, volume 2.0 billion shares.
S&P 500: -3 to 1073, volume not available.

The stock market pauses today with small changes and light volumes. All eyes are on the quarterly earnings report from Intel, which is a major indicator for the health of the high tech industry.

Despite sales falling short of last year’s, Intel beats analysts’ estimates on all counts especially profit and gross margin. In addition, the company also paints an improved picture for next quarter and beyond. This is not entirely a surprise as its share price has risen for the last few days.

Intel closes today at $20.5 but rises to $21.5 in after-hours trading. That means its price will open at the higher level tomorrow instead of today’s close. Talking about after-hours trading, many people are eager to show you what it is and how it works. Have they ever asked the following:

• Is this a fair practice?
• Who can do after-hours trading? Why not me?
• What is the purpose of limiting the trading to after hours?
• Who invented this kind of system?
• Is this like trading under the table in the after-hours?
• Does that benefit them or the general public?

I don’t have an answer, but I don’t think it hurts to ask these questions.

10/12/09 Monday

Dow: +21 to 9886, volume 0.95 billion shares.
Nasdaq: +0 to 2139, volume 1.8 billion shares.
S&P 500: +5 to 1076, volume not available.

The stock market opens today with significant gains but cannot hold for long. However, the three indexes still end up on the positive side. The trading volumes are light.

Recently, the market looks very cautious due to the presence of both good and bad news. Buyers are not coming out in force although billions of surplus cash are reported to be sitting on the sideline.

The following are my observations:

The trend is up but is interrupted by many temporary retreats. The major indexes continue to break the highs of the previous months.

The turnover cycles are very short, usually lasting for just one or two days. This means after the price of a stock rises for one or two days, a pullback follows, sometimes even bigger than the increase. This short cycle shows the cautions of the major stockholders who would rather take some short-term profits than wait for a bigger gain.

The short turnover cycle also applies when the price of a stock is falling. The retreat seldom lasts long before it turns around.

What should the small players do? Well, you just follow as many up-down movements as possible. If you manage to catch the majority of them, all those small gains will add up significantly at the end of the month.

Following the short cycles takes more of your time. But you don’t have to look at the market like every five minutes. You can place LIMIT orders for the stocks of your interest. For instance, if ABC stock has risen for 2 days to $7, you place a limit sell at $7.30 for tomorrow, and a limit buy at $6.70. The prices for the limit orders are determined by your judgments after following the stock for a while. You may change or cancel a limit order anytime you want when you find that your judgment is way out of line.

10/9/09 Friday

Dow: +78 to 9865, volume 0.99 billion shares.
Nasdaq: +15 to 2139, volume 2.0 billion shares.
S&P 500: +6 to 1074, volume not available.

This has been a good week as the three major indexes continue their fifth consecutive day of advance except for a slight pause on Wednesday. However, the advances for today are marked by small volumes of transaction.

The following table shows that on their way up, the three indexes have broken the record highs for September except for the Nasdaq, which is well within the striking distance.

———-Aug High—-Sept High——-Today
Dates——-8/27——–9/22———–10/9
Dow——–9581——–9830———–9865
Nasdaq—–2028——-2146————2139
S&P 500—-1031——–1072———–1074

When I think about this bull run. It is made possible only because of the financial meltdown last year that has brought down nearly all stocks to their record lows. Besides this opportunity that comes with a big crisis, what lessons have we learned? I have learned the following:

When I buy a consumer product or service such as a car, a cell phone, a shirt, a hotel room, or an airline ticket, I don’t have to know the technical details in order to enjoy it. I only need to find out if the results satisfy my expectation. For instance, I don’t need to know all the intricate circuits inside a cell phone. If it works for me, I’ll be satisfied. If not, I can demand the company for a refund, an exchange, or some kind of compensation. The consumer laws protect me from being swindled.

The question becomes tricky for a financial product or service such as buying health insurance, or putting money in a mutual fund or investment fund. For health insurance, the result I want is protection in an emergency. For mutual fund, what I want is for my money to grow. What if the insurer refuses to pay? What if the mutual fund says I’ve lost all my money? Do I have any recourse? Can I demand a refund, or some kind of compensation? The answer is no. There is no consumer protection in financial products. Why? As a consumer, should I accept this kind of swindle? The answer is no way unless I’m a fool.

