Stockfessor

2010 Jul-Sep, Daily Insights

Thursday 9/30/2010

Dow: -47 to 10788, volume 1.3 billion shares.
Nasdaq: -8 to 2369, volume 2.4 billion shares.
S&P 500: -4 to 1141, volume not available.

Stocks opened high but could not sustained, resulting in a loss for all the three major indexes. Although September used to be a bad month, this year has turned out to be the best since 1939 according to a report. The following shows how much the indexes have advanced in September:
————8/31/10——-9/30/10
Dow———10015———10788
Nasdaq——-2114———-2369
S&P500——-1049———-1141

Topic for today (9/30/10): Re-post of yesterday’s topic.

Wednesday 9/29/2010

Dow: -23 to 10835, volume 1.0 billion shares.
Nasdaq: -3 to 2377, volume 2.1 billion shares.
S&P 500: -3 to 1145, volume not available.

The three major indexes went through two ups and two downs during today’s trading session. Oscillation is in vogue for the past four days. For all the recent big gains achieved on September 20 and 24, the market seems to be holding onto them. If so, we may see some more advances in the days ahead.

Topic for today (9/29/10): Is the Chinese Currency too Low?

When two countries trade, the exchange rate (values of their currencies relative to each other) becomes a key factor in determining the prices of the products being traded. If the Chinese Yuan appreciates relative to the US dollar, Chinese exports to the US will be more expensive, whereas US exports to China will be cheaper. The consequence is that it will help the US sell more goods to China, hence reducing the US trade deficit.

China ranks second behind Canada as a top trading partner with the US, followed by Mexico, Japan, Germany, U.K., and South Korea. In 2009, the US imported $296.4 billion worth of goods from China while exported only $69.5 billion. The imbalance known as trade deficit amounted to $226.9 billion.

This huge imbalance tends to become a political football in US domestic politics, especially at a time of recession when unemployment reaches a high of 9.6% right now. The issue comes to a boil as the mid-term Congressional election draws near. It does not hurt to bash foreigners like the Chinese and blame them for all our problems.

Today, the US Congress has passed a bill forcing China to revalue the Yuan higher, else punitive actions will come in the form of higher tariffs for Chinese goods imported into the US. This looks like the beginning of a trade war with China. However, this bill, like all others, is subject to approval from the Senate and the President in order to be implemented.

What will the Chinese government do? As before, they will probably let the Yuan float a little higher to soothe US anger. Beyond that, they won’t do much because they are holding the comparative advantage. Their biggest strength is cheap and productive labor in seemingly unlimited quantity. Revaluating the Yuan too high means eliminating this advantage overnight, leading to a slump in their export industries and massive unemployment.

Now let us examine the US side. Americans used to produce all the goods imported from China such as clothes, shoes, and many other consumer goods some 20 years ago. But they could no longer compete due to rising wages. So US manufacturers closed shops and went overseas, or subcontracted to foreign producers.

The loss of manufacturing in the US is happening not only to low-cost consumer goods, but also increasingly to high-tech and expensive products such as personal computers, cell phones, and software. This phenomenon also occurs for Japan, Germany, Taiwan, and Hong Kong with fast rising wages and standards of living. Due to low-cost labor, China has been able to obtain most of the business coming from overseas. This is the result of worldwide competition, or globalization if you will. We can never solve our own cost problems if we blame the Chinese for snatching our jobs away.

The newly passed bill promises to increase tariffs on Chinese imports into the US. Have the Congressmen thought about the implications? One of the few bright spots in the US economy is low inflation for a long period of time. This is largely due to imports of low-price consumer goods made in China. Suppose a 10% tariff is imposed, US consumers would face a 10% price rise overnight. What good would it do? Perhaps we could blame China again for causing US inflation, another political football.

Business relocates overseas for one single reason: profit. American business moves overseas or sub-contracts abroad because they can make more money doing so. How can we get those low-cost jobs back? Let’s not kid ourselves. Those jobs will never come back after they leave. Why? Should they come back, it would mean that the US had wages and a standard of living lower than in China. Do you want that to happen? Those who complain should stop dreaming and move on to do something else.

What else? Technology is advancing faster day after day. We shed the low-cost jobs so that we can focus on those with higher technological content such as high tech designs, robotics, management systems, biotechnology, new composite materials, nanotechnology, and green technology, etc.

Every country in the world is subject to economic pressures from others with a lower cost structure. The developed world is currently subject to pressure from China. The Chinese are willing to do what we are no longer competitive for a cheaper price. The competition does not stop there. China is in turn subject to competition from even lower-cost countries such as India, Vietnam, Indonesia, Mexico, and Brazil. Those are in turn subject to pressures from many countries in Africa whose citizens survive on a few dollars a day. This is how the world economy works. Companies go around in search for the cheapest cost. At the same time, they also go around searching for the highest technology. Which end do you want to compete at? You’ve got a choice: high end with technology or low end with bottom wages.

The value of a country’s currency depends on its trade balance. The US dollar has been under downward pressure for a long time due to its large trade deficits. On the contrary, the Japanese Yen has been facing upward pressure due to its trade surplus. Do you remember we bashed the Japanese before in the 1980s? Lately, we find a bigger scapegoat in China.

Reducing the huge US deficit is a big challenge. More attention should be focused on increasing US exports to China. How come US exports are so low? I think they are perhaps largely understated because many companies open shops in China rather than delivering finished goods like airplanes or a autos. This involves many financial corporations such as Citibank, AIG and Morgan Stanley. Many companies produce consumer goods or parts there, then sell them to the Chinese consumers, such as Coca Cola, Avon, McDonalds, Intel, etc. Due to the rise of the Chinese middle class, these companies have reaped tremendous profits. However, their products and services are not registered as US exports because they are not finished products made in USA. So this is the missing item whose size we never know, but the money is made by US corporations. We may want to call this “invisible” exports. In addition, the profits go directly into the coffers of those companies without any visible increase in new US jobs being created.

Fiddling around with the currency to improve trade balance is an artificial move for getting votes from an angry public without solving the fundamental problems of cost and economic competition. It’s the loss of business competitiveness that actually causes an increasing trade deficit and unemployment, which in turn lead to devaluation of the country’s currency. Fiddling with the currency cannot solve any problem. It’s like putting the carriage before the horse.

Tuesday 9/28/2010

Dow: +46 to 10858, volume 1.0 billion shares.
Nasdaq: +10 to 2380, volume 2.1 billion shares.
S&P 500: +6 to 1148, volume not available.

Yesterday’s skid extended into today’s early morning hours. Then the three major indexes changed course and registered moderate gains at the close. This happened in spite of reported lower consumer confidence and slower production in the southeastern part of the country.

Topic for today (9/28/10): Taking a break, re-posting yesterday’s topic.

Monday 9/27/2010

Dow: -48 to 10812, volume 0.9 billion shares.
Nasdaq: -11 to 2370, volume 1.9 billion shares.
S&P 500: -7 to 1142, volume not available.

The three major indexes went through an up-down cycle during today’s trading session. They only started to slide in the last half hour, so it did not look like a sell off. Sufficient to say that it is a consolidation after Friday’s big gain.

Topic for today (9/27/10): America’s Image Abroad

Many Americans like to ask: Why do they hate us? I don’t think the world hates the American people. It’s American foreign policies that they hate. If the American people fail to change their government to making more sensible policies, this question will be asked for generations to come.

Why should we care about our image? A country’s image is like a person’s credibility. Do you care about your own credibility? What is the big deal about credibility? It makes life easier for you, such as securing other people’s trust, cooperation and help.

Does a superpower need credibility? The more power you have, the more credibility you need. The simple reason is that your power depends on other people’s respect, not that much on love or fear. When they lose respect for you, they will not cooperate. They will even undermine and sabotage your undertakings. Look at all the big corporations around the world. They spend millions every year in advertising to boost their images and brand names. Cultivating a good image does not mean kissing everybody. It means conducting ourselves responsibly and fairly to win other people’s respect.

A good image does not guarantee friendly response. “A bigger tree attracts more wind”, so goes a Chinese saying. There always exist other countries or groups wanting to challenge a superpower for one reason or another. They never want to challenge a small country like Singapore or Denmark. How much news can it generate? The 9/11 terrorist attack is an extreme case that deserves plenty of reflections for the US. Within a few days after the attack, most of the world expressed sympathy and solidarity with the US. One major French newspaper, Le Monde, even proclaimed, “We are all Americans.” Note that the French are not usually warm toward the US but they were with us. What has happened since then? All the sympathy and solidarity have evaporated, because the Bush Administration has squandered this political capital by invading Iraq. How can we succeed fighting terrorism originating from abroad without other countries’ cooperation?

One positive aspect of America’s image comes from its history. The American Republic was born out of revolution against British imperialism in 1776. This revolutionary past represents a common heritage with many developing countries in Africa, Asia and the Middle East. The countries of South and Central America also share this revolutionary heritage (against Spanish imperialism). In contrast to many European countries, America is by no means a full-fledged colonizing power. However, because America is predominantly white and rich, the non-white world thinks that they are all the same colonizing bunch. They have a point in thinking that way because America often looks like a white bully through its military ventures overseas.

A second positive aspect is that America is the oldest democracy in the world with liberty, human rights, and rule of law written into the US Constitution. The rest of the world understands these powerful ideas as many of them are still struggling to achieve the basic elements of democracy. Around the world, many governments exist by oppressing and abusing their people. They fear liberty, human rights, and rule of law while their people aspire to having them. However, the US government usually allies itself with those governments for political convenience. Hence US foreign policies make friends with the bad regimes while making enemies with the people.

A third positive aspect is better opportunities that the world understands. America’s economic dynamism and technological prowess attract foreigners to come using whatever means to stay. They also understand that we offer better opportunities than other industrialized countries due to our diverse racial mix, immigrant population, and more open-mindedness. They also see a country changed from slaves owning to segregation living, then to civil rights legislation, and finally to a black president living in the White House.

The fourth aspect is interesting because it cuts both ways. It is American pop culture like Hollywood movies, Coca Cola, and McDonalds hamburgers. Many people of foreign cultures hate them, while the young generation finds them new and interesting. Inadvertently, American business has created a culture war with other countries. At the same time, it has introduced conflicts between the young and old in foreign societies. It is hard to say whether it is a positive or negative thing, but it’s unintentional given the facts of globalization and the inherent aggressiveness of American business.

The fifth aspect definitely has a negative effect on America’s image abroad. The huge defense industry in the US needs to find domestic and foreign buyers. How can they sell more weapons in peacetime especially with the end of the Soviet Union and the Cold War? Obviously you have to invent a condition and a need. They will find a way to do it, especially through corrupting government officials, and financial contributions to politicians. No wonder the US government always seems willing to undertake foreign military ventures despite getting burned badly a number of times such as in Vietnam, Iraq and Afghanistan.

