Don’t you realize that what you do in life depends on your view or outlook about yourself and the world? Your actions, right or wrong, originate from your own view, and only change when your view changes.

Playing in the stock market requires a realistic view of the power of money, investment risks, and human psychology. The closer your view approaches reality, the more success you will be able to achieve.

Let me explain the realities of the stock market as follows. Hopefully, this will give you a fresh outlook and help you find a new way to play.

The stock market is a tremendous money game where big fish eat small fish legally by hook and by crook, but it is not casino gambling. The difference is that in the casino a bet relates to the present and is independent of any other bet. By contrast, every bet in the stock market relates to the future. What we don’t know is how far into the future, and what the big players think.

What’s happening in the stock market is not accidental but planned. In order to make profits, the big shareholders must somehow organize the market to do three things: to build up to a better future (creating a peak), build down to cash out (sliding to a low), or build flat with frequent fluctuations (seesaw market) according to changing economic conditions. Each of these build processes lasts from a few weeks to a few months. When the big guys have accumulated enough of a stock, its price is due to rise. They will invent a reason to boost its price. Likewise, when they plan to cash out, there will be a reason for the stock’s downfall.

With limited cash to play, you are a helpless small fish subject to being eaten. What should small fish do? They should swim closely behind the big fish rather than straight toward its mouth. Small fish should think about survival all the time. You are no investor because you don’t organize the build processes I’ve just described. You just buy and pray while the big shareholders buy and play. The fatal mistake of millions of small players is that they think they are real investors, and waste their time trying to be.

Believing wrongly that you are an investor means that you will never bother to find out who your opponents are and the tremendous powers they possess. How can you win if you don’t know whom you are dealing with? Who are your opponents actually? They are the ones who have plenty of cash to buy and plenty of stocks to sell. They include: wealthy individuals, venture capitalists, mutual funds, investment funds, insurance companies, big commercial banks, investment banks, brokerage companies, many corporations that trade on the side, and a shady group known as money launderers. All of them qualify as major shareholders by virtue of their large share holdings and cash reserves. They are the true investors because they organize the three build processes I’ve just described.

Thinking of being an investor, you waste your time listening to the experts about investing strategy, company performance, product analysis, etc. All those stuff are interesting but not particularly relevant to making money for you. Don’t you notice that all the experts and analysts are employed by the big players? Do you agree that people work for their paychecks? Their reports are produced for your consumption but certainly do not serve your interests. The reports are used to drum up or orchestrate public behavior to buy or sell stocks. Big players do not read those reports. Why should they? They have access to insider information by virtue of being major shareholders whom public companies are obliged to serve.

The passing of insider information by the company’s top management to the major shareholders is routine but done discretely to avoid conflict with the law. After all, those who own a major part of the company should be entitled to exceptional treatment. Secondly, top management owes their careers to the approval from major shareholders. All small shareholders are ignored because they don’t carry enough weights individually. A small guy holding some shares who thinks that he is an investor and an owner is too romantic a dreamer to play in the stock market.

Stock prices are set by auction using a system of ask and bid, not determined by supply and demand based on need and utility as in the case of PCs, cell phones, jeans, hamburgers, and autos, etc. When you buy a stock, you are only buying a dream. The stock certificate has no utility value. In modern electronic trading, the certificate is even replaced by a mere numerical entry in your brokerage account. That means your brokerage company knows everything about how you play. Remember, your brokerage company is a big player and your opponent.

The supply of any company stock is always limited, as shown by the existing number of outstanding shares to be set by the company’s board of directors. The supply is further limited by the willingness of the major shareholders to sell. If they keep on buying rather than selling, the price will run up pretty quickly. If they dump, the reverse will occur.

The demand for a company stock comes from basically two groups of people: small and big guys. The small guys (the public) base their buy decisions on what they see and hear, which is always second-hand materials fed into their heads. Usually, the small guys buy when prices go up, because rising prices signify good stocks. On the other hand, the big guys buy in big quantities when prices come down real low to make themselves bottom-heavy. After becoming bottom-heavy, they continue to buy up the price to increase the value of their total share holdings in order to prepare for an eventual cash-out. You should appreciate that being bottom-heavy in stock holdings enables a big player to control the stock price in either direction.

There exists the system of short-sell that should cause a small guy to raise eyebrows. If one buys stocks as investment for prices to go up, why does one need short sell? If you think deeper, the short-sell system is installed legally by the big players to serve their own purpose. Big players make prices go up and down and profit handsomely both ways. The short-sell enables them to make money on the way down.

The small guys should also raise eyebrows about the opinions of all the experts, analysts and rating companies as well. Collusion between them and the big players is inevitable due to the huge amounts of money involved, and the boss-subordinate relationship. Remember Enron, WorldCom, and the sub-prime housing bubble? What did the experts and the rating companies opine? They were all bullish about the prospects for the purpose of seducing the public to jump in. After everything had collapsed, they blamed the market, and the small guys too for panic sales, as if a disaster just happened by accident.

In conclusion, the stock market is a zero-sum game where one person wins and another person must lose. The people who win are those who have lots of shares to sell and lots of cash to buy, for they can control prices in either direction. Small guys become victims easily, especially when they have the wrong view or outlook, thinking that they are investors. In order to survive and win, small guys must follow the big guys closely and get a free ride from them as often as possible. You have to think of yourself as a free rider, not investor. There is nothing wrong with that except it hurts your ego.

www.stockfessor.com
August 2010

Wednesday 8/18/2010

Dow: +10 to 10416, volume 0.92 billion shares

Nasdaq: +6 to 2216, volume 1.7 billion shares

S&P 500: +2 to 1094, volume unavailable

The three indexes started out in the red but recovered to positive territory with some small gains at the close. It looks like the market returns to a regular holding pattern waiting to move in either direction.

Topic for today (8/18/10): Don’t feel like writing anything. Can I have a break?

Tuesday 8/17/2010

Dow: +104 to 10406, volume 0.98 billion shares

Nasdaq: +28 to 2209, volume 1.7 billion shares

S&P 500: +13 to 1093, volume unavailable

After so many down days, the market turned positive after good earnings reports from WalMart and Home Depot. Due to the relatively small volumes of trade, the upturn may not last long.

Topic for today (8/17/10): Going Mainstream

Going mainstream is the dream of a businessman who thinks he has a great product to promote. So many products have made it but many more others don’t. The same goes for a scientist, an activist, or others who are fighting for public acceptance of a new idea, an attitude, or even a truth. Remember in the old times, any scientist who spoke the truth about his new discovery was labeled a heretic and executed.

Why is public acceptance so hard to achieve? There exist the hurdles of inertia and status quo. What we are thinking and doing everyday is a result of culture, habit, attitude, education, and even advertising. After a period of time, what we think and do become ordinary and regular. These become the standards we go by. They also become our self-interests because our lives are linked to them. Any disruption or change represents an uncertainty, a risk, or even a threat.

The following is a list of some issues that have taken years or even centuries to gain public acceptance or go mainstream:

• The earth revolves around the sun
• The earth is round
• Evolution, its evidence and theory
• Equal rights for all humans
• Women’s rights
• Children’s rights
• Protect animals against human cruelty
• Global warming and its consequences
• Health care and all other reforms
• Change our lifestyles to consume less oil
• Learn to be gentle to the environment and the ecosystem
• Learn the lessons that violence cannot solve problems
• Learn to question those stupid people who keep on telling us what we want to hear.

Monday 8/16/2010

Dow: -1 to 10302, volume 0.87 billion shares

Nasdaq: +8 to 2182, volume 1.6 billion shares

S&P 500: +0.1 to 1079, volume unavailable

The three major indexes meandered about the flat line and closed with little changes.

Topic for today (8/16/10): Government Efficiency

We should raise issues about government efficiency if we think that government exists for the purpose of serving the people. Government tends to be inefficient for one simple reason: It spends taxpayers’ money. How can you expect anyone to be careful about expenditure if he spends someone else’s money?

Furthermore, a government does not go bankrupt the way a private company does. When a company goes bankrupt, its top managers have to leave and its assets sold. Many governments in the world are either bankrupt or close to it, but the top officials still keep their jobs and continue to pilfer their own countries. Thus government officials are held less accountable than top managers of a company.

A candidate for California governor, Meg Whitman, former CEO of EBay, said that should she be elected, she would apply her business experience in running California. This makes me nervous. Why? A company’s sole purpose is to maximize profits. It does not care much about anything else. On the other hand, the California government has to ensure smooth working of the infrastructure so that private companies can make money. It has to maintain high standards in the education system to ensure sufficient human talents are available for high tech jobs. It has to pay for the police and the fire departments to guarantee public safety. It has to guard against environmental pollution and consumer exploitation by profit-maximizing companies. The list goes on and on.

So you see the job of a government is completely different from that of a company. How can you run a government with the same profit principle? A subtle aspect often ignored is that government has to ensure justice and fairness. For instance, the courts are maintained by the government rather than by companies. Else the one who pays more will get more justice and fairness. An airport built by the government serves every user. Else the rich who finance it will make it their own private airport.

So you see government operates under a cumbersome process because of the requirements of justice and fairness. The consequence is that it is less efficient than a company. Can we have a really efficient government? Yes. The most efficient government is one run by a dictator, a communist, or an authoritarian regime. During World War II, Hitler was so efficient running his war machine and operating his gas chambers and concentration camps. In communist or authoritarian regimes, people who dare to oppose the government are rounded up and put in prison camps without due process of law. Do you want to pay that kind of price for an efficient government? If so, you may wind up being a victim.

Despite the fact that government is less efficient, it does not mean that the people should tolerate it, for the situation will get worse especially when bribery is taken into account. Government can become more efficient if the people demand more from their government officials through elections, protests, criticisms, exposing the truth, and pressures from various associations and activist groups. In other words, we as private citizens should get involved to make government more efficient and more accountable to ourselves.

Friday 8/13/2010

Dow: -17 to 10303, volume 0.87 billion shares

Nasdaq: -17 to 2173, volume 1.6 billion shares

S&P 500: -4 to 1079, volume unavailable

The three major indexes started out in the green but turned red by midday. Today represents a fourth consecutive day of loss for the market.

Topic for today (8/13/10): Stock Potential

The word potential carries mystery. It means different things to different people because it concerns the future. To a businessman, anything mysterious smells money for he can make a buck out of it. That is why you see so many people make a living analyzing the stock market. Each analyst gives his own reason about the potential of a stock. You probably believe the one closest to your own thinking. That does not mean that you are right or wrong. It only means two people concur.

May I offer you a simple way to look at a stock? Since the stock market is an emotional animal, stocks rise and fall often for no particular reason. Do you agree that a high tide lifts all boats? The reverse is true when the tide retreats.

I usually rely on the tidal phenomenon to find good and bad stocks rather than spending time reading technical stuff. For instance, during the financial meltdown back in the fall of 2008 while most stocks fell precipitously, quite a few did not fall as much, some even rose a little, e.g. IBM, WalMart, and Coke. You will get more insights when you start to think how come.

If you narrow down to a particular industry, the picture is even clearer. For instance, Intel stock was on the rise recently after its earnings report and optimistic forecast about the next quarter. A few days later words came that the chip industry might not be as robust as expected. Intel took a hit, together with some other chipmakers like AMD and Micron. However, you should not believe literally optimistic or pessimistic news, for they may be fabricated. You should follow up how those stocks behave in the same industry immediately after the fall. Some rebound strongly, some don’t. Then you’ll know which ones have better potential.

I am more concerned about good news than bad news. Why? A string of good news over several months can produce a bubble or a mini one where most stocks are inflated. This means bigger risks. It’s hard to tell how high prices can reach when buyers are intoxicated with the good news.

When stocks are falling due to bad news, opportunity is knocking on your door. You just wait a while to study whether they rebound or not, and whether a bottom has been reached. A word of caution, a falling stock may continue all the way to zero if the company is suffering from severe financial trouble. To take bankruptcy out of the equation, you should avoid small stocks. For big companies suffering severe financial deficits, you cannot escape the big news. It’s only the small companies that you don’t know how dire their situations are.

8/12/2010 Thursday

Dow: -59 to 10320, volume 1.0 billion shares.

Nasdaq: -18 to 2190, volume 2.2 billion shares.

S&P 500: -6 to 1084, volume not available.

The three major indexes fell again after yesterday’s slaughter. This is the third day of consecutive loss. Of the past six trading days, only Monday recorded an increase.

Since I keep a short list of stocks to watch, I always look at how fast a rebound occurs after a day of big losses like yesterday. A quick strong rebound signifies good potential. Here are the stocks I found: MOT (+$0.32), YGE (+$0.40) and MU (+$0.22).

Topic for today (8/12/10): Global Warming

An acquaintance of mine complains that the scientific theory of global warming is a hoax. His reason? The California city where he lives, San Jose, is unusually cool this summer. How can it be global warming? No wonder it took people thousands of years to accept the fact that the earth is round.

Although scientific evidence is supposed to be objective and accurate, it does not mean that people will accept it readily. One reason is its complexity that tends to confuse more than to convince.

Without explaining the theory, I only wish to point out the results that we are seeing now. Simply put, the weather pattern becomes more weird, erratic and extreme for many places throughout the world. You probably have seen on TV the hot summer in the US East Coast, the forest fires in Russia, and the devastating floods in Pakistan and China caused by heavy rain. The cool summer in California is another evidence, too. The long-term consequences include lower agricultural production, rising ocean levels, and extinction of many animal species. Believe it or not, global warming is the biggest challenge facing humanity short of alien invasion from outer space or a comet hitting the earth.

Do you believe that drunken driving kills? I don’t, but I take precaution not to drink alcohol when driving because I’ve seen some tragic results. Drunken driving may not kill, but why take the risk? Precaution does me no harm. The same goes for global warming. You don’t have to prove it to heed it simply for the benefits it brings. How can you prove that humans cause global warming? We can and we can’t, depending on how you look at it. But why bother with the complicated proof? The following will show we don’t need proof:

First, global warming relates to increasing amounts of greenhouse gases such as carbon dioxide and methane released into the atmosphere. Autos, planes, boats, factories, and our air-conditioning system produce huge amounts of greenhouse gases by burning fossil fuels such as oil and coal. Fossil fuels are dirty in the sense that they pollute the environment (BP’s disaster in the Gulf Coast), cause smog in cities (Beijing, Tokyo, and Los Angeles) and, combined with soot, also lead to respiratory problems. Do you want to ignore greenhouse gases produced by burning fossil fuels just because you cannot prove global warming? Global warming is just the latest addition to the problems created by greenhouse gases.

Second, if you are in the oil business, probably you are willing to pay the price for greenhouse gases. The US spends more than a billion dollars a day for foreign oil, the largest wealth transfer in the history of mankind, not to mention the Iraq war. Due to the need for energy, oil and national security cannot be decoupled. However, energy does not necessarily mean oil and other fossil fuels. Since the US has become so much addicted to oil, you can see the high price being paid, including blood.

Third, there exist other kinds of energy sources that can be developed including solar, wind, waves, geothermal, etc. If you insist on proving global warming first before plunging into new energy, it’s equivalent to the case of drunken driving mentioned earlier. What harm can it do by adopting the new energy sources? Furthermore, green energy has the potential of becoming the next big thing because of the technology involved and the new jobs being created. Remember the great benefits brought about by the computer chip industry?

For a die-hard, discussing global warming is a waste of time. They cannot appreciate the practical benefits, but insist on proofs in the first place.

8/11/2010 Wednesday

Dow: -265 to 10379, volume 1.2 billion shares.
Nasdaq: -69 to 2209, volume 2.3 billion shares.
S&P 500: -32 to 1089, volume not available.

Today’s market is a slaughter. The three major indexes continued to drop up to the end of the trading session. The volumes of trade picked up significantly. This is a reaction to all kinds of uncertainties out there, and some signs that the current economic recovery is losing steam.

Looking back, I find some instances where the magnitudes of decline are similar:
7/16/10
Dow: down 261 to 10098
Nasdaq: down 70 to 2179
S&P 500: down 32 to 1065

6/29/10
Dow: down 268 to 9870
Nasdaq: down 85 to 2135
S&P 500: down 33 to 1041

6/04/10
Dow: down 323 to 9932
Nasdaq: down 84 to 2219
S&P 500: down 38 to 1065

I notice two things. First, a slaughter occurs just about every three weeks. Second, a few days after the slaughter, stocks start to climb back up again. This is the phenomenon of the so-called traders’ market where little participation from the public is seen. Due to the lack of cash coming from the public, traders try to make money by buying and selling within narrow margins just to keep going and earn small profits frequently. What they are doing basically is buy, cash out, and buy again.

Note that after today, we are still higher than the lows of June when the market retreated significantly. There is concern that the market may revisit the June lows again. If it doesn’t, the market will recover but fluctuate on a higher plane.

8/10/2010 Tuesday

Dow: -55 to 10644, volume 0.97 billion shares.
Nasdaq: -29 to 2277, volume 2.0 billion shares.
S&P 500: -7 to 1121, volume not available.

The three major indexes spent the whole session in negative territory. They regained some lost ground toward the end of the trading day.

Topic for today (8/10/10): Unemployment

Recently there have been grave concerns about the high unemployment rate. Since the US economy is driven by consumer demand, high unemployment means less demand, and slower recovery from the current deep recession.

I wish to give you some perspectives about the unemployment situation. The following table presents a recent history of US unemployment rates published by the Labor Department:

1932-1940: 23.6 – 14.6 % (Great Depression)
1978-1982: 6.1 – 9.7 % (Stagflation due to oil crisis)
1983: 9.6 %
1984: 7.5 %
1985: 7.2 % (President Reagan second term began)
1986: 7.0 %
1987: 6.2 %
1988: 5.5 % (Reagan last year in office)
1989: 5.3 %
1992: 7.5 % (Last year before President Bush I left office)
1993-1999: 6.9 – 4.2 % (High tech boom)
2000: 4.0 % (President Clinton last year in office)
2001-2008: 4.6 – 6.0 % (President Bush II in office)
2009: 10.2 % (Financial meltdown triggering worldwide recession)
2010: 9.5 % (July)

The bad situation we are having now does not compare with the Great Depression of 1930s. No wonder we saw in the documentaries long lines of people in the streets waiting for food handouts.

Our current situation comes close to the one during the period from 1978 to 1982 when the unemployment rate hit a high of 9.7 %. The big difference is that back then the deterioration happened over a period of four years triggered by an oil crisis, which led to inflation and stagnation (hence the term stagflation).

On the other hand, the current deep recession happened within a few months when unemployment shot up from 6.0 % in the summer of 2008 to 10.2 % in October 2009 with the loss of 8 million jobs. While we can blame the previous recession on the Arab oil embargo, we shot ourselves in the foot this time because our big banks failed us.

What about the prospects for recovery? A good lesson can be learned by looking at the previous one. President Reagan was credited with creating millions of job for the recovery. However, many people fail to appreciate that in a capitalist economy like the US, the government’s role is necessarily limited. Job creation is in fact carried out by private companies. They will start hiring when they feel good about future prospects. In other words, the business cycle has to run its course. The government provides only limited help.

When did things begin to look better when Reagan was President? During1984, the last year of his first term in office, unemployment dropped from 9.6 to 7.5 %. This trend continued to 5.3 % when he left in January 1989 after the second term. As we can see, the unemployment rate stayed high during the first three years of Reagan’s first term.

What does it imply for President Obama? Obama took office in January 2009. This is only his second year in office when unemployment dropped from 10.2 to 9.5 %. If we want to compare with Reagan’s performance, we have to wait and see the results in 2012, that is the last year for Obama’s first term. It’s too early to tell right now. Of course everybody is impatient, just like they were impatient with Reagan before.

Let’s try to associate recent US Presidents with the unemployment rate:
Reagan (Republican): unemployment down from 9.7 to 5.3 % upon leaving office.
Bush I (Republican): up from 5.3 to 7.5 %.
Clinton (Democrat): down from 7.5 to 4.0 %.
Bush II (Republican): up from 4.0 to 10.2 %.
Obama (Democrat): down from 10.2 to 9.5 % so far.

8/09/2010 Monday

Dow: +45 to 10699, volume 0.79 billion shares.
Nasdaq: +17 to 2306, volume 1.6 billion shares.
S&P 500: +6 to 1128, volume not available.

The alternating holding pattern continues within narrow margins, that is, one day rising and another day falling for the three major indexes. Today’s trading volumes are unusually light.

In this kind of market, it really tests your patience to wait for your stock holdings to go up. However, a small player can still win if he holds a number of different stocks. He sells some on an up day for a small profit, and buys some on a down day to replenish his holdings. In this way, there are frequent positive transactions that will add up significantly later.

Topic for today (8/09/10): Charity

It is heart warming to learn that Warren Buffett and Bill Gates have recently succeeded in asking 40 billionaires in the US to pledge at least half of their fortunes to charity. The total amount comes to $150 billion as estimated by Forbes magazine.

You may be interested to know that in 2009, individual Americans gave a total of $227 billion to charity according to the Center on Philanthropy at Indiana University. This figure was only 0.4 lower than 2008 despite the deep recession. Apart from the rich, this charity giving is performed by regular people like you and me. So charity giving is not limited to the rich only.

Is tax deduction a motivation for charity giving? No. According to Buffett, “Not one has talked to me about taxes .… I think the motivation goes far, far beyond taxes.”

To quote another billionaire, T. Boone Pickens, ”I’ve long stated that I enjoy making money, and I enjoy giving it away. I’m not a big fan of inherited wealth. It generally does more harm than good.”

“I have always thought that the best thing to do is to make the world better for your kids and your grandkids rather than just give them some money”, Michael Bloomberg told reporters, “Your kids get more benefit out of your philanthropy than your will.”

President John F. Kennedy, himself a rich man, brought out the aspect of self-interest in charity giving. He once said, “If a free society cannot help the many who are poor, it cannot save the few who are rich.”

I also want to ask from where do the rich derive their wealth. Basically, the companies they own sell products and services to the millions of middle class and the poor. The rich only account for around 5% of the total population, a very small market indeed. Although the rich may think they deserve every penny they earn, it serves their self-interest not to weaken the goose that lays the golden eggs.

Regarding the not so rich, many people say they will gladly give when they become rich. Well, nobody should be shamed or forced to give. On the other hand, charity should have no conditions attached. It is a voluntary action of self-interest and self-enlightenment even though it appears only benefiting other people.

Another excuse is that there are so many problems in this world such as unemployment, falling wages, and jobs going overseas. Why should we give to the poor who may not deserve it? My reply is that there exist countless people who need help even though there are many who don’t deserve it. The world will never be devoid of problems and unfairness. We are only able to mitigate them during our productive lives, rather than totally eliminating them. So, if not now, when? If not us, who?

8/06/2010 Friday

Dow: -21 to 10654, volume 0.95 billion shares.
Nasdaq: -5 to 2288, volume 1.9 billion shares.
S&P 500: -4 to 1122, volume not available.

The three major indexes dropped today due to disappointing job numbers published by the Labor Department. However, they recovered to register smaller declines toward the close. For the whole week, the indexes remain more or less at the same levels. In other words, they are holding onto the gains over the previous week.

Total US employment in the private sector edged up by 71,000 in July, only one-third of the increase recorded for March and April. This suggests job growth may be losing steam. So far for this year, the private sector has added 630,000 jobs. The progress appears too slow considering 8 million jobs were lost between 2008 and 2009. The unemployment rate remains unchanged at 9.5%.

Broken down by major sectors, the job increases for July are as follows:
Manufacturing +36,000
Health care +27,000
Transportation & warehousing +12,000
Mining +7,000
Financial services -17,000
Construction -11,000

Topic for today (8/06/10): How to create more Jobs?

In view of today’s unimpressive job report by the Labor Department, it is only fitting to ask how to create more jobs.

From the figures given above, two sectors are still bleeding jobs, i.e. financial services and construction. Why? This is due to the burst of the housing bubble created by sub-prime mortgages, a risky venture invented by the big banks. They contribute to the bulk of the problems we are having now.

Thus we see that besides creating jobs, we have to first prevent big corporations from operating recklessly, which will eventually lead to failures and massive layoffs. This is precisely why we need financial reform. The big banks oppose to reform because they want more freedom to operate recklessly for more profits. On the other hand, the people want stability and jobs, not massive layoffs. The financial reform bill passed recently serves the public good by tightening regulations and supervision of the big banks and other financial companies.

Now we come to the problem of creating jobs. In a capitalist country like the US where the private sector provides most of the employment, job creation depends directly on private companies. Management has to feel good about future prospects before they start hiring more workers. How can you make them feel good? Well, the business cycle will do the job with no need for outside help. Things will begin turning better after the low point, like it is happening now. The question is how fast. Can we make it faster?

All companies look after nobody else but themselves. Only the government is supposed to look after the public good. Therefore government must play a role in promoting job growth. The US government cannot force a company to hire more workers. It can only create a better business environment for job growth.

What constitute a better business environment?
• Better infrastructure such as transport and communications (e.g. The government is investing in a smart electric grid, broadband, and high-speed rail).
• Better education and health care for citizens (e.g. Health care reform passed, education reform being done where most needed).
• A tax structure that is fair, and competitive with the outside world (e.g. Tax reform now being discussed in the Senate, tax cuts being discussed).
• Enforcement of laws and regulations to ensure fair competition, consumer protection, and public safety (e.g. Financial reform passed, immigration reform being discussed).
• Stabilize prices and promote credits to enhance certainty and future prospects (e.g. Federal Reserve has kept interest rates very low).
• Special tax incentives for new and promising industries (e.g. electric cars, solar and wind).
• Partnership with private companies to promote special research and development (e.g. government investments in biotech and greentech).
• Financial subsidies for areas of need (e.g. education subsidies given selectively, financial subsidies for state governments recently approved by the Senate).

8/05/2010 Thursday

Dow: -5 to 10675, volume 0.88 billion shares.
Nasdaq: -11 to 2293, volume 1.7 billion shares.
S&P 500: -1 to 1126, volume not available.

In contrast with yesterday, the three major indexes spent the whole day in negative territory and ended up well above the lows of the day. The volumes of trade remained light, but the fluctuations were significant. Let’s see how the market will react tomorrow to the July unemployment figures published by the Labor Department.

Topic for today (8/05/10): The Courts

The Senate today confirms Elena Kagan as the third woman Justice in the nine-member US Supreme Court. While the press is discussing her influence in future court rulings, I only want to dwell on the basic things that a citizen needs to know about the US Supreme Court.

The court system is indispensable in a democratic society because of its independence in issuing opinions regarding justice and fairness in society. That’s why in a communist or dictator regime, the courts are never given such independence, and are made a rubber stamp to give legitimacy to government policies, no matter how harsh or unfair.

The power of the US Supreme Court comes from the US Constitution establishing the Court as a third branch equal in power to the Legislative and Executive Branches. Comparing the raw power of labor and resources, the Supreme Court has only nine Justices; whereas the Congress has more than 500 Legislators, and the President is Commander-in-Chief of the entire US armed forces. It is hard to believe that the Supreme Court has equal power but it does, because its rulings always stick. This confirms that the pen is mightier than the sword.