The financial companies will say that their products are different. Of course they are different. But being different does not give them the right to swindle people. They will also say that you should have read all the technical details in the fine prints. I am not that stupid to waste my time reading the technical garbage that is designed by them to trick the consumers into buying their products. They also say that you lose money because the stock market goes down. How come the consumers did not get any money when the market goes up? In short, this is a scam but is legal.

We cannot expect any protection from the government. Why? The financial companies are so powerful. They exert incredible influence over most high officials in the US government. There exists a cozy relationship between the government and the financial sector. What should we do? If you have no stomach for a revolution, at least you can stop buying their financial products. They rely on you to make money. Don’t finance them to scam you. Don’t be a sucker!

10/8/09 Thursday

Dow: +61 to 9787, volume 1.3 billion shares.
Nasdaq: +14 to 2124 volume 2.4 billion shares.
S&P 500: +8 to 1065, volume not available.

Stocks rise broadly higher today but the volumes of transaction remain at moderate levels. It’s not a bad day for the beginning of the earnings report season.

Alcoa, a major aluminum producer, announced the first profit after a few quarters of losses. In addition, the retail sector seems to pass a turning point, too. Retail sales in September registered a small increase of 0.1% after thirteen months of consecutive losses. Compared with a 7.7% decline in November last year during the financial meltdown, this first-time increase represents a significant improvement despite the economy continues to lose job.

The stock market always responds actively to turning points because it looks forward instead of backward. That is why this is the best time to buy as more and more companies are emerging from the recession with first time increase in profits. This emerging process regarding profits will take several months to complete.

Following profits, it will be the sales volumes that produce the momentum. The emerging process regarding sales will probably take longer time to complete.

Currently, many big companies have amassed tons of cash due to cost cutting for the last few months. They will spend the money for merger and acquisitions (M&A) to consolidate their market shares. As you know, M&A tends to boost the stock market too.

What about initial public offerings (IPO)? Yes, the IPO activity is heating up because there is plenty of cash floating around. This is another positive factor for stocks.

We may be at the beginning of a boom in green technology as more investments are being allocated, especially from the government. When a new technology comes along, the stock market always goes crazy. Remember the Dotcom and the Internet booms?

For the same reason as you are optimistic, you have to beware of the negative response of the stock market. Turning points can go either way. When all the factors providing momentum to the market appears reaching a peak, stock prices begin to slide. You should cash out before that time rather than frolicking in the boom. But the boom has not arrived yet. We are only at the beginning where we see only small booms interrupted by temporary retreats.

10/7/09 Wednesday

Dow: -6 to 9726, volume 1.1 billion shares.
Nasdaq: +7 to 2110, volume 2.2 billion shares.
S&P 500: +3 to 1058, volume not available.

There is not much energy in today’s market as shown by the light volumes and small changes in the three major indexes.

The earnings report season begins today as Alcoa releases its quarterly results after the market closes. Although sales are lower than last year, Alcoa manages to make a small profit after a few quarters of big losses. How will the market react tomorrow? We’ll see.

Let me bring back some statistics to show how the market reacted last time in July:

——-June High—July Low—Sept High—Oct Low—-Today
Dates—-6/12——–7/10——–9/22———10/2——–10/7
Dow—–8799——-8147——–9830———9489——-9726
Nasdaq—1859——1756——–2146———-2048——-2110
S&P 500—946——-879———1072———1025——-1058

The earnings report season started last time in early July. The good results brought the three indexes from the July lows to the September highs as shown in the above table. The increases during this two-month period are pretty significant. Then the indexes retreated for two weeks to the October lows. This retreat is similar to the previous one (from June highs to July lows) but is milder and lasts shorter.

Take the Dow for instance. The last earnings report season has added 1683 points to it (from July low to September high). If this report season provides equal momentum as the last one, the Dow may be able to reach 11000 within two months (add 1683 to the October low of 9489). Do you think it’s possible? Let’s see.