The sixth aspect also produces negative effects due to American domestic politics. A democracy like America allows people to say whatever in their minds without fear of going to jail. Thus we have a multitude of special interest groups as follows:
• Conservatives who hate changes and think that the world is not fair to them despite being relatively well off.
• Corporations who use money to buy politicians to promote their own self-interests, especially reducing government regulations, drilling for more oil, and rejection of global warming evidence.
• Powerful religious groups exerting pressures on the US government to prevent it from performing the job of an honest neutral broker in resolving international conflicts, particularly in the Middle East.
• Many single-issue interest groups who don’t care if the world dies as long as they can own guns, reduce government to bare minimum, pay less taxes, and so on.

So the rest of the world sees America on TV and gets the impression that it is a chaotic country full of ignorant, selfish, and self-righteous people. They don’t see the silent majority who don’t make news on TV but only immersed in their work and livelihood.

Friday 9/24/2010

Dow: +198 to 10860, volume 1.1 billion shares.
Nasdaq: +54 to 2381, volume 2.0 billion shares.
S&P 500: +24 to 1149, volume not available.

Stocks shot up at the opening hour and stayed there until the close. This is in response to the news regarding an increase in demands for durable goods. However, the price increases are not matched by the low trading volumes.

Topic for today (9/24/10): Are we in a Rally?

In case you have doubts about a stock rally, I think we are having one right now. The rally has so far lasted for three weeks since September 1st. Perhaps it cannot last too much longer due to insufficient public participation as shown by the low volumes of trade.

The following figures illustrate the extent of the rally:
————8/31/10—–9/24/10
Dow———-10015——10860
Nasdaq——–2114——-2381
S&P500——–1049——-1149

Previous to this rally, there was a slide lasting for about a month:
————–8/02/10—–8/31/10
Dow———–10674——-10015
Nasdaq———2295——–2114
S&P500———1126——–1049

Prior to August, the stock market showed no direction at all for two month in June and July when stocks went up one day and down another. However, by August 2nd, the market had recovered somewhat before another slide occurred.

Prior to June, we saw a sell off lasting for one month after a high point was reached in early May. This prompted people to talk about a double-dip recession. The sell off in May was quite significant as shown below:

————-5/03/10—–6/07/10
Dow———-11152——-9816
Nasdaq——–2499——–2174
S&P500——–1202——–1050

What do we conclude from the above data?

It seems that the up and down cycles both run for about a month before they turn the other direction.

Even though we are in a rally right now, we still have not recovered to the high point achieved on May 3rd.

The current rally may have one more week to run. If it continues, we may have a chance to break some records for this year.

The way the stock market moves does not correlate to the economic recovery at all. They are planned and organized by the traders. The analysts are no traders. So they try to explain the movement by bringing in the news. Since there always exist good and bad news everyday. The analysts will refer to the good news when stocks go up, and the bad news when they come down. I also try to do the same. Otherwise, you guys will say that I don’t know the market. Who knows the market anyway except those who plan and organize it? It’s just a game, not a real competitive market. Get it?

Thursday 9/23/2010

Dow: -77 to 10662, volume 0.95 billion shares.
Nasdaq: -7 to 2327, volume 1.9 billion shares.
S&P 500: -9 to 1125, volume not available.

The good news about home sales and economic indicators could boost stock prices only for a few hours in the early morning. When the bad news came regarding weekly jobless claims, the market started to slide. Overall, it does not represent a sell off today.

Topic for today (9/23/10): Generation Gap and Politics

What is generation gap? Those who have children understand it more. The fact is that people born and raised at different times will develop different viewpoints, interests and attitudes. Since life is changing faster and faster by the month, the generation gap will grow bigger and bigger, whether we like it or not.

Generation politics develops naturally out of this growing gap as more young people reach voting age. When they vote to flex their muscles, we will see plenty of changes in our political system.

The following is a summary of an interesting article published in California magazine dated Fall 2010:

Our generation can be divided into several groups:

Silent Generation: born between the Great Depression and World War II. They have a distinctly simplistic view: white/black, right/wrong, Just Say No. This generation is either becoming senile or dying out.

Baby Boomers: born between World War II and mid 1960s. This group is currently the most powerful because they occupy most of the important positions in industry, finance, commerce and government. In America, a cultural war exists within this group between one camp known as conservatives and the other known as liberals. The Silent Generation is engaged in this fight too, as seen by the average age of Fox News fan (65) and that of MSNBC’s Olbermann program (59).

The Boomers and Silents make up three-quarters of the small but noisy ultra-conservative Tea Party. This group has benefited a lot from all kinds of government services such as social security, Medicare, and G.I. Bill. However, they fail to see why they should help pay for other government services such as schools, infrastructure, health care, and environmental protection. Due to this selfishness, they are really the “me” generation. Despite their power and wealth, they still complain that the world is not fair to them.

Generation X: born between mid 1960s and 1980. This group is seen as cynics, slackers, anti-authority, and uninterested in politics and public affairs.

Millennial Generation: born between 1980 and late1990’s. This group is characterized by short attention span, thumbs glued to cell phones, instant gratification, and hard-wired for self-absorption. It appears that America is doomed with this new generation poised to inherit the country.

Don’t get despaired! All signs are pointing to a gentler and kinder America as the Millennials take control someday. One expert calls it a “tremendous generational shift”. Some major signs are:

* More diversity with only 61% white.
* More tolerant: 50% support gay marriage (versus 24% of the Silents). Only 30% believe that “immigrants threaten our values”. Regarding racial attitudes, 89% think that it is ok for dating between blacks and whites.
* Even when they are paying taxes to support social security and Medicare for the Silents and Boomers, 53% still say that “government should do more to solve problems”, whereas only 39% of the selfish Silents agree.
* 58% believe we should prioritize environmental protection even if it means slower economic growth.

* 71% of college freshman had volunteered in the previous week according to one survey.

* They are also more interested in public service as shown by rising participation in Teach for America and the Peace Corp, and rising enrolment in college classes regarding global poverty.

What about the growing strength of the Millennial Generation? Every year, 3.6 million more become eligible to vote. By 2016, all the 80 million Millennials will be of voting age. The Silents and Boomers should take heed while they are dying out. This also applies to the Tea Party that has only 5 million noisy and angry members. They need divine intervention to reverse this demographic trend.

In the presidential election of 2008, the Millennials gave Obama 2-1 margin while the rest of the generation groups almost split evenly. Will they turn out again in the mid-term election of 2010 a few weeks from now? It depends on how much they are being mobilized. One concern is that they may stay at home come election day.

Wednesday 9/22/2010

Dow: -22 to 10739, volume 1.0 billion shares.
Nasdaq: -15 to 2335, volume 2.2 billion shares.
S&P 500: -6 to 1134, volume not available.

Stocks opened a little higher, but could not sustain after a while. For most of the time, the three major indexes stayed in negative territory.

After advancing for eight out of the last ten days, the moderate declines of today do not suggest a sell off. It looks like the market is holding onto its gains, which is a good sign.

Topic for today (9/22/10): Health Care Reform: The Great Middle-Class Slumber

Lately, I’ve found that most ordinary people (or the so-called middle class) are confused about many things important for their livelihood. This is a dangerous situation because they are easily subject to exploitation by special interest groups.

The US health care reform passed into law this spring is the most misunderstood. The middle class is really confused about what is good and bad for them.

Let me make a list of what is good for your livelihood in the reform bill:

If you belong to the 47 million medically uninsured people, you will be covered with government subsidy.

If you are happily insured right now, nothing will change in your policies.

If you have a pre-existing illness such as heart problem or cancer, the insurance company cannot refuse or drop you from coverage.

If you have a child who is over 18, the insurance company cannot kick him out of your family policy until he is over 26. This will limit higher insurance for your adult child.

If you are a senior over 55, the insurance company is barred from continuously raising premiums based on your age.

If you are a senior enjoying the current Medicare prescription drug program that leaves a price range uncovered by insurance (the so-called doughnut hole), the reform bill will eliminate that doughnut hole to cover the whole price range.

The above are the major reforms that will better your livelihood. Everybody will wind up better regardless of age. Please raise your hand if you don’t want any of those for yourself.

Now comes the list of what is bad:

What is bad is mainly targeted for the insurance companies that have invented all those rules to profiteer and make life difficult for the common people. Then why do the insurers reluctantly accept the reform? Because the government promises to subsidize the uninsured. This means 47 million uninsured people will be added to the insurance market. Assuming $400 premium per person per month, this new market suddenly becomes $18.8 billion per month! No wonder the insurers secretly salivate over this new market, despite they have to give up some profit in the existing market. Businessmen know how to count money. It may not be that bad for the insurers after all.

It appears bad for the federal government because it has to pay the huge subsidy for the uninsured amounting to $0.2 trillion per year. To put things in perspective, health care in the US cost over $2.3 trillion in 2008. The government subsidy represents only 8.6% of total health care cost. With that additional spending, universal coverage is achieved for the whole country. Furthermore, the health care subsidy for the uninsured costs less than the war in Iraq and represents only 5.7% of total US government expenditure in 2009.

Relatively speaking, covering all the 47 million medically uninsured cannot break the government budget although it seems huge to an individual. The government can easily recover this extra outlay by clamping down on Medicare fraud, trimming wastes, and becoming more efficient in operations.

The reform bill requires everybody to buy health insurance with government subsidies for low incomes. This provokes protests that the government has no right to force people to buy something. If you drive a car in America, you are required by law to buy insurance anyway. You are also required by law to pay sales taxes and income taxes, too. Those things are for the public good.

So what is bad? Nothing except the bad labels:
*The reform is labeled Obamacare by those who do not like the President.
* It is labeled socialist medicine or socialism taking over America.
* Some people even call Obama Hitler for pushing health care reform.
* People seem to like labels better than the truth.

The only bad thing I can see is that the reform fails to put the government into the market to compete with existing insurance companies. Again this will invite the label of socialism taking over America. They forget that capitalism requires competition to make it healthy. The insurance industry is just too powerful that only a minority of lawmakers dares to vote for government participation in health insurance.

All our lives we’ve heard about cutting out the middleman to save cost. In health care, the big middleman is the insurance company that stands between the doctor and the patient. If we really need health insurance, either we should have one single payer (the government), or many insurance companies including the government to foster competition and bring down costs. What’s wrong with competition to reduce costs? Will you label it socialism again because it involves the government for a good cause?

So wake up middle America! Stop dreaming! Don’t be fooled! Refuse to be led by the nose! Think for your own good!

Tuesday 9/21/2010

Dow: +7 to 10761, volume 1.0 billion shares.
Nasdaq: -6 to 2349, volume 2.1 billion shares.
S&P 500: -3 to 1140, volume not available.

Stocks are going through consolidation after yesterday’s jump. The Fed’s announcement to keep interest rate low gave some boost to the market, but only for a short while. At the close, the three major indexes wound up near the flat line. It is encouraging to see little profit taking after many days of advance.

Topic for today (9/21/10): Your Brokerage Company: Shorts and Options

In an earlier post, I talked about the profit opportunity for your brokerage company when clients place limit orders. Today, I want to discuss short and option orders.