Besides the Constitution, power is guaranteed to the individual members of the US Supreme Court. Each Justice is appointed by the President and confirmed by the Senate for life. A Justice can only be removed by death, incapacitation, or voluntary retirement. So a younger Justice has the potential of influencing court decisions and people’s lives for decades to come.

When the Supreme Court considers a case, each Justice makes his or her own decision independently. Then they cast a vote for the final decision of the Court. What about a tie vote? A tie is impossible because the Court is designed to have nine members, an odd number.

The Supreme Court has the power to rule on any issue they want. Each year, a number of cases are tossed out because the Court refuses to hear them without having to give any reason. Whatever case they have ruled on, it has a great impact on the country and the people.

Despite all the guarantees for justice and fairness, we must recognize that the Justices are human beings who have their biases and preferences. As a consequence, their backgrounds and philosophies will play a part in their court decisions. That is why the President has to be careful to nominate the right person. And the Congress has to spend a few months to grill the candidate regarding what he/she has said or done before confirmation is granted.

As you are aware, recent rulings of the US Supreme Court tend to be a 5-4 split vote. This means the issues are either very controversial, or the Justices are divided between two camps in their philosophies, or both. This will certainly raise the profile of a newly appointed Justice who may be able to swing the final vote in either direction.

8/04/2010 Wednesday

Dow: +44 to 10680, volume 0.98 billion shares.
Nasdaq: +20 to 2304, volume 2.0 billion shares.
S&P 500: +7 to 1127, volume not available.

The three major indexes stayed in positive territory for most the trading session. The moderate increases were due to a favorable report about employment especially in the service sector. Note the light trading volumes as usual. The market is holding out for the July employment figures to be published on Friday.

Topic for today (8/04/10): Taxes on Vice

At a time of large deficits, the government is thinking about how to generate more revenues to cover expenses. Raising income tax is not a good idea because people’s incomes are shrinking or uncertain at best due to the recession. Raising sales tax is not good either because it will dampen demands.

What about raising vice taxes? The so-called vice taxes include alcohol, tobacco, casino gambling and some others. That should be fine because people seldom use them. If you use or become addicted, you pay a higher tax as a discouragement. Perhaps you should also pay for the burden to society because of your addiction. What about guns and assault weapons? Can those be included in vice tax? Many countries will agree but not the US. This is a very sensitive issue in America because the Second Amendment of the US Constitution explicitly allows for bearing arms as a means of self-defense. There is a large vocal group of enthusiasts who won’t trade guns for anything. Their powers are effectively exerted through the National Rifle Association. No politicians dare to argue against bearing arms, else they will be voted out of office. Those who argue for tighter control of guns see the real dangers to society, especially when their friends or relatives have suffered injury or death.

8/03/2010 Tuesday

Dow: -38 to 10636, volume 1.0 billion shares.
Nasdaq: -12 to 2284, volume 2.0 billion shares.
S&P 500: -5 to 1120, volume not available.

After yesterday’s big surge, some profit taking occurred as expected. The three major indexes spent all of today’s session in negative territory. Since the declines are not large, we may say that the market resumes a holding pattern waiting for some news to make a move.

Topic for today (8/03/10): Government Deficits

Lately we have heard all kinds of alarming news about the huge US deficit. I wish to give you a balanced picture to help you understand the problem.

The US deficit is huge for sure because the economy is huge. This year the federal deficit is expected to rise to $1.5 trillion, accounting for 11% of the GDP. The big number can easily cause alarm, but the percentage is more meaningful. Remember this year and last have been very difficult years when the economy plunged due to a financial meltdown and more than 8 million people lost their jobs. The following are times when the deficit as a percentage of GDP was considered high:
1918-1919: 12-17 % (World War I)
1933-1936: 3-5 % (The Great Depression)
1942-1945: 12-28 % (World War II)
1982-1988: 3-6 % (President Reagan’s defense build up)
1991-1992: 4.5 % (Short recession)
2003-2005: 2.5 – 3.5 % (Iraq war)

Among developed countries, the US deficit as a percentage of GDP is relatively low, and is below that of Japan, Italy, Canada, South Korea, France, and Germany.

The above facts do not mean that the US deficit is small problem. It must be resolved later, but not now when the economy is recovering from a deep recession.

During times of recession especially the current one when companies have cut millions of jobs, the private sector contracts and demands shrink. It will take the normal process of the business cycle for the economy to recover. That is, companies have to cut labor and inventories to stay afloat. They will not hire workers until inventories have mostly been depleted and orders are coming in again. This process usually takes two or more years.

To hasten the recovery, the US government has to act by spending more in times of recession rather than cutting expenditures like private companies do. However, the taxes collected by the government have been greatly reduced due to the recession because people have lesser incomes and spend less. Thus the government deficit swells because of more money flowing out, and less money coming in the form of sales and income taxes. But this is nothing to be feared. In a couple of years when the economy recovers, tax money will flow in again. Then the government will consider reducing spending. Do not underestimate the tax revenues in times of growth. During the high-tech boom of 1990’s, the US had a 4-year surplus between 1998 and 2001 averaging $552 billion per year. This entire surplus has sadly been squandered by President Bush in the Iraq war and tax breaks for the rich.

The situation is different for state and local governments. Most of them reduce spending during the recession like private companies because they don’t have the power to print money and change interest rates. Their deficits must be resolved more urgently than the deficit of the federal government. Thus the US government is the only resource powerful enough to ameliorate the recession and hasten the recovery. Until the economy is restored to normal, the US government then begins to tackle its huge deficits. You should appreciate that this is a matter of timing, not the size of the deficit that is mandated by the severity of the recession.

To make US government spending more effective during the recession, the following must be done:
• Tax breaks for the middle class, not the rich.
• Low interest loans for small business, not big corporations.
• Infrastructure repair/expansion such as roads, bridges, broadband, etc.
• Federal financial aids to state and local governments.
• Invest in education and job training.
• Invest in new industries by partnering with private companies.

8/02/2010 Monday

Dow: +208 to 10674, volume 1.2 billion shares.
Nasdaq: +41 to 2295, volume 2.1 billion shares.
S&P 500: +24 to 1126, volume not available.

It has been an up-market all day. The three major indexes managed to close near their highs. However, the trading volumes were only moderate.

There was no particular great news except that the July manufacturing index (PMI) published by the Institute for Supply Management was not as bad as expected. The PMI stood at 55.5, a slight decrease from 56.2 for June. Any number above 50.0 represents growth.

You should be aware that this kind of market surge like today happens once a while. The previous occurrences were on July 22, 7, and June 15, 10, and 2. Between these upsurges, there also occurred down days of similar magnitude on: July 16, June 29 and 22. On balance, the three indexes have risen from their low points recorded on June 7 (Dow 9816, Nasdaq 2174 and S&P 1050). So the stock market is advancing steadily albeit with frequent large fluctuations.

7/30/2010 Friday

Dow: -1 to 10466, volume 1.2 billion shares.
Nasdaq: +3 to 2255, volume 2.1 billion shares.
S&P 500: +0.07 to 1102, volume not available.

The stock market opened down due to less-than-expected GDP growth for the second quarter. The three major indexes wandered in negative territory most of the day until some positive news came out regarding higher factory orders for June. The turnaround near the closing hour brought the indexes back to the flat line.

For this week, the market can be described as lack of direction. It goes wherever the news blow.

Topic for today (7/30/10): The Middle Class

We have been hearing a lot about the middle class lately. What is the middle class anyway? To sum up, it is you and me, and millions of other people.

The middle class does not exist in two kinds of societies: First, in many poor countries around the world where people generally subsist on a few dollars a day. Second, in communist countries where everybody should be equal and poor. For instance, China did not have a middle class until the communist government turned capitalist since early 1980s.

Let me give you a practical definition of middle class:
• People making a living with both labor and brain.
• People who can hardly afford without a job for a few months.
• People who need a safety net when they get old or gravely ill.
• People who have some things to lose (e.g. job, house, car, PC, jewelry, etc.) but have to work hard to keep them.

By now you don’t need me to explain what is the meaning of being rich or poor. Because of the presence of the middle class, the poor do not seem so desperate. They have something to look forward to, that is, to become a middle class through labor and education. Likewise, the middle class has a higher aim: make and save enough money to build a safety net. If possible, make a lot of money to become truly rich, although the rich account for only about 5% of the population. For most of us, getting rich is only a dream. To be rich means making money with money, and not relying on government for a safety net. As long as this material dream lives on, and there is upward mobility, the society has achieved stability and progress.

What will happen if the middle class is weakening or shrinking? The society will be sliding into deeper troubles. You may want to ask what causes a communist revolution. It results from the rich getting richer, the poor getting poorer, and the middle class becoming the poor. This was the situation in China back in 1949 when the communists took over.

It follows that strengthening the middle class is the overriding aim for building a stable and progressive society. How?
• Create a business environment where there exist more job opportunities. Without jobs, the middle class cannot sustain.
• Keep inflation low. The savings of the middle class can be wiped out by high inflation. It happened in China prior to the 1949 Communist Revolution.
• Invest in education. It is the best investment to enhance upward mobility.
• Strengthen the safety net such as social security and health care. Without a safety net, the seniors and the gravely ill will suddenly become the poor of society.
• Prevent the rich from exploiting the middle class by strengthening regulations especially in the area of finance such as credits, loans, investment funds, retirement funds, and the stock market.
• Government should not side with the rich by giving them tax breaks, lax regulations, and other business advantages.

Will the rich scream unfair? They always do. They should recognize that they are the privileged few who make money out of the middle class. It’s the huge middle class who buys the products and services from the companies that the rich own. It’s also the middle class who provides labor and brain for their business production. The rich should be wise enough not to weaken the goose that lays the golden eggs. But they tend to abuse their powers by weakening the middle class whom they depend on. Thus the rich don’t need protection in the business game. They need to be restrained in a fair manner by laws and regulations.

7/29/2010 Thursday

Dow: -31 to 10467, volume 1.2 billion shares.
Nasdaq: -13 to 2252, volume 2.3 billion shares.
S&P 500: -5 to 1102, volume not available.

Stocks initially moved up but turned south later after some disappointing earnings reported by some high-tech companies. At the close, the three major indexes all registered declines for a second consecutive day.

Topic for today (7/29/10): Tax Cut for the Rich

In a democracy, tax is a right given by the people to the government for three main purposes: to maintain the country, to sustain government itself, and to help the people in case of need. Given all the complexities involved in running a government, there is a constant struggle with how much tax is needed, and where should tax money be spent. In short, the big issue is how to strike the right balance to enable the country to progress.

In America, cutting taxes has emerged as a single important issue clouding all the rest even though US taxes are relatively low compared with other developed countries. Tax cut has been embraced as a mission, and used as a campaign issue by the Republican Party for as long as people can remember. Why? The simple reason is that being selfish by instinct, people hate taxes. A deeper reason is that big corporations hate taxes even more. They will ensure, with help from their Republican friends, that tax cut becomes the dominant issue in public debates.

As a member of the public, we can easily be misled by public debates about taxes. We mostly hear that cutting taxes is good (but for whom?), and that tax cuts will lead to more jobs (but really? how?).

To avoid being brainwashed, let’s sit back and do a little reasoning. We agree that everybody wants a tax cut. The problem is how to do it. An across-the-board cut is said to be fair, but it always favors the rich. Why? For a taxable income of $20,000, a 5% cut saves you $1000. On the other hand, the same cut saves a millionaire $50,000. The difference is that you need to spend the tax cut on something you need. So your tax cut goes directly back into producing goods for the economy.

The millionaire does not need the tax cut as badly as you do. From the society’s point of view, the government forgoes the 5% tax money to give you some limited subsidy, while giving the millionaire a large bonus. As a middle-income person, supporting an across-the-board cut means supporting large tax bonus for the rich. The politicians use your own tax cut as a bait to seduce your support for the rich because the rich don’t have enough votes. For fairness, lower incomes should receive more tax cuts than higher ones, that is, a progressive tax cut, not across-the-board.

In addition, for each dollar of tax bonus given to the rich, the government spends one dollar less on things that the middle class needs such as social security and health care. The rich do not need government subsidies when they get old or sick. That is the privilege of being rich. They know how to reward themselves with huge bonuses even during a deep recession like the recent one.

The argument that tax cut creates jobs is even more questionable. Try to ask any businessman what motivates investment. It’s always profits, which depend basically on market potential and cost structure. Although lower tax is an added advantage, no investment decision is based on tax cuts. If a businessman invests solely because of a tax cut, he is a stupid person and is doomed to failure in business, because he disregards market and cost conditions. As you can easily see, investment goes to places where the market is bigger and the cost lower, anywhere in the world today. That is why China and India have attracted the bulk of foreign investments. Their governments don’t have to cut taxes to attract investors. US companies invest in China rather than the homeland because of the big market and the vast amount of cheap labor.

You are misinformed and misguided if you believe that tax cut can create jobs. They only create big bonus for corporations. As you know, corporations hate taxes more than you do because of their billion-dollar profits. When the government hands them a big tax cut, they will use the extra cash to fulfill their well-known priorities, which are: reward top management with big bonuses, reward shareholders with increased dividends, boost up their share value by buying their own shares, buy weaker companies to expand their market share, invest more in machines and equipment, and lastly, to hire more people only when demands cannot be fulfilled.

So why do you think that cutting taxes will create jobs? Tax cut mainly serves the rich and powerful. Since they don’t have enough votes, they must seduce and misguide the public to have their way. However, many people believe in the fiction while eating only the crumbs being thrown at them in the name of tax cut, but letting the rich carry the meat home.

7/28/2010 Wednesday

Dow: -40 to 10498, volume 1.0 billion shares.
Nasdaq: -24 to 2265, volume 1.8 billion shares.
S&P 500: -8 to 1106, volume not available.
The three major indexes spent most of the time in negative territory and ended up with moderate losses today. There was no major news to push the market, resulting in lukewarm trading volumes. They call this a holding pattern, waiting for a reason to move in either direction later.

Topic for today (7/28/10): Jobless Recovery?

Despite all the uncertainties, one thing is sure about the US economy. It is recovering but not fast enough to create more jobs. The unemployment rate still hovers around 9.6 %. The recovery is only seen in corporate profits, corporate cash holdings, and corporate capital investment. As for the common people, jobs are hard to come by. The housing market is still in the doldrums after the bubble burst. Only retail sales have shown signs of pick up. That means consumer demands are slowly moving up.

The job market is always the last to recover. Why? The simple reason is that labor is expensive in the US. Unless companies cannot fulfill their orders, they are reluctant to hire permanent workers. Even when more labor is needed, management tends to hire temporary workers first to fill in the gap, before they commit to increasing the permanent work force.

How can we increase jobs faster? If the US were a communist country, the government would solve unemployment overnight by employing millions to do something irrelevant to demand at a very low wage, and nobody would dare to complain. But the US is not a communist country. So it all depends on the private sector to hire more people. The private sector consists basically of two groups of employers: big companies and small businesses.

Big companies publicly owned are slow to hire as explained earlier. With more cash in hand now, their priorities are: to reward top management by paying huge bonuses, reward shareholders by increasing dividends, increase share values by buying back some existing shares, take over weaker companies to increase market share, update plants and equipments; and lastly, increase labor force to fulfill demands.

Small companies that are privately owned behave differently. The owners do not have a management bureaucracy and shareholders to kiss. They also pay relatively lower wages. They respond quickly to small increases in demands by incremental hiring of one or more workers at a time. Considering millions of small businesses all over America, the effects cannot be underestimated once demands really pick up .

The US government cannot force any company to hire more people, but it can provide incentives through low interest loans, tax reduction, research grants for new industries, and improvement in business infrastructure. Among all the options, tax reduction receives the most attention even though it has the most dubious effect. The reason is that big corporations want tax reduction above all else. With their regular cash contributions to legislators, tax cuts dominate the public debate about government incentives. I will discuss government tax incentives further tomorrow.

For those who play in the stock market, you won’t see a bull on the run if employment continues to be sluggish like it is now. A bull only comes when public participation is strong after unemployment is reduced to a normal level of around 5%. Currently, the stock market is a traders’ market where the public is mostly sitting on the fence for lack of cash and confidence. That is why you see these unpredictable frequent ups and downs, because the traders buy on the dips and sell on the rise within narrow margins.

7/27/2010 Tuesday

Dow: +12 to 10538, volume 1.1 billion shares.
Nasdaq: -8 to 2288, volume 2.1 billion shares.
S&P 500: -1 to 1114, volume not available.

Lacking any dramatic news, stocks fluctuated around the flat line today, resulting in only small changes for the three major indexes.

Looking back, the previous earnings season (April – June) was not good for stocks as shown below:
———4/23/10—–7/2/10—–7/27/10
Dow——11204——-9686——-10538
Nasdag—-2530——–2092 ——-2288
S&P 500—1217——–1023- ——1114

Up to now, the three major indexes have recovered about half of the losses in July. Given the current economic uncertainties, it is hard to tell if the surge will continue in August to break the high levels reached on April 23. If it does, we will have a traditional summer rally. If not, stock prices will probably swing between the lows on July 2 and the highs achieved this week in a so-called traders’ market.

Topic for today (7/27/10): Strength in Diversity

It has become increasingly clear to me that the more diversity we can achieve in our lives, the stronger we shall become. Diversity covers many aspects as illustrated below:

Diversity is apparently a natural law of development. Try to look at the different species of plants and animals. There is plenty to amaze you. By observing the great diversity of life in the tropics, Charles Darwin discovered the powerful natural law of evolution that enables plants and animals to survive with the inherent capability to adapt to ever-changing environments.

People may take diversity for granted in daily life. Imagine what would be like if the food offered in the supermarket was suddenly reduced by half. In fact, diversity is synonymous with choice. You don’t have a real choice if you don’t have a diversity of things to choose from. The quality of life decreases with less choice.

For those interested in pure breeds of dogs and horses for a special reason, they are aware that pure breeds are harder to take care of. They get sick more often and are less adapted to the environment. Cross breeding increases the chance of survival in the wild.

What about diversity of viewpoints? That is certainly desirable. There is less chance for error if we are willing to listen to other peoples’ ideas.

Coming back down to stocks and shares, if you hold a diversity of stocks in your portfolio, you will be less subject to the frequent swings in stock prices.

7/26/2010 Monday

Dow: +101 to 10525, volume 1.0 billion shares.
Nasdaq: +27 to 2296, volume 2.2 billion shares.
S&P 500: +12 to 1115, volume not available

The market stayed in positive territory and shot higher during the last half hour. This is the third consecutive day of surge, but note that the volumes began to taper off.

In this kind of environment, I would not get overly optimistic about consecutive surges. The previous one occurred from July 6 to 14, a total of seven consecutive days of increase. Then we had a big plunge on Jul 16 that almost canceled out all the gains. Is this planned or by accident? You tell me.

Topic for today (7/26/10): Magic Number 60

There are many magic numbers that affect your life. In the US Senate, the magic number of 60 votes is one of those. Let’s see how it works.

The US Congress consists of two Houses, the Senate and the House (of Representatives). For any Federal legislation, both Houses have to pass it before the President can sign the bill into law. In case of disagreement, both Houses have to assign some members to attend a Conference where they iron out their differences. The compromised final bill is sent back to be voted again separately in both Houses. A majority vote in both Houses is required for passage of any bill.

The US Constitution sets up the following structures:
Senate: 100 members, each has 6 years’ term.
House: 435 members based on state populations, each has 2 years’ term.

Senate: 2 Senators from each state.
House: A proportional number from each state based on population census. For instance, Alaska, Montana, and Wyoming each has only one Representative due to their small populations. By contrast, California has 53.

What conclusions can you draw from the above structures? In the House of Representatives, the big states dominate because of their large voting numbers. This creates a situation where big fish eat small fish.

The Senate is supposed to equalize the voting power between states. Why should we bother to equalize? Remember all the states were independent entities before they joined the Union. Knowing that it would be out voted by the big states, Alaska, for example, would not have joined the Union without the Senate structure guaranteed by the US Constitution. The US allows Alaska to send two Senators to Washington like any other state. As far as voting goes, Alaska has the same power as California in the Senate because each state has only two Senators.

Another factor has to do with the unique rules and traditions of the Senate where seniority is held in high esteem. Many Senators had done much (good and bad) before they died old in office such as Robert Byrd (93 years) and Strom Thurmond (101). Hillary Clinton was glad to leave the Senate after Obama offered her the job of Secretary of State. Why? She was just a junior Senator from New York.

A third factor concerns the special personalities of the Senators. Many Senators from smaller states have achieved fame (or infamy) such as: Edward Kennedy (Massachusetts), Joe Lieberman (Connecticut), John McCain (Arizona), and Ted Stevens (Alaska).

Now comes the magic number 60. A long-held Senate rule allows a debate to go on forever unless 60 votes are obtained for cloture. That means any bill can be held in the Senate for debate forever without being passed. This becomes the ultimate weapon of the Senate in passing (or holding) bills regardless of the wish of the people. The magic number 60 becomes most critical when the Senate is equally divided between the two major parties.

The current spread of Senate seats is as follows:
Democrats: 58
Republicans: 40
Independents: 2

From the above, you can see that President Obama cannot get any of his bills passed by the Senate unless he manages to get the two votes from the Independents, granted full support form his own Democratic Party.

In the landmark Health Care Reform bill being passed early this year, all Republicans were opposed to it. Obama managed to get all the 58 votes from his own party plus 2 Independents. It so happened that Joe Lieberman was a Democrat lately turned Independent. Remember he helped John McCain to campaign against Obama for president? The Democratic Party wanted to punish Lieberman for being a traitor. Obama urged them to keep cool because he knew he needed his vote later. In addition, the absence of the “public option” from the Senate bill was lamented by the House, which passed the “public option” earlier. However, the House had no choice but to adopt the Senate bill in full during Conference because there was no way it could pass the Senate again after any modification. So you see the treacherous waters in passing bills through the Senate.

In another landmark bill for Financial Reform passed this July, Obama was able to overcome the 60 votes barrier due to support from 3 Republican Senators.

A few days ago, John Kerry said that the Energy bill he introduced in the Senate to include a price structure for carbon emissions could not get the 60 votes needed. You may recall that the House has already passed its own version of the Energy bill earlier. It appears that the Energy bill, so crucial for national security and global climate, will be stalled in the Senate for the near future.

There are additional tough fights lining up in the Senate: extension of the Bush tax cuts, immigration reform, and a comprehensive energy bill.

7/23/2010 Friday

Dow: +102 to 10425, volume 1.2 billion shares.
Nasdaq: +24 to 2269, volume 2.4 billion shares.
S&P 500: +9 to 1103, volume not available.

The market was directionless in the morning. Then it began to rise after learning some positive results of the stress test on major banks in Europe. This marks a second day of surge for the three major indexes.

So far, this earnings report season has seen many major companies exceeding their bottom lines, although some have missed their top lines of revenue growth. This shows the sluggishness of the current economic recovery, to which the market can always react and give us a down day.

Topic for today (7/23/10): Distributed System

According to my observation, the world is evolving toward a so-called distributed system of independent operations mostly enabled by technology. What do I mean?

Do you remember the hassles of submitting a computer program when you were a student in the 1970s? The personal computer has changed all that, no more punch cards and midnight waiting in line. The PC enables people to do their own work whenever and wherever they want, an obvious example of distributed system of independent operations. The mainframe computer is not the central brain for data processing anymore.

Now the Internet connects all the PCs and enables them to communicate with one another, a real game-changing phenomenon. I don’t need to describe how much our lives have been changed due to this development.

On a deeper level, the power structure of our society has also changed profoundly. Writers can now publish their own books without relying on a publisher. Musicians can publish their works without having to connect with a record company. Many people become self-employed by just working in front of their PCs. Simply speaking, the power of the Internet has translated into power for the people.

What happened to those telephone booths on the streets? They have been replaced by the cell phones. In fact, the cell phones make the landlines in homes unnecessary. AT&T would have vanished had they not plunged into the wireless business soon enough.

What about solar panels? Buildings with solar panels installed can become self-sufficient electricity generators without relying on the supply from a utility company. It will render transmission lines unnecessary unless they want to share the surplus electricity generated by more efficient producers.

What about the automobile? It is a game-changer because it has altered our lives so much. The auto also belongs to the distributed system because people can go wherever and whenever they want on the roads connecting them. It makes the society very mobile and spreads development quickly to other places. On the other hand, the auto has inflicted heavy costs on society, such as traffic accidents, smog, and CO2 emissions because it burns gasoline.

What about the printing press? Imagine a world where words and knowledge could not be printed on paper. You would have to memorize and rely on some “learned” person to teach you. What if he gave you the wrong information that you could not compare with other sources? With information printed on paper, people can distribute knowledge much easier and open more minds. When more people become well informed, they are able to make better decisions for themselves. So I think the invention of printing on paper long time ago is probably the first sign of the world evolving toward a system of distributed operations

7/22/2010 Thursday

Dow: +202 to 10322, volume 1.2 billion shares.
Nasdaq: +59 to 2246, volume 2.2 billion shares.
S&P 500: +24 to 1094, volume not available.

In a sudden reversal, the market surged today and erased all the losses of yesterday. This is a common phenomenon when equal doses of good and bad news are haunting the market, giving it no clear direction to go. Since public participation is low, it is mainly a “traders’ market” where they buy on the dip and sell on the rise within narrow margins just to reap enough short-term profits.

Topic for today (7/22/10): Internet Power

Today’s headline of San Jose Mercury, my hometown newspaper, talks about the Facebook phenomenon. In a span of five years, the monthly active users of Facebook have grown to 500 million worldwide. Among them, 77% age below 55 years. Any advertiser will salivate at this impressive data. This shows the great potential of the company when it goes public one day.

The Internet is truly a star born of the electronics revolution. It owes its phenomenal growth to the technological advancements in chips, routers, servers, and software.

Given the technology, the Internet cannot grow this fast without the human element. I can identify the following basic human desires: to communicate, share, socialize, trade, learn, search, investigate, entertain, and educate. These are not isolated desires. In fact, they overlap each other to some extent.

We have seen companies grow really fast by successfully tapping into these human desires, as exemplified by:
Google (search, investigate, learn)
Youtube (share, entertain, educate)
Apple, Twitter (communicate)
EBay (trade)
Facebook (socialize)

So far, no single company has made it big by specializing in learning and education. Wikipedia is a good start but it limits itself by providing for a free encyclopedia only. There is talk about open university. Pilot programs have also been conducted by some colleges to assess the value of education over the Internet.

The Internet phenomenon has produced some victims who cannot adapt fast enough. Who are they? They are: newspapers, magazines, TV, and record companies, which find their customers dwindling because people can look up the Internet or download from it.

In conclusion, the Internet has proven to be a wonderful gift for the common people. I cannot live for one day without it. Internet power really means people power. If you fail to understand this, ask yourself why do the Chinese and other communist governments try to limit the content and reach of the Internet. The reason is that the Internet erodes the power of the state and the communist party everyday. From this we know that the Internet is also a tool for democracy.