10/6/09 Tuesday

Dow: +132 to 9731, volume 1.2 billion shares.
Nasdaq: +35 to 2104, volume 2.4 billion shares.
S&P 500: +14 to 1055, volume not available.

The three major indexes extend yesterday’s gains with even bigger increases, and volumes too. It looks like they are on track to break the September highs achieved on 9/22. When? I have no idea. I only know that stocks don’t move up or down everyday. They dance around back and forth. An uptrend is already evident for some time now, but a downtrend is equally possible in the future.

A report says that Arab oil producers are considering replacing the US dollar with other currencies for charging oil exports. This is a rational move that they are doing for quite some time in view of the structural weakness of the US dollar. Despite being old news, the report has caused the dollar to tumble today. As a result, gold and material prices shoot up on the weakness of the dollar.

There is a good reason for the increases in gold and material prices because the world supplies are limited. Furthermore, some of these materials serve other purposes besides industrial use, especially gold.

If the Arab oil exporters want to switch away from the US dollar, what would be their costs? Well, the costs cannot be expressed strictly in money terms.

First, holding huge amounts of US dollars has the power to influence US government policies. The Arab countries want the US to restrain Israel and Iran. Most of the Arab purchases of advanced military hardware come from US manufacturers. Saudi Arabia and the wealthy Gulf States have long established good financial connections with the US over the last decades.

Second, what are the other alternatives? How about the Yen, Deutschmark, or Renminbi? None of them can replace the US dollar in the foreseeable future because of the size of their economies in comparison with the US. Only the Chinese economy with its large population and landmass has the potential to surpass the US in the future. The Euro can replace the dollar in theory. But the Euro is backed by a number of European countries most of which are small except Germany and France. A basket of world major currencies can of course replace the US dollar. However, holding a basket of currencies would dilute the power of influence over a single large country.

In short, many non-monetary factors are at play when you ask why the US dollar has become the singular world currency for so long.

10/5/09 Monday

Dow: +112 to 9600, volume 1.1 billion shares.
Nasdaq: +20 to 2068, volume 2.1 billion shares.
S&P 500: +15 to 1040, volume not available.

Today’s market breaks a string of losses over the last two weeks. However, the volumes of transaction are relatively small. That means buyers are not out in force.

One more sign of economic recovery provides a boost today. The ISM non-manufacturing index for September shows an unexpected rise to 50.9%. Any figure above 50% represents economic growth. For the past 12 months, this index was below 50%. So this is the first month of growth observed since the bottom of last year.

What is ISM? It is the short form for Institute for Supply Management. They track the orders received by supply managers for different industries. The ISM index that they publish gives a month-by-month snapshot of business activities. It is considered one of the most significant indicators of the business environment.

Incidentally, the ISM has released their September manufacturing index last Thursday. It stood at 52.6%, also representing growth. However, the stock market reacted very negatively. Why? Because the figure for August was 52.9%, a little bit higher. This raises the fear that we are headed back to a deep recession.

Is this fear legitimate? Well, fear is an emotional feeling. You can feel what you want to feel by citing anything as a reason (or excuse). You may also choose to feel like the rest do. The stock market is always subject to emotions like fear, hope, panic, exuberance, etc. Make no mistake that there is a small group of players who don’t respond to the market this way. They are cold-blooded profit maximizers who move the market by playing on the hopes and fears of small ordinary people like you and me.

10/2/09 Friday

Dow: -22 to 9488, volume 1.4 billion shares.
Nasdaq: -9 to 2048, volume 2.5 billion shares.
S&P 500: -5 to 1025, volume not available.

This is the fourth consecutive day of decline for the stock market. If you look back a little further, the market has fallen seven days out of the past eight. Compared with the highs achieved in September, you can see that the retreat is significant:

————–Sept high——-Today
Dates———-9/22———-10/2
Dow———–9830———-9488
Nasdaq——–2146———-2048
S&P 500——-1072———-1025

What factors have led to this retreat? The main reason is the worsening unemployment, and the fear that the current recession may be a double-dip one.