I have always stressed that if you place a bet, you have to know the strength of your opponents. In the stock market, most small players have no idea about their opponents. They don’t even bother to find out who they are. The irony is: Your brokerage company is one of your opponents, because it is a big player who has some power to move the price, and share your data with other big players.

I assume that the readers know something about shorts and options. So I am not going to explain them here. The most important things to remember are the following:

Shorts are the most dangerous bets because you are betting that the price will come down. In reality, the stock price can go up and up, and the share can split and split. Your potential loss seems infinite. Whereas you bet long, the worst scenario is when the price falls to zero.

Shorts are only useful for protecting your existing holdings. When you short at a price higher than that of your existing holding, you effectively guarantee your gain no matter where the price moves later.

As for stock options known technically as calls and puts, the bet becomes more complicated because of the time limit. Not only do you bet the price to go in one direction, but also within a time frame. You will lose if the price fails to meet the specified target by the option expiration date.

Do you realize that your brokerage company has all the crucial data regarding your bets? This is the most stupid thing to do when you play with your opponents. Why? You want to keep your opponents guessing, rather than telling them what you plan to do. With option orders, your broker knows how many shares you want to buy or sell, at what price, and when. They also know how much cash you have, how much you borrow on margin, and your level of pain when you lose. You are in the worst possible betting position versus your opponent. Most small players refuse to believe these facts because they think that their brokerage company takes care of them.

With the crucial data in its possession, there is nothing to prevent your brokerage company from aggregating all the orders of different types placed by small players. In addition, your brokerage company can even share the data with other companies, too. Here, I am not talking about your own personal account data, which must be kept confidential as required by law. I am talking about the aggregate data of all personal accounts where clients names are not shown.

Let me illustrate with an example of option orders for Stock ABC:
Option expiration date: Last Friday of September 2010.
Highest number of puts (sell): 1000 worth $1 million, at target price of $17
Highest number of calls (buy): 2000 worth $2 million, at target price of $12
Current price of Stock ABC: $14

What does the above aggregate data say about Stock ABC? It says that more small players expect the price to come down to $12 so that they can buy the right to own the shares. If the price does not come down by the option expiration date, all the call placers will lose. On the other hand, a smaller number of put placers expect the price to reach $17 by the expiration date.

Do the smaller players know whom they are playing against? They must think that they are playing against the free market. But who is the market? There must be a person or groups of people to play against. In fact, the market is not free because it is dominated by the big players, who are in a position to influence the share price.

Suppose you are one of the big guys. What would you do? You would take advantage of this opportunity to make sure that as many small players as possible would lose. How? You would make sure that by the expiration date as shown in the above illustration, the stock price would not hit both the target prices of $12 and $17. In other words, you would influence the market price in such a way that Stock ABC stays within the range between $12 and $17. How? You buy up when the price falls, and sell down when the price rises. What if you don’t have enough cash or shares to do that? That is why as a big player brokerage company, you have to share the crucial data about your clients with other big players to seek their cooperation in this deal. When the big players gang together and split the profits, they can easily move the market price to whatever level they want.

Now, does that make you a fool to play options? Therefore, my strategy is as follows:
* Buy with cash as often as possible to avoid paying margin interests.
* Buy or sell by placing market orders to keep my opponents guessing.
* Place limit orders only because I cannot baby-sit the market the whole day.
* Place shorts only when I hold the same stocks, and to protect my gains.
* Never play options.

Monday 9/20/2010

Dow: +146 to 10754, volume 0.95 billion shares.
Nasdaq: +40 to 2356, volume 2.0 billion shares.
S&P 500: +19 to 1145, volume not available.

The bull comes early today largely due to pronouncement by the National Bureau of Economic Research that the US recession started in December 2007 was officially over in June 2009. The stock market reacted with cautious optimism, hence low trading volumes.

Topic for today (9/20/10): The Process of Economic Recovery

Although the deep recession in the US has been declared over since June 2009. It has been more than a year now that people hardly feel any difference. Why? The reason is that a slow process exists for the economy to recover, especially when the recession is deep and global.

First of all, what does it mean by “over”? It does not mean that business suddenly booms. It means that June 2009 was the month when business activities reached the lowest point. Since then business began to turn around on the path of a slow recovery. Up to now, we have not even recovered to the level back in December 2007 when the recession began.

A recession affects different groups of people with different intensities at different times. For this recession, the housing bubble first burst with a wave of foreclosures. This created liquidity problems for the banks leading to a financial meltdown. The loss of confidence in the financial sector spread to other industries and other countries. The sectors affected came in the following order: housing construction, residential real estate, mortgage business, banking, finance, autos, materials, consumer goods, retail, transportation, and so on. As a consequence, people working in those industries face massive layoffs as companies cut work force and reduce inventories.

When a turning point finally came after June 2009, the recovery happened to different industries with different intensities at different times. The banking and financial sectors recovered first largely due to the government bailout of $800 billion. The infrastructure sector and some selected industries also got a boost from a $700 billion stimulus package. The housing industry is slow to recover due to high unemployment. The other industries still face slow demands albeit improving.

As we have seen, the following groups of people benefit first from the economic recovery:

* Top managers who have brought increased profits for their companies as a result of massive layoff, consolidation, and re-organization. They are rewarded with huge bonuses for helping their companies to amass cash.

* Traders in the stock market who have caught the bottoms of many stocks, and participated in the first dramatic rebound in March 2009.

* People in finance, construction, and some selected industries who have been re-hired back to work as those industries began to recover first.

What happen to the rest? They have to wait for the business cycle to run its course. In other words, they have to wait for demands to pick up. When companies see better future ahead, they will proceed to hire more workers to produce for increasing demands. That is why the unemployment rate has been staying at around 10.5% for painfully long.

So what the economists say about the recovery will only impact ordinary people later down the road when the job market begins to really improve. When there are no jobs, ordinary people cannot see a recovery. Jobs in the US are mainly created by the private sector. So we have to wait for top managers of companies to feel good about the future before they commit to hiring more workers.

Friday 9/17/2010

Dow: +13 to 10608, volume 1.9 billion shares.
Nasdaq: +12 to 2316, volume 2.4 billion shares.
S&P 500: +1 to 1126, volume not available.

The three major indexes spent most time in negative territory until the last hour when they managed to close with some gains. Overall, this represents eight consecutive days of steady but moderate advances except being interrupted on Tuesday. It looks like a good sign for the market that is characterized by caution rather than optimism.

The trading volumes picked up significantly today, especially for the Dow. The reason is quadruple witching meaning different forms of options and futures expire on the same day.

Topic for today (9/17/10): Your Brokerage Company

I seldom spend more than one hour watching the market everyday. I usually place limit orders for buy and sell. I suppose many people do that, too. This makes me think about the following scenario:

Suppose this is what my brokerage company faces on a certain day,
Total limit orders to sell Stock ABC placed by clients: 100
Total number of shares involved: 50.000
Limit selling price range quoted: $10 – $12
During the last hour of the trading session, the share price shot up to: $13.
So all the 100 limit orders should have been executed.

Suppose you happen to own the brokerage company, what would you do? Can you see a profit opportunity here?

Let’s assume the average quoted price of all the limit sell orders is $11.
Total amount of cash to be disbursed to clients: $11 x 50,000 = $550.000
Total amount of cash you realized during the last hour by selling the shares:
$13 x 50,000 = $650,000
Total trading profit: $650,000 – $550,000 = $100,000
Total commission profit: $10 x 100 = $1,000, assuming $10 per trade.

Is this legal? Sure. The clients only want the sales at the limit prices they quoted. They don’t care when you sold the shares as long as you convert their shares to cash within the day. You have sold the shares at a price higher than your clients wanted. The difference is the profit you deserve. You can also see that the sales commission pales compared with the trading profit.

The above example is a limit sell on just one specific stock. There also exists a profit opportunity for limit buys. I leave it to you to work out the details.

What about options and shorts? These are more complicated trades. I’ll discus the profit opportunities at a later date.

Can your brokerage company make money similarly on market orders too? Why not? But this is trickier because the clients demand immediate buy or sell at the going market price.

I conclude that brokerage companies operate a very profitable business by manipulating their clients’ money and shareholdings. This profitability is reflected in the high price for getting a license to operate. When your brokerage company becomes greedy and unethical, their profits will grow even more at the expense of their clients. How many clients are able to see through this kind of operation?

Thursday 9/16/2010

Dow: +22 to 10595, volume 0.9 billion shares.
Nasdaq: +2 to 2303, volume 1.8 billion shares.
S&P 500: -0.4 to 1125, volume not available.

The three major indexes opened low and stayed in negative territory most of the day. Then they began a moderate rally about two hours before the close, thus more than having recovered the lost ground.

Topic for today (9/16/10): Light Volumes of Stock Trade

Have you noticed the shrinking volumes of trade throughout the stock exchanges recently? This phenomenon has been going on for almost ten months now. There are several reasons:

First of all, there exist all the uncertainties about the current economic recovery in the face of high unemployment, huge federal deficits, weak consumer demands, and so on. The public is sitting on the sideline, unwilling to commit any cash to the stock market.

Since the recession began, most people have been burned as stock prices plummeted from the late summer of 2008 through the spring of 2009. Besides, their long-term investments in 401k retirement accounts have vastly depreciated because of linkage to stock prices. As a result, most people are either short of cash or lack confidence to return to the stock market.

Recent reports show that the public is trying to liquidate their holdings in all kinds of stock investment funds totaling several hundred billion dollars. This must have curtailed the trading activities of stock funds.

With the public largely remain inactive and the stock funds with less cash to play, no wonder we see light trading volumes in the stock market. However, stock prices have to move. Else nobody will make any money. The consequence is the so-called traders’ market. It means at present, the people who play are mainly insiders, stock professionals, and those whose livelihood depends on the ups and downs of the stock market. The investing public stays largely outside of the picture.

In this traders’ market, we see several characteristics: frequent up and down movements, fluctuations within narrow price margins, extra sensitivity to good and bad news. This situation only favors short-term profit taking and repurchase. So if you think you are a long-term investor, this market will prove to be a tough one to make money. You have to wait it out for the investment climate to return.

Will the stock market become more investment oriented as before? Absolutely. Wait until the economy finally recovers with falling unemployment as a sure indicator. The public will come back eventually. After all, who can resist the temptation to get rich quick?

Wednesday 9/15/2010

Dow: +46 to 10573, volume 0.9 billion shares.
Nasdaq: +12 to 2301, volume 2.1 billion shares.
S&P 500: +4 to 1125, volume not available.

The three major indexes continue with their six-day climb after being interrupted only yesterday. It looks like a bull market is in the making. The mood is cautious optimism as shown by the small volumes of trade and the moderate but steady advances. However, it does not mean that you won’t see a big drop some day, perhaps tomorrow.

Topic for today (9/15/10): US Primary Election Upsets

Many people are confused and intrigued by the twists and turns of the US primary elections held yesterday.

Let’s try to understand the election schedules first. The US President is elected every 4 years, a US Senator every 6 years, and a US Congressman (or House Representative) every 2 years. This year is called midterm election because it is midway into the presidential election cycle (Obama was elected in 2008 and will face re-election in 2012).

Every two years, a number of Senate seats are up for re-election. Why not six years since they have 6-year terms? Because the 100 US Senators are not all elected to office in the same year due to various circumstances such as death, retirement, resignation, etc. This year, 37 Senate seats are due for re-election to be held on November 2, 2010. Normally, most Senators get re-elected. This year, about 13 seats are tossup or in play because the incumbents are politically weak. This is where the Republican Party hopes to take control of the Senate. They need to win 10 seats to boost their current number of Senators from 41 to 51.

As for the House of Representatives, all 435 seats face re-election this year and every two years. As usual, most members get re-elected. It is not clear how many seats are in play this year (maybe 30). For the Republicans to take control of the House, they have to boost their seats from the current 178 to 218.

The election scheduled for November 2 this year is a general election because the population of each state votes for the re-election of their own Senators and Representatives to be sent to Washington.

The one held yesterday, September 14, in various states, is a primary election where only the political party members vote for their own candidates to face those of the other parties in the general election to be held two months later. When a party is not united, they usually come up with a weak candidate who may have a problem winning the general election, hence benefiting the other party candidates. One example is the drawn-out primary battle between Barack Obama and Hillary Clinton for the Democratic presidential candidacy in 2008, which the Republicans watched with pleasure because it might weaken the Democratic Party in the general election.

Now what do I mean by this year’s primary election upsets? It happens within the Republican Party due to the negative mood of many voters against the incumbents. They are basically angry about Washington’s inability to jump-start the economy and the huge amounts of federal deficits. This anger gave the so-called Tea Party movement a boost at the primary election. The upset is that the candidates who embrace the principles of the tea party movement have managed to defeat most of the candidates supported by the Republican establishment. So the Republican Party has to find a way to embrace this insurgent Tea Party movement, Otherwise, it may split the party in the worst scenario. For now, it appears that it will reduce the Republican chances of winning control of the Senate or the House.

Why does it hurt the Republicans more than the Democrats? The problem is that besides the anger about government impotence and huge deficits, the tea party movement is perceived as radical and extreme for supporting the following: repeal of health care reform, social security, and civil rights legislation. In addition, the Tea Party supports a strong US military posture, tough immigration laws against Latinos, tax cut for the rich, and minimum government in the US thus freeing the rich and powerful from regulatory restrains. All of these are viewed with concern or horror by the mainstream voters. In the general election come November, the majority of voters tend to vote for the candidates who stick to moderate principles rather than extreme or radical ones. Since the winning tea party candidates represent the Republican Party, the Republicans’ chances to win may be reduced.

When you look at the historical results, the key to winning in a general election lies in the ability to attract the independent voters who do not belong to any political party. These voters do not subscribe to party principles. They are neutral, reasonable, and issue-oriented in their voting habits. They vote for what is good for themselves and the country, rather than what their party says it’s good. Given what the Tea Party movement embraces, it is unlikely that the independent voters will swing the votes for them.

Although the Tea Party ascent seems bad for the Republican Party, the Democratic Party cannot rejoice now. They have less than two months to appeal to the independent voters like they have done in the 2008 presidential election. Should they fail, the independent voters will switch or simply stay at home on election day.

Tuesday 9/14/2010

Dow: -18 to 10526, volume 0.92 billion shares.
Nasdaq: +4 to 2290, volume 2.1 billion shares.
S&P 500: -0.8 to 1121, volume not available.

The four-day winning streak was broken. The three major indexes stayed in positive territory most of the time but could not hold at the end, resulting in some minor losses.

Topic for today (9/14/10): My Rules for Playing in the Stock Market

Someone asked me what rules I used for trading stocks. Here they are:

I never let other people play with my money. So I don’t buy into any investment funds. I buy and sell stocks on my own.

You may naively think that you are an investor. That usually gets you into trouble. I consider myself a free rider of the market ups and downs.

You may hold a stock for many months hoping to make a big gain. I want small gains frequently that will add up in several months. I act in the short term in order to build the long term, just like I go to work everyday.

I am not a day trader, which is despised and discriminated by brokerage companies. I keep my stocks overnight before considering selling them.

I keep a short list of the stocks I like. The short list is based on my budget and my knowledge about the stocks. Different people have different lists.

Although having a limited budget, I try to play like a big shot. That is, everyday I have some stocks to sell, and some cash to buy. I hate holding stocks and wait there like a sitting duck.

I keep my mind open for new business conditions to unfold. I don’t follow blindly what the experts say. I only take reasonable advice.

I view every piece of stock news with a grain of salt. Most news doesn’t make sense regarding stock price movements. Some news does after careful consideration.

I never buy a stock if I have not seen its price movements for the last five years, maybe longer. I need a historical perspective for any stock I consider buying.

Although buying stocks is about the future, you are nowhere if you don’t have any idea about the recent history of the stock you buy.

I never play options. Why? Trying to make a judgment about future prices is hard enough. Options have a time dimension that complicates things and increases my chances of losing.

I play shorts sometimes. Shorts are dangerous bets. I only play them when I have holdings of the same stocks in another account. This reduces the danger and guarantees my gains if the shorts are higher than the buys.

I use multiple accounts to keep track of my different stock holdings and trades. When you hold more stocks and trade them in batches at different times and prices, multiple accounts will help with the accounting.

I don’t buy a stock with all allocated cash at one time. I buy small batches each time, between 300 and 500 shares. Why? I may be wrong in the first buy. But my second and third buys will get a lower price that will make up for the first wrong decision.

When I sell, I may sell in batches or all of them at once depending on what I think about future prospects.

I have a reason for everything I do. To see the reasons in details, please view my research articles in www.stockfessor.com, or view my videos on www.youtube.com.

Monday 9/13/2010

Dow: +81 to 10544, volume 0.93 billion shares.
Nasdaq: +43 to 2286, volume 1.9 billion shares.
S&P 500: +12 to 1122, volume not available.

This is the 4th consecutive day of increase for the three major indexes in response to positive news about the health of the banking system, the Chinese economy, and merger acquisitions in the US. The trading volumes are relatively low as usual. It looks like the stock market is due to climb a little after a wave of pessimism passes.

Topic for today (9/13/10): Two Presidents

I wish to bring up two US Presidents who share some interesting commonalities and contrasts: Ronald Reagan (Republican), and Barack Obama (Democrat).

Both presidents have great communications skills. Reagan made people feel good while Obama was able to bring hope. Both assumed office when the country was in the middle of an economic crisis. Both were able to attract voters from outside their own political parties. Both have incurred large deficits for the US government.

Regarding contrasts, Reagan is one of the oldest presidents while Obama is one of the youngest. The two men have very different political philosophies. Reagan believes in shrinking the government, cutting taxes, and boosting defense spending. Obama believes in making government more efficient, cutting taxes only for the middle class, and using diplomacy and soft power rather than the military.

People like to judge presidents based on two criteria: US government deficit and the unemployment rate. Why? They are simple to understand because only numbers are involved. Secondly, these numbers can be used effectively in political campaigns to praise one’s own party and attack the other.

Let’s see how they perform in dealing with the deficit. In 1979, the US economy was in a tailspin due to a second oil crisis coupled with high inflation. The interest rate stood at an unbelievable 18% that practically stalled any investment projects. When Reagan came to office in 1980, he cut taxes. The reason given was to stimulate the economy and create jobs. At the same time, he increased defense spending. The reason given was that the US was falling behind the Soviet Union, which he called the Evil Empire. This combination caused the US deficit to explode from $41 billion in 1979 to $221 in 1986. When Reagan left office in 1988, the deficit came down to $155 billion mainly as a result of more tax revenues because the economy was booming again.

When Obama came to office, the US economy was on the brink of collapse due to the financial meltdown leading to a worldwide deep recession. In 2008, the deficit under Bush had already worsened to $459 billion. When Obama took office in 2009, the deficit swelled to $1413 billion after a bank bailout of $800 billion already authorized by Bush. Later, a $700 billion stimulus package was passed to rescue the economy. In addition, the government continued to lose tax revenues due to the recession. Because Obama has been in office for less than two years, it is too early at this time to judge his performance on the deficit.

Let’s now turn to unemployment. When Reagan took office in 1980, the unemployment rate rose from the previous year’s 6.0% to 7.1%. Then it rose further to 9.6% in 1983. Having been in office for three years, Reagan was unable to create any jobs even with massive tax cuts and defense spending. Despite Reagan’ popularity, the public was impatient with him for the slow economic recovery. This shows the limits of government stimulus in job creation. It all basically depends on the private sector. The business cycle has to run its course. The economy finally turned around in 1984, reducing the unemployment rate to 7.5%. This enabled Reagan to trumpet his economic policies and won a landslide re-election. When he left office in 1988, the unemployment rate dropped further to 5.5%. So Reagan was credited with the economic turnaround, but the economy did not actually turn until the last year of his first term.

When Obama inherited the economic mess in 2009, the unemployment rate shot up from 5.8% to 9.6% in just a few months because 8 million people lost their jobs. One year later now, the unemployment rate has not changed but the economy has stabilized and is in fact growing. Again the government stimulus has not produced any visible effects. As usual, the economy must depend on the private sector to turn around. How many years will it take? In Reagan’s time, it took almost four years. Obama is only in his second year in office. We need to wait until the end of 2011 to see any significant results of the private sector turnaround. By that time, if the unemployment rate comes down significantly, Obama can likewise trumpet his policies when he seeks re-election. This is how politics work. Success depends on the convergence of positive things that the public can understand.

Friday 9/10/2010

Dow: +48 to 10463, volume 0.76 billion shares.
Nasdaq: +6 to 2242, volume 1.7 billion shares.
S&P 500: +5 to 1110, volume not available.

This is the third consecutive day of increase for the three major indexes. The trading volumes are relatively low as usual. There is not much news to make the market move in either direction.

Topic for today (9/10/10): The Four Deadly Traps of Tax Cut

It is true that a tax cut pleases everybody. It pleases the rich even more because 5% cut on an income of $1 million produces $50,000 of tax refund from the government. Whereas the same cut on $50,000 income only yields $2,500. However, the middle class wants a tax cut more urgently because they want to use the tax refunds to buy something they need.

Herein lies the FIRST TRAP of tax cut. The rich want it but don’t need it. The middle class wants it and needs it. The poor are indifferent because they pay little or no taxes and hence receiving no benefits of tax cut. On the other hand, the government loses because there will be less tax revenues coming in. As a result, government services will be reduced that always affect the poor and the middle class.

Sadly, the middle class may not see the results, and supports the rich anyway to clamor for lower taxes. In other words, the rich initiate the tax cut. The middle class supports it for the same selfish reason, but will find themselves hurt later down the road. The rich always manage to get the tax cut legislation passed with middle class support.

The SECOND TRAP of tax cut relates to fairness. Paying taxes can be considered a contract between the government and its citizens. The citizens are willing to pay taxes in return for government protection (defense, police, fire fighting) and benefits (roads, airports, education, public health, social welfare).

In most developed countries, we have a progressive tax system where the rich pay more, the middle class pays less, and the poor pay none. Why? Should you reverse the existing system, we would have a society where the rich get richer, while the poor and the middle class get poorer. This cannot sustain and will lead to a communist revolution where the poor masses would rise up and slaughter the minority rich. Many enlightened rich people understand this danger and are willing to pay more taxes. They also understand that their riches are derived from the huge middle class who buys the products made by the factories owned by the rich. They don’t want to weaken the goose that lays the golden eggs.

In America, the Republican Party has been employing tax cut as a political platform for many decades. They always argue for across-the-board tax cut in the name of fairness. Do you see the trap here? Across-the-board tax cut will make the existing system less progressive because the government gives back to the rich the same percentage of tax refunds as the lower income groups. If they do that in successive years, it will make the tax system less and less fair. Many rich people see this trap that is harmful to society. They are unenthusiastic about the tax cut, and say openly that they don’t want it. However, the tax cut initiated by the selfish rich always gains support from a large section of the middle class who does not see the trap.

The THIRD TRAP is about the argument used for the tax cut. The Bush tax cut over the last few years is the biggest in history, resulting in some $700 billion government refund to the rich. The reason given is that tax cut for the rich creates jobs. This is simply not true as I have argued in the previous post dated 9/9/10. During the Bush years from 2000 to 2008, unemployment increased from 4.0% to 7.7% when he left office. Where is the job creation? For those who support the tax cut, you are being conned by the Republican Party. The argument given is a smoke screen for the selfish rich who make up less than 2% of the population.

The FOURTH TRAP is about national security. The retail price of gasoline in the US is less than half of those in Europe and Japan. Why? This is the result of the government’s refusal to raise gasoline tax, which is equivalent to tax cut or subsidy in the face of a worldwide shortage and increasing US imports of oil. As a result, the American consumers are paying billions of dollars every week to the oil exporting countries, some of which are not even friendly. This is equivalent to Americans allowing foreigners but not their own government to tax them. Over the years, the price of oil keeps on rising anyway. We are seeing an unprecedented transfer of money from the US to the oil producers.

You may ask why they are so dumb. First, when you are addicted to something, you will do dumb things. Second, don’t underestimate the power of the oil industry in the US. They are making unprecedented profits if the American public continues to get addicted to oil, just like the drug dealers. They will do everything they can to bribe any politician who opposes a tax increase for oil as wisely suggested by some economists and some brave reporters. But no politicians have the spine even to talk about tax increase for gasoline to discourage addiction. Remember the Congressman from Texas who even apologized to BP a few months ago for polluting the Louisiana coast?

So wake up middle America! Try to think, and refuse to be conned and led by the nose.

Thursday 9/09/2010

Dow: +28 to 10415, volume 0.84 billion shares.
Nasdaq: +7 to 2236, volume 1.7 billion shares.
S&P 500: +5 to 1104, volume not available.

The three major indexes opened high but could only managed to make some gains at the close. Some good news about a narrower trade deficit and a not-so-bad weakly unemployment claims did not sway the market. This holding pattern continues from yesterday.

Topic for today (9/9/10): Tax Cut to Create Jobs?

The Republican Party in the US has employed tax cut as a political platform to gain votes for many decades. We know that tax cut will please everybody. The argument (or smoke screen) being employed is that more tax cuts will create more jobs. Is that true? Let’s investigate.

First of all, tax cut is after the facts. That means you only realize the benefit after you have made an income or profit. If you lose your job, or your business incurs a loss, a tax cut will give you nothing because you have no income or profit to base on. You don’t even have to pay an income tax, and you are not entitled to a tax cut.

Try to ask yourself or your colleagues, what is the motivation for you to work? Besides having to make a living, you want a better life and you look to future prospects. Taxes never play a major role in your decision, although heavy taxes may discourage you. Since taxes are progressive in developed countries, the wealthier you are, the more you are taxed. This should not bother anybody. I’d rather be wealthy and pay more taxes than be poor and pay no taxes. What about you?

The same goes for a company or corporation. Hiring more people is a big investment that cannot be taken lightly. For a company to hire more workers, market factors overweigh all others. In short, a company has to feel good about present and future profits before increasing employment. They have to see increasing demands, depleting inventories, and reasonable costs for ramping up production. No company would start hiring when the government gives a 5% tax cut. It would violate business principles and would not survive for long. However, many people do not understand this and believe the politician’s smoke screen that tax cut creates jobs. It will only fatten the company’s pocket for sure.

Compared with other industrialized countries, the US has lower tax rates in most areas. That’s why many rich people from overseas take up residence in the US. In addition, the existing tax structure does not constitute a barrier for business incentives, economic growth, and innovation. The Republicans are only playing up the fear of higher taxes to scare people.

Yesterday, President Obama proposed a tax cut for the so-called middle class with annual income under $200,000. This covers about 98% of the entire population. The purpose is to stimulate demands leading to job creation. How does that work?

The middle class needs the tax cut more urgently than the rich. With the tax refund, they are likely to spend it right away on the things they need. This ensures that the tax refunds will be re-circulated back into the economy in the form of increased demands for goods and services. When demands increase as seen by employers, they will have a good reason to hire more workers.

Once again, the Republicans oppose it because , in the name of fairness, it does not include the rich that make up the top 2% of the population. Does the fairness argument hold water? No. As I mentioned earlier, the present tax structure is progressive requiring the rich to pay more taxes, which is considered fair to society. If we give tax cuts across the board, we will make the tax system less progressive. The second argument is the same old one: tax cuts for the rich will create more jobs because the rich own or run big corporations. That is simply not true as I pointed out earlier. It also demonstrates that the Republicans are working for only the top 2% of the people.

Why do so many average-income people believe the smoke screen that tax cuts create jobs? They are either confused or being seduced to believe so. Worst of all, they promote the selfish interests of the 2% rich without getting any benefits for themselves or for society.

Wednesday 9/08/2010

Dow: +46 to 10387, volume 0.88 billion shares.
Nasdaq: +20 to 2229, volume 2.0 billion shares.
S&P 500: +7 to 1099, volume not available.

The three major indexes switched back to positive territory with moderate gains and small trading volumes. This looks like a return to a holding pattern, waiting to move in either direction depending on the news of the day.

Topic for today (9/08/10): US Stimulus Package

A few months after President Obama took office, an economic stimulus package was passed totaling over $740 billion. The TIME magazine has detailed where the money was spent in the September 2 issue. I wish to comment on its purpose.

Although the size of the stimulus package is huge, it is only 5% of the US annual GDP of around $14 trillion. Moreover, the size befits the occasion because the economy was on the brink of collapse with the financial meltdown, and 8 million people lost their jobs within just a few months.

Why did the Republican lawmakers complain about this deficit spending? You should ask them. Is it urgent to save the economy in a grave crisis? Remember the Republican Administration started the Iraq war in 2003 that has cost the country $1 billion a day. They have also given a big tax cut for the rich totaling over $1 trillion. Those are all deficit spending, too.

In a capitalistic economy like the US, job creation mostly depends on the private sector, not the government. The business cycle has to run its course to recover from the bottom. First, companies responded to the global recession by slashing employment and drawing down inventories to reduce costs. They usually over-react in cost cutting, which results in the return of profits faster than expected, as now seen in many big corporations. With surplus cash in hand, corporations start to consolidate their markets first by acquiring or merging with others. This will bring in more sales. More sales will force them to plan for more production, that is, to hire more workers. Therefore, the hiring of more workers won’t happen quickly until the second or third year of the economic recovery when increasing sales materialize.

When President Reagan assumed office in 1980, the high unemployment of the recession at that time did not come down until 1983. Many people were impatient with Reagan about his economic policy. At present, we are only past the first year of the recovery. More time is required before we can see a significant increase in employment. The government cannot do much to hasten this normal process of job-creation that is mostly done by private companies.

If the US government cannot create most of the jobs, what should it do? Lots of things as have been done already:
• Provide immediate relief to people who lost their jobs, such as extending unemployment benefits.
• Provide financial aids to state governments in a budget crunch that led to worker layoff including policemen and firefighters.
• Repair infrastructure such as roads, bridges, rails, airports, etc.
• Tax cut for the middle class to stimulate demands (being proposed).
• Tax cut for small business (being proposed).
• Investing in the future.

The last item is where the current stimulus package concentrates on. Why? We cannot count on private companies to do it because the projects won’t bring in profits soon enough to stimulate private investments. Some major projects undertaken are listed as follows:
• Improve secondary and college education.
• More funds for research such as renewable energy, stem cells, etc.
• Digitalize medical records to reduce health care costs.
• Upgrade existing broadband network.
• Upgrade existing electricity distribution to a smart grid.
• Construction of high-speed rails.
• Green projects such as electric battery for cars, hybrids, solar/wind power generation, etc.

Overall, I think the deficit money is well spent in a time of grave crisis because the financial returns will be multiplied in the near future. It is definitely better than spending it on a war. What have we got in return in Iraq except more people hate us? It is also better than giving tax cuts to corporations and the rich. What have we got in return? Corporations employ more workers due to increased demands, not tax cuts. The rich only constitute less than 5% of the population. They won’t spend the tax-cut money immediately on ordinary items. So the tax cut is not circulated back into the economy fast enough. Rather, the rich will buy more antiques, more paintings, maybe more mansions, boats and planes. Those are by no means sufficient to stimulate the economy.

Tuesday 9/07/2010

Dow: -107 to 10341, volume 0.83 billion shares.
Nasdaq: -25 to 2209, volume 1.7 billion shares.
S&P 500: -13 to 1092, volume not available.

The four-day winning streak of last week is broken. Most stocks opened down today and stayed near their lows until the end of the session. The market went through some profit taking as usual.

Topic for today (9/07/10): Your Personal Vested Interest

In a previous topic, I talked about the vested interests of other people that you should understand in order to secure cooperation from them. Have you thought about your own personal vested interests? They are more important because you may not even recognize them. They tend to put your own thinking in a box, which limits where you want to go.

Some of your own vested interests are very obvious such as: your family and friends, your job, your assets, and the things you enjoy in life. You will oppose anything that tends to have a negative impact on them. You may even opposite anything that introduces some uncertainties into your status quo. For you to accept something new, it takes some vision where you see the longer-term benefits better than the present ones. An example is career switching that carries all kinds of uncertainties about the future, but you may decide to take the risks.

There exists a less obvious personal vested interest that people seldom recognize, or even refuse to recognize. This consists of your background, how you were brought up, your education, your biases, and even your ego. They all make up what you are as a person, good or bad, right or wrong.

You tend to protect the less obvious vested interests in the name of faith or belief, even when they contradict the facts or common sense. That is why we often find people who don’t seem to see the truth. When your thinking is bounded in a box like that, it will take a sudden revealing moment of truth being forced upon you to break the box. If you keep an open mind, chances are you will encounter some form of enlightenment that will help you think outside the box. When that happens, it will become a really valuable personal experience that is hard to forget.

My point is that the less obvious personal vested interest just described is a major factor that can hamper human progress. There are so many such examples:
• Believe in what the authorities say without questioning and thinking.
• Hang onto your belief and faith blindly without any reflections.
• Invent weird reasons for holding onto your wrong beliefs.
• Refuse to give a new idea or scheme a chance to work.
• Refuse to recognize you may have learned the wrong stuff all along. This is especially true about the stock market. How can it be? Well, try to query and think critically. You will discover that it’s only a money game. The rest is just gas.

Friday 9/03/2010

Dow: +128 to 10448, volume 0.94 billion shares.
Nasdaq: +34 to 2234, volume 1.6 billion shares.
S&P 500: +14 to 1105, volume not available.

This is a fourth consecutive day of stock surge following a favorable report by the Labor Department that the private sector has added 67,000 jobs in August. Some economists suggest that the US need to add 200,000 jobs every month to make a normal recovery.

Although the current pace of recovery is painfully slow, the job news has provided the market something positive to savor, but the trade volumes remain relatively low. September and October are not good months for the stock market according to past experience. So beware!

Topic for today (9/03/10): Vested Interest

Have you wondered why so many big problems remain unsolved in society? I can point to a very important reason, that is, vested interest. If you want to get something done while relying on cooperation from other people, you’d better find out what their vested interests are. Else, little progress will be achieved. What are vested interests?

Vested interest usually carries a monetary value. People who are in certain professions and enjoying certain privileges will feel threatened if you introduce some changes or uncertainties that affect them. For example:

In the recent US health care reform, those who oppose include people from the insurance, drugs, and health care industries, which have enjoyed great profits from fast rising prices at the expense of the rest of society. So they labeled the reform as “socialism” to confuse the public. I think the public only understands socialism as un-American and not much more. Many seniors are also against reform for a different reason: too complicated to understand. They see only uncertainties about their future health care benefits because reform means change. The vested interests employed phrases like “death panels” and “killing grandma” to scare the elderly into opposing health care reform.

The US has a tendency for military ventures overseas. Do the American people want war? Not really. However, the powerful weapons manufacturers and dealers will make sure that some politicians and top government officials want war. In addition, the large military establishment will support any war no matter how unjust, because that is their job. There is always a section of the public who are subject to being swayed or brainwashed to embrace a war when a patriotic theme is invoked such as “our freedom is being attacked!”

Global warming and green energy are slow to catch on in the US because of the powerful oil, utility, and transport industries that continue to rely on fossil fuels. Any green project or regulation initiated by the government has been labeled by the opposition as “job killer” to seduce support from the public. Because of the complexity of climate change, the public understands “job killer” better than global warming. In recent years, because of the rapid rises in oil prices and the demise of the American auto industry, public opinion has started to turn positive toward green. This time, the public understands rising prices better than “job killer”. But climate change still appears beyond comprehension for many people.

In the important examples cited above affecting the whole country and the world, do you notice that the vested interests have money but not the majority? That’s why they need to invent things like “death panels”, “job killer” or “freedom is being attacked!” to seduce the public into supporting them. Now it all depends on how ignorant the public is, or willing to be. Normally, members of the public can see through the smoke screen, but sometimes they cannot. When they don’t, the vested interests will gain the upper hand. When the public keeps an open mind, view the issues critically rather than blindly following the slogans used by the vested interests, the country will become better off and move in the right direction.

Vested interests represent a brake on progress in society. The reason is simple: Vested interests can hardly change, while external conditions are changing faster and faster everyday. As a result, vested interests don’t know how to adapt, only to oppose anything affecting the status quo.

One telling example is the American auto industry. They continue to produce gas-guzzlers even though oil prices have multiplied since the first oil crisis began in 1973. As a consequence, only Ford survives out of the Big Three now.

What will happen if a company abandons its vested interests through adaptation? The result will be wonderful. I give you two companies to consider:

Intel was producing mainly SRAM and DRAM memory chips until 1981 when it began to switch to microprocessor chips. It started to invest heavily in PC chips during the 1990s, having foreseen the explosive growth of the personal computer. Had the company not abandoned its vested memory chips, Intel would not have become the world’s number one producer of microprocessors.

Apple nearly went down the drain in the mid 1990’s due to very intense competition. The company was never able to capture a significant share of the PC market although widely regarded as the PC inventor. When Steve Jobs came back in 1997, he began reinventing the company for consumer electronics. Now that Apple is the top dog of the electronics industry, its PC market share is still small. However, the company has opened up immense opportunities in the iPod, iPhone and iPad. Apple has effectively become a multimedia company instead of sticking with its vested interest in PCs. The company is now in an enviable position to define the future products in the multimedia and consumer electronics world.

Thursday 9/02/2010

Dow: +51 to 10320, volume 0.96 billion shares.
Nasdaq: +23 to 2200, volume 1.7 billion shares.
S&P 500: +10 to 1090, volume not available.

After yesterday’s big rise, stocks managed to keep some of the momentum today. Toward the end of the trading session, the three major indexes climbed some more, but the trading volumes were only moderate.

Topic for today (9/02/10): Hedging

Hedging means minimizing risks. We do this all the time in daily life such as: look before crossing the road, stop at a red traffic light, don’t drink alcohol before driving, and so on. What do you do to minimize risks in the stocks you bought? Most people don’t have a plan because they think they have done enough work to ensure that the stocks will likely rise. Really? That’s why I used to say most small players buy and pray. They are sitting ducks.

Big players are different for one single reason: a lot more cash. They buy and play. All of them hedge against sudden downturns beyond their control or expectation. They have to do this because their stakes are much higher. They are no big players if they don’t hedge. Although I am a small player, I am able to reason out what big players do, and then deduce a hedging strategy for small players.

Big players need control of the market, the more the better. The following is their hedging strategy according to my reasoning:

First, achieve a bottom-heavy condition in the stocks of interest. That is, they have to own a lot of shares near bottom prices. For instance, a person owning 1 million shares of Apple between $5 and $50 bought long ago has much more power compared with one buying the same amount at today’s price of $252. The former can buy and sell anytime he wishes. The latter carries a lot of risks and stands to lose millions should Apple drop $2 tomorrow. He is a stupid big player because he fails to be bottom-heavy, and therefore he is reduced to buy and pray like a small player.

Second, being bottom-heavy, the big player of Apple described above can influence the stock price by dumping some of his shares (press down the price) or continuous buying (buy up the price). Even if he buys another million Apple shares at $252, the average cost to him for a total of 2 million shares will be well under $150. Can’t you see the advantage there?

Third, owning a lot of shares (usually 5% of total outstanding shares) qualifies you to claim a seat or a representative in the Board of Directors of the company. This puts you in the inner circle of the company. What’s good about being in the inner circle? Well, insider information directly supplied by top management of the company regularly but done in a discrete manner to avoid conflict with the law.

Fourth, big players don’t sit on their shares. Why? The stock market fluctuates everyday. It would be foolish not to trade your stocks to realize a stream of good incomes on a regular basis. Thus they buy some when the price dips and sell some when the price rises. Due to the large volumes of shares, they usually employ special agents to trade for them.

Fifth, big players short-sell part of their holdings to guard against unexpected market downturns. Short selling is normally a risky business. However, if you happen to own the shares you short, it guarantees your profit no matter where the price moves. (For a detailed explanation please see my Youtube video on short sales).

Now, what can you do with limited cash? A small player cannot expect to play like a big one. However, he still needs to hedge his bets to avoid losing it all. In the end, it all boils down to how smart he is, not how knowledgeable, because most of the stuff he learns about companies are second-hand and outdated materials.

A small player can try to be bottom-heavy by ensuring the price of the stock he buys is near the bottom. How? It’s not easy. The most basic thing is to find out the range of prices over the last three to five years. Beware that a low price may not mean a bottom. Zero is the real bottom if the company cannot survive.

If more cash is available, shorting a stock that you own may work. It should be done in a separate account dedicated to short sales to avoid being confused with the buys.

Small players should think about playing the short term in order to build the long term. The strategy of buy and hold carries a lot of risks because of so many uncertainties out there. You basically reduce yourself to a sitting duck. You should think about making short-term profits frequently that will add up significantly at year end.

Remember, cash in your hand is much safer than cash in the stocks.

Wednesday 9/01/2010

Dow: +255 to 10269, volume 1.2 billion shares.
Nasdaq: +63 to 2177, volume 2.1 billion shares.
S&P 500: +31 to 1080, volume not available.

Stocks surged after news that the US and China both showed better-than-expected increases in manufacturing output in August over July. This dampened the recent pessimism about sluggish growth. It is what the market wants to hear, but should not be construed that the worst is over.

I’d like to caution you about the moderate volumes of trade. In addition, there is a mix of good and bad news out there. It all depends on which one the stock market chooses to respond.

Topic for today (9/01/10): Split Market After Recovery

You have probably noticed that all the major indexes tend to move in tandem over the past year or so. Very seldom do we see a split market where some indexes head north while others go south. Why?

This is what we call the recovery phase where stock prices are gradually coming back from their historical lows around February 2009. Stocks from all sectors of the economy that managed to survive the financial meltdown and the worldwide recession are low enough to attract cash infusion. As a result, they rise together, but of course some rise faster than others.

The fact that prices rise does not mean that they cannot fall, because people profit from price fluctuations. Another reason for the fluctuation is that the recovery phase is never smooth as we wish to see. There exist frequent hiccups as the economy tries to adjust and confidence is being built. Sometimes the recovery appears to be in jeopardy as we have heard all the bad news recently.

The recovery phase usually takes two to three years, maybe longer for this deep recession. The alternating economic expansion and contraction is a fact of life. It’s what we call the business cycle that moves with its own natural pace depending on how people conduct their day-to-day business activities.

When the recovery phase is over, the split market will gradually come into play for two reasons. First, some sectors of the economy have shorter business cycles. They begin to experience a downturn while others are still expanding. Second, stock prices at this stage are much higher than during the recovery period. With a limited amount of cash infusion, it necessitates robbing Peter to pay Paul. That is, holders of high-price shares tend to unload and cash in to lower-price ones with greater potential. Even within the same sector, we will find that some high-price stocks become stagnant or sliding while the lower-price ones continue to soar.

What should small players do? During the recovery period like the present time, picking a stock is much easier because most stocks tend to rise from a low base level. The only difference is how fast. One important thing to make sure is that the company will not go bankrupt, because many small companies exhaust all their cash after the end of the recession. Furthermore, you want to buy into a sector that will grow faster during the recovery period.

Picking stocks is much harder in a split market after the recovery period. First of all, most stocks have attained a higher price level already, thus increasing the risk of purchase. Secondly, you may have read a lot about the potential of a certain stock. However, you will never know when the major shareholders are planning a cash-out, which is insider information unavailable in all the stock analyses. In case of this uncertainty, a sophisticated small player buys a stock in one account, and sells short of the same stock in another account to hedge against an unexpected decline. This is one way of playing the uncertain fluctuations of the market.

Tuesday 8/31/2010

Dow: +5 to 10015, volume 1.4 billion shares.
Nasdaq: -6 to 2114, volume 2.1 billion shares.
S&P 500: +0.4 to 1049, volume not available.

Stocks opened low but managed to climb to positive territory later, and stayed there for a few hours. Then they came back down again and ended up with little changes for the three major indexes at the close.

Topic for today (8/31/10): Iraq Pullout

Today marks the official end of US combat mission in Iraq. The drawdown of US troops from a high of 150,000 to the present 50,000 represents the fulfillment of a campaign promise by President Obama, who was one of the few politicians who had the spine to oppose the US invasion of Iraq. The remaining US troops will carry on their training and advising duties, and are due to withdraw by end next year.

The Iraq war is one of a series of US military misadventures around the world. It was waged under a cloud of pretense about the existence of weapons of mass destruction, which could never be found. The true reason was simply oil. Had Iraq not been an oil producer, the US could have looked the other way even if Saddam Hussein murdered one million more of his own people, like the genocide in Rwanda.

The Iraq war is perhaps the biggest disaster of the Bush presidency. Politically, it caused his popularity to plummet to the lowest level. It also brought down his Republican Party in both the Senate and the House. Financially, the war cost the US I billion dollars a day to operate. The human toll was over 4000 US dead and many more injured, not to mention the countless Iraqi casualties.

Have you ever wondered why US policy makers never learned from the past, especially Viet Nam? Despite superior firepower, US forces were outsmarted by the indigenous enemy. In Vietnam, guerrilla tactics were employed in the countryside under the natural protection of tropical jungles. In Iraq, improvised roadside bombs were used on desert roads and in urban areas that could easily bring a superpower to its knees. All those smart planners in the Pentagon should therefore take heed. When foreign troops are inserted into a strange territory, they are no match for the natives who will find a simple way to overwhelm and evict them. The point is that you can never win if you are not able to win the hearts of the local people there.

I think US misadventures abroad will continue in other hot spots around the world. Why? We have to look at the motivation for war. Do you see the great influence of the US weapons manufacturers and dealers? President Eisenhower, also a famous General of the Second World War, referred to the source of this devious power as the military-industrial-complex. Very few politicians dare to resist the combined power of the military establishment, the weapons manufacturers with all the associated industries, and the businessmen who stand to profit from a war being waged abroad.

Can this craziness be stopped? Yes, all it takes is for the US Supreme Court to rule against a war deemed illegal. However, the Supreme Court has always refused to consider a war case for some inexplicable reason.

Thus it all boils down to the power of the American people. Although lasting for more than 10 years, the Vietnam war ended mainly due to widespread popular revolt that even brought down President Johnson in 1968. In the Iraq war, even without widespread protests, public anger has brought an early end to it.

The people I sympathize most are those who go overseas to fight. While the weapons dealers make tons money at home, the soldiers are inspired to go abroad to spill blood for their country’s freedom. Everybody in the world cherishes freedom, not limited to Americans only, who pretend to know more because they think they are more free. When the US sent troops in the name of freedom to “save” a country, the foreigners will perceive this action as a threat to their own freedom, and will resist with even more vigor.

Freedom is something much deeper to appreciate than to fight for. When you ask people what is freedom, many reply with a blank stare. When you ask them to kill for freedom, some will perhaps join you right away. So my opinion is that those who died for some so-called freedom have probably died in vain, because they were inspired to sacrifice by the policy makers, who were in turn pressured by the salesmen of the military-industrial-complex. That is why I have the utmost sympathy for the soldiers. They are in fact the innocent victims.

Monday 8/30/2010

Dow: -141 to 10010, volume 0.82 billion shares.
Nasdaq: -34 to 2120, volume 1.6 billion shares.
S&P 500: -16 to 1049, volume not available.

The market started out in negative territory and continued to slide the whole day. Uncertainties persist about the pace of the economic recovery and job prospects. Another reason is profit taking after Friday’s big increase.

Topic for today (8/30/10): Play by the Rules

Since we were born, we have been taught to play by the rules. When we get older, we should ask who made the rules, and how will the rules benefit us.

The stock market is a fertile ground for asking this kind of question. In all my research, I have been trying to look at the rules critically. In conclusion, I’d say that all the rules of the stock market are made by the rich and powerful for their own benefits.

Only the government has the power to regulate the US financial market through the Security and Exchange Commission (SEC), and prevent the rich and powerful from milking the public to the last drop. Sometimes the government turns a blind eye depending on which political party is in power. The situation was most lax during the last 8 years (2000 to 2008), producing such big scams as the Enron collapse, Maddox swindle and the ultimate financial meltdown.

Looking at the rules critically is not easy to do. The biggest obstacle is that our minds are programmed to follow the rules and try to learn the technical details from them, rather than questioning with our common sense. As a result we are distracted, confused, and fail to see the true intentions of the rules.

Let me point out two basic aspects of rule play that exist in society:

In the old times when a monarch ruled a country, the rules were designed to cement and preserve his absolute power. In modern times, the same goes for a dictator or a communist regime wanting absolute power. The thing they fear most is questioning by the public, leading to an open rebellion or revolt. They want total obedience. Else you’ll face persecution. Brute force was used to enforce the rules.

In a modern democratic society, the rich and powerful cannot have absolute power, but they want most of it nonetheless. So they employ distraction and misinformation to achieve it. They flood you with all kinds of technical details that will keep you busy trying to learn them. Consider all the rules of a mutual fund, an insurance policy, a credit card policy, and all the stock market trading rules such as options, margins, short-sell, etc. How much time will it take you to learn them? Will it help you win after learning them? I think you will still end up a loser if you follow their rules. Their intention is to cheat you by distraction and confusion.

Rules are made by a small group of people to encourage others to follow. Rules are usually good for society if they are simple enough, such as waiting in line, stopping at a red light, no potential weapons on a commercial airline, refund or exchange if the product does not work, and so on.

When a rule gets complicated, you should view it with a critical mind. You should find out how it will benefit you before you agree to follow it. All the rules in the financial sector are exceedingly complex because it is where most cheating occurs. So be careful! The other area of rampant cheating is the health care sector, where they employ fear to seduce you into buying or taking certain drugs, procedures, or vitamins. An example is that if you don’t do this or that, you’ll be less healthy or even die.

Remember, complicated rules are made by a small group of people to control or cheat the masses. Do not waste your precious time learning the technical details, because it will only make you a sucker and loser.

Friday 8/27/2010

Dow: +165 to 10151, volume 1.1 billion shares.

Nasdaq: +35 to 2154, volume 2.1 billion shares.

S&P 500: +17 to 1065, volume not available.

The three major indexes responded positively to an upward revision of the GDP for the second quarter of 2010. This does not mean that the US economy suddenly turns better. It only means that the fear of a double-dip recession is reduced somewhat.

Having been bombarded by so much negative news, the market just wanted a day to feel good about. Over the last four days, it has been one day up and another down, back to the usual pattern of frequent fluctuation within a small margin.

Topic for today (8/27/10): White Colonialism

Recently, I visited the JFK Presidential Library and Museum in Boston. In a documentary clip, a reporter asked the President, “Why do people around the world hate us?” This is the question that Americans continue asking for half a century but still cannot grasp the answer. JFK nailed it on the head by pointing out the historical perspective that many Americans failed to see, or refused to recognize. He mentioned two key words, white colonialism.

Since the Industrial revolution originated in England with the commercialization of the steam engine around 1710, the English merchant fleet and the Royal Navy became mechanized instead of relying on sails and wind. This new technology made a powerful force for venturing out into the new world. The merchants wanted to make money and the Royal Navy was eager to protect their own citizens engaging in business.

With technology and firepower over other peoples, the British ambition did not stop with making money alone. They wanted to claim lands in the name of the British Crown. So it happened that the East Coast of North America became a British colony, followed by many territories in Africa, India, and some Chinese coastal cities including Hong Kong. By the end of War World I, the British Empire was known as a country where the sun never set, having acquired some more territories in the Middle East from the disintegrating Ottoman Empire.

As the Industrial Revolution spread, other European countries, the US, Russia, and Japan joined in to compete with each other in the greatest land grab in human history. By the eve of the Second World War, the colonizing powers have carved up the rest of the world into pieces of colonial territories for permanent occupation. The end of the Second World War ushered the disintegration of the British and other colonial empires. As a result, many new countries became independent in Asia and Africa.

It should be mentioned that colonialism was not practiced by whites alone. Japan had colonized Korea, Taiwan and Manchuria until its defeat in World War II. China used to practice a colonialism called “tributary states” where no land grab was involved, but the neighboring countries must pay annual tributes to the Chinese Emperor to satisfy his ego. In return, the Emperor returned a precious gift to acknowledge the subordination of the tributary states.

In most places of the world today, the native people can name one country in Europe as their former colonial occupying master. The Chinese can name even eight including Japan and Russia. The term “foreign devil” was coined by the Chinese to show disgust.

Have you ever wondered why a small island country like Britain could conquer so many territories? How many Navy ships did they have? How many troops could they transport overseas? In the American Revolution of 1776, England sent less than 5000 troops to suppress the independence movement, which was their most difficult challenge. I did not think they sent 5000 troops to conquer India or Africa. This made people think that the natives in India must be stupid. They were not. In the old times, the natives lived in small tribes that were not totally friendly to one another. The British came in and played one tribe against another. They employed the strategy called divide and conquer. This strategy only worked when the natives were disunited and lacking a strong leader. Thus the success of colonialism during that time depended on superior technology and firepower, plus a smart strategy. Manpower was not an important factor.

You should appreciate that the US has a unique colonial background. After gaining independence from Britain, the US bought land from France (Louisiana Purchase), grabbed territories from the Indian natives in North America (west of the Mississippi), from Spain (the Philippines), and from Mexico (Texas, California, Oregon and Washington). The US never grabbed a piece of land in Africa. However, it suffers from the stigma of slavery lasting until the end of the Civil War, and racial segregation until the mid 1960s. In addition, the US station troops in many sensitive areas, especially Saudi Arabia and Iraq, causing hatred among Moslem Fundamentalists.

Besides what President Kennedy meant when he mentioned white colonialism, I wish to add some more interpretation here. There is a Chinese saying that a bigger tree attracts more wind. If the US were an under-developed agricultural country, nobody would want to pay much attention to it. Worrying about the world’s feelings goes with the territory of being a superpower because image assumes more importance.

In fact, I think the rest of the world do not hate the American people. What they hate is American foreign policy and military ventures worldwide. The US government has a habit of being friendly to the wrong leaders who fail to gain enough support from their own people. The list is long: Chiang Kai-Shek of Nationalist China, Nguyen Van Thieu of South Viet Nam, Ferdinand Marcos of the Philippines, the Shah of Iran, the Saudi Royal family, the corrupt governments of Pakistan and Afghanistan, and so on. Until the US government learns this lesson, it will continue to be hated around the world. This hatred may occasionally flare up into violence against American citizens who become innocent victims.

Thursday 8/26/2010

Dow: -74 to 9986, volume 1.0 billion shares.

Nasdaq: -23 to 2119, volume 1.8 billion shares.

S&P 500: -8 to 1047, volume not available.

There was some optimism in the morning regarding a smaller jobless claim number for last week. Stock prices rose for a while but they could not hold. At the close, the three major indexes were back in negative territory again after a short pause yesterday.

Topic for today (8/26/10): I’m taking a break, not in the mood to write.

Wednesday 8/25/2010

Dow: +20 to 10060, volume 1.1 billion shares.

Nasdaq: +18 to 2142, volume 2.0 billion shares.

S&P 500: +3 to 1055, volume not available.

The decline of yesterday continued into this morning. Then the three major indexes began to turn around and ended up on positive territory at the close. This terminates four consecutive days of losing streak. However, it may not mean the end of the current decline. The market may be just taking a pause.

Topic for today (8/25/10): Territorial Power in Stock Trading

You know what territory means when a colleague claims expertise in your sphere of work, or when a competitor opens shop nearby. We are all territorial animals. We perceive danger when other people seem to be stepping on our toes. Many people even feel danger when their egos are being challenged.

Do you have a notion of territory in stock trading? You’d better not because it won’t help you win. Being a frequent trader or a so-called expert in a given stock does not give you a territorial advantage or privilege. The only exception is when you are a major shareholder, that is, you own at least 5% of all the outstanding shares of a company. Why?

The daily turnover of a stock is usually less than 5% of the total shares outstanding. Being a major shareholder, you are in a position to cause a landslide by dumping your shares. You can also inflate the price by continuously buying to increase your holdings. In other words, you have territorial power in the company stock you own. You will use this power to protect your advantage and privilege of being a major shareholder.

Territorial power in a given stock is a beautiful thing because it is perfectly legal. You see, nobody can legally claim territorial power except in the privacy of home. The Mafia and the drug dealers have to spill blood to protect their own territories. The major shareholders don’t have to. How do they do it?

For new public companies, major shareholders usually own close to 90% of all outstanding shares. As the company grows, more shares are being issued and the public is buying more in the open market. As a result, the total share of major shareholders will come down from 90% to perhaps 50%. Even with a smaller percentage of ownership, the weight of the major shareholders cannot be underestimated. They can easily make the stock price move in either direction.

There cannot be too many major shareholders for any company stock. The existing major shareholders will make sure that it continues to be a small exclusive club. Why? Simple reasoning. More people will dilute their power of controlling the company and the stock price.

All major shareholders are represented in the Board of Directors, either personally or through a representative. Being in the Board is a beautiful thing because they can obtain all kinds of insider information from top management. It’s legal if they do it discretely to avoid open conflict with the law. You must recognize that major shareholders have every right to inquire about company performance, purchase orders received, problems facing the company, and so on. Furthermore, all top officials of the company owe their careers to the Board that has the power to hire, fire and promote. Top management is always eager to please the Board members.

Do major shareholders trade their stocks? Why not if they can profit from it? Due to the large amounts of shares involved, they employ agents to trade for them. In order to avoid one major shareholder undercutting another, they must consult each other when they plan to buy or sell a large quantity. Consequently, there exists some degree of coordination (or collusion?) when major shareholders buy or sell the company stocks. They also trade in a discrete manner to avoid open conflict with the law.

In view of all the above, do you think a small guy can win? Yes, provided he sees the realities. A small guy makes his decisions based on second-hand outdated information obtained from friends, newspapers, or analysts. The major shareholders base their decisions on insider information obtained directly from top management, which is perfectly legal if done discretely. Can’t you tell who has the upper hand?

Some more interesting situations: Major shareholders are human beings who tend to have big egos. Can they get along with each other in the small exclusive club? If not, what will be the consequences? What happens if a rich outsider tries to force himself into the club by buying lots of shares in the open market? This would be an intrusion into their territory. How would the exclusive club respond? I leave you to ponder these questions.

Tuesday 8/24/2010

Dow: -134 to 10040, volume 1.2 billion shares.

Nasdaq: -36 to 2124, volume 2.1 billion shares.

S&P 500: -15 to 1052, volume not available.

The three major indexes opened lower and stayed there for the whole day. Again, concerns about the strength of the economic recovery came back to haut us, especially lackluster housing sales and negative performance of some Asian stock markets.

Topic for today (8/24/10): Is China a Bubble?

Today’s decline is attributable to the weakness in Asian stock markets, a reaction to the concerns about an economic bubble developing in China. Is China a bubble? This has been an on-and-off question since the country opened up to the world in 1980’s. Many experts predicted the rapid growth would not last, but it has continued for decades at double-digit rates.

There may be a small bubble here and there in the Chinese economy such as the stock market and real estate in big cities. Overall, I don’t think China is a bubble. Here are the facts:

China started out as an agricultural economy in 1970’s when 90% of the population lived in the countryside. As of now, 50% of the people live in the cities where most factory jobs are located. You can see the challenges of this great migration to the cities and the stresses created on the economy. But it has generated enormous demands for housing, construction, infrastructure, etc. On the other hand, the countryside requires more development as the cities grow. You cannot have a bubble when there exist real solid demands for goods and services, instead of artificial blown-up demands like sub-prime mortgages in the US.

The most amazing thing is the rise of the middle class estimated at around 500 million, greater than the entire population of the US. The huge consumption of the middle class extends to anything foreign including McDonald’s, Avons, Toyota, Apple, and Louis Vuitton.

Although China lacks material resources, it has plenty of labor and land waiting for investment from domestic and foreign companies. That is why we see companies competing for a foothold there, trying to capture a piece of the growing market.

The overall supply and demand conditions in China do not suggest any sign of a big bubble. If any concern exists at all, it’s the stability of the society. The communist government almost collapsed during the Tiananmen Square protests in 1989. Another concern is the economic disparity between city dwellers and country folks during the rapid industrialization process. Worsening inequality tends to destabilize a society. However, the country seemed to handle the global recession pretty well when tens of millions of factory workers were laid off and sent back to the countryside.

Although oppression exists in the communist regime, there seems to be an implied contract between the people and the government. The people want better jobs and higher consumption. As long as the government can maintain economic growth, the people will be too busy immersing in working and enjoying their newfound wealth.

Monday 8/23/2010

Dow: -39 to 10174, volume 0.86 billion shares.

Nasdaq: -20 to 2160, volume 1.7 billion shares.

S&P 500: -4 to 1067, volume not available.

After rising briefly at the open, the three major indexes stayed around the flat line most of the day. Then they fell toward the closing time. This represents a third consecutive day of loss. Please mote the relatively low volumes.

Topics for today (8/23/10): Stock Funds Cash Outflows

The New York Times recently reported that during the first seven months of 2010, a total of $33 billion has been withdrawn from US stock investment funds. During a time of economic recovery, there is normally an inflow of around $10 billion.

What is happening? The public is suffering from a confidence crisis. Most people have lost money when the stock market collapsed around the fall of 2008. Many have seen their life savings wiped out. It will take a while for confidence to return, especially when the job market brightens up.

This year’s significant withdrawal of cash from the stock funds has already created a so-called traders’ market. This market fluctuates within narrow margins. Due to low public participation, there is not enough cash to sustain any continuous rise. Thus a small price rise encourages a sell to replenish cash. When prices drop back to a level low enough to make some profit, the buying starts again to repeat the cycle. In this kind of market, only frequent trading following the ups and downs can net you a profit.

When will this traders’ market end? It depends on how soon the economy recovers, that in turn depends on how soon the jobs return. When concrete evidence appears about good future prospects, the small guys will come back again to the stock funds. Who does not want to get rich quickly?

According to my reasoning, getting rich by buying into a stock fund is not a smart move. It’s never a good idea to let other people play with your money, especially when you have to follow their rules, not your own. Why on earth do you want to give them your money and play on their terms? Remember, when you pay cash, you are king. Please see my video on Youtube.com, “Should I buy into a mutual fund?” (Video #3).

Friday 8/20/2010

Dow: -58 to 10214, volume 1.1 billion shares

Nasdaq: +1 to 2180, volume 1.9 billion shares

S&P 500: -4 to 1072, volume unavailable

Similar to yesterday, the three major indexes opened and closed in negative territory except for the Nasdaq, which managed to edge out a very small gain.

Topic for today (8/20/10): Illusions

A friend of mine told me that he went to the emergency service of a local hospital one day for a swollen toothache. He got a bill later for $2000 including a charge of $500 for two pills that the doctor prescribed. This kind of horror story is real, and is not uncommon in the US. Let me continue with the interesting story that follows:

He asked the hospital why the bill was so outrageous. The reply was that so many uninsured patients came to the emergency room for treating regular problems that greatly increased the costs of the hospital. So everybody wound up having to pay more. This is one of the many valid reasons why medical expenses in the US exploded through the roof. How to deal with the 50 million plus uninsured citizens is one of the most pressing problems.

My smart friend immediately linked this problem to the illegal immigrants from Mexico because he heard a few of the patients speak Spanish. He concluded that it’s the illegal people who caused his unreasonable medical bill. What? First of all, how could he tell that they were illegal? Secondly, the number of illegal residents in the US is estimated at about 11 million, while the number of medically uninsured is over 50 million. How can he say that the rising medical costs are caused by the illegal residents? My friend must be having an illusion. He never thought for a moment that the high price was a result of profiteering by the hospital and the insurance company. He has in fact been ripped off but he blames some other people he does not like. The danger is that facing the phantom rather than the facts, he never understands the real problem and will continue to be victimized.

There are plenty of examples like this in real life:

When we lose in the stock market, we blame the analysts. Why should we listen to the analysts anyway? The analyst’s job is to get paid for his opinion, right or wrong. You take it at your own risk.

When we don’t succeed in school, we blame the teacher. Everyone agrees that bad teachers should be fired. On the other hand, good teachers cannot make good students either. Learning depends on ourselves. If we truly want to learn, we don’t need teachers to hold our hands.

When the terrorists slammed the planes into the World Trade Center, we said that they were against our freedom or way of life. They couldn’t care less about how we live our lives just as we don’t care about how they live theirs. We should ask why they hated us so much that they are willing to trade their own lives for some commercial buildings.

When Osama bin Laden claimed responsibility for 9/11, we sent troops to get rid of Saddam Hussein instead. Now that the US has spent more than one trillion dollars in the Iraq war, we should ask if it is worth the price for the head of one dictator.

Giving tax cuts to the rich will create jobs. What? The US has been cutting taxes for the rich for several years now, why has the unemployment rate gone up to the current 9.5%? You may counter that this is because of the worldwide recession. Then who caused this recession in the first place? Did the big banks mess up? Who run the big banks? How many jobs have they cut?

My advice is: Don’t listen to other people about the things that matter to your life. Get the facts first, think and see if they are reasonable, then make your own decision. Take charge of your own life. Don’t be a sucker all the time! The biggest sucker is one who is being ripped off, but is told to blame other people instead of the ripper.