7/21/2010 Wednesday

Dow: -109 to 10121, volume 1.2 billion shares.
Nasdaq: -35 to 2189, volume 2.2 billion shares.
S&P 500: -14 to 1070, volume not available.

The three major indexes fluctuated around the flat line for most of the day, but fell when the Fed Chairman discussed the slow economic recovery in his Congressional testimony. The fact is we already know that the recovery is disappointing. There is nothing new but the market chose to react to it.

Topic for today (7/21/10): Making Sense out of Financial Reform

Finally, US financial reform is signed into law by President Obama today. Many people are confused about the new legislation. To make sense out of it, you must ask what is good for you as an average citizen.

Do you think you are a victim of the financial meltdown in the fall of 2008? The new legislation is intended to prevent another one from happening.

Are you against massive bailout of big financial companies by the government? The bailout was necessary and was implemented by the Bush Administration because the meltdown caused the whole economy frozen with no credits. The new legislation enforces tighter supervision of the financial industry and regulates their risky ventures to prevent failures, so that a bailout will be unnecessary.

To protect yourself as a consumer, you must appreciate the uniqueness of financial products. When I buy a cell phone or a car, I want all the technical complexities to be hidden from my sight. My requirement is that the product works for me and makes me feel good. If not, I can exchange it or get a refund. I know the company stands behind its products.

Financial products are entirely different. Think about a credit card, a consumer loan, a student loan, or a mortgage. I want all the technical complexities to be transparent, not hidden. What are the fees, the interest charged, any penalties, payment methods, and others? If those things are hidden from me in the fine prints or written in deceptive language, I’ll be in deep trouble because I don’t know what I am getting into. It will be too late when I find out later. The new legislation will make all the terms transparent and easily understood.

Investment products are even worse. Do you know the risks of the stock, commodity, or currency market? Do you know the risks of investment funds based on these markets? Do you think that the financial company may be hiding something from you? Are you aware that you have no recourse when you lose money? Do you know that the financial companies do not stand behind their products? When something bad happens, they will blame the market for making you lose. They will also blame your impatience not to hold onto your losing assets. There is no such thing as exchange or refund when nothing works out. The new legislation tries to make all these financial risks more transparent for you to see.

In summary, the new financial legislation tightens supervision of the banks, makes financial products more transparent regarding terms and risks, and protects the average consumer like you and me.

As you know, most big banks are against reform for it restricts their activities. So they spent millions of dollars to lobby against it. The result is a piece of legislation that is a compromise between the legislators who work for the common people, and those who work for the rich and powerful. Therefore, this legislation should not be considered as perfect. But it represents a big move in the right direction.

As a consumer, you must be vigilant about your own money. No laws can protect you from losing money because of your carelessness. The best defense is your own defense. There exist in this world plenty of businessmen who want to swindle your money. Regardless how tight the laws, they will find a way to create loopholes or to bypass the laws. So be on guard all the time to protect your hard-earned money.

7/20/2010 Tuesday

Dow: +76 to 10230, volume 1.1 billion shares.
Nasdaq: +24 to 2222, volume 1.9 billion shares.
S&P 500: +12 to 1083, volume not available.

Today’s market can be described as steady climb with stocks starting out in negative territory but ended up positive. The market continued to advance despite missing revenue expectations reported by IBM, Goldman Sachs, Texas Instruments, and Johnson & Johnson.

Tomorrow, the Fed Chairman will testify in Congress again. It is expected that he may announce some actions to stimulate the sluggish US economy. He cannot lower interest rates anymore due to the current near-zero rate. I wonder what the experts are thinking about his moves.

Topic for today (7/20/10): Smart Grid

We take electricity for granted when flipping a switch to light a room. If Wall Street suddenly comes down due to a blackout, we’ll begin to think that a smart grid is necessary.

What is a smart grid anyway? It is an updated version of the decades-old electricity distribution system across the United States. Up to now, the Obama administration has invested billions of public money to help the utility companies build a smart grid for the future.

A smart grid has to fulfill the following requirements:
• To guard against very disruptive blackouts or brownouts.
• To provide capacity for future growth.
• To minimize electricity loss during transmission.
• To monitor consumption in order to produce electricity efficiently.
• To incorporate new energy sources from solar, wind, and others.

Up to now, utility companies in the US produce electricity by mainly burning fossil fuels like oil, gas, and coal. These used to be abundant and cheap. So cost efficiency in production and distribution has not been a big issue. Rising oil prices have changed the equation entirely. The dangers of global warming have forced the use of clean energy to gradually replace fossil fuels.

The big problem with electricity is that after being produced, it will be lost unless being consumed or stored. In addition, a percentage of electricity is always lost during transmission over long distances. A third problem is that electricity is consumed heavily during office hours, and much less during nighttime. Providing for peak hours is very challenging for utility companies. It follows that a smart grid needs to have the following features:

• New materials for manufacture of transmission lines to increase capacity and reduce electricity loss.
• More facilities to store surplus electricity for use during peak hours.
• New transmission lines to connect the main grid to solar and wind farms currently being built.
• New transmission lines to enable office and residential buildings to feed their surplus electricity to the main grid after installing their own solar panels.
• New system to monitor electricity consumption in office or residential buildings, so that utility companies can adjust production accurately to how much is being consumed at different times.
• New facilities in office or residential buildings so that utility companies can adjust their air-conditioners a little lower on hot days to save electricity.

In conclusion, a smart grid has to achieve two-way feedback so that utility companies can adjust production accurately to consumption with minimum loss of electricity for the purpose of saving costs and saving the planet.

7/19/2010 Monday

Dow: +57 to 10154, volume 0.96 billion shares.
Nasdaq: +19 to 2198, volume 1.7 billion shares.
S&P 500: +6 to 1071, volume not available.

Stocks hit a low point in the morning hours but managed to recover to positive territory. Note the light volumes of trade. Today demonstrated just a nominal technical recovery when the down volumes last Friday (July 16) were much bigger by comparison.

Topic for today (7/19/10): Brand Names

To explain away the recent antenna problem of Apple iPhones, Steve Jobs said that they were not perfect and the iPhone were not perfect either. Then he offered a free case as consolation. There was surprisingly no customer outcry. This shows the magic power of the Apple brand combined with the popular personality of a CEO. Can you imagine the CEO of Toyota could pull off such a feat regarding their brake problems?

A brand name requires a great deal of time and investments to cultivate. The following are some of the world’s greatest brands: Coca Cola, Xerox, American Express, McDonalds, Apple, BMW, Honda, Boeing, Tylenol, IBM, Intel, Microsoft, and so on. You know immediately what the company makes by seeing the brand name.

A good brand connects the consumer to the company in such a mysterious way that loyalty is maintained for generations. Customer loyalty translates into stable and increasing sales. That is why most brands pay good dividends on their stocks. In the case of Apple, despite no dividends paid, the customers even tend to be forgiving when the company makes a mistake.

On the other hand, great brands are not immune to declining fortunes. Remember Pan American? The company went under in 1980’s in the midst of airline deregulation. In 2009, bankruptcy fell on GM due to upheavals in the auto industry brought about by rising oil prices and intense foreign competition.

7/16/2010 Friday

Dow: -261 to 10098, volume 1.5 billion shares.
Nasdaq: -70 to 2179, volume 2.2 billion shares.
S&P 500: -32 to 1065, volume not available.

Due to declining revenues reported by Citicorp and Bank of America, the banking sector took a big hit today. Coupled with a dim outlook for the current economic recovery and unemployment, stock prices tumbled and ended up near the lowest levels when the market closed.

Where do we go from here? I’d say never mind the news. Good and bad news come everyday. We may use the news to explain what we see to boast our expertise. Regardless, the stock market moves with its own rhythm based on the principle of buy low sell high, and the strategy of buy, cash out, and come back to buy again.

Topic for today (7/16/10): Are stock movements planned?

Do you think stock prices move according to supply and demand? By no means! The stock price is determined by a system of bid and ask in the stock exchange like an auction. It’s not determined in a regular market like a cell phone or a pair of shoes.

The total supply of any company stock is fixed by the board of directors as shown in the published total outstanding shares. The daily supply of a stock depends on how much people want to sell, especially the major shareholders. You and I don’t have much to sell. When everybody gets panicked, millions of small shareholders will sell together in a day or two.

Likewise, the daily demand for a stock depends on how much people want to buy, especially the major shareholders. You and I don’t have much cash to buy. When the experts trumpet a particular stock, millions of small shareholders will jump in together in a day, or maybe weeks.

If a few major shareholders decide to buy more while not selling their existing shareholdings, the price will go up quickly. When the small guys see the rising price, they will rush in because a rising price signifies good stock. The stock price can go through the roof creating a bubble.

The following illustrates a situation like the current one where the economy is slowly recovering, but not enough to boost employment and jubilation. Stock prices have no clear direction to go except fluctuating with a regular rhythm as planned by the major shareholders. In this way, they can still make good profits by buying and selling frequently.

The following shows movement of the three major indexes since early June:
———-7/2/10—–7/14/10—–Change
Dow——-9686——-10367——681 up
Nasdaq—–2092——-2250——-158 up
S&P 500—-1023——-1095——–72 up

Let’s go back two more weeks:
———-6/18/10—-7/2/10——Change
Dow——-10451——9686——-765 down
Nasdaq—–2310——-2092——-218 down
S&P 500—-1118——-1023——–95 down

Let’s go further back two more weeks:
———–6/7/10—–6/18/10—–Change
Dow——–9816——-10451——635 up
Nasdaq——2174——-2310——-136 up
S&P 500—–1050——-1118——–68 up

What do you see in the above figures? I see a long up-down cycle through time. Each direction (up or down) lasts for about two weeks. After a cycle of up and down, the three indexes wind up about the same. Do you think this kind of movement is planned, by chance or by news?

If you believe that it is planned, the rest of July will likely be a down market where the three indexes may fall back down to the levels on 7/2/10.

7/15/2010 Thursday

Dow: -7 to 10359, volume 1.1 billion shares.
Nasdaq: -1 to 2249, volume 2.0 billion shares.
S&P 500: +1 to 1096, volume not available.

The weakness of yesterday extended to today as stock prices fell during the trading session until picking up near closing time. This up tick will probably be carried over to tomorrow morning because of the news that BP has successfully plugged the oil leak off the Louisiana coast temporarily.

Topic for today (7/15/10): Wrong Incentives

Have you ever wondered why so many countries remain poor for so long? It is easy to say that the people are stupid. You may also say that their country is screwed by another. On the other hand, how can you explain that some countries suddenly turn around and make progress? There is a logical explanation:

On a country level, success depends on how the people view themselves collectively. There is a vast difference in collective outlook between a rich country and a poor one. Besides, there exists something much more important. It’s the system of incentives a country has developed.

A communist country is destined to be poor. Why? It’s all about the lack of incentives, and the misplacement of them. People are not created equal although we all agree that they should be given equal opportunities. Let them run, and some people will run faster than others. Let them operate their own businesses, and some will succeed and some fail.

A communist country is so obsessed with equality that everybody earns more or less the same amount whatever they do. Thus nobody has any incentive to do better due to lack of rewards. Why should they?

In a communist country, nobody is allowed to own much. Therefore the state winds up owning almost everything. The state is in turn owned and tightly controlled by the all-powerful communist party. The party members will divide the riches of the state among themselves. So there are billionaires in a communist country too! They belong to the top layers of the communist party who are too embarrassed to admit that they are rich. A communist country always winds up having the top party members being too rich and powerful while the people are all equal and poor.

Being on the other extreme, a capitalist country can also develop the wrong system of incentives. Health care in the US has degenerated into a system of high costs, low quality, and extreme complexity that have the potential of bankrupting the entire middle class and the whole country. The wrong incentives are as follows:

Because the system is not government run (except Medicare for seniors and Medicaid for the poor), the private insurance companies practically take over the health care industry. They collect premiums from individuals and pay doctors and hospitals. In order to make maximum profits, the insurers have to collect as much as they can and pay as little as possible. Most of us have had bad experiences with insurance companies without my having to describe any further.

The doctors and hospitals are not paid by how much they help the patients, but by how many procedures they perform, and how much drugs they prescribe. The consequence is over-testing, over-surgery, and over-prescription. This leads to over-payment by the insurance companies, which in turn demand higher premiums from individuals. A dangerous vicious circle is thus created.

The lawyers are attracted to the health care business because of some unavoidable mistakes made by doctors, hospitals and drug companies. The lawyers help the patients sue for malpractice while getting a large share of the millions worth of damage rewards. This causes the health care providers to practice defensive medicine, that is, over-testing, over-prescribing, and over-consultation to cover their ass. This adds to the vicious circle mentioned earlier.

Drug companies are out there to grab market shares and reward their shareholders rather than helping to combat diseases. Drugs that will fetch high prices and sales will be given higher priority, rather than those providing most benefits for the common people.

The traditional relationship between doctor and patient has been disconnected by the insurance companies, which insert themselves as middlemen to collect premiums and dispense payments. When you see a doctor, the first question he asks is whether you have insurance rather than what is wrong. The doctor wants to earn as much as possible from the patient’s illness. Since the patient is paying a monthly flat premium, he wants to receive as much service as possible. He does not mind that for a normal cough, the doctor sends him to a lung expert, gives him an X-ray, prescribes various drugs, and performs further tests. Why should the patient care? The insurance company pays anyway. But he does not understand that the insurer will come back later to demand higher premiums.

7/14/2010 Wednesday

Dow: +4 to 10367, volume 1.1 billion shares.
Nasdaq: +8 to 2250, volume 2.2 billion shares.
S&P 500: -0.2 to 1095, volume not available.

After six consecutive days of gain, the three indexes showed signs of weakness even in the face of stellar earnings posted by bellwether Intel Corp. In today’s trading, the market performed one short up-down cycle, dipping into negative territory before recovering to some slight gains at the close.

It looks like the market will return to the usual short-term fluctuations given all the uncertainties about jobs and economic growth for the time being.

Topic for today (7/14/10): Wrong Outlook

Have you ever wondered why some people keep on doing the wrong things over and over? It is easy to say that they are stupid, or are messed up by other people. On the other hand, how can you explain that some people suddenly turn around and do the right things? There is a logical explanation:

What you do everyday depends on your view or outlook about yourself and the world. If you have a low image of yourself, you are not going to achieve anything big. If your view is that nothing you do matters, and that the world will be the same whatever you do, you will always remain a prisoner of your belief. Look at the successful people around us. What distinguish them are their higher views and outlooks. All their actions and achievements flow from their views or outlooks.

Have you ever wondered why you and countless other people tend to lose money in the stock market? If you view stocks as an investment, chances are you will be a loser. Believing that stocks are investments, you will spend all your time reading company reports, product analyses, and market trends. Being second-hand material, those things only help but cannot make you win.

You must recognize that the stock market is a zero-sum game where big fish eat small fish. A small fish can never win unless he is content with being small and follows the big fish closely, instead of swimming toward his big mouth. I always think of myself as a free rider, not an investor. I try to ride the waves that the big fish create everyday. All my videos on Youtube (search for Stockfessor) are hammering on this main theme all the time.

7/13/2010 Tuesday

Dow: +147 to 10363, volume 1.1 billion shares.
Nasdaq: +44 to 2242, volume 2.3 billion shares.
S&P 500: +17 to 1095, volume not available.

This is an amazing six-day winning streak buoyed today by the earnings of Alcoa confirming that the economy is slowly recovering. There appears to be further upward momentum the next few days as major corporations report their earnings. After that, we may have to worry about profit taking.

Alcoa’s good earnings today only boosted its price by $0.13 because of depressed prices for aluminum. So optimism is not high for material stocks. Let’s see what will happen to Intel tomorrow, to be followed by GE, Citicorp, and many others.

Topic for today (7/13/10): Public Confusion

As life gets more complicated in this modern society, people tend to get confused and make wrong decisions. I hereby humbly offer some simple advice:

Life is like sailing in the ocean. You have to know what you want and keep your direction. Only then you’ll be able to sail through when the sea is rough. What do you really want? I don’t know about you. I think I want to be self-sufficient, content and happy, take care of my loved ones, and if possible, take care of other people too.

Beware of all the vices in society, especially financial tricks. The easiest trap you can fall into is credit card debt, investments related to the stock market, and worst of all, gambling. Many people have their life savings swindled by falling into those financial traps.

Take a hard look at investments for your future. In the early stages of your life, all good investments require constant amounts of hard work over a long period of time, be it labor or brain work. Hard work always pays in different ways although you may not recognize it. What are good investments: good health, daily exercise, good education, good connections with people, and cultivate a mind to think more and ask questions. With luck, some people climb much faster than the rest. You may be one of those lucky ones.

When your hard work bears fruits, you begin to make money with money. This can easily multiply your net worth many times. What are good investments at a later stage of your life? Real estate is the safest by comparison. The least safe is the stock market unless you really know how to play it. Somewhere in between is investing in a business of your choice based on your good judgment.

Even though you know what to do with your life, you may still be confused by many big issues of the day. I use the following yardstick to judge: What is good for me and for the common people must be good for society. For instance:

I welcome a 5% income tax cut. If the tax cut is applied across the board, it may not be good for society. An income of $20,000 will save $1000, while a millionaire will save $50,000. A millionaire does not need the tax cut as badly as the average guy, and there are lots of average guys in society. In fact, Warren Buffett and many of his rich friends have said that they did not want the tax cuts President Bush gave them several years ago. So I find myself opposed to a 5% tax cut for everybody because it does not provide for the common good.

I don’t pretend to know much about the current financial reform bill. However, I want the consumer protection feature in there because it’s good for me. I also want the big banks to be stable where I open my checking accounts. I don’t want them to use my money in risky derivatives and other ventures because I don’t get the profits anyway. I also want to see better government supervision over the banks, because the financial meltdown was partly caused by lax oversight.

I want health care reform because I don’t want to get bankrupt just because of a grave illness. A stable society should provide every citizen with a safety net, and health care is part of it. In addition, I don’t want health care insurance premiums to go up every year faster than the rate of inflation. I don’t want the insurance companies to play games such as pre-existing conditions, deductibles, co-payments, etc.

I want a good energy bill because gas prices are going up every year. I don’t feel secure if the US has to import $400 billion worth of oil a year. Oil is dirty and polluting as everybody agrees. Finally, I want to see new alternative energies develop to create more jobs and a cleaner environment.

7/12/2010 Monday

Dow: +18 to 10216, volume 0.86 billion shares.
Nasdaq: +2 to 2198, volume 1.8 billion shares.
S&P 500: +1 to 1079, volume not available.

The market gives a five-day winning streak. For the whole day, stock prices fluctuated up and down showing no direction and light volumes of trade. Alcoa is the first major company to report quarterly earnings. It beats analysts’ estimates. Let’s see how the market will react tomorrow.

Topic for today (7/12/10): The World Cup: Will they change?

Many of us have seen the World Cup games where Spain won the championship yesterday. One thing that comes to mind is some referee errors that caused the FIFA President to apologize to the English and Mexican teams for losing. He promised that FIFA would review the procedure to allow camera records to be used in addition to the human eye.

Why has it taken FIFA so long since cameras were invented decades ago? I can see two hurdles. The first is the dated outlook of those in authority. The other is the entrenched self-interest of those affected. When you are in a high position, you don’t want people to rock the boat. You want to feel safe and certain about what you already have. Being a referee means calling all the shots during the game. Many people love this kind of authority. Giving away some of this power to the camera is hard to swallow. There is even an argument that referee error is part of the game. Never mind about fairness. What? It does not have to be that way if we can help it. The one billion plus viewers around the world simply cannot accept referee errors if cameras can help.

We can see the conflicts here between the FIFA authority and the world audience. The public outcry is just too much so FIFA has no choice but to yield.

On the other hand, plenty of outdated things in the world are still standing. The US offers many examples:

The financial reform bill aiming to prevent another financial meltdown from happening is still facing tough opposition in the US Senate. We have the big banks wanting to do what they have been doing pitting against the public who wants a more stable financial system.

The current education reform regarding teachers’ pay is to switch incentive from seniority to performance. Nobody wants teachers who don’t teach and students who don’t learn. You’ll be surprised how tough the teachers are trying to hang onto their positions.

The powerful oil industry has successfully blocked many initiatives to foster clean energy and reduce oil dependency. Oil is perhaps the biggest issue for our generation. However, many people do not see the urgency except when oil prices rise.

Opposition is strong regarding teaching evolution in US public schools. The argument is that evolution goes against the “intelligent design” of life. The opposition fails to understand that evolution is not a man-made phenomenon although it is not mentioned in the bibles. The process of evolution is glaring proof that “intelligent design” has scientific backing. All evolutionists marvel at this wonderful process that has been so intelligently and naturally built into life. The opposition should embrace the evolutionists as their allies, not enemies.

My conclusion is that changing the status quo is very challenging simply because people don’t want to rock the boat, even though the results look very promising for the future.

7/9/2010 Friday

Dow: +59 to 10198, volume 0.88 billion shares.
Nasdaq: +21 to 2196, volume 1.6 billion shares.
S&P 500: +8 to 1078, volume not available.

The stock market gives a four-day winning streak. Just like yesterday, stock prices seemed faltering all session until finally picked up during the last hour. Note the light volumes of trade recorded. What does this imply for next week, the beginning of the earnings report season? We shall see.

Topic for today (7/9/10): China and Russia: How much have they changed?

The biggest event in our generation is probably the retreat of communism in both China and Russia, which directly affects the livelihood of nearly 2 billion people, equivalent to one-third of the world population.

The great change to reorient their countries originated from two top leaders: Deng Xiaoping of China, and Mikhail Gorbachev of Russia (formerly the Soviet Union). These two communists led their people on two separate journeys, resulting in two very different economies today. China is now a full-fledged capitalistic economic powerhouse. Russia is neither capitalist nor communist, having developed into a so-called oligarchy.

The contrasts between these two giants are very illuminating as follows:

History
The Chinese Communist Party won the revolution in 1949 after a protracted civil war with the ruling Nationalist Party. With grass root support from the peasants, the revolution started in the countryside and finally engulfed all the cities. After 1949, Mao Zedong subjected the country to great turmoil through a series of class struggles and misplaced priorities like the Great Leap Forward. The Cultural Revolution, Mao’s final disaster, began in 1966 and ended when he died ten years later. As a consequence, Chinese economic and other developments were gravely set back for decades during his rule.

By contrast, the Russian communist revolution in 1917 started in Moscow and spread through the entire country. The Soviet Union was formed in 1922 after incorporating Ukraine, Belarus, etc. It became a military superpower after WW II, with the Red Army dominating Eastern Europe. Note that the Soviet Union was by no means an economic power, because it produced only military hardware and not much else.

Economic reforms
After assuming power around 1978, Deng Xiaoping adopted a bottom-up approach to economic reform. Ordinary people were allowed to own and operate private businesses again. Then Deng opened up special economic zones along the coast to attract foreign investors. The Chinese economy started to boom ever since. Today, China is poised to take over Japan as having the world’s second largest GDP (after USA). It is already the second largest exporting country (after Germany). A great middle class has been created numbering over 500 million people, more than the entire US population. The large Chinese state companies are receding because they cannot compete with private ones. China is now a capitalist country by any measure.

In contrast, Gorbachev wanted to do economic restructuring (perestroika) after political reform (Glasnost). He chose the top-down approach to reform the economy instead. The policy of privatization came following the disintegration of the Soviet Union in December 1991. The preponderant assets of companies and lands owned by the state were sold or distributed to private hands. Guess who inherited those properties? Naturally those with money, power and influence were handed a bonanza, including communist party members, high-ranking government officials, and even the Mafia having the cash to buy state companies. As a consequence, the wealth of the entire country passed from the all powerful Soviet Communist Party to the top individuals who happened to belong to the same old system. No new wealth was created among the ordinary people. This ensured that the rich were getting richer and the poor getting poorer. We call this an oligarchy where a small minority possesses most of the assets of a country.

Political reforms
The Chinese people have created tremendous wealth in private hands since the economic reforms beginning in late 1970s. With money comes power and influence for the people. The Communist Party only manages to hang on to political power and the military. Even that is eroding day after day. The Party’s authority is now solely dependent on its policies to enhance economic growth and employment opportunities. Deng might not have foreseen this power erosion for his own Communist Party. Or he might actually have intended to initiate economic reforms first, and let the results gradually force political reform, as it is now happening. Regardless of his intentions, Deng was a politician with guts and spine who had done something so uncertain but with so great an impact on China and the world.

On the other hand, not much progress has been made in Russia after the implosion of the Soviet Union. However, Eastern Europe has undergone tremendous changes after the withdrawal of the Red Army. Although elections have been held in Russia, many Communist Party members and old-timers still occupy top positions in government. The Russian people have more freedom now than before. However, there seems to be a lack of enthusiasm for small private enterprise, which is the real engine of economic growth. When you pick up a product anywhere in the world, there is a good chance that it is made in China. How often can you find one made in Russia? This sums up the major differences between the two countries. Regardless of the consequences, Gorbachev also had the guts and spine to change his country. Had he adopted another approach, the results might have turned out very differently for Russia.

7/8/2010 Thursday

Dow: +121 to 10139, volume 1.2 billion shares.
Nasdaq: +16 to 2175, volume 2.0 billion shares.
S&P 500: +10 to 1070, volume not available.

This is the third consecutive day of upsurge buoyed by good news about smaller unemployment claims and prospects for global economic growth. The three indexes seemed faltering around midday, but managed to pick up again during the last trading hour.

Topic for today (7/8/10): The Free Press

I mentioned in an earlier article that democracy is in trouble if some individuals or groups become too powerful in a society. How can we prevent this from happening? I can point to three guardians of democracy: the laws, the court, and the free press. When we look at a dictatorship, a communist country, or an authoritarian regime, none of the three guardians are actually performing their duties. They are there to serve those in power instead of the people.

In America, the rich, powerful and famous all agree that the press is a pain in the ass. Isn’t that what the free press is supposed to do? The laws in a free society protect freedom of the press and the courts back it up. Like good health, freedom is something you take for granted until you lose it.

In a free society, the rich hate the press because it digs up all the dirt about their methods of getting rich. The politicians dislike the press because it challenges their ideas and decisions. In case of a bribe, the press has the ability to trace where the money comes from. The celebrities wish the press would go away although the press has contributed to their fame. Sometimes the press overreaches and gets sued. For instance, the National Enquirer has been ordered by the courts to pay millions in libel damages to some celebrities.

When you become rich, powerful or famous, you should recognize that being haunted by the press comes with the territory. There is no free meal in this world. You pay for your high status with some of your privacy. For instance, a superstar cannot go to an ice cream shop on a whim like the rest of us. The fans and the media will surround him. He may miss the things he used to do when he was nobody.

The press is less susceptible to bribery. Why? If a rich and powerful person tries to bribe the press to shut up, immediately it will explode into news headlines. This raises an intriguing question: What if some rich person owns and operates a big news company to promote his thinking and agenda? A conspicuous example is Rupert Murdoch of News Corporation, which owns Fox News. Do you think Fox presents a “balanced” coverage and opinion as they claim? You will say yes only if you close your mind to the facts and other opinions.

The people rely on the free press to inform, entertain, challenge, and if possible to enlighten. The cost of news is almost free especially on the Internet. A truly free press delivers the most value to the people. A lesser free press delivers lesser value and perhaps at great costs. Three glaring examples:

The current deep recession is mainly caused by sub-prime real estate lending by the big banks. Before the real estate bubble burst in 2008, there was not much news regarding the potential dangers of sub-prime lending. Worse, some press joined in the risky adventure by praising how creative the bankers were. They failed to mention how reckless the bankers were.

During the months leading to the US invasion of Iraq in 2003, the press did not perform its duty to challenge President Bush for his risky venture to fight a war of choice. Fox news was even arguing for the war. By 2006, the war turned out to be a disaster. The US now is still struggling to get out of there.

In many countries ruled by an authoritarian regime, the press is performing self-censorship . They dare not challenge those in power. Instead, they ally with them and congratulate on their “achievements”. This is a dangerous situation. Why? Without a free press, the unrestrained rich and powerful will become more so, while the people will become a misinformed and misled bunch. Instability easily follows, and will eventually lead to a blood bath.

7/7/2010 Wednesday

Dow: +275 to 10018, volume 1.3 billion shares.
Nasdaq: +66 to 2159, volume 2.2 billion shares.
S&P 500: +32 to 1060, volume not available.

The stock market has not seen many good days like today. The surge is strong despite little good news and only moderate trade volumes. It may as well be a big rebound after prices have fallen to a tempting low level.

To give you some perspectives, this kind of strong surge occurred recently on June 10th, followed closely by another one on 15th. The market then retreated for two full weeks until July 2nd to an even lower level than before. Big waves come and go in an uncertain market like the current one.

Topic for today (7/7/10): Popular but Wrong Thinking

When I went into my email account yesterday, I saw an advertisement urging people to access a site where they revealed the single stock that Warren Buffett had invested $1.9 billion. Big deal! The thinking is that if you buy what the legendary investor buys, how can you lose? Well, you will likely lose because you don’t know how low he bought and how high he wants to cash out. So, I don’t even bother what stocks he buys, enough to know that he must own a great variety to spread the risk.

A big guy with plenty of cash to buy and plenty of stocks to sell never acts the way you do. You buy and pray (for the price to go up). By contrast, they buy and play (continue buying until the price is high enough to cash out, then go back in after a bust and play again).

Let me illustrate my point with one example. During the financial meltdown around October 2008, all the financial stocks were falling like rocks. Goldman Sachs (GS) fell to $47 a share from the bubble peak of $250 one year earlier. Warren Buffett was asked to pump in $5 billion to support GS. He readily chipped in and got his money’s worth in GS shares. Less than two years later, GS is selling at $136 a share today. How many people can afford this kind of spectacular investment at a time of crisis? Only the big guys can. So now you see the advantages of being rich.

Should you buy GS since Buffett has invested $5 billion in 2008? You buy at your own risk, because he is bottom-heavy at $47 a share and you would be top-heavy at $136 currently. What happens if he cashes out $2 billion tomorrow? Besides, you never know how much GS he has bought before the financial meltdown. Chances are he is very bottom-heavy well below $47 a share since GS has been around for a long time.

I use the term bottom-heavy to illustrate the basic strategy of the big players. Every big guy has to be bottom-heavy in the stocks they own. Otherwise they will be reduced to sitting ducks and lose all their fortunes.

By now you should appreciate the advantages of being bottom-heavy. It means three important things: lower cost/less risk, the ability to control prices, and the ability to create a regular income stream. These are all the basic factors pertaining to good investment. Can a small guy do all those three? Not a chance, only if he knows how to play the first and third, never the second for it’s impossible.

Suppose a major shareholder is bottom-heavy in GS. That is, he owns 5% of all GS shares bought at different times at $47 a share or lower:
Total shares owned: 515 Mn x 5% = 25.8 Mn shares.
Total cost: $47 x 25.8 Mn = $1,212 Mn or less.
Total worth today: $136 x 25.8 Mn = $3,509 Mn
Income from dividends per quarter: $0.35 x 25.8 Mn = $9 million

Knowing his financial strength, the major shareholder will play the market to make many times more money than the dividend income. He can do the following:

When conditions are good, he keeps on buying more GS shares until it reaches a bubble peak. He can do it with his cash reserves, or borrow money from the GS shares he owns. He will also find some other major shareholders to engage in a collected push. The major shareholders know each other because there are not so many in the world. The public will jump in when they see the stock price rising. Since he owns 25.8 million shares, each dollar increase will raise the value of his portfolio by $25.8 million.

When conditions look bad, he will think about how to cash out. First, he shorts GS near the peak, then he starts to sell his holdings gradually causing the price to drop. Besides cashing out, he also profits from the shorts he made. This is best done collectively with other major shareholders to avoid the misunderstanding that someone is pulling the rug under them.

When conditions are uncertain without a clear direction like right now, he plays GS up and down as often as possible using his cash and shareholdings. Imagine he buys or sells an average of 100.000 shares a day around $136 per share, even 1% profit yields a handsome regular income.

So what should you do being a small fish? By now you’ll agree that you don’t buy what Warren Buffett buys. Every stock is controlled by its major shareholders. Depending on which stock you select based on your budget, you must follow closely the waves its major shareholders make. That is, you should follow the stock price regularly to gain a good historical perspective. Then you’ll be able to make good trading decisions.

7/6/2010 Tuesday

Dow: +57 to 9744, volume 1.3 billion shares.
Nasdaq: +2 to 2094, volume 2.1 billion shares.
S&P 500: +5 to 1028, volume not available.

After five consecutive days of losses and a Monday holiday, stocks picked up quickly in the early morning hours but could not sustain later. The three major indexes only managed to gain moderately. Once again, the market has gone through an up-down cycle within just one day.

The retreat toward the end of the trading session was in response to lesser than expected growths in June employment and factory orders as published by the Institute For Supply Management (ISM).

Topic for today (7/6/10): Corporate Powers

The last fifty years have witnessed a rapid growth of corporations in America and around the world. The US Census Bureau has provided the following figures regarding company employment in 2004:

Total paid employees in US: 115.1 million people.
Firms with less than 500 workers employ: 58.6 million people.
Firms with 10,000 or more workers employ: 30.4 million people.

The above figures show that the very big corporations with 10.000 or more workers employ over 26% of the labor force. That is, more than one in four Americans work for a big corporation. This number must be higher considering many small companies subcontract with big corporations.

How many big corporations are there in the US? The following figures show:

Total self-employer firms in US: 19,523,741 (owner is the sole worker)
Total employer firms in US: 5,885,784
Firms with 10,000 or more employees: 890

In summary, less than 900 big corporations (10,000 or more workers) employ more than 26% of the total US labor force.

The powers of US corporations are most conspicuous as follows:

During the current deep recession, the US non-farm industry has shed close to 8 million jobs between January 2008 and December 2009, most of which were due to corporate layoffs, not to mention their cut back overseas.

According to OpenSecrets.org, companies donated a total of $5.8 billion to US Federal and State legislators. The top 1000 corporations accounted for 36% of total donations during the 2007-08 election cycle. This is the money that can be tracked as required to be reported by law. How much is donated under the table nobody knows.

With so large corporate donations, no wonder Joe Barton, US Congressman from Texas, apologized publicly to BP recently for its oil spill disaster off the Louisiana coast. The US Congress has been in gridlock for so long because of this flow of donation money (or legal bribe?) for serving the self-interests of corporations.

Do the people and corporations have any common interests? This is an important question to ask if you think you are a responsible citizen. Most politicians will tell you that whatever is good for corporations must be good for you. The CEOs of big corporations always say they are doing good things as a public relations posture. Do you just listen to them, or want to examine their actions?

Corporations, like any business, exist for the sole purpose of making maximum profits. They respond only to their major shareholders, not small fish like you. They distribute part of the profits regularly to the shareholders according to how many shares each individual owns. Their mission is very simple and materialistic. By contrast, we the people have various different missions such as making a living, pursuing happiness, and taking care of loved ones. Where can we find common grounds between the people and corporations? The only common ground is when you happen to be an employee of a corporation. When time gets rough, the corporation will lay you off.

Because of its huge resources, a corporation has the potential to do both good and harm. It all depends on the leadership of the CEO and the board of directors. In any society, we rely on the conscience of an individual and an organization to do good. Can we also rely on conscience not to do harm? Of course not! That’s why we have all kinds of laws and regulations to punish and restrict misbehaviors.

We should worry that corporations can bribe their way into government and change existing laws or make new ones for their own benefits. In this way, their powers will be multiplied many times.

7/2/2010 Friday

Dow: -46 to 9686, volume 1.1 billion shares.
Nasdaq: -10 to 2092, volume 1.6 billion shares.
S&P 500: -5 to 1023, volume not available.

This is the 5th consecutive day of decline for all three major indexes. A turnaround occurred past midday. It only erased some of the morning losses but could not pull the indexes to positive territory.

Topic for today (7/2/10): Freedom and Democracy

As Americans prepare to celebrate July 4th Independence Day, I wish to reflect on the meaning of freedom and democracy.

Freedom and democracy go hand in hand, although sometimes one proceeds a little faster than the other. Freedom for an individual or group can easily translate into selfishness, and therefore must be circumscribed for the common good. Examples:

We cannot be free as a nation if some of us are not free (President Kennedy referred to the injustices of racial segregation in America in the early 1960s).

You are not actually free if your mind is not free (John Lennon expressed this idea in his song “Revolution”).

A really free country is one when it has the most power but refuses to use it to bully others, because it does not think it’s fair or just.

You don’t have the freedom to exploit or cheat other people.

You don’t have the freedom to carry a weapon for self-defense on a commercial airplane.

You don’t have the freedom to shout “fire” in a congested public place to cause trouble.

Democracy normally relates to a country where it demonstrates how different interest groups manage to strike a balance of power. A country is more democratic if it achieves a better balance. Democracy succeeds best if home grown, not transplanted or imposed.

Democracy is in jeopardy or cannot even exist if one of the following occurs:
People don’t have the freedom to open their own businesses.
Some individuals, groups, or companies assume too much power.
People are usually subject to misinformation, orchestration, indoctrination, or brainwashing.
The education system fails to encourage the citizens to think for themselves.
People are not used to the idea of give and take.
The middle class does not exist or is weakening.
The rich is getting richer and the poor getting poorer.

Note that I did not mention election for democracy. Why? Although one person one vote tends to produce a better balance of power, you have to ask whether the people are ready and whether the circumstances are ripe. If not, you can easily get a rigged election and give legitimacy to someone who does not deserve it.

7/1/2010 Thursday

Dow: -41 to 9733, volume 1.6 billion shares.
Nasdaq: -8 to 2101, volume 2.7 billion shares.
S&P 500: -3 to 1027, volume not available.

This is the 4th day of consecutive decline for the three major indexes. The only consolation is that they turned around during the last hour, erasing most of the losses. This turnaround may continue early tomorrow morning but most likely will not last.

Topic for today (7/1/10): Are we in a double dip?

You may want to see how much the indexes have fallen over the last two weeks:
———-6/18/10—-7/1/10——Change
Dow——-10451——9733——-718 down
Nasdaq—–2310——-2101——-209 down
S&P 500—–1118——-1027——–91 down

Let’s go back two more weeks earlier and see how things looked:
———–6/7/10—–6/18/10—–Change
Dow——–9816——-10451——635 up
Nasdaq——2174——-2310——-136 up
S&P 500——1050——-1118——–68 up

What do you see in the above figures? I see a long up-down cycle lasting for almost the whole month of June. The up cycle lasted for about ten days until June 18, followed by a down cycle lasting a little longer. The indexes ended up at lower levels but not too much. In conclusion, although June is not a good month for stocks, the indexes have not really fallen as much as feared. If you observe the daily runs, you will also see many short cycles lasting only a few hours long, some spanning from one day to the next.

This is typical of a so-called traders’ market where most of the public sit on the fence without participating. The traders are playing against one another. They know what the stock game is all about whereas the public doesn’t. Without full public participation, the market cannot go too far. So the traders have to cash out with only a slight change in price. When prices come back down, the traders will move in and play again, hence all these up-down cycles. In this kind of environment, the traders make money out of the frequent swings in prices instead of a steady price rise. On the other hand, the public is mostly confused because they cannot catch up with the frequent short cycles.

Are we in a double dip? No, we are only in a small dip right now. To qualify for a double dip, the indexes have to fall close to 6500 for the Dow, 1400 for the Nasdaq, and 930 for the S&P. Those are the crisis levels around February 2009 when the US economy was on the brink of total collapse brought about by the financial meltdown. We have already passed that dreadful stage. The economy has been on the mend for more than a year now. It will take probably two more years to get back to normal because of the damages done by the recession. In the meantime, the stock market is going through frequent wild swings because the public is not confident yet to come in and give the market a steady push.

The stock market is treacherous territory. You need plenty of wisdoms to survive and prosper as a player. The following are three kinds of wisdoms. Hope you know which kind you need.

Conventional Wisdoms

Conventional wisdoms are those generally held as true until being proven wrong. Some good examples are:

The earth is flat. This had been held as true since day one until 500 years ago when some ocean explorers proved it wrong.

Heavier-than-air cannot fly. This had been true until the invention of the airplane some 100 years ago.

What you don’t see does not exist. This had been true until the invention of the microscope that reveals a complex world of microorganisms.

The Internet is just a fad. Many experts said so 20 years ago.

The capitalist market can solve all problems. Really? The devil is in the word competition. A market without competition only results in the rich getting richer, and the poor getting poorer.

The stock market resembles perfect competition because the government regulates it. Really? Government officials can be bribed to look the other way. The fact is, most big players win and most small players lose.

New Wisdoms

New wisdoms emerge everyday. Most fade away, only to be recycled with a new marketing touch. Some of them gain traction, even being wrong, and will become the reigning conventional wisdoms. The following are some examples:

Certain food and vitamins are good for this and that. Really? We never seem to get tired of this kind of stuff being pushed everyday.

Drill, drill, drill! This sounds like an addict demanding for more. You may find some oil underneath your house if you do that. The fact is, the world demand for oil now outstrips supply resulting in ever-increasing gasoline prices. The other fact is that oil pumped out from the ground requires large-scale refining and distribution infrastructure near a large oil field. The oil beneath your house won’t work. Sorry, all the big oil fields are located in the Middle East and some other less friendly countries where huge infrastructure has been put in place.

The greater details you study about the stock market, the more profits you will make. If so, why don’t we see a doctor’s program in stock trading? The winning big guys don’t study the market like you do. Why should they? They have connections to insider information. Besides, they can buy and sell in large quantities to affect the price. Money and power is name of the game.

The so-called stochastic methods will help you win in the stock market. Really? All the statistical methods are based on the past, which is used to project the future. If future prices can be predicted accurately from the past, there would not have existed such things as bottom or peak, where things suddenly turn the other way. Most small players miss the bottom and fall from the peak.

If a company comes out with a new product, its stock price must rise. Really? Again, the devil is in the competition. What will the competition respond? How will the consumers embrace the new product?

True Wisdoms

What are the true wisdoms? You possess the true wisdoms if you are willing to question what you see and hear everyday. True wisdom means you use your mind to think and reason without accepting what is out there and without being herded like sheep. It also means you accept that the world is a dynamic place where things are changing faster and faster. Thus the more you know, the more you find you will need to learn. True wisdom means that you are vigilant, flexible, and adaptable to changing circumstances.

There always exist some major forces that shape and move the stock market. The forces that impact you most originate from the big players whose intention to buy or sell remains a mystery. They determine the peak and bottom of a stock. The small guys can only play within the range of bottom and peak. When you play near the bottom, the chances are good. Near the peak, your chances of getting toast are much bigger. So make sure you know where you are playing.

There is no need to immerse in great details about companies and products. You only need to see the big picture about the economy and general business conditions. You also need to understand the characteristics of different industries, and the price histories of the stocks of interest.

For any stock you buy, you must find out where and when were the previous peaks and bottoms, and preferably why. Then make an intelligent guess as to where and when are the next peak and bottom.

If possible, position yourself in such a way that at any given time, you have some money to buy, and some stocks to sell. This will help you make some profit, replenish your cash, and play the new opportunities again.

We small players may think that we are investors. We are not, we’re just free riders. What’s wrong with that?

Besides reaping long-term profits, we small investors should be looking for short-term gains to take advantage of frequent ups and downs. Consider making an average of $500 per week, it will add up to a significant amount for the whole year. This is what I call, play short term in order to build long term.

Playing short term does not mean day trading. Day traders are despised and discriminated by brokerage companies. To overcome this hurdle, simply keep your stocks overnight or for a few days before you sell. Remember to buy them back when the prices have come back down once more, given the stocks are still worth buying.

www.stockfessor.com
April 2010

Dow: -96 to 9774, volume 1.4 billion shares.
Nasdaq: -26 to 2109, volume 2.2 billion shares.
S&P 500: -11 to 1031, volume not available.

Yesterday’s big drop extended into today. For most of the trading session, stocks appeared to be able to hang on to the flat line without much change. However, they started dropping again one hour before the close.

Tomorrow marks the beginning of the earnings report season. The market needs to see some good company performance in order to break out of the lows in June. Let’s see how this will play out.

Topic for Today (6/30/10): Tesla IPO and the Green Industry

The successful IPO of Tesla Motors in a tumbling market yesterday has opened a new chapter for the green industry. The electric car is one more step closer to commercialization. In addition, electric storage batteries, solar panels, and wind energy have also received significant increases in funding from both private and government sources.

Why do we need green energy? First of all, the US oil imports amounted to about $400 billion last year. With so much money going to foreign countries most of whom are not friends, the US finds itself being held hostage. Oil import now becomes a big issue for national security. The US must reduce its oil imports. How? There are four options, all of which have to proceed at the same time.

Reduce oil consumption:
The US economy owes its growth and dynamism to oil. After becoming so dependent on oil, the US is going through a painful effort to reduce oil consumption. Painful or not, all countries of the world have no choice, because oil prices are going up due to supply gradually running out.

Increase domestic oil production:
Does the US have immense oil reserves underground? None proven. So domestic oil supply is necessarily limited. The oil companies want to drill more along the coastlines. In view of the current BP disaster off the Louisiana coast, we now know that big oil has drilling technology but no technology for damage control. Do we want them to take further risks? Another proposal is to open up Alaska for drilling. Once again we know that they don’t have the technology for damage control. Ultimately it comes down to how much risks are we prepared to take for a limited amount of oil. To an oil addict, it may be worth everything.

Increase efficiency in usage:
For a big country that spends so much on oil, better efficiency in usage generates great savings. The biggest potential for savings in the US lies in transportation, heating and air-conditioning.

A hybrid car cuts down oil consumption by 50 per cent, with the oil engine charging the battery that powers the electric motor. A plug-in electric car consumes no oil, but the electricity may come from a power plant that burns oil. That is why solar and wind come in handy to substitute for burning oil in a power plant.

Efficiency also means development of a smart electricity transmission system. The so-called smart grid is able to monitor usage at the points of consumption, adjust production at the power plants, and receive electricity generated from solar panels in countless independent buildings. A smart grid increases efficiency by encouraging consumption away from peak hours, reducing inefficient production at power plants during peak hours, and providing for storage of surplus electricity generated.

Develop alternative energy:
Solar energy needs the sun. Solar leadership goes to Germany which is hardly a sunny country. China is probably the second largest solar producer. The powerful thing about solar is that each building can be made self-sufficient in electricity with solar panels mounted on the rooftop and occupying no extra space.

Wind is usually available in a local region and therefore best operated as a wind farm from which the electricity generated is distributed elsewhere. Denmark is now the world leader in wind energy production.

Oil substitutes can be generated as a bio-fuel from corn, switch grass, plant wastes, and animal wastes. Corn is being used to produce ethanol in the US but it competes with food, so it is not sustainable. In Brazil, ethanol is widely used which is produced as a byproduct of its sugar industry. Other bio-fuels are being improved in the laboratories waiting for commercialization.

So far I have not mentioned global warming, which is perhaps the most pressing reason for alternative fuels. However, many people find it hard to believe even in the face of overwhelming scientific evidence. In order not to waste time arguing about global warming, I have deliberately used the economic and security reasons to argue for green energy. These reasons are urgent enough even when global warming is totally discounted.

6/29/2010 Tuesday

Dow: -268 to 9870, volume 1.6 billion shares.
Nasdaq: -85 to 2135, volume 2.8 billion shares.
S&P 500: -33 to 1041, volume not available.

Today’s big tumble is in response to the news that the Chinese economy is slowing down, and that US consumer confidence registers a big drop. Will the news change again next week? Let’s wait and see.

One thing is sure: Given all the economic uncertainties out there, the stock market cannot find a clear direction. So it maintains a holding pattern for a few days, then drops for one day, and picks up on another day. June has not been a good month. The three major indexes hit a low point on June 7 with Dow at 9816, Nasdaq 2174, and S&P 1050. Today, both the Nasdaq and S&P even dip below these lows. It looks like the market is trying to maintain a holding pattern at a lower level than now.

Topic for Today (6/29/10): Why is a society poor?

When you look around the world, there are many more poor countries than rich ones. When you focus on a wealthy country like the US, only 10% of the population is considered rich. Some 13% live below the poverty level where putting food on the table is a constant struggle. The great majority is the so-called middle class which have to work everyday to maintain their standard of living.

The sad thing is that a poor community or country can stay poor for generations. Why? When you are poor, you live in a vicious circle. You suffer all kinds of disadvantages being poor, such as little access to good education and health care. It’s very difficult to break this vicious circle. It takes some deliberate radical change to lift oneself or a society out of poverty.

On the other hand, you get all kinds of advantages being rich because money makes more money and labor only makes so much. With enough money, you can even buy government officials to make laws favorable to you, like tax cuts and relaxed rules for your business. You and I see these advantages. That’s why we all want to be rich.

What characterizes a poor society?

Refusal to modernize with the new realities:
Old religious belief is usually the culprit such as Islamic Fundamentalism. In the old times, the Roman Catholic Church prosecuted intellectuals for preaching that the world is round, and that the planets revolve around the sun.

Absence of middle class:
In poor countries, you will find that the rich is less than 1% of the population and almost no middle class exists. The great masses are poor.

Corrupt government:
All governments are corrupt due to human nature. The point is how much. The society gets poorer when the government fails to foster competition resulting in the rich getting richer, the poor poorer, and the middle class becoming the poor.

Stifling government:
Examples are dictatorship, authoritarian government, communist government, and religious government where there is no separation between religion and state. These governments are able to impose very strict rules on the behaviors of the citizens to the effect that they don’t have a chance to put their talents to productive use.

Absence of merchant class:
In a poor country, few people are engaged in their own business. There are lots of unemployed. When they find work at all, they usually work for the government or for the very few rich people. Without a merchant class who own small businesses and employ other people as well, the society will remain poor for a long time. It should be noted that small business is the dynamo of a rich society.

Absence of law and order:
This may be a consequence of civil war. Even when there is no war, the laws of a poor society are usually arbitrary and selectively enforced. You can do whatever you want by paying bribes. The most conspicuous is the absence of real estate laws regarding ownership and use of land. People are by nature rooted to their lands. If you don’t know what piece of land you own or rent, and your right of use, how much productive can you get?

6/28/2010 Monday

Dow: -5 to 10139, volume 0.9 billion shares.
Nasdaq: -3 to 2221, volume 1.8 billion shares.
S&P 500: -2 to 1075, volume not available.

The holding pattern continues with especially light trading volumes today. Although the three indexes changed little at the close, they have already performed two up-down cycles back to back during the trading session.

This kind of market is very hard to play because of the short duration of each cycle lasting for less than four hours. If you cannot afford the time following the ups and downs, placing limit orders is a good way to catch the prices you want.

Topic for Today (6/28/10): G-20 Meeting

The meeting of the heads of state of the world’s 20 largest industrialized countries just ended in Toronto. As usual, we cannot expect too much to come out of it. On the other hand, the meeting is not a venue for them to dine or wine only. Each time they meet, there is something important or urgent to discuss, and hopefully to come up with a common priority and solution.

Due to the deep global recession, most participants have incurred heavy deficits to rescue their economies. This has the potential of creating a serious global inflation spiral. Therefore, the heads of state have agreed to cut down the deficits as a priority. Of course they cannot agree on how much and how fast.

The case of financial reform is also discussed. The way to do it varies widely depending on the philosophy and the financial structure of each country. Most participants agree that they should curb the reckless ventures of banks and other financial companies that have caused the current recession.

Most countries want to see the Chinese currency appreciate to limit the increases in Chinese imports. However, the overwhelming weight of the deficits has relegated the Chinese currency issue to the back burner.

One aspect that people tend to ignore is the opportunity to meet face to face between the different heads of state. This provides a great opportunity for developing some personal rapports. When a thorny issue comes up, the personal chemistry between the top leaders will assume great importance because it can instill trust that will make things run more smoothly.

6/25/2010 Friday

Dow: -9 to 10144, volume 2.6 billion shares.
Nasdaq: +6 to 2223, volume 3.5 billion shares.
S&P 500: +3 to 1077, volume not available.

The market resumes a holding pattern at a lower level with little changes for the three major indexes. Note that the trading volumes have increased quite significantly. I wonder what it means for next week.

The financial sector was leading the market the whole day. Financial stocks were sliding due to the uncertainties about financial reform. Today’s news about impending passage of the reform bill served to eliminate most uncertainties hanging overhead.

Topic for Today (6/25/10): Passage of US Financial Reform Bill

As I said before, people resist change unless a disaster happens. Two years after the financial meltdown and a global deep recession, the US finally wants to do financial reform. Both Houses of Congress have agreed on the final reform bill after a marathon negotiation. The President is scheduled to sign it into law some time next week.

Since I have discussed the important features of the reform bill a few days ago, I will leave the experts to give you more details. But I have a few complex questions to ponder:

Is the Bill good for the banks?
Who knows? One easy way to tell is to observe their stock prices. Since their prices were sliding recently, we know that there were plenty of uncertainties surrounding the outcome. We also know that the banks did not like reform because it would limit their profits and forbid them to make risky ventures. Now that passage of the Bill is guaranteed, their stock rebound today means the uncertainties are suddenly lifted. If prices continue to go up, that means the banks will continue to prosper.

Will the banks continue to prosper?
You bet! Private enterprises are always smarter than the government. No matter how strict the laws are, they will find a way to circumvent them. No laws are devoid of loopholes. Remember the banks have plenty of money and therefore plenty of friends and cronies. I bet some loopholes have already been designed into the new Bill to facilitate the banks. Rest assured that the banks will develop another new game to make money. They will run wild again until another disaster happens.

Is the Bill good for the people?
Definitely for some years to come although the Bill is not perfect. It will be harder for the banks to gamble with depositors’ money. Consumers will have stronger protection under the new laws. But consumers beware! I trust the scientist and the engineer more than the banker. Why? When I buy a Toyota or a cell phone, I know what I want and what is good for me. I find out easily after using it without having to be an expert in the design or manufacture of the product.

However, if I buy a stock or invest in a fund, I am only buying a dream. I should know that the company and the salesmen are trying their best to paint a rosy picture to attract my money. With financial products, they can use all kinds of figures, graphs and technicalities to seduce me. Worse, I will never know it’s a trick until I lose money and that will be too late. I also know that I have no recourse. The financial company will always blame the market for my losses. So I wind up being a sucker.

6/24/2010 Thursday

Dow: -146 to 10153, volume 1.3 billion shares.
Nasdaq: -37 to 2217, volume 2.0 billion shares.
S&P 500: -18 to 1074, volume not available.

The holding pattern that lasted for six consecutive days is broken today. The stock market goes through a broad retreat where most stocks linger in negative territory. It seems that the market wants to test the lows on June 7 when the Dow hit 9816, the Nasdaq 2171 and the S&P 1050.

Despite some good news about higher manufacturing production and lower unemployment claims, the market only reacts to the news of slow sales in new and existing homes.

Topic for Today: The Military

I want to share with you some thoughts about the military establishment after hearing the top news that President Obama fired General McChrystal for publicly criticizing the White House team on the conduct of the Afghan war.

The military is a very unique organization that operates on three basic principles: obedience, honor, and country, which are totally different from our regular employment that is based on monetary compensation for the work done. A soldier is required to sacrifice his life for the country while a company employee is required much less.

Why is obedience so important in the military? Imagine you give every soldier a machine gun. If they don’t obey your orders, what would be the consequence? Besides obedience, strict discipline should also be enforced.

In a democracy, the military is placed under civilian control. They swear loyalty to the flag or the constitution, not to any person. In the US, all the generals are subordinates to the Secretary of Defense. The President is the Commander in Chief. As a result, you should never see the US army taking over the government in a coup as in some other countries.

In the old times, the king always appointed himself the highest commander of the army. In effect, the kingdom’s army became his own army. Otherwise, how could he keep his throne?

In a dictatorship, the dictator has to own the army to maintain absolute power. That is why the first thing Hitler did was to have the German army swear loyalty to his name.

In a communist country, the communist party also owns the army for it wants to keep absolute power. In case of a rebellion, the party will send the army into the streets to kill its own citizens in the name of maintaining order. The Tiananmen incident in China is an example.

In an authoritarian regime, the leader either comes from the top military brass, or has to partner with the army to keep his authority.

In many developing countries, the military runs wild. They either take over the country (many times in Pakistan) or split into groups occupying different parts of the country (Afghanistan and Iraq).

Although the US military has plenty of talents, their preoccupation with getting the job done for whatever it takes gets them into big disasters. In Vietnam, Gen. Westmoreland once said that the boys will be back home by Christmas, only to materialize ten years later after more than 50,000 dead. In Bush’s Iraq war, Gen. Franks delivered an invasion plan without an exit strategy. The US was brought to its knees by the insurgents and is still struggling to get out since 2003.

In conclusion, although I respect the military, I would not trust them for good advice or planning because they have been trained to say yes sir all the time even under impossible or unpredictable conditions. Should you give them the sky, they would say they could conquer it in no time.

6/23/2010 Wednesday

Dow: +5 to 10298, volume 1.1 billion shares.
Nasdaq: -8 to 2254, volume 1.9 billion shares.
S&P 500: -3 to 1092, volume not available.

The holding pattern continues with slight changes in the three major indexes. The up-down cycles continue to be short, ranging from a few hours to one day. This shows the market cannot figure out which direction to go in view of current economic uncertainties. The trading volumes continue to be light because the majority of the public is still waiting on the sideline. In this kind of situation, either you wait it out or you buy/sell within narrow margins for the short term.

Topic for Today: US Financial Reform

People usually learn things the hard way. That is, they seldom learn until a big failure occurs or disaster strikes. The call for comprehensive reform in the US was only made after the financial meltdown of 2008. Finally, a financial reform bill is due for passage in the US Congress within a week or two. The main features are as follows:

Something has to be done to address the problem of too big to fail. If a company is too big to fail, it should be deemed too big to exist. When a big company being mismanaged fails, the impact should not create a tidal wave that buries us all. We have seen the bankruptcies of GM and Chrysler last year. Their impacts, though grave, were relatively limited for the whole economy.

It’s a different story regarding financial institutions. When Bear Sterns failed in early 2008, the other banks got nervous and became distrusting of each other. When Lehman Brothers collapsed a few months later, a credit freeze followed where banks stopped lending to each other and to other sectors too. When there was no credit, the entire economy came to a halt. This necessitated an urgent bailout from the government in the amount of $800 billion to get the economy moving again. Therefore in the financial sector, the problem of too big to fail is an acute one because of the psychological and real financial impacts throughout the economy.

How to prevent a financial company from getting too big? The practical way is to limit its operations.

A commercial bank such as Chase or Citibank that takes in deposits from the public should not be allowed to gamble with depositors’ money. Why? a commercial bank already profits from the big differences in interests between deposits (less than 2%) and credit card loans (19%), consumer loans (15%), and real estate loans (5% or more). A commercial bank should not engage in risky business such as trading stocks, derivatives, securitized products, and other activities. The reason is that if a big commercial bank fails, it would impact millions of common folks in addition to creating financial mistrusts in society. The current reform requires the commercial banks to spin off their risky operations as independent investment ventures that can fail on their own mismanagement.

Investment banks such as Goldman Sachs and Morgan Stanley are different. Their customers are risk takers who know that they will lose all if their investments turn sour. The investment banks have more latitudes for financial innovation at their own risk. The failure of an investment bank, however big, only affects the richer guys who have surplus money to invest and to lose. It would have much less adverse impacts to society than the commercial banks.

Insurance companies are also required by the current reform bill to spin off their risky ventures such as derivatives and credit default swaps (as explained yesterday). A big insurance company has millions of common folks as customers who buy life, health, house, auto, and other insurance. Its failure would be as grave as the commercial banks.

The financial reform bill also includes a stronger supervising agency to be set up. Its job is to oversee the operations of different financial institutions, to ensure accountability, and to enforce the laws if necessary.

No financial reform is complete without the important feature of consumer protection. I have explained earlier that financial products and services can deceive people easily. The most important thing is to emphasize transparency. It means that all charges, benefits and risks should be explained to the consumer clearly and up front. There should be no rules hidden in the fine prints or footnotes, and no muddy language in the sale contracts.

6/22/2010 Tuesday

Dow: -149 to 10294, volume 1.1 billion shares.
Nasdaq: -27 to 2262, volume 1.9 billion shares.
S&P 500: -18 to 1095, volume not available.

The holding pattern for the past few days turned into a rout, which happened toward the close of the trading day. The market responded negatively to the news that sales of existing homes in May fell 2.2 % from April. However, compared with May 2009, the figure is in fact 19.2 % higher.

Topic for Today: The Benefits of Innovation

Everybody understands that companies have to innovate to stay ahead of the competition. Innovation enables the company to lower costs and improve quality. Better still, it opens up a new product line, creates new demands, and turns on a new stream of revenue.

Consumers also enjoy the fruits of innovation in terms of lower prices, better performance and quality, more attractive products, and higher satisfaction. Nowhere can you see this more apparent than in PCs, cell phones, autos.

There is one area where innovation seems to bring disaster. That is, financial products and services. The financial meltdown of 2008 is the result of crazy innovations such as sub-prime mortgage, securitization, derivatives, and credit default swaps. What are these things anyway? The fact that you ask this question means the innovation has gotten out of control. It not only confuses the public. It has brought down many big banks where the innovation originates.

Sub-prime mortgage is easier to understand than the others. You might have been burned by one already. The mortgage features a low or zero down payment, and a variable interest rate lower than the prime rate for the first few years. The purpose is to entice as many as possible to assume the mortgage to buy houses, whether they can afford it or not. So a housing bubble was created.

Most people didn’t know what they were getting into. When the initial sub-prime period expired, interest shot up to float with the current rate. Many people suddenly found that they could not afford the mortgage payments. They defaulted and the banks foreclosed on their houses. So millions of foreclosures caused the housing bubble to burst.

The millions of foreclosures came back to haunt the banks where the sub-prime mortgages originated. The foreclosures became a toxic asset because they generated no revenues for the banks. The value foreclosed amounted to hundreds of billions of dollars, enough to cause some big banks to fail, thus forcing the government to bail them out to maintain financial stability.

Securitization is an innovation to spread risk. The banks chopped up the mortgages and combined the good and bad ones together into securities to be sold to other investors, including foreign banks. The tidal waves of foreclosures in America caused these securities to become toxic too. So the financial meltdown spread around the globe.

Derivative is a bet that can become exceedingly complex. Buying a stock for it to go up is in fact buying a derivative because the price is derived from the performance of the company. To go one step further, you can buy the bet that bets on the stock to go up. This can go on further and further until nobody knows what they are buying or selling. This is how things got out of hand in the special exchanges for derivatives.

Credit default swap is mainly invented by insurance companies to insure against the failure of other banks. AIG had the most exposure in this innovation. When more banks were failing, AIG found itself in deep trouble and required the biggest bailout from the government to prevent collapse.

In conclusion, an innovation must bear fruits that benefit both the company and the consumers. It should benefit the environment too. As demonstrated in the recent financial meltdown, innovation in financial products and services only benefits the company for the first few years. It confuses the consumers and seduces them to make bad decisions like buying a house that they cannot afford. In the end, the disastrous results come back to revenge the company, and also cause great pains to the whole world.

6/21/2010 Monday

Dow: -8 to 10442, volume 1.1 billion shares.
Nasdaq: -21 to 2289, volume 1.9 billion shares.
S&P 500: -4 to 1113, volume not available.

We have a short rally today that lasted for a few hours on the news that China may allow its currency to float freely against the US dollar. This is just talk and is unlikely to happen due to the reasons I described a few days ago.

The fact that the three indexes end up slightly lower (except for Nasdaq) means that the current holding pattern of stock prices will continue, waiting for either good news or the start of the earnings report season next week.

Topic for Today: The Role of Government

As discussed yesterday, if all the different interest groups in society are left to their own designs, the consequence will be: the strong eat the weak, the rich get richer, and the poor get poorer. This is a dangerous situation that inevitably brews bloody revolutions, because one day the poor with their overwhelming strength in numbers will rise up. We have seen this happening many times in history.

What can be done? That is why we need government, which is the only group powerful enough to instill balance into society. The government has plenty of power if it chooses to exercise it. It has the power to levy taxes, raise an army and a police force, and make laws and enforce them, etc.

Although every society needs a government, the fact is only a few societies manage to have good governments. There are more poor countries in the world than rich ones. Poor countries are also unstable and are ruled by bad governments. The reason why they end up this way is that their governments are ineffective and corrupt. Their governments choose to align with the rich and stronger groups to milk the rest of society.

Communist governments are supposed to fight for the poor and redistribute incomes from the rich. Tell me which country in the world that is both rich and communist. None. China was a communist country before but turned capitalist now. Once assuming power, a communist government is preoccupied with preserving its own power. They become the absolute rich and powerful group. They forget the poor and the society that they are supposed to serve.

Most rich countries in the world are democracies. Democracy is based on one person one vote. Because the number of rich people in any society is small, the rich therefore cannot make enough votes to represent their self-interest. That is why a democracy tends to be stable and successful in balancing the different group interests.

However, a democracy does not guarantee fair and just government. A democracy is weakened if the common people take no interest in voting. It is also weakened if the laws allow rich people to contribute money to elect their own cronies to government, or buy corrupt officials and legislators. Worse still, an elected government may deliberately want to side with big business and the rich to squeeze the rest of society. The Bush Administration from 2000 to 2008 is a good example. The Republican Party offers another bad example as one of their Congressman, Joe Barton of Texas, apologized publicly to BP for the oil spill. What? Why? He later apologized saying that his remark had been misconstrued. No Congressman! We heard it clearly and we understand your character now. You told the world in effect that you have sold your soul to BP.

6/18/2010 Friday

Dow: +16 to 10451, volume 1.6 billion shares.
Nasdaq: +3 to 2310, volume 2.0 billion shares.
S&P 500: +1 to 1118, volume not available.

This is the third consecutive day when the market continues a holding pattern after the big boost on Tuesday, June 15. It looks like a good sign because the gains on Tuesday are consolidated rather than evaporated as a result of profit taking.

Another evidence supporting the good sign is that we have just come out of a period of retreat when the three major indexes hit a low on Monday, June 7. A boost coming after a retreat, then followed by a consolidation signifies future advance, whereas a plunge followed by a pause may signify further plunges ahead.

Topic for Today: How can conflicting interests find a balance in society?

Yesterday I explained the various group interests existing in a society, which are more conflicting than harmonious. How can they reconcile with one another so that the society as the whole remains stable and progressive?

We have to examine the four basic ingredients of power: money, status, number, and group feeling.

Everybody understands the power of money. In any society, there are always more poor than rich people. In the US, the rich comprise less than 10% of the population. In developing countries, the rich are even less than 1%. How can the rich maintain their wealth? Well, money makes more money. Labor only makes so much. If you are rich, you tend to be richer. That’s why you and I want to get rich too!

With money, the rich also gain status because the masses adore money and want to gain favors from the rich. People with special knowledge and skills want to serve the rich in order to advance their careers. The rich also know how to employ their money to buy government officials so that they would make the laws easy for them to further prosper.

Although possessing all kinds of power, the rich are easily scared by the word revolution. Revolutions have happened many times all over the world. It means the status quo would be turned upside down. It also means the poor would rise up and confiscate the wealth of the rich. However, a revolution cannot happen until the time is ripe. Although the poor have the basic power of big numbers, they are usually disorganized unless they find a strong leader to motivate them to revolt. In addition, although being exploited, the poor usually do not feel angry to the extent that they would rise up to overthrow the status quo.

A stabilizing factor is the rise of the middle class from the poor through education and private enterprise. In modern society, a poor young man can aim for a better living by getting a good education, learning a good skill, or going into business on his own. He does not have to serve the rich to advance his career like in the old days. In other words, the poor have better hopes today because of more opportunities available.

Another stabilizing factor is competition between companies and people. When competition is intense, everybody tries harder to satisfy the customers. The consequence is that everyone gets better values for products and services. In addition, there will be more innovation and creativity incorporated into the things we buy. Without competition, we will only see rising prices and lower quality because the sellers and producers will not bother to improve.

There exists one single factor that can make society go either way. It is how the government chooses to operate. In poor countries, you always find the government colluding with the rich to milk the poor. In a communist country, the communist party, the government and the rich all belong to the same group of people. In a democratic country, the elected government can choose to side with the rich or the poor. If it sides with the rich, the livelihood of the poor will be made worse. The middle class cannot grow. This will create an unstable situation conducive to a revolution down the road.

So you see, if things are left to their own designs, a society can easily become unstable where the rich get richer and the poor poorer. Therefore, it falls on the shoulders of the government to find a balance of interests, basically to side with the weaker groups, to help the middle class grow from the poor, and to enhance competition in society.

6/17/2010 Thursday

Dow: +25 to 10434, volume 1.2 billion shares.
Nasdaq: +1 to 2307, volume 1.7 billion shares.
S&P 500: +1 to 1116, volume not available.

Today’s market is similar to yesterday. The three major indexes recovered near the close. The more frequent this happens, the more it shows that the market is resilient for bouncing back after hitting a low.

Topic for Today: Self-Interest.

Living for one’s self-interest is both human and animal nature. Adam Smith, the famous English economist once said that the butcher who sells you meat is not trying to feed you. He is only trying to feed himself. When you deal with people, you must understand the self-interest of the other side. Else, you are unlikely to strike a deal or a compromise.

When a businessman offers you something impressive or too good to be true, you must ask what benefits it will bring to you. If you don’t think about this tough question, you are likely to be swindled. When a politician promises action, you must find out his/her self-interest. Otherwise you will be misled.

You may say that people should not live by self-interest alone. On the other hand, self-interest is the fuel for action. Without self-interest, where can you find motivation? There exist various levels of self-interest. For a merchant, it is just money. For a volunteer, it is the satisfaction of performing a good deed without pay. For a politician, it involves a combination of money, power, ego, and self-satisfaction.

In a society, different self-interests between groups are at play. They are normally based on the business that people are engaged in, such as doctors, nurses, finance, oil, environment protection, teachers, students, labor unions, government employees, and so on. On the other hand, group interests may be built around strong beliefs such as pro-life, pro-choice, pro-guns, anti-trade, anti-immigration, anti-establishment, apartheid, segregation, etc.

How a society develops depends on the interplay between various interest groups. Some interests may gain dominance over others, but the situation may change another time. The government can become the most powerful interest group if the head chooses to lead, or to ensure a healthy balance by siding with the weaker interest groups. When the government chooses to side with the stronger interest groups, an unhealthy situation will develop where the strong eat the weak, the rich get richer, and the poor get poorer. This has happened many times in history until the weaker groups say enough is enough. What is the consequence? In some countries, a big reversal will come peacefully through voting. In most other countries, you will see bloody upheaval or revolution.

6/16/2010 Wednesday

Dow: +5 to 10409, volume 1.2 billion shares.
Nasdaq: +0.1 to 2306, volume 1.9 billion shares.
S&P 500: -0.6 to 1115, volume not available.

There was some profit taking in the morning as stock prices came down. At the close, the three major indexes managed to recover to near flat. So today can be described as a pause in a rising trend that is becoming apparent as time passes.

Topic for Today: Abuse of Knowledge.

Yesterday I talked about the misuse of knowledge that is either unintentional or clouded by one’s biased thinking. On the other hand, an abuse is the intentional and planned employ of knowledge to deceive other people. You can find knowledge abuse everywhere. That is why you cannot adore experts or get intoxicated in technical details. Since you don’t know the true intentions of other people, you’d better be careful to protect yourself. That is why we need consumer protection laws to prevent someone from deceiving you with their technical knowledge.

As a consumer, do you have the time to read or understand the contracts you have signed, such as an insurance policy, a loan, a service contract, an employment contract, and so on. If they want to deceive you, they will do it in the fine prints, which are deliberately made complicated to confuse you or discourage you from reading the fine prints.

In the health area where the medical people seem to know everything, fear is usually employed to encourage you to do something you don’t need. Have you been told before that if you don’t do this procedure or take that medicine, you will suffer serious health consequences?

The area where knowledge abuse is most rampant is finance and the stock market. All the things you see and hear are invented to serve their purpose, not yours. You can be sure that what you see and hear will impress you. However, you must recognize that you are just a member of the ignorant herd to be exploited, not served. Worse, when you find out the truth, there is no recourse, because the finance experts always blame the plunging stock market for your losing money. In other words, they can get away with it easily. Ask the millions of people who have lost their life savings by investing in retirement or stock plans. Where can they get compensation? Can they get it from the fund managers or salesmen?

Knowledge abuse tends to be much less in products and services where the providers are held accountable for their mistakes. We don’t need to know much about a jet plane. We only need to make sure that it is safe and comfortable. We can make the provider responsible because they cannot blame the plunging stock market when a plane crashes. When we buy a car, a PC, or a cell phone, we don’t need to know the technical details about how the products work. We only need to be satisfied by their utilities. We can hold the providers responsible for any defects.

6/15/2010 Tuesday

Dow: +214 to 10405, volume 1.1 billion shares.
Nasdaq: +62 to 2306, volume 1.9 billion shares.
S&P 500: +26 to 1115, volume not available.

The upturn continues after a short pause yesterday. Today’s big rise in stock prices has the same magnitude as that achieved last Thursday (June 10). Judging from the steady advance for the past few sessions, it appears that the market has struck a temporary bottom on Monday, June 7, where the three major indexes fell to 9816 (Dow), 2174 (Nasdaq) and 1050 (S&P) respectively.

According to recent experience, some profit taking usually occurs after the Dow has advanced for more than 500 points. It seems that the time is ripe for a temporary pull back any day now.

Topic for Today: Misuse of Knowledge.

Although knowledge is power, it is not easy to amass the right kind of knowledge for one’s benefit. The same goes for applying your knowledge to improve your wellbeing.

It should be noted that knowledge does not equate to truth, because knowledge can be false, wrong, or propagated incorrectly. If your mind is ingrained with the untruths, it will take a long time to find out and unlearn what you have learned before. How can you make sure you are learning the truth? You have to constantly validate your knowledge with everyday experience.

Even when you have obtained the truths, you still have a chance of misuse by applying them incorrectly. Let me give you a few obvious illustrations.

Employing big guns or overwhelming firepower in guerrilla or urban warfare is a misuse of military strategy. Why? The enemy is either hiding to avoid direct confrontation or living around you. You cannot kill them without killing your own people. When you least expect it, they will strike anywhere and anyhow that really shock you.

Surfing the Internet to find which kind of stuff to take for good health is an endless cycle that exposes you to mountains of truths and untruths. How can you distinguish between the two? Chances are you pick the ones listed on top due to time available, but that does not guarantee the truths. It follows that the chance of misuse is also great.

In the area of finance and stocks, the truths are buried under a mountain of man-made untruths. However, many people like the technical complicated stuff that is used to hide the untruths. So they wind up learning the untruths, and of course they will misuse whatever being learned. As a result, they become just a member of the herd subject to being led and exploited.

6/14/2010 Monday

Dow: -20 to 10191, volume 1.1 billion shares.
Nasdaq: +0.4 to 2244, volume 1.9 billion shares.
S&P 500: -2 to 1090, volume not available.

The upturn for the past two days could not sustain as stocks began to retreat after midday. It looks like the retreat will continue tomorrow as profit taking takes hold. Recent trends suggest that an upturn seldom lasts for more than two days. So is a downturn. In this kind of market, smart players should sell on the rally and buy on the dip.

Topic for Today: Knowledge is power.

It is beyond doubt that knowledge is power. We should spend time everyday educating ourselves about what we do and how society works. However, we should also beware that people with power tend to take advantage of others.
Let me point out two areas of where the experts rule:

First, medical doctors tend to use technical terms to describe a patient’s problems. Most patients are confused including me. But we like to pretend that we understand and use the same technical terms to hide it. As a result, in everyday conversation about health issues, people drop technical terms like they drop names. I often find that this kind of conversation does not help our health at all.

Second, in finance and stocks, this technical name-dropping is all over the place. It seems that the more technical you pretend to be, the more knowledgeable you will become. No wonder the so-called financial experts can easily impress other people and take advantage of them. You have to be careful with technical terms, because it is so easy to get burned if you pretend you understand them.

My advice is: Stick with the basics. It is better to be smart and prudent than knowledgeable. Practice moderation, you’ll have good health. Buy low and sell high, and do not follow the herd, you’ll reap profits in the stock market. You don’t have to know everything in details in order to fully realize its benefits. For instance, I enjoy driving a nice car without having to know how the transmission or the engine works. When something gives you value, you know it and can feel it.

6/11/2010 Friday

Dow: +39 to 10211, volume 1.0 billion shares.
Nasdaq: +25 to 2244, volume 1.9 billion shares.
S&P 500: +5 to 1092, volume not available.

After a big boost on Thursday, some profit taking is in order today. However, the market turns around near the close, and the three major indexes winds up in positive territory again.

Topic for today: Humility and prudence.

When people talk about humility, it seems a little high sounding. Through experience, I think we should heed their words especially in the area of finance. We must practice some prudence in everyday life, else it will hurt.

In the stock market, we may strike luck a few times consecutively. That does not mean that we have suddenly become an expert, although we may gain a little more knowledge. The next play always requires refreshed thinking and reassessment, because circumstances change everyday. The same strategy may not work the next time around.

If you do not appreciate what I mean by humility and prudence, let me point out some good examples:

The current BP oil spill in the Gulf Coast is the disastrous result of a big gamble to drill for oil on the seabed. BP has the advanced technology for drilling. However, it does not have the technology for safety and damage control. For over 50 days now, BP is still struggling for an answer to the continuous oil spill.

The financial meltdown around September 2008 demonstrates the reckless risk taking on the part of the big banks in real estates. Due to their vast financial resources, they lent, lent and lent through creative financial instruments like sub-prime mortgages and credit default swaps. Look at the mess they have created as a consequence.

The US has not been acting as a humble superpower in history. Some say it does not have to. Because of its supreme firepower, the US should impose its will on others. I wonder if the US has learned a hard lesson yet through its most recent misadventures in Afghanistan, Iraq, and Vietnam. Immense firepower like nuclear weapons, aircraft carriers, cruise missiles and stealth bombers may not be useful in many circumstances. A smart enemy can choose to hide in the tropical jungles or among the civilian population. They may choose to counter-attack with guerilla tactics and employ primitive weapons like booby traps, improvised explosive devices (IED) , or suicide bombers. These primitive methods can easily bring a superpower to its knees. Have you ever heard the popular story of David against Goliath? So does it help to practice humility and prudence? If not, you must pay with great pains to learn a hard lesson.

6/10/2010 Thursday

Dow: +273 to 10173, volume 1.3 billion shares.
Nasdaq: +60 to 2219, volume 2.2 billion shares.
S&P 500: +31 to 1087, volume not available.

We have not seen a good day like this for quite some time. Stocks kept on rising for the whole trading session. Has a real bottom been reached? We should remain cautious because first, the trading volumes are not high. Second, all the economic worries afflicting the market recently have not suddenly disappeared.

Topic for Today: Renminbi, the Chinese currency

The dominating news today are the strong growth of Chinese exports (+49% in May) and the rumor that a major Chinese oil company offering to buy part of BP.

China’s economy has been on steroid for almost three decades now. One consequence is the increasing pressure for its currency to appreciate. The Chinese government consistently resists this pressure and only allows the currency a limited upward float for good reasons.

First, the Chinese economy is export driven. The majority of workers are engaged in production for exports. When the Renminbi appreciates, exports will become more expensive leading to a decrease in demand, hence production. This means fewer people can find jobs. What the Chinese government fears most is unrest due to high unemployment that can topple the communist regime.

Second, China has over one trillion dollars of foreign reserves, which are mainly spent on purchasing US treasury bills. This policy directly supports deficit spending by the US government. Besides, it also helps keep interest rates low in the US. As a result, China is now a big creditor for the US with all the financial and political influence that go with it.

The US of course wants the Renminbi to appreciate. Why? When the Renminbi appreciates, the US dollar depreciates in relation to it. Since the US debt to China is denominated in US currency, the dollar depreciation will automatically wipe out a significant percentage of the US debt to China. Do you think the Chinese government is so stupid to let that happen?

Third, although the Chinese government is reluctant to see its currency appreciate, the reality is that it is happening automatically with the changing economic circumstances. The trick is for the Chinese government to enforce some order in the upward movement of its currency so that the appreciation won’t destabilize its own economy.

6/9/2010 Wednesday

Dow: -41 to 9899, volume 1.7 billion shares.
Nasdaq: -12 to 2159, volume 2.3 billion shares.
S&P 500: -6 to 1056, volume not available.

As I predicted, yesterday’s late-session rise extended to today’s morning but could not sustain. The Dow made just one strong upturn that lasted for less than six hours. You must pay attention to this kind of daily short cycles if you hope to make some money out of the current nervous market.

Topic for Today: Low Labor Cost
The recent front pages of major Chinese newspapers published overseas are filled with stories about employee suicides in Foxconn, a Taiwanese-owned company in southern China. Foxconn manufactures electronic parts for some major US companies such as Apple, Dell and HP.

To stem the tide of suicide, foxconn raised wages by more than 130% across the board to boost morale. Answering shareholders in a meeting, the CEO said that the company should rely more on good technical management to make profit rather than on cheap labor. I think he has made a very good point that should be modeled by all other companies.

Over the last few decades, China has attracted a large number of foreign investors due to its low labor costs. Now that the country has built up a huge middle class and domestic market, it is time for transition from low cost labor to creative technical management to enhance the living standards of its people. This transition is a normal step in economic development throughout history. As you know, the US was a cheap labor source for Europe before the 1900’s. Japan was a cheap labor source for over a decade right after World War II. Now it should be China’s turn to transition.

Many countries in the developing world are waiting to become the next cheap labor source including: India, Pakistan, Vietnam, Mexico, Brazil, South Africa, and so on. They would like to attract foreign investors to boost their chronic unemployment.

You may dislike the idea of corporations exploiting foreign cheap labor, but that’s how the real world works. Most people living in developing countries cannot find jobs. Would they like low-paying jobs or no jobs at all? Low pay is true compared with the living standard of the investing country, but the pay is not low in the host country. Else nobody will be coming to work for the foreign investor.

By saying this, I don’t mean that foreign companies should exploit their workers overseas. They should treat their overseas workers equal to or better than the current standards in the host country. Despite complaints about unfairness, investing overseas is a good practical way to spread wealth from developed to developing countries. It is also a way to make the investing company competitive by taking advantage of the wage differences between various countries.

6/8/2010 Tuesday

Dow: +123 to 9940, volume 1.6 billion shares.
Nasdaq: -3 to 2171, volume 2.7 billion shares.
S&P 500: +12 to 1062, volume not available.

Like yesterday, the Dow managed to make two up-down cycles in one trading session. The up cycle was cut short by the closing bell, resulting in an increase for the day. This up cycle may extend to tomorrow morning but may not last long.

A friend of mine has sold off all his stock holdings in BP for fear that the company may go bankrupt as a consequence of the disastrous oil spill off the Louisiana Coast. Although this may be a prudent move, I feel that the strength of big oil cannot be underestimated.

First of all, the demand is there and growing fast especially in developing countries. Just look at the number of cars, ships, and airplanes. Most of the world’s propulsion energy comes from oil. Besides, the oil market is controlled by a cartel of oil producing countries with the oil companies being willing partners. They control world prices by adjusting production volumes.

Big oil companies make billions of dollars of profit every quarter. Flushed with cash, they have bought the souls of some top government officials and contributed liberally to the election campaigns of legislators of major political parties. The energy policy of the Bush Administration was crafted by the oil interests headed by then Vice President Dick Cheney. At the Republican Convention in 2008, you can feel the power of the oil interests as they clamor for “Drill Baby Drill!”

A look at a comparable oil spill in 1989 of the tanker Exxon Valdez off Alaska will tell you what has happened to the oil giant Exxon-Mobil. The company did not go bankrupt. In fact, it thrives today. There are plenty of lawsuits still seeking damages after all these years. But Exxon has a team of top lawyers who have managed to either delay compensation or bargained them down to acceptable levels. So I don’t think BP can die that easily.

Thus the stocks of big oil companies are good to own, except that they are pretty expensive. I cannot afford to own them but I buy something else that is a good play and is related to oil. I am buying some solar company stocks.

Don’t you think that solar is positively related to oil? When oil prices rise, solar stocks rise too because expensive oil makes alternative energy more attractive. When oil prices dip, solar stocks don’t dip that much as oil stocks because they stand out as an alternative source again. Furthermore, solar energy is near the point of commercialization in the US with each passing day. Being a clean alternative energy, it is considered one of the next big things.

US solar stocks are risky because of either high prices or limited domestic market. I recommend buying Chinese solar stocks, which are relatively cheap and serving a huge market. Besides, American solar companies are small and cash-strapped. On the contrary, Chinese ones are big and expanding overseas, with strong government support too. I recommend two: STP and YGE, both are traded on the New York Stock Exchange. Both have come down quite a bit in recent months due to the general market pull back. A word of caution: they fluctuate quite a bit everyday. You should treat that as an opportunity.

6/7/2010 Monday

Dow: -115 to 9816, volume 1.4 billion shares.
Nasdaq: -45 to 2174, volume 2.2 billion shares.
S&P 500: -14 to 1050, volume not available.

The market fell some more today after Friday’s massacre. For the duration of the trading session, the Dow went through two up-down cycles with a sharp rise at the beginning and a bigger drop toward the end.

In this kind of market with violent swings, I wonder how many people have become innocent victims while the big traders make waves. Is this what real life is all about? The few big guys make decisions and the many small guys swallow the consequences, good or bad.

I can think of many cases where people at the top take unnecessary risks and the society as a whole suffers the consequences.

The financial meltdown of 2008 was the result of risky schemes such as sub-prime mortgage and credit default swaps. It precipitated the current deep recession worldwide where millions of people lost their jobs and saw their lifetime savings wiped out.

The wars of choice in Vietnam and Iraq cost the US the lives of over 50,000 and 4,000 young men respectively. The dead soldiers might have thought that they were serving their country, but they did not have to end up like this were it not for the big mistakes of those in charge at the top.

People tend to have a short memory about disastrous events. After a few years when things are forgotten, the same mistakes will be repeated. So we can say that people seldom learn from history.

Worse, there is one thing we never learn again and again. It’s the workings of the stock market! How many booms and busts the market has gone through in the past ten years? Enough to make you wiser and richer. Have you asked yourself how much insight have you learned? Are you thinking the same way now as you used to a few years ago. If the answer is yes, you’d better try to get smarter. Else you’ll wind up being an innocent victim one more time.

6/4/2010 Friday

Dow: -323 to 9932, volume 1.6 billion shares.
Nasdaq: -84 to 2219 volume 2.4 billion shares.
S&P 500: -38 to 1065, volume not available.

Today’s market can be described as a massacre. This also occurred not long ago on May 20 when the three major indexes fell even more. Between these two massacres, there were two days when the Dow rose by more than 200 points. The consequence is that we wind up today not much different from the levels on May 20.

The last two weeks show that the market is not moving anywhere but reacts violently to certain good or bad news that come along. This may be the condition we have to face until the next earnings season starting July.

What is the bad news this time? It’s about the slow job growth of only 41,000 in May. This brings fear that the current recovery may not sustain for long. Is this fear justified? Let’s take a look at a past economic recovery.

The big economic recovery between 1983 and 1988 looks similar to the current one. In 1979, the US economy was devastated by an oil crisis where people had to line up for gasoline. The fast rising oil prices brought high inflation that led the Federal Reserve to raise interest rate to an unimaginable 18%. The high interest rate later caused the collapse of the Savings and Loans banking system that relied on low-interest mortgage financing to stay in business. Comparing that recession with the current one, the current recession is mainly caused by sub-prime mortgage but is more deep in magnitude, but it lacks the complexity of oil supply, big inflation, and the collapse of the entire Savings and Loans system.

During the recovery beginning in 1983, it took a long time for job recovery. There was no significant job growth until 1985 and beyond. Job growth is always the last one to take hold after company profits and consumer spending have reached a high level. Why? Companies are quick to lay off workers and slash inventories when times look bad. They are slow to hire until they are pretty sure that business is good enough to sustain the higher costs of a larger labor force. When can we expect to see a significant growth in employment this time? Probably in 2011 while the economy continues to crank up.

As a consequence, the stock market will fluctuate violently for the next few months every time it turns attention to the slow job growth.

6/3/2010 Thursday

Dow: +6 to 10255, volume 1.2 billion shares.
Nasdaq: +22 to 2303 volume 2.0 billion shares.
S&P 500: +4 to 1103, volume not available.

Yesterday’s rise extended into the early morning only. Then the Dow began to slide and wound up with a small gain. On the other hand, the Nasdaq has shown some strength in maintaining momentum.

Today’s market performance once more confirms the short up-down cycles that last for only a few hours. This phenomenon is going to last for a while given the major economic uncertainties (US high unemployment, BP oil spill, and the weak Euro) that will take time to resolve.

The light volumes of trade show that public participation is low. People either don’t have enough cash or are not confident about the future. That’s why they call this a traders’ market. A traders’ market is characterized by frequent profit taking, short up-down cycles, violent swings especially near the opening and closing hours, and light volumes too. The market moves with whatever news it wants to hear or ignore.

For small investors, this kind of market is very hard to play. I’d advise not to follow the news because you never know which news the market wants to hear or ignore on any given day. I’d suggest you pay attention to the intra-day stock price movements. You will find that there is a certain pattern. The pattern shows that both up and down times cannot last long, two days at most. Once you get used to this crazy pattern, you can time your buy and sell accordingly.

6/2/2010 Wednesday

Dow: +226 to 10250, volume 1.4 billion shares.
Nasdaq: +59 to 2281 volume 2.1 billion shares.
S&P 500: +28 to 1098, volume not available.

Today’s market rebounded after two days of consecutive losses. Two pieces of good news are said to have given the market a boost: higher home and auto sales. The market chose to ignore the uncertainties of the Gulf Coast oil spill and the Euro crisis, which will stay in the background for some time to come.

Yesterday I talked about the “artificial” highs and lows near the opening and closing hours of the trading session. I also said that the “artificial” low of yesterday near the close needed proof. Well, the quick rebound of today has proved it. Thus we have seen that the two low points of yesterday that have been artificially created only lasted for less than half an hour. This short duration is long enough for the big guys to move back into the stocks where they have deliberately pushed down the prices.

Today’s market looks similar but in the opposite direction. The Dow rose by almost 50 points during the last half hour of trading. Will this sudden boost last into tomorrow morning? We’ll see. If it does not last, it means that we have a temporary high instead of two temporary lows for yesterday.

In this kind of short-cycle play as shown over the last few days, an up-down cycle lasts for a few hours only, but the price range is around 200 points for the Dow from high to low. This is a good price range to make some decent amount of money if you have a lot of cash to buy and a lot of shares to sell. For the small player, it’s really tough to follow the short cycle, but it can be done to make a few hundred bucks.

6/1/2010 Tuesday

Dow: -113 to 10024, volume 1.4 billion shares.
Nasdaq: -35 to 2222 volume 2.1 billion shares.
S&P 500: -19 to 1071, volume not available.

The market fell for a second consecutive day after the Memorial Holiday. Oil stocks were dragging down the market as the press began to question the survival of BP in the disastrous oil spill off the Louisiana coast. Besides having spent $1 billion already in fixing the ruptured pipe, BP is facing huge damage lawsuits and government investigations about wrongdoing.

The behavior of today’s market shows its nervousness to news. Stocks slid right after opening due to news about slower manufacturing activities in China. Prices picked up later when news arrived about better-than-expected US manufacturing data. During the closing hour, stock prices fell again on worries about BP’s failure to curb the oil spill. After all is said, I don’t think you can benefit much from the stock market if you follow the news. The news only confuse you. As I have always emphasized, news are used to “explain” the market when you don’t know what is really happening.

What we have now are two sets of opposing facts. On the one hand, there exist the uncertainties regarding the disastrous oil spill and the Euro crisis, and the fear that economic recovery may be impaired resulting in a double-dip recession. On the other hand, the global economy is slowly but surely on the mend, especially the US economy. In addition, the Euro crisis is causing a steady appreciation of the US dollar and the flight of money away from the Euro zone. This is a good environment for US stocks. Why is the US market going down then? Well, it’s just a temporary cash-out by the big players. They will come back when prices come down low enough.

You must note the big ups and downs close to the opening and closing hours. This is the best time for the big players to “create” a high or a low when most people are not yet into the market. Today we saw two “artificial” lows at both opening and closing. The first low has been proven artificial because prices rebounded quickly a little later. The second low is not proven yet because it may extend into tomorrow morning until we see prices rebound. These artificial highs or lows do not last long, but long enough for the big guys to make some money out of it. As a small guy, you can make some too if you follow them closely.

5/28/2010 Friday

Dow: -122 to 10137, volume 1.5 billion shares.
Nasdaq: -21 to 2257 volume 2.1 billion shares.
S&P 500: -14 to 1089, volume not available.

After a run on steroid yesterday, stocks retreated to consolidate gains. Given all the economic uncertainties still unresolved, the market may test the February lows for multiple times. This should be considered a good opportunity to see a temporary bottom. A temporary bottom for a stock is one where the price promptly rebounds after passing through it for a short while. The more this happens, the more certain is the bottom.

This week saw the crowning of a new top dog in the high tech industry. Apple has just surpassed Microsoft to become the leading company in total stock value. Back in the mid 1990s when Apple was in dire straits with its stock price falling below $5, Bill Gate coldly remarked that it would be a sad thing if Apple went down the drain. Well, Steve Jobs came back to lead and brought Apple to glory. Jobs’ vision and strategy can be summed up in his remark about Microsoft products. He once said that Microsoft did not have style.

To understand what style means, you have to use an Apple product to appreciate. First of all, it feels good to look and hold an Apple in your hand. When you use it, you see the intuitive ease of its software. A very technical product suddenly becomes a useful toy. To many people especially the young, Apple is cool, fun and hip. Can you name another technical product for the masses that embodies such emotional feelings? None, except perhaps the Prius and the Accord.

Apple not only tops in total stock value, but also succeeds in diversifying its product line to include PCs, software, retail, mobile phones, music players, electronic books, and future multimedia products. People have been talking about multimedia products for decades but have little ideas what they are or will be. Apple comes along and defines the concept of multimedia with its iPod, iTouch, iPhone, iPad, and whatnot. It has created a niche market of its own where people are willing to pay a higher price to enjoy the new experience.

Let’s compare the two company stocks:
—————————Apple————-Microsoft
Stock Price 5/28/10———–$257—————$26
Outstanding shares———-909.9 Mn———–8763.8 Mn
Total Stock Value———-$233,844 Mn——–$227,859 Mn

The above shows that Apple stock has the potential to split many times. Suppose the split is ten for one, the situation would be:
Stock price after split: $257 / 10 = $25.7
Outstanding shares: 909.9 Mn x 10 = 9099 Mn

Thus a ten for one split would put Apple in the same league as Microsoft with a low enough price for small investors and a huge amount of outstanding shares typical for top companies. But Steve Jobs would be singularly opposed to it. He probably would say that Apple would be reduced to no more style. I think Jobs would favor a two for one split, to be followed by another one later. In that case, the stock price would still be around $257 / 4 = $64, high enough to reflect its niche and style.

5/27/2010 Thursday

Dow: +285 to 10259, volume 1.4 billion shares.
Nasdaq: +82 to 2278 volume 2.3 billion shares.
S&P 500: +35 to 1103, volume not available.

Today’s market seems to be running on steroid. Note that the trade volumes are only moderate, not high.

The stimulus came from the success of BP stopping the oil spill near the Louisiana coast. Even though the stock price of BP rose significantly, pretty soon people will turn attention to the costs of cleaning up the mess, and the huge amounts of lawsuits being filed against the company.

Another stimulus came from China’s announced intention to keep her assets denominated in Euro, thereby relieving some pressure on the currency. However, nobody should take China’s words for granted. Big investors have to be on constant alert to maintain the values of their investments. If the Euro is weak, big investors will be on the lookout for diversification away from the currency. It’s a matter of being prudent with your money.

The problems with the BP oil spill and the weak Euro cannot go away that fast. They will stick around to haunt the stock market. Since the market has emotions, it all depends on which problems it wants to ignore on a given day. Today, the market ignores the BP and Euro problems for a change after being plagued by them for more than a week.

5/26/2010 Wednesday

Dow: -69 to 9974, volume 1.9 billion shares.
Nasdaq: -15 to 2196 volume 3.0 billion shares.
S&P 500: -6 to 1068, volume not available.

Yesterday’s recovery extended to significant gain today. However, the gain could not sustain and the three major indexes fell again at the close. For two days, we have seen two short cycles of ups and downs, but the end results are net declines for the indexes.

In this kind of environment, small players hoping for a steady climb in stock prices are quite frustrated. There exist lots of economic uncertainties out there, especially the weak Euro, and little progress in employment. Other than that, sales, company profits, housing, and consumer confidence are on the mend.

Economic uncertainties always gain the upper hand in influencing stock prices. That is why we see short cycles of ups and downs almost on a daily basis. It shows that buyers tend to take short-term profits after stock prices have risen just a little. If you have the time to play daily, you may be able to win, too. If you set your sights to longer term, you will have to hang on and wait it out.

5/25/2010 Tuesday

Dow: -23 to 10044, volume 1.9 billion shares.
Nasdaq: -3 to 2211 volume 2.9 billion shares.
S&P 500: +0.4 to 1074, volume not available.

Yesterday’s plunge extended into today’s morning. The Dow fell almost by 300 points for a brief period. Then suddenly things started to turn around. At the close, the three major indexes have recovered significantly.

In this kind of situation, do you think a temporary bottom might have been reached this morning because of the sudden recovery? I would say yes. The key word is temporary. Note that the lowest bottoms reached during the fall of 2008 in the mist of the financial meltdown are 6500 for the Dow, 1400 for the Nasdaq, and 930 for the S&P 500. Why Do I say it’s temporary? The reason is that the Euro crisis that precipitated the current downturn by no means equals in severity to the meltdown of the big US banks in 2008.

Now this temporary downturn will give birth to a temporary upturn where the Dow may advance 1300 points to beat out the previous temporary peak, just like it has done so a few times before. There are plenty of reasons for optimism because the US economy is steadily on the mend. Today’s announcement about consumer confidence shows that it has been rising for three consecutive months. This is one among plenty of good news coming out in recent weeks.

One thing we never know is that when the market will react to the good news and ignore the bad ones. So the timing of the upturn is still unclear. What is clear is that a downturn always feeds an upturn and vice versa. In this way, the people who are leading the market will continue to make money. Remember, the stock market is a money game, not an investment as most people think. If you want to win, follow the people who make waves, not the so-called investment experts.

5/24/2010 Monday

Dow: -127 to 10067, volume 1.3 billion shares.
Nasdaq: -15 to 2214 volume 2.1 billion shares.
S&P 500: -14 to 1074, volume not available.

The market spent most of the day in negative territory. The Dow suddenly plunged by triple digit half an hour before the close. The trading volumes were only moderate.

Talking about change, we must appreciate that human nature is afraid of change because of its uncertain results even though it carries the promise for a better future. Real change is only possible after a big crisis has occurred. Let me give you a few examples:

The US Senate has passed a comprehensive financial reform bill last week. The bill will tighten government supervision of banks and financial companies. It will also enforce better consumer protection. Such a bill could never have been possible without the financial meltdown in 2008 that precipitated the current deep recession causing millions of Americans out of work.

The US government was talking about health care reform for 40 years until a comprehensive bill was passed a few months ago. A health care crisis has been brewing in the US for a long time until US industries finally realized that they could no longer afford paying for the health insurance of their employees. The heavy burden of health care costs has also eaten into American competitiveness overseas, and threatens to break the federal budget in the near future.

At the Republican Convention in 2008, the oil interests demonstrated their influence by shouting, “Drill baby drill”. The oil spill near the Louisiana coast seems to have silenced their voices somewhat. It awakens the public to the dangers of uncontrolled drilling and the price we have to pay in the form of damaged environment, destroyed fishery and tourist industries. This big oil spill still continuing today is likely to enable the passage of a comprehensive energy bill some time this year.

My conclusion is, if you want big change, wait for a big crisis to happen. If you want no wars waged by the US overseas, wait for more disasters in addition to Vietnam and Iraq. If you want better gun control, wait till enough children and innocent people have died due to the spread of guns.

5/21/2010 Friday

Dow +125 to 10193, volume 2.3 billion shares.
Nasdaq +25 to 2229, volume 3.3 billion shares.
S&P 500 +16 to 1088, volume unavailable.

The market exhibited violent fluctuations today. During the last half hour of the close, the three indexes suddenly shot up to register nice gains. Will this recovery last given the continuous uncertainties in the Euro? I think the roller coaster ride is still on.

To follow up on my proposed new approach for small stock players, let me list a few don’ts to help you stay alive in the market:

Don’t let other people play with your money like buying a mutual fund. You must realize that all people including financial experts work for their own interests, not yours. If you don’t know how to play with your own money, try to learn how.

Don’t think that you can beat the big guys who are your opponents in the stock game. You are just a helpless small potato. But the nicest thing about the capitalist system is that small guys can win. So try to learn how to join the big guys by follow them closely, not going against them or fall into their traps.

Don’t try to follow the big guys by reading about what stocks they buy. The people who wrote about the big guys are usually their employees or agents. Follow the big guys by objectively studying the trends of the market, that is, the results of their actions everyday.

Don’t waste your precious time by looking for insider information or some expert tools to win. You will get no insider information simply because you are no major shareholder. The expert tools are only numbers game designed to seduce the small guys to think that they can easily win.

Don’t buy penny stocks because they are cheap. You must know why a stock has deteriorated to penny status. Nearly all penny stocks are due to mismanagement and losing market shares, which will lead to bankruptcy. A good stock can be dragged down to penny status due to a big economic crisis like the financial meltdown of 2008. However, it does not stay there too long, maybe one or two days, because the big guys will come in to get themselves bottom heavy in that stock.

Don’t buy and pray like most people do. A winner buys and plays on a daily basis. Build up your assets in such a way that you always have some stocks to sell and some cash to buy.

Don’t think of yourself as an investor. In the stock market, everyone is an opportunist and free rider. There’s nothing wrong with that, and nothing to be ashamed of. It’s just human nature.

5/20/2010 Thursday

Dow: -376 to 10068, volume 2.0 billion shares.
Nasdaq: -94 to 2204 volume 3.0 billion shares.
S&P 500: -43 to 1072, volume not available.

Today’s market can be described as a blood bath. It is mainly due to the ongoing uncertainties about the Euro, and its negative impacts on the global economic recovery. The unexpected increase of unemployment claims in the US does not help. However, this figure is published on a weekly basis and usually shows fluctuations.

On a day like this, I’d like to bring back my favorite table to show how much we have dropped:

Dates—1/19/10—2/8/10—4/23/10—5/7/10—-Today

Dow—–10725—–9908—–11204—–10380—–10068

Nasdaq—2320——2126—–2530——2266——-2204

S&P500—1150—–1057——1217——1111——–1072

The three indexes have already fallen through the previous lows on 5/7. They are testing the lows on 2/8 in a matter of days. These previous lows are results of temporary profit taking with no big reason except that things fall short of expectations.

However, the current Euro crisis seems like a big deal that will last for a while. I am not surprised if the market falls further. So hang on tight. We know that it’s not the end of the world.

5/19/2010 Wednesday

Dow: -67 to 10444, volume 1.6 billion shares.
Nasdaq: -19 to 2298 volume 2.6 billion shares.
S&P 500: -6 to 1115, volume not available.

The market continued to slide today. Around midday, the Dow was down by about 170 points but recovered significantly at the close. It looks like stocks are coming down to test a temporary bottom as the Euro begins to show some signs of stabilization.

I discussed the top seven investments in life yesterday. Are you surprised that stock investment ranks last? The top six investments are so obvious but many people seem to neglect them. The reason is that it takes time to build, maintain, and enrich. It takes determination to invest the time and cultivate a good attitude to succeed.

The same goes for stock investment. Many people think that some advice from experts or some insider information will be sufficient. No! That’s precisely the wrong approach. Investment experts try to serve themselves, not you. You will never get any insider information simply because you are not a major shareholder.

When you immerse in the wrong approach, you are doing the wrong things and wasting your precious time over and over. As a small stock player, you have to appreciate how much you don’t know and how helpless you are. But that does not mean that you cannot win. The key to win is to keep your eyes open, broaden your vision, think a few steps ahead, and follow closely the direction of the market. All my videos on Youtube are trying to help you with the right approach.

5/18/2010 Tuesday

Dow: -115 to 10511, volume 1.5 billion shares.

Nasdaq: -37 to 2317, volume 2.4 billion shares.

S&P 500: -16 to 1121, volume not available.

The market started out with a positive note but began to slide toward midday. At the close, the three major indexes registered the same degree of decline as last Thursday and Friday. It looks like Monday was a brief rest rather than a turning point. But who knows? A spike may come tomorrow that will bring back the roller coaster ride.

Since we are interested in stocks, we may as well take a hard look at investments. If I am asked to give a ranking of the best investments in life, I would rank them in the following order:

1. Enrich your experience. The best investment is always the cheapest, like fresh air and rain water. All successful people have gone through dramatic experiences that shape their lives. Those experiences may be good, bad or even horrifying. But those people have learned a good lesson from their encounters, hence they increase their chances of success later.

2. Enrich your health. Health is always taken for granted until you get sick. Bad health destroys your life and happiness. Bad health prevents you from achieving what you want.

3. Get a good education. A good education does not necessarily mean a structured program to be learned in school. People tend to learn more out of school than in it. Getting a good education generally means keeping your mind open for new ideas.

4. Do something meaningful and satisfying as a career. The material pay does not count as much as the invisible spiritual pay.

5. The wider is your network, the greater is your net worth. Successful people always have friends and supporters helping them in their climb to higher positions.

6. Own your residence. You need a roof whether you rent or buy. Also, you pay monthly whether you rent or buy. So you may as well buy to save rather than rent to spend. All real estates appreciate in the long term. That’s why they are called “real”. You may have a good formula to help you figure out whether to rent or to buy. I would advise you to spend your time instead to acquire a down payment.

7. Buying stocks as an investment is the wrong approach advocated by those people in the investment business. Buying stock is just a money game where you can get a free ride and get rich quick. But no one can pitch this approach to the general public as a business proposal. So stock playing has to carry the smoke screen as an investment. Given the true facts about the stock market, do you know how to do it? How do you learn to play smartly? How much time have you wasted in learning the wrong approach? How many people have lost money in the stock market? These are the questions you should think hard about. Incidentally, if you have done well in Investments 1 and 3 as mentioned above, you have probably made yourself a smart and successful stock player.

5/17/2010 Monday

Dow: +6 to 10626, volume 1.4 billion shares.
Nasdaq: +7 to 2354 volume 2.4 billion shares.
S&P 500: +1 to 1137, volume not available.

The two-day decline continued to midday today. Then a V-shape recovery occurred that brought the three indexes back to positive territory. Although the financial uncertainties in the Euro zone remain, US stocks seem to be stabilizing, at least for now.

A financial crisis hurts nearly every stock. The current Euro crisis does not measure as big as the one in US that occurred in late 2008. Let me assure you that the sky is not falling, only the fear that the US economic recovery will be cut short. In comparison, the US financial crisis was more terrifying than the Euro crisis because the big banks’ troubles seemed to bring down the entire global economy at that time. But where are we now? The US financial crisis is over in less than a year. We are now waiting for the economy to slowly crank up.

Many experts think that the Euro system won’t work. Well, the Euro currency has been in circulation since 2002. The current crisis is testing the strength of this international system. The Euro countries will learn as they go and will find a way to fix the weakness of the system. Their success depends on the will of two pillar countries, Germany and France, with the support of more than a dozen other countries in Europe.

The Euro crisis is real but is comparatively small, and hence will last shorter. Since the fear of it brings down stock prices much more than warranted, we should view this as an opportunity rather than a doomsday. When most people think that the sky is falling, what do you do? There is no place to hide. You will die rich or poor anyway. For me, I may as well grab some cheap stocks rather than sitting there complaining. What if the sky does not fall?

5/14/2010 Friday

Dow: -163 to 10620, volume 1.5 billion shares.
Nasdaq: -48 to 2346 volume 2.6 billion shares.
S&P 500: -22 to 1136, volume not available.

Yesterday’s last-hour slide continued into today’s whole session mainly due to the uncertainties regarding fiscal problems in the Euro Zone. Although the three indexes have come down quite a bit for two consecutive days, they are still well above the lows set last Friday, May 7. Let’s see if the market wants to test those lows next week.

To follow up on yesterday’s topic about adopting a different mindset for small players to win, the idea of a target bottom and peak set by the big players is very important. How can you tell the target bottom and peak? You cannot because you did not set them. However, the previous target bottom and peak serve as a good indicator.

How long is the duration between a target bottom and peak? When a big player invests in a stock, he has to gradually accumulate be bottom heavy. Only then it is worth the risk to push up the price, and also seduce the public to buy. This takes time, at least six months depending on the outstanding shares of the company and the economic environment. Between the target bottom and peak, there exist many temporary bottoms and peaks where the big player cashes out and goes back in again to reap some profits. For big companies with billions of shares outstanding, a group of big players come together to jointly play the stock in order to share resources and profits.

As a small player, you can only tell after you’ve seen the target bottom and peak. Don’t rely solely on guesswork because it is very dangerous. Using past records as guide, try to see if a target bottom has passed. After you’ve found one, you have at least three months to go in to ensure you have bought below the mid point to the peak.

As for the target peak, you’d better apply some intelligent guesswork based on past records. Else it will be too late for you to cash out when you see one. If you have successfully bought the stock below the mid point between the target bottom and peak, you still have enough padding to cash out, probably a week or so after you’ve seen the target peak.

For your own benefit, try to identify the previous target bottoms and peaks for the stocks of interest to you. Remember to distinguish between temporary and target bottoms and peaks. Their difference lies in the duration.

5/13/2010 Thursday

Dow: -114 to 10783, volume 1.2 billion shares.

Nasdaq: -31 to 2394, volume 2.3 billion shares.

S&P 500: -14 to 1157, volume not available.

The market had been moving up and down across the flat line all day until it started to slide sharply toward the final hour of trading. Profit taking is coming back again when good quarterly earnings fail to boost the stock price. In the case of Cisco and Disney, shareholders just sell into the good news today.

I happen to think about why so many small investors lose money in the stock market. The basic reason is the wrong mind-set. They think of themselves as investors. So they buy according to the investment news being fed to them by friends, investment companies, and the media. It would serve them better if they think of themselves as free riders in a money game where the big guys control everything. What’s wrong with being a free rider if you can make money legally? It’s only your ego that stands in the way.

The time you begin to think of yourself as a free rider in the stock game, your buying decisions will be totally changed.

First, you will find out who your opponents are. Most small players think that the market is their opponent. What is the market anyway? The stock market is not a free market like that of bread, cell phones or PCs. The stock price is set by auction, not by supply and demand as you think. Your opponents belong to a group of rich and powerful people who can make the stocks go up or down, because they have plenty of cash to buy and plenty of stocks to sell. The stock market is where the strong eat the weak. It’s by no means an investment market.

When you have a clear image of your opponent, you’ll make an effort to understand their sources of power, motives and actions. This is better time spent than reading the stock analyses about companies and products.

When you appreciate the real power of your opponents, you won’t try to beat them for you can never win. Rather, you should join them and follow them closely.

Your opponents always set a range for any company stock, between a target bottom and a target peak. They make money by forcing the stock up and down as many times as possible within this range. They go in full force when they think the stock has reached a target bottom, thus becoming bottom heavy. Then they continue to buy to boost up the price. They are the true investors of the stock by putting in lots of money and to see that their assets keep growing.

Before reaching the target peak, the stock price will be made to fluctuate many times in temporary profit taking. They use the good and bad news as a smoke screen for their price manipulation up and down.

Perhaps past the mid point between target bottom and peak, your opponents start to encourage more and more public like you to participate. That is to say, they have invested in the lower half, and the public is seduced to “invest” in the upper half of the range. If you think of yourself as an investor and follow the investment news, you’ll likely buy into the upper half range, maybe near the peak if you are not lucky.

When the stock has reached the target peak, your opponents will start to cash out gradually at first, then more quickly. The stock price will plunge when the public becomes aware and begins to panic-sell. The price will eventually reach the target bottom, or may even fall through it. When the price has finally fallen to a new target level, your opponents will come back to play again, especially when the company is safe and sound.

What will happen to the company after a stock turmoil? Well, the company moves on as usual. A company operates for profit, not for the stock price, although higher stock price is an added bonus for its employees. The violent fluctuations of the stock price cannot bring down a well-managed profitable company. But a badly run company will eventually bring down its stock price.

So, as a small player, do you want to be an investor or a free rider in the stock market? Are you prepared to toss your ego now?

5/12/2010 Wednesday

Dow: +149 to 10897, volume 1.3 billion shares.
Nasdaq: +50 to 2425 volume 2.3 billion shares.
S&P 500: +16 to 1172, volume not available.

The market continues to rebound after a pause yesterday. The high tech sector exhibits more resilience due to an upbeat guidance from Intel that the chip industry is growing fast because of increasing demands for PC, cell phones and other appliances. There are plenty of indicators out there to boost the market, but it also depends on which one the market wants to focus on from day to day.

I’ve read a recent issue of TIME magazine talking about the President of Brazil wanting to change the lopsided income distribution of his country. Uneven distribution of incomes is a hallmark of under-development where the few rich and powerful control most of the resources of a country. This is in fact the definition of true poverty where the middle class is almost absent.

One interesting fact mentioned is that in the US, the top 2 per cent of the population have a combined income bigger than that of the lowest 95%. This makes me wonder whether the middle class in the US is slowly being squeezed out of existence. I think I belong to the middle class and I feel that I am being squeezed. Do you feel the same way?

This also makes me wonder why are all those big company CEOs complaining about how tough to run a business, how intruding government regulations are, and how many jobs they can create when government relaxes the rules. Don’t they know that running a business is always tough? With their high pay, big company CEOs belong to the top 2% of the national pay scale. Do they really care about the common people? Or do they want government to make their lives even easier and richer?

5/11/2010 Tuesday

Dow: -37 to 10748, volume 1.5 billion shares.
Nasdaq: +0.6 to 2375 volume 2.5 billion shares.
S&P 500: -4 to 1156, volume not available.

The three indexes closed today with not much change. Compared with yesterday’s big surge, today’s small drop of the Dow can be considered stabilization, not immediate profit taking.

The next few days will test whether the lows on Friday (5/7/10) are just a temporary phenomenon. If so, it is likely that the three indexes will gradually climb back to where they were two weeks ago. They won’t stop there on the road to recovery because we are on an up-trend as I tried to reason it out yesterday. My take is that the Dow will likely reach 11700 by July.

5/10/2010 Monday

Dow: +405 to 10785, volume 1.9 billion shares.
Nasdaq: +109 to 2375 volume 2.8 billion shares.
S&P 500: +49 to 1160, volume not available.

The market opened like a rocket today, and managed to stay high until the close. We have not seen this kind of snap back since early March 2009 when the big banks suddenly appeared to be stabilizing after the meltdown. This sudden turnaround is a reaction to the news that the European Union is willing to commit near one trillion dollars in bailout money for Greece and some others in trouble. Note that the trading volumes are not high, meaning not much public participation in today’s upturn.

Where do we go from here? Let’s look at the recent up-down cycles again:

Dates—1/19/10—2/8/10—4/23/10—5/7/10—-Today

Dow—–10725—–9908—–11204—–10380—–10785

Nasdaq—2320——2126—–2530——2266——-2375

S&P 500—1150—–1057——1217——1111——–1160

From the above table, the Dow fell 817 points in two weeks (1/19 to 2/8). Then it rose 1296 points in eleven weeks (2/8 to 4/23). It has recovered more than it dropped because we are in an uptrend.

The Dow then fell again by 824 in two weeks (4/23 to 5/7). Today it has gained back 405 points in just one day.

It seems that the temporary cash out within two weeks in both instances are planned for they are so similar. Is today’s recovery the start of the eleven-week upturn we’ve seen last time? If it is, we can reasonably expect the Dow to rise 1300 points from the low on 5/7. That is to say, the Dow would reach 11700, very likely 12000.

The key is: Are we still in an uptrend? Yes, all the economic indicators point to this direction. My take is: As long as unemployment remains high and interest rates remain low, we are still on an uptrend. Why? Because the public has not come in droves yet due to the unemployment situation. When they do, we’ll have a real boom and the big guys will be cashing out, leading eventually to a bust again.

5/7/2010 Friday

Dow: -140 to 10380, volume 2.4 billion shares.
Nasdaq: -54 to 2266 volume 4.2 billion shares.
S&P 500: -17 to 1111, volume not available.

The market falls again for a fourth consecutive day. The trading volumes have also increased significantly.

Although it seems scary, big plunges for a few consecutive days usually represent a quick temporary correction, which is preferable to a slow correction lasting over many weeks. As I mentioned yesterday, the previous Dow upturn went from 9908 (on 2/8/10) to 11204 (on 4/23/10). When you look back to see the previous upturn, you know that the market is due for a temporary correction anyway, regardless of the news.

The current downturn is quick and big. In two weeks, the Dow has lost 824 points, and may go down some more next week. You may want to note that this downturn is almost exactly the same as the previous one from 10725 (on 1/19/10) to 9908 (on 2/8/10).

So there is nothing to fear, the market just plays a temporary up-down game in an upward trend. We now blame Greece for the current downturn. What did we blame for the previous one? Nothing, except that company profits were not as good as expected, which is always a good excuse when we cannot find a reason. Are we playing games ourselves or are the experts?

I am not going to worry since the Dow is still well above the temporary bottom of 9908 (on 2/8/10). When it falls through this level, I will begin to wonder where has the bull gone.

5/6/2010 Thursday

Dow: -348 to 10520, volume 2.0 billion shares.

Nasdaq: -83 to 2320, volume 3.3 billion shares.

S&P 500: -38 to 1128, volume not available.

This is a third consecutive day of slaughter for the US stock market in response to the financial uncertainties of the Euro countries led by Greece. The Dow was down briefly by near 1000 points in mid afternoon but recovered to a still terrible drop of 348 points. It was reported that the brief big drop was due to an error.

Let’s put this situation in a larger context. The global financial meltdown of late 2008 was terrifying enough, but it did not bring down the stock market. In fact, we saw a bottom at 6500 for the Dow, 1400 for the Nasdaq, and 930 for the S&P. These are considered once-in-a-lifetime lows since the Depression of the 1930s.

Are we heading to another meltdown or double dip? We are dipping of course but will not be as deep as last time. The fact is that Greece has a relatively small economy, hence a smaller impact. Only the fear exists that there may be other Euro countries waiting to slide including Portugal, Spain and Italy.

Let’s review the up-down cycles in recent months:

Dates———1/19/10——2/8/10——4/23/10——5/6/10 (Today)

Dow———–10725——–9908——–11204——–10520

Nasdaq———2320——–2126———2530———2320

S&P 500——-1150——–1057———-1217———-1128

From the above table, the major indexes have fallen to levels below those on 1/19, but are still well above those on 2/8.

The previous temporary downturn lasted a little more than two weeks between 1/19 and 2/8 when the Dow lost over 800 points. However, it rebounded 1300 points to 11204 by 4/23. This shows that the bull is alive and only resting for a while.

Another downturn has occurred again since 4/23. By today, the Dow has lost almost 700 points within two weeks. Does this downturn look similar to the previous one? Quite, but it may come down some more due to the bad news about the Euro countries.

Will the current downturn be temporary? I think so because the smaller Euro financial problem will pass, just like the great financial meltdown of 2008 has passed. What will make the bull continue to run again? Just pay attention to the string of good news coming out lately regarding factory orders, company profits, retail sales, productivity, housing sales, consumer spending, employment; and don’t forget, the appreciation of the US dollar as the Euro continues to slide.

5/5/2010 Wednesday

Dow: -59 to 10868, volume 1.5 billion shares.
Nasdaq: -22 to 2402 volume 3.0 billion shares.
S&P 500: -8 to 1166, volume not available.

The market still suffers from the hangover of yesterday’s big plunge. On one side, we now have the financial uncertainties of the Euro zone and the big oil spill of the US Gulf Coast. On the other side, all recent indicators are pointing to a steady recovery of the US economy. The stock market has a choice to attend to or ignore any factors coming up each day.

If you have seen the riots in Athens on TV, you will understand how angry people feel after suffering from the recession and financial turmoil brought about by the big banks in late 2008. The anger is worldwide but it shows up as riots in Greece today.

People have a reason to be angry. They are forced to bear the burdens of the recession while big business gets away with it. Look at the questioning of top US executives in the US Senate. They beat around the bush trying to explain what had happened. There was not a single admission that they were responsible for the current economic disaster. They are those few who must have benefited from the agony created while still receiving multi-million dollars in bonuses.

If this thing is allowed to continue, the rich will get richer, the poor poorer, and the middle class will be wiped out. This is the best recipe for a communist revolution as happened in China in 1949 and many other countries before. If we want to preserve the capitalist system where people are free to make a buck, we need good government supervision and oversight so that the rich cannot have too big an advantage over the common people.

5/4/2010 Tuesday

Dow: -225 to 10927, volume 1.5 billion shares.

Nasdaq: -74 to 2424, volume 3.0 billion shares.

S&P 500: -29 to 1174, volume not available.

The market turns its attention again to the economic problems of Greece and other Euro countries. There is the fear that even if Greece’s difficulties are over, which country will be next. As a consequence, we see the slaughter of today. Also, the value of the Euro has been falling significantly.

Have you noticed that despite the fear is a financial one, the Nasdaq has dropped by a bigger percentage than the Dow. That means tech stocks are going through a temporary cash-out besides the financial fear.

It has been reported that the declining value of the Euro may help the US stock market. How?

As you know, the currency market and the stock market are very fluid, both subject to the movements of huge amounts of cash within and across borders. The stock market is a money game. The ups and downs in prices seldom affect the performance of companies. Rather, it’s good or bad management that makes or breaks a company.

On the other hand, the fluctuations of currency values impact many areas of our economic life. Let’s look at some examples:

An appreciation of the Renminbi will make Chinese exports more expensive, thus weakening its dynamic export sector that employs hundreds of millions of people. Although the US wants to see an appreciation of the Chinese currency, the Chinese government is reluctant to let that happen.

The US owes China more than one trillion dollars mainly in the form of US treasury notes denominated in dollars. If the Chinese currency appreciates against the dollar, the US debt will be worth less when converted back to the Chinese currency. The Chinese government would be upset to see the shrinking of the US debt held in their hands.

The major players of world currencies are multinational corporations. Due to their operations around the world, they have regular incomes and expenses in various currencies. The daily fluctuations of currencies merit great attention, and require them to play the currency market to minimize risks. Depending on where they operate, multinationals may gain or lose due to violent currency fluctuations.

At present, the US dollar, Euro, and Yen are three most important international currencies. When the Euro declines in value due to the problems of Greece and other Euro members, the US dollar appreciates accordingly, leading to more cash inflows into the US for hedging reasons. This surplus cash will later wind up buying US treasuries and US stocks. Besides boosting the stock market, the surplus cash also helps to hold down US interest rates. Furthermore, when the dollar is stronger, the huge US deficit will appear to be less of a problem, thus creating a better psychological environment for the stock market.

5/3/2010 Monday

Dow: +143 to 11152, volume 1.2 billion shares.
Nasdaq: +38 to 2499 volume 2.3 billion shares.
S&P 500: +16 to 1202, volume not available.

Have you got used to this roller-coaster ride yet? During the last five days, the Dow has recorded four days of triple-digit ups and downs. The other two indexes have also fluctuated to the same degree. The fact is that they all move in tandem. That means there is enough cash flowing into the market on an up day, not yet reaching the stage of robbing Peter to pay Paul.

In the commencement speech at the University of Michigan last week, President Obama touched upon an important point that got me thinking. He said something like this: “In a true democracy, the government is us”. How can we make the government to be “us” in a democracy? In other words, how can common people like you and me influence government decisions for our benefit?

In a non-democratic society, the government is certainly not “us”. In a dictatorship, the dictator owns the country while his cronies run the government. In an absolute monarchy, the king and the royals own the country and their cronies run the government too. In a communist country, the communist party owns and runs everything. In each of the societies mentioned above, the government belongs to the top person and is run by his cronies. The common people are subject to the mercy of the powerful people up there.

In a democratic society where there is one man one vote, the government can be made to belong to the people. The requirement is that the voters must participate fully and have to be well informed. Otherwise, the wrong persons may be elected into powerful office. So there is no guarantee that a democracy produces a government belonging to the people.

If I were rich and powerful and owned a big factory, I’d like to have slave labor in the US to keep cost to the minimum. But I could not do that because slavery was abolished in the US around 1870. Without slaves, I’d like to offer $1 an hour labor but the minimum-wage laws stood in the way. So I had to move my factory overseas to find cheap labor. With my money I wanted to buy up all my competitors so that I could operate a monopoly. But I could not do that because of the anti-trust laws. Finally, I’d like to shed responsibility for any defective products I made but the consumer protection laws would punish me. So I would complain everyday that doing business is tough due to all these laws enforced by the government. You would do the same if you were rich and powerful. This is where government comes in, to create a level playing field, so that the rich can profit reasonably, and the common people are protected from exploitation. It’s not whether we need government. It’s how much and how good a government we want to achieve a balance of power between different groups of citizens.

Why do so many common people fear government? They are mostly misinformed. They don’t like the taxes they have to pay to government without thinking about the benefits they get in return. They don’t understand that only the common people like themselves need government protection. That’s why they must fully participate in the democratic process to make the government their ally by voting out the corrupt bums and voting in the responsible. The rich don’t need government as much as the common people do. In fact, the rich rather want a government that protects their properties and gives them a complete free hand to exploit.

So next time when you vote, ask yourself whether you are a rich or a common person. Also ask if you want to be treated fairly or exploited.

4/30/2010 Friday

Dow: -159 to 11009, volume 1.6 billion shares.
Nasdaq: -51 to 2461 volume 2.7 billion shares.
S&P 500: -20 to 1187, volume not available.

A second slaughter comes around today after two days of recovery. Although the reasons given are the big oil spill in the US Gulf Coast, and the government’s investigation into Goldman Sachs’ possible criminal dealings, the most significant drop occurs in the high tech sector, not oil or financial sector.

Yesterday we talked about transparency in prices. Today I want to discuss transparency in business dealings, which affects consumers even more. Business dealings are mostly not transparent to the consumers. However, if competition exists, consumers will get the benefit of lower prices, and the adverse impacts of non-transparency in business dealings will be offset.

The worst scenario involves little competition, complicated products, and non-transparency. This is fertile ground for corruption and scam. The financial sector dominated by big banks and investment firms is where the worst scenario tends to occur.

Let me point out a few simple facts. When big money is involved, it will bring out the worst instincts of human beings. When the government looks the other way and fails to regulate, scams will spread like weeds.

As a consumer, do you ever wonder if investment companies invest for themselves or for you by using your money? When your investment goes sour, do they blame themselves or the market? Do you think they will play one client against another? Do you think they will play against their own clients? I hope they honestly take good care of the interests of their clients, but I have nothing to buttress my hope.

4/29/2010 Thursday

Dow: +122 to 11167, volume 1.4 billion shares.
Nasdaq: +40 to 2512, volume 3.0 billion shares.
S&P 500: +15 to 1207, volume not available.

Two days’ rebound almost restores the major indexes to the levels before the big plunge on Tuesday. This testifies to the strength of the bull. However, we cannot tell if the bull wants to pause again. If it does, it will be brief under the current economic circumstances.

In the discussion about financial reform, we hear a lot about transparency. What actually does it mean? Are we greatly affected by it? You bet! Let me point out a couple of concrete examples:

In your credit card monthly statement or a loan document, the interest rate is clearly shown or even highlighted as required by law. Imagine if the interest rate is not transparent and hidden somewhere in the fine prints or in a foot note, the consumers cannot tell how much they are being charged. For a loan, the interest rate is equivalent to the price of a product being bought.

When you buy a cell phone, a PC or a car, the prices are displayed clearly. Don’t you notice that for the most important and expensive things in your life, there is no transparency in the price? Do you see any price display for a triple bypass, an hour of emergency in the hospital, a blood test for cholesterol, or a prescription drug? Try to ask a hospital, a doctor or a pharmacist and see if they will tell you the price. In the area of health care in the US, the consumer has to buy first and being charged later. This is really a scam! Where is consumer protection here? Do we have the right to shop around? This is what we call non-transparency that should have been fixed long time ago. Without price transparency, no wonder health care costs shoot through the roof. We consumers should rebel and have a “tea party” of our own.

You may say that in health care there is no need for price transparency because the insurance companies pay for it. Well, the insurers will charge you higher premiums to pay for it. In addition, when the costs get too high, the insurers will find a reason to cut and run, such as using “preexisting conditions” as an excuse. So you see, price transparency ensures competition in the marketplace. Without competition, the market will deteriorate into a monopoly where the suppliers can charge as much as they want.

4/28/2010 Wednesday

Dow: +53 to 11045, volume 1.4 billion shares.
Nasdaq: +0.3 to 2472 volume 2.7 billion shares.
S&P 500: +8 to 1191, volume not available.

Although the financial problems of Greece and Portugal have not disappeared overnight, the stock market chose to ignore them today. The three major indexes started to rebound when the market opened and stayed mostly in positive territory.

A rebound after the big plunge yesterday is considered a good sign. If the rebound sustains for several more days, it shows that the bull wants to take only a brief rest before raging on.

The financial reform bill being fought in the US Senate may have a chance to pass due to Republican softening of their stance. The following are the main features of the bill:

• New laws to regulate financial derivatives. Financial derivatives are complex packages designed to be sold to investors. The housing bubble that burst in 2008 was mainly caused by the blossoming of derivatives based on real estate mortgages.

• Strengthen consumer protection by requiring more transparency in financial products so that consumers and investors know what they are buying and the risks involved.

• Require financial companies to be more accountable and transparent in their dealings and operations.

• Address the problem of “too big to fail” by insuring and limiting the operations of big banks and financial companies.

• The ultimate objective is to guard against a repeat of the financial meltdown in 2008, which resulted in more than $800 billions of taxpayers’ bailout money.

4/27/2010 Tuesday

Dow: -213 to 10992, volume 1.7 billion shares.
Nasdaq: -51 to 2471, volume 2.7 billion shares.
S&P 500: -28 to 1184, volume not available.

Today’s market looks like a slaughter. The plunge was especially sharp during the last hour, pushing all the three major indexes to near the lowest levels for the day.

While the economic recovery is slow but steady, the market chose to pay attention to the financial difficulties of Greece and Portugal, two small economies of the European Union.

Another legislative battle is raging in the US. This time it’s about financial reform. The Republicans have twice voted down reform debates as a delay tactic. Like the banks, they don’t like reforms even after the devastation of the financial meltdown in 2008. Whose side are they on?

Perhaps you are interested to see the grilling of Goldman Sachs executives on TV in the US Senate. Earning multimillion dollars a year, the executives could not even answer simple questions. An internal email of Goldman Sachs revealed that a department head remarked that an executive had done a “shitty deal” for a major client. Then Senator Levin asked the executive if he was comfortable doing a “shitty deal” for his client. Any person would quickly answer an absolute no. But the executive gave his answer by trying to beat around the bush. Unless he is stupid, he must have something to hide.

Let me try to sum up what’s happening in the real world:

For legislators: They are supposed to protect the public good. They should prevent the rich and powerful from bilking the public, and prevent the strong from eating the weak. However, the rich have money and contribute to the political campaigns of the legislators. So the legislators tend to cozy up to the rich. They won’t enforce the laws even if the laws exist.

For the rich bankers: Their overriding goal is to make more and more money. They know they have the power and will use it to enhance their goal. Where does the money come from? From the public of course. Will they do shitty deals for their clients? Why not if there is money to be made? Making a deal is to make money, shitty or not, clients or else. There is nothing to worry about. When your iPhone does not work, you blame Apple, which has to shoulder the blame. When your investment goes sour, you can blame your investment banker, but he always blames the market. It’s always the market that causes you to lose money. Get that, you smart investors!

For the innocent public: You are no less smart than them provided you think critically, rather than believing and trusting their sales pitch. Nobody can take care of your own interests better than yourself. As I always say, don’t let other people play with your money. If you don’t know how, learn! If you don’t want to learn, let the smarter investment banker take good care of you at your own risk.

4/26/2010 Monday

Dow: +1 to 11205, volume 1.2 billion shares.
Nasdaq: -7 to 2523 volume 2.4 billion shares.
S&P 500: -5 to 1212, volume not available.

The three major indexes made some gains in the morning hours but could not sustain, resulting in some slight changes at the close. It looks like the market wants to pause for a while.

I happened to come across an interesting topic in the May issue of National Geographic. It gives a ranking of where rich people and corporations prefer to hide their assets. The following are the so-called top ten tax havens:
1. State of Delaware, USA (Surprised?)
2. Luxembourg
3. Switzerland
4. Cayman Islands
5. United Kingdom (Surprised?)
6. Ireland
7. Bermuda
8. Singapore
9. Belgium
10. Hong Kong, China

Why do people want to hide their money? There are mainly two reasons. One is to avoid paying high taxes. The other regards the shady origins of income. The tax havens have a set of privacy laws to protect their rich clients’ assets in order to attract their money.

I wonder how big are those assets. They must be real big due to the size of the global economy. Have you ever wondered an underground economy also exists in parallel? It can be real big too if you think about the money involved in narcotics, weapons, prostitution, corruption, extortion, and illegal gambling. Remember, the underground economy also involves all kinds of scams in stock market investments.

4/23/2010 Friday

Dow: +70 to 11204, volume 1.2 billion shares.
Nasdaq: +11 to 2530 volume 2.4 billion shares.
S&P 500: +9 to 1217, volume not available.

Stocks spent most of the day in negative territory until they finally recovered in the last two hours before the close. Despite large oscillations day in day out, the Dow and Nasdaq have gone through eight straight weeks of gains. Are we in a bull market or what?

I’ve just browsed through a recent issue of the Atlantic magazine. In one topic it gave some interesting figures about the last three financial crises in the US:

The current one started in the fall of 2008 where about 200 banks have failed. The government winds up spending $800 billion to rescue the big banks to prevent the economy from collapsing.

The previous one is the savings and loans crisis. It occurred between 1983 and 1993 where 2000 banks failed. The savings and loans companies have nearly been wiped out. No figure was given about the size of government intervention.

An earlier one occurred between mid 1920’s and mid 1930s where 9000 banks failed. This financial crisis precipitated the Great Depression.

This makes me think about the following:

Although tens of millions of people have suffered, the economy recovers after each crisis and continues to roll on. My advice is: Pay attention to the big picture of what is happening around you. Do not let yourself become an innocent victim of a crisis. And best of all, try to protect yourself, survive through the crisis, and benefit from the rebound later on.

4/22/2010 Thursday

Dow: +9 to 11134, volume 1.3 billion shares.
Nasdaq: +14 to 2519, volume 2.7 billion shares.
S&P 500: +3 to 1209, volume not available.

There was a big drop in stock prices when the market opened where the Dow plunged almost 100 points. As the day went by, the market recovered to positive territory.

Today represents one short up-down cycle that started two hours before the close of yesterday’s session. For those who play long term, today’s market behavior may not seem significant. On the other hand, those who play short term today may have benefited from the opportunity of a sudden downturn in the early morning hours.

Have you noticed lately that stock prices tend to change direction suddenly in early opening or late closing? If you piece together the movements of the three major indexes for each day, you will see the short up-down cycles more clearly. Some are as short as a few hours as in yesterday, while some straddle between two trading sessions as in today.

What are the implications? Well, given the current environment where big companies are making good profits but consumers worry about jobs, the stock market is dominated by big players without much small guys’ participation. The boom time must wait until the small guys come in droves.

How can the big guys make money for the time being? Easy, just make waves. When stock prices move, someone will make money. How? If you have plenty of assets like the big guys, you just buy some and sell some on a daily basis. To make a bigger wave, do it in the early opening hours when most people are not yet ready to trade. Or do it in the late closing hours when most people are preparing to leave for the day. During those times, a relatively small buy or sell can effect a bigger change in price. This explains why we often see volatility near the beginning or the end of the trading session.

4/21/2010 Wednesday

Dow: +8 to 11125, volume 1.3 billion shares.
Nasdaq: +4 to 2505 volume 2.1 billion shares.
S&P 500: -1 to 1206, volume not available.

Today’s market can be described as seesawing. The Dow dipped into negative territory twice before ending up with a slight increase.

You may like to associate this phenomenon with the comings and goings of good and bad news. What I observe is that the up-down cycles are getting shorter. Like today, the trading session accommodates two short cycles for the Dow index.

I think it’s more reasonable to associate the ups and downs with the profit motive rather than good/bad news. People get into the market to make a buck. They don’t care less how the news go as long as they know how to benefit from it. Who are those people? They are mainly the big players, because small players mostly follow the news, not taking advantage of the news.

In the current market environment, a mixture of both good and bad news are coming everyday. It all depends on which one you want to emphasize and which one to ignore. Two things are certain. First, the big guys have been accumulating stocks since the big turnaround in March 2009. Second, it will take a couple of years before the accumulation turns into a cash-out. This is a long-term play because they have to wait for the economy to gradually improve so that the small guys will feel confident to come in. They cannot sell the stocks to themselves. What for? Besides, the stocks have not reached their planned target peaks yet.

In the stock market, if you can make money everyday, why not? This is the rationale for the short-term play. This short-term play explains the ups and downs we see everyday. Since the big guys have plenty of cash to buy and plenty of stocks to sell, all they do is moving a small percentage of their assets to effect an up or down, thereby making a profit in the process. In so doing, they are also readjusting their assets in view of changing circumstances.

Remember, in the stock market, big guys lead and small guys follow. If you are a small guy, you can never afford to lead. But you can follow closely and stay ahead of the herd.

4/20/2010 Tuesday

Dow: +25 to 11117, volume 1.1 billion shares.
Nasdaq: +20 to 2500, volume 2.1 billion shares.
S&P 500: +10 to 1207, volume not available.

The major indexes spent most of today in positive territory. Although good quarterly results came out from big companies such as IBM, Johnson & Johnson, Coca Cola, and Goldman Sachs, the favorable news failed to stimulate the market to a great extent.

I’d like to bring up an interesting topic today. How can you tell the stocks you own will rise in the near future? I am sure there will be many different answers. Most of them make no sense if you consider the following are true:

• The stock market is planned and organized by the big players.
• There is no such thing as perfect competition in the stock market.
• The big guys are true investors. We are free riders for the lucky minority, and suckers for the majority.
• The big guys determine the bottoms and peaks. We only play within the range they set for any stock.
• For the long term, the big guys buy large quantities near the bottom. They continue to buy the same stocks in order to raise the prices and hence the values of their holdings. When the time is ripe, they will cash out, let the prices fall, then start the cycle again.
• For the short term, they trade heavily everyday to replenish some cash, take some profits, and readjust their holdings. Their buy/sell decisions are usually based on the total amounts of call/put options and limit orders placed by the small guys, which are recorded by the brokerage companies. Remember, brokerage owners are big guys too!
• We read, watch TV, and ask our friends about good/bad stocks. The big guys have the connections to insider information because of their financial power.

Do you think the above are true? If yes, what you have been doing is not the right thing. You may get lucky once a while, but luck is very elusive.

My advice is: Use your critical thinking skill. Learn how to follow them closely. There is plenty of money to be made when you do the right thing.

4/19/2010 Monday

Dow: +73 to 11092, volume 1.3 billion shares.
Nasdaq: -1 to 2480 volume 2.1 billion shares.
S&P 500: +5 to 1198, volume not available.

The big declines on Friday lasted through today’s morning, but a turnaround occurred during the last two hours before the close. So Friday’s retreat was a short one caused by the SEC investigation into Goldman Sachs.

To continue with my Friday’s observation, the following are the performance of selected companies:

Goldman Sachs (GS) -$23.6 to $160.7 on Friday, +$2.6 to $163.3 today.
Bank of America (BAC) -$1.1 to $18.4 on Friday, -$0.02 to $18.39 today.
Citibank (C) -$0.25 to $4.56 on Friday, +$0.32 to $4.88 today.
Wells Fargo -$0.95 to $32.6 on Friday, +$0.46 to $33.02 today.

The above figures show that the financial sector has strengths as shown by the big banks’ quick rebounds. Friday’s losses can be thought of as caused by fear and emotion. The significant rebound of Citigroup is boosted by a good quarterly result.

The point I want to make is that an uptrend is always subject to disruptions by bad news. When the bad news fade away, the good stocks will resume their rise.

4/16/2010 Friday

Dow: -126 to 11019, volume 1.8 billion shares.
Nasdaq: -34 to 2481 volume 2.9 billion shares.
S&P 500: -20 to 1192, volume not available.

There is a broad-base decline after the three major indexes have advanced for six days without interruption. The volumes also increase significantly.

Despite good quarterly results announced by GE, Bank of America, and Google, the market would rather pay attention to the bad news. This time it’s about Goldman Sachs, a darling of Wall Street, being charged by the Securities Exchange Commission with defrauding a client some time ago by peddling risky securities based on sub-prime mortgages.

This charge goes to the heart of the banking and investment business, which is trust and reputation. As I have raised this question recently about the insurance companies’ practice of cut and run, do you want to trust your bankers and investment advisers? I do, subject to sufficient government regulation and consumer protection. Do we have enough regulation and protection? I don’t think so. However, the banking industry always presses the government for less supervision. Can they supervise themselves? They want a free hand to squeeze maximum profits out of the consumers. As a consumer, you decide whether you want to side with the bankers or not.

Today’s down market offers some insights. As high tide raises all boats, low tide will bring them down. However, the good ones will rebound very quickly after a few days. The following are some examples:

Goldman Sachs (GS), down $23.6 to $160.7
Bank of America (BAC), down $1.1 to $18.4
Citibank (C), down $0.25 to $4.56
Wells Fargo (WFC), down $0.95 to $32.6
Google (GOOG), down $45.2 to $550.1
Apple (AAPL), down $1.5 to $247.4
Intel (INTC), down $0.30 to $23.92
Advanced Micro Devices (AMD), down $0.35 to $9.81

You may want to add to the above list some more companies of your interest. If they rebound quickly after the bad news have subsided, you can tell they will perform well in the near future.

4/15/2010 Thursday

Dow: +21 to 11145, volume 1.2 billion shares.
Nasdaq: +11 to 2516, volume 2.7 billion shares.
S&P 500: +1 to 1212, volume not available.

Yesterday’s surge did not extend to the morning hours of today. Stocks went through a choppy ride but still ended higher.

All the three major indexes have risen for 6 consecutive days now. The bull seems to demand a break, unless being stimulated again tomorrow by some impressive quarterly results due to come out in this reporting season.

Because of lukewarm public participation, we usually see a high tide coming in the form of small creeping increases for a few days, followed by a big one, then a temporary retreat. This phenomenon repeats again and again. The next high tide often breaks the old record. This shows we are living in a bull market, albeit a rather choppy one.

If you believe that the big guys are playing the market, the choppy condition seems logical. They need to replenish the cash by selling some existing stock holdings. Then they buy again when new opportunities emerge. This is the only way to push up the market to their target levels.

When public participation increases as the economy improves, we shall see bigger advances lasting for a little longer. Still, periodic retreats due to temporary cash out will continue. The successful player is one who manages to follow these ups and downs closely, pocketing many small gains along the way until reaching the peak.

4/14/2010 Wednesday

Dow: +104 to 11123, volume 1.1 billion shares.
Nasdaq: +39 to 2505, volume 3.0 billion shares.
S&P 500: +13 to 1211, volume not available.

The stock market surged forward, stimulated by good quarterly results from Intel and JP Morgan Chase. Note that the S&P broke the 1200 level for the first time. This shows the advance is broad-based because the S&P covers many more companies than the other two indexes. Also note that the trading volume for the Nasdaq is notably higher than usual.

Today’s high tide is created by two big companies that are the bellwethers of the chip and banking sectors respectively. This high tide necessarily raises all boats. However, some boats with leaks cannot go too far and will come back down in a matter of days. If you are interested in seeing which ones are leaking, you should follow some other companies in those two sectors and see how they will perform. Let me give you a few examples:

Chip Sector ($ Price increase 4/14/10)
Intel (INTC) +0.75 to 23.52
Advanced Micro Devices (AMD) +0.33 to 9.89
Applied Materials (AMAT) +0.61 to 14.41
Micron Technologies (MU) +0.54 to 11.30
LSI Logic (LSI) +0.29 to 6.59

Banking Sector ($ Price increase 4/14/10)
JP Morgan Chase (JPM) +1.86 to 47.73
Bank of America (BAC) +0.73 to 19.40
Wells Fargo (WFC) +1.13 to 33.28
Citigroup (C) +0.31 to 4.93

You may want to add the stocks of your interest to the above list. Follow their prices for a few more days. Those coming back down later means they perform less well and may not be able to keep up with their own industries.

4/13/2010 Tuesday

Dow: +13 to 11019, volume 1.1 billion shares.
Nasdaq: +8 to 2466, volume 2.5 billion shares.
S&P 500: +1 to 1197, volume not available.

The first Dow company to report earnings (ALCOA) failed to excite the market due to lower revenues. The Dow dropped by almost 70 points in early morning, but has recovered to a moderate gain at the close.

Today I watched a TV interview of a fund manager and found some insights on the short-term trading behavior of a fund. You may think that the investment funds buy and hold for the long term like you do. Of course they do, but they also trade heavily for the short term on a daily basis.

The reason is simple. If there is significant money to be made on a stock today, why not? Secondly, the business environment changes on a daily basis. The fund manager is always on the lookout for new happenings, good or bad, and will take the necessary actions.

The manager being interviewed also reveals that they will sell a stock if the market price exceeds the assessed price by 20%. They will buy too if the market price is 20% below. We cannot of course take this percentage seriously. At least we know that they have a short-term target price for a stock and they will sell or buy when the market price various beyond a certain margin.

This explains why we see so many ups and downs in the market. Since the funds are trading in huge volumes, the ups and downs are mainly created by them, and can be violent sometimes.

4/12/2010 Monday

Dow: +9 to 11006, volume 0.98 billion shares.
Nasdaq: +4 to 2458, volume 2.0 billion shares.
S&P 500: +2 to 1196, volume not available.

The three indexes fluctuated during the course of the trading day in positive territory. At the close they settled to moderate gains. The Dow has recovered back to the 11000 level recorded just before the financial meltdown in the fall of 2008.

A recent article in my local newspaper says that many analysts are concerned about the increasing divergence between the Dow Jones Index and its daily trading volume.

From February 2009 to present, the Dow has steadily risen from around 7000 to 11000. On the other hand, the volume traded has fallen steadily from 2.0 to 1.2 billion shares per day. A price increase without an accompanying volume increase shows that there is no new participation in the stock market. It does not seem healthy, does it? But wait a minute:

This is what I have been saying all along. The stock market right now is mostly a big players’ market. Most people are sitting on the fence, especially the public, that is, the small guys. Why? They either have little money left due to the current recession, or they are anxious about how fast things will get better in the near future.

However, the big players do not see and act this way. For them, this is the time to buy and accumulate while prices are low. The moment of opportunity has arrived. Stock prices need to be pushed further up later with more cash investment. Moreover, as the economy slowly improves, the small guys will come to the market, either voluntarily or be seduced. The analysts employed by the big players will trumpet the stocks they have accumulated to boost up prices. Why? This is the only way for the big guys to make money. They go in when price are low and when few people want to buy. They cash out when prices are high due to a bidding frenzy by the small guys. The stock market is the perfect tool for income re-distribution from the middle class to the rich.

The big guys don’t want to profit at the expense of other big guys. Why? There are not many people or funds owning more than 1% of any company stock. The major shareholders probably know each other or are business pals. They don’t want to invite retaliation by hurting the other major shareholders. Acting their self-interests, they tend to collude and profit against the small players rather than against their own group.

So don’t fret about low participation or low trading volumes right now. The big guys are playing the stock market. The participation will increase once the small players come in as the economy improves. By that time, the big guys will have already accumulated enough shares. The prices will have been pushed high enough, ripe for cashing out. The small guys will either come voluntarily or be seduced. Who does not want to get rich quick? We will be able to see another bubble in the making. Believe me, this thing always repeats itself as it has done so many times in the past.

4/9/2010 Friday

Dow: +70 to 10997, volume 0.97 billion shares.
Nasdaq: +17 to 2454, volume 2.1 billion shares.
S&P 500: +8 to 1194, volume not available.

The three major indexes were in positive territory the whole day. During the last half hour, the Dow raced to cross the 11000 mark, only to settle down a little bit lower.

Do you remember when the Dow hit 11000? It was in the summer of 2008 before the implosion of the banks that precipitated the current deep recession. So the Dow has completely recovered because it looks to the future while the economy is still struggling right now.

Will the Dow come back down? It will come down frequently but only for a while. The reason why it recovers to the 11000 milestone is that it wants to go further and break more records. This is how the stock market behaves.

Yesterday I talked about the peak. Let me finish this by talking about the bottom. Perhaps you’ll agree that stock prices are 70% performance related and 30% emotional. It takes “irrational exuberance” to reach the peak. On the other hand, it takes scare and fear to reach the bottom.

All of us have seen the bottom in February 2009 after which stock prices turned around and never looked back. If you missed that one, you’ve probably missed a great opportunity of a lifetime. But don’t get disappointed. When stocks recover, it takes months to reach the peak. It will probably take more than two years in the current economic environment.

The bottom of a stock is caused by a company crisis. It can reach zero if management fails to solve the problem. Even when a company performs well, a big external crisis like the financial meltdown in 2008 can cause the stock price to plummet. This is the best opportunity because the stock will recover very quickly.

Besides the real bottom just described, there exist countless temporary bottoms where the big guys try to cash out for some reason unknown to us. But they will go back in after a while.

My advice is: Don’t try to catch the bottom. Beware that it may turn out to be a bankruptcy case. You never know where is the bottom because the big guys determine where it should be. You are extremely lucky if you catch one. Therefore, the bottom is one that you have seen, not one you will guess. After you’ve seen the bottom, you have plenty of time to go in to enjoy the upturn. Remember, stocks will take at least a few months to go from bottom to peak, because the big guys need this amount of time to build it to the peak for the final cash out.

4/8/2010 Thursday

Dow: +30 to 10927, volume 1.0 billion shares.
Nasdaq: +6 to 2437, volume 2.3 billion shares.
S&P 500: +4 to 1186, volume not available.

Yesterday’s retreat continued into today’s morning hours. Then the three major indexes turned around and ended up with positive gains. Note that this down cycle lasted for about 10 hours, but spread between two trading days.

Similarly, today’s upturn is likely to extend into tomorrow morning. Chances are the up cycle will last longer because the entire market is slowly trending up, provided there are no major disruptions.

Yesterday I mentioned the big guys determine the peaks and bottoms of every stock. You will incur great risks if you don’t pay attention to peaks and bottoms. Let me analyze the peaks first.

A stock peak usually arrives a few months before a real peak in the company’s performance. Why? The big guys have insider information beforehand. Secondly, since they own a lot of stocks, they need time to cash out. They have to sell their stocks to the small guys. Look at Enron and General Motors that have gone bankrupt. Their stocks started falling several months in advance before a real big plunge. During that time, they painted a rosy picture of those companies to attract small buyers. Even Enron employees were deceived.

How can you avoid being deceived? Well, if you follow the crowd and don’t question and think, you will likely be deceived.

My advice is very simple:

When everybody says buy, including the experts, watch out for being scammed. Better turn away.

When a booming economy coincides with the peak, watch out! A booming economy means the small guys are happy due to plenty of jobs around. They tend to buy whatever is being trumpeted. The fact is that a boom only lasts for a few months. This is the time when the big guys are unloading to get maximum cash out of their stocks.

A peak price is at least double that of the bottom. This gives a margin big enough for the big guys to gradually and quietly unload. Thus you have to know the previous bottom in order to tell if the peak is near.

Within a long-term cycle from bottom to peak and back to bottom, there exist numerous short-term cycles where the peaks and bottoms are only temporary. These temporary cycles are also created by the big guys. They want to replenish their cash (by selling) or replenish their stocks (by buying). You have two ways to play. If you go long term, you ignore the temporary cycles. If you go short term, you play closely with the big guys. I’ve found that playing the frequent short-term cycles is much more beneficial due to more chances.

How can you tell a temporary peak? Well, the stock price falls for one or two weeks, and quietly creeps back up. Then it breaks the peak and sets a new one.

Given the current economic conditions, do you think stocks have reached their peaks? If you think so, think again and try to tune into the realities of life. This is not boom time. How can the big guys sell their stocks to the small guys who have no money to play? This is a time for the big guys to accumulate. Therefore no peak except plenty of temporary ones.

4/7/2010 Wednesday

Dow: -72 to 10898, volume 1.2 billion shares.
Nasdaq: -6 to 2431, volume 2.9 billion shares.
S&P 500: -7 to 1182, volume not available.

The three major indexes spent all their times in negative territory today, despite a short rally on midday trying to flirt with the Dow’s 11000 mark. With regard to trading volumes, there were significant increases compared with the past few days.

If you have followed the stock market for some time, it should be apparent that everything is being planned and organized by an invisible hand. Most people interpret this invisible hand as the “market”. In other words, they don’t know what is happening, so the “market” is used as an explanation.

I think the invisible hand includes all the big players who have plenty of cash to buy and plenty of stocks to sell, plus insider information due to their financial power. They determine the bottoms and peaks of all stocks where the small guys must play within that range. A small player unwilling to recognize this fact is destined to be a loser because he does not know who he is dealing with.

The big guys’ game is to gradually bring their stock holdings from bottom to peak, while making frequent buys and sells in between to replenish some cash and reinvest the money in the same or different stocks. When the peak for a stock as determined by them is reached, the big guys will cash out to let the price fall to the bottom as determined by them. Then they will go back in to repeat the cycle. A cycle like this may last as short as three months.

As a small player, you have no choice but follow them closely. The bottom is easier to see than the peak. After you’ve seen the bottom, go in and follow them after a week or so. You have plenty of time for the upside. However, after you’ve seen the peak, it may be too late for you. So it is always less risky to play near the bottom than near the peak.

What makes the big guys determine the peak and the bottom? The company’s sales and profits with some exceptions (e.g. Enron and other scams). They get this information much earlier through insiders. A small player has no such information, although most think they have it or know it. As a small player, you should be satisfied with the broad picture like the economy, current business conditions, interest rates, oil prices, pertinent characteristics of different industries, and most important, the understanding of an invisible hand. These are your weapons to win. Thus having much less power, you can still play smart and win!

4/6/2010 Tuesday

Dow: -4 to 10970, volume 0.9 billion shares.
Nasdaq: +7 to 2437, volume 2.1 billion shares.
S&P 500: +2 to 1189, volume not available.

The three major indexes spent most time in negative territory today, resulting in small changes at the close.

Yesterday I discussed the recent failings of the bankers and insurers causing a significant erosion of public trust. As a business, they had had a good run for the past ten years until they shot themselves in the foot. The government should shoulder part of the blame because it has failed to regulate properly. After this bad experience, financial reform is now being formulated to guard against a future financial meltdown. A new health care bill has been passed to forbid insurers from cut and run.

Business has to be regulated otherwise rampant profiteering will develop. Government is the regulating agent because business cannot police itself, resulting in damages to all consumers.

It is puzzling that so many people clamor for government to be run like a business, while no one says that business should be run like a government. It is easy to understand why government winds up being the whipping boy due to its relative inefficiency. In fact, the two are totally different entities serving different purposes.

Government should never be run like a business. Using profit principles, how can you operate the police, the fire department, social welfare, the courts, air traffic control, and the army? Do you only serve those who pay you more money?

Business operates single-mindedly for profits. As long as profit is maximized, a business tends to do anything regardless of consequences. That is why we need regulations to guard against extremes.

Do we need better regulations for the stock market? Yes we do, but the key is to strike a balance so that excess speculation is prevented. There always exists a tug of war between those who don’t want regulation and those who do. The degree of regulation we have depends on who gains the upper hand.

4/5/2010 Monday

Dow: +47 to 10974, volume 0.9 billion shares.
Nasdaq: +27 to 2430, volume 2.0 billion shares.
S&P 500: +9 to 1187, volume not available.

The market is in an optimistic mood for a second day after good news about job growth, housing sales, and manufacturing orders. But watch out for the next day or two since there are still numerous bad news that can suddenly gain the upper hand.

Today I have a question to ask that goes to the heart of the banking and insurance industries. Should we trust the banks? Will they run away with our money? Should we trust the insurance companies? Will they cut and run when we need them?

The banking and insurance industries operate totally on trust. You are required to give them your money first as deposits or monthly premiums. In return, the banks provide you with conveniences and interest payments. The insurance companies provide you with a safety net in case you run into trouble.

I used to trust the banks but I don’t now despite their powerful brand names and impressive buildings. The simple reason is that they have demonstrated that they are reckless businessmen. They caused the financial crisis in 2008 by reckless lending that eventually brought on the current deep recession and millions of people out of work.

Why do I still deposit money with the banks? Because the FDIC guarantees my deposit even if the bank runs away. Since the financial crisis, the government-owned FDIC has taken over some 100 failed banks without loss for any depositor. In other words, I only trust the government now.

I used to trust the insurance companies too but not now despite their powerful brand names and impressive buildings. They and the bankers are the same reckless bunch. They cut and run on you when the compensation gets big. Try to talk to those people whose houses have been destroyed by hurricanes or flood, and see how long and difficult it is to receive compensation. The bad thing is that the government does not guarantee your insurance. So you have no last resort when you need help.

The case is even worse with health insurance. When you need help, they invent all kinds of reasons to deny you coverage, such as pre-existing conditions, lifetime caps, or even dropping your existing insurance. This prompts me to ask why should I buy insurance from a company that cuts and runs? Am I a fool or what? Luckily, the health care bill recently passed will specifically forbid the insurance companies from cut and run. In this sense, the new bill is really a consumer protection bill that we desperately need. In other words, the government comes in to rescue the public from the recklessness of businessmen.

For those people who say that less government is better, they must have been brainwashed by the reckless businessmen. Despite being scammed, and cut and run, they still say that their predators are good for society.

Now, should you trust the investment funds? You trust them at your own peril. Just think about it.

4/1/2010 Thursday

Dow: +70 to 10927, volume 0.9 billion shares.
Nasdaq: +5 to 2403, volume 2.3 billion shares.
S&P 500: +9 to 1178, volume not available.

In contrast to yesterday, the three major indexes rose early in the morning and managed to sustain their gains at the close. Comparing the performance today with that of yesterday, the differences reflect the sudden and frequent changes in mood of the stock market.

It is very difficult to tell what the next day will bring. To reduce disappointments, your vision should be extended longer than the variations between days or weeks if you are buying long.

On the other hand, I would advise taking advantage of the day-to-day fluctuations by selling a portion of your existing stock holdings when the price jumps suddenly for a day or two. Even the stocks you hold have good prospects, they will likely dip for a short while every so often. In those cases, you would buy them back at lower costs and pocket the differences between sell and buy.

In a bull market with frequent dips like the current environment, I would advise people to play short term in order to build long term. That is, sell on a sudden surge and buy on the dips, even when you are playing with just one stock.

There is a saying I’d like to share with you:
“We don’t see things as they are. We see things as we are.”
Perhaps you’ll appreciate the fact that how much we see is influenced by personal or subjective factors. Think about ghosts or extra-terrestrials. Are they real or fake? It’s up to your own belief.

The stock market we see is no exception, especially due to all kinds of misguided information floating around. It is so easy to make a bad decision based on what we see and hear. In order to see better, we must not lose sight of the real fundamental factors no matter which direction the wind blows.

Price
The principle of buy low and sell high governs everything in the marketplace. When stock prices are low enough, the bull will come no matter what. Conversely, when prices have risen to unrealistic levels, the bear will take control.

Example I: In early March 09 when the sky seemed falling, the bull suddenly appeared and took the market to a high level by December. This happened despite the world was immersed in a deep recession.

Index—–March Low 09—-December High 09—-Per Cent Gain
Dow——–6500————10547————-+62%
Nasdaq——1400————2291————–+64%
S&P 500——930————-1128————–+21%

Example II: From January to February 2010, the market plunged quickly within two weeks despite better quarterly earnings, GDP rising by 5.7%, and unemployment dropping to a lower 9.7%.

Index——1/19/2010—-2/8/2010—-Per Cent Loss
Dow——–10725——–9908———7.6%
Nasdaq——2320———2126———8.3%
S&P 500——1150——–1057———-8.1%

It is difficult to tell when the price levels are unrealistically high or low. One thing we are sure, the bull lasts longer than the bear, because the former takes time to build, while the latter is a rush to cash out. Therefore, you have more time to get into a bull market even though you miss the initial phase, but very little time to get out unharmed when the bull says goodbye.

The Market Drivers
The stock market is very complicated. You must appreciate the fundamental driving force. Who are the drivers? They are the big players who have plenty of cash to buy, and plenty of stocks to sell. They also have access to insider information by virtue of their money and high positions. As a result, they control price movements in either direction. Everything else will become secondary when you have a group of dominant