Is this a legitimate fear? Yes for the wage earners only. This is a regular explanation employed by most reporters and analysts. It is not a true reason leading to the decline. Since the market always looks ahead several months, the worsening unemployment has already been discounted. Employment is the last thing to improve in an economic recovery. It even tends to get worse during the recovery because companies may continue to fire people until the business environment becomes much more certain.

No matter what we think or fear, those people who make millions in the stock market such as the big players do not think the same way. They think in money terms. After pushing up the prices of their stocks to achieve the September highs, they need to replenish their cash, which is their working capital. How? They have to sell part of their stocks and pocket the gains. After the sales, the stock prices come back down somewhat. This will give them another opportunity to move back in and push them up again until the prices are high enough for another sale. This explains why the stock market goes up and down in short cycles but still maintaining the long-term uptrend. The only question remaining is how far the current retreat will last. That is their calculation, not ours because we don’t have the power to move the market either way.

What should we do as small players? We should watch the game with interest and open mind. Try to figure out their next move. You should sit on your stocks and don’t panic sell. If you are brave enough, you should try to follow their movements. That is, sell on the high and buy on the dip.

Here are the overriding reasons why the stock market is on the uptrend:
• The economic situation is improving except employment.
• Billions of private money in the form of investment funds are reported waiting on the sideline.
• The billions of dollars in government stimulus packages are only beginning to work their ways through the economy.
• Most big companies are flushed with cash waiting to invest in business expansion or acquisition.
• There will be a flurry of mergers and acquisitions as companies begin to act. This will stimulate the stock market.
• This recovery is being led by company expansion initially to replenish their inventories, to purchase more capital equipment, and finally to hire more workers.
• Green industries are receiving a boost for the first time. In a couple of years, their expansion will be felt.
• Employment and consumer spending will finally recover. This will provide the last leg of expansion for the economy. When this stage is reached, the stock market will have achieved a peak when the ghost of inflation will come to haunt. You will be a fool if you buy stocks at that time when the big players are thinking of cashing out.

10/1/09 Thursday

Dow: -203 to 9509, volume 1.6 billion shares.
Nasdaq: -65 to 2057, volume 2.7 billion shares.
S&P 500: -27 to 1030, volume not available.

You may describe today’s market as a rout or a bear. I think it is only a temporary setback that occurs once a while in a bull market. Today’s slip is due to an unexpected rise in weekly unemployment, and a not-high-enough improvement in manufacturing orders published by ISM. This re-ignites the fear of a double-dip recession. Have no fear, many other figures are pointing to a gradual recovery. That is why I insist that this bull market will last longer than previous ones because there exists a mix of good and bad news, and that the bull began from record lows for most stocks.

To give you some perspectives, let me bring back my familiar table:

——-June High—July High—Aug High—Sept High—Today
Dates—(6/12)——(7/17)——–(8/27)———(9/22)——(10/1)
Dow—–8799——-8744———–9581———-9830——-9509
Nasdaq–1859——-1887———–2028———-2146——-2057
S&P 500–946——-940————1031———–1072——-1031

Today’s retreat brings us back almost to the level of August high. That means all the gains in September have been cashed out. You may say wiped out but some people (big players?) must have pocketed the gains because the gains could not just have evaporated. It also means that the cash used to boost prices up in September has largely been replenished.

Now, if more cash is needed for future price boost, the big guys may bring the indexes down to the July high. This is a million dollar question. The main factors to consider are: First, October is the month when companies begin releasing their quarterly earnings reports. There could be surprises up or down. Second, October is traditionally not a good month for stocks. Third, what are the bets placed by the small guys in the aggregate figures for options, shorts and margins? If the majority of the small guys are betting downward, chances are stock prices will go up to make the small guys lose. Let’s see how this complicated thing unfold.

Why do I still think it’s a bull market. As I said before, the bull Waltzes or Tangos on its way up. It breaks the previous month’s high most of the time as shown in the table above. When you look back to the March lows, the figures are as follows: Dow 6500, Nasdaq 1400, and S&P 930. Look at how far we have come and it’s only just the beginning. If it’s not a bull, what is it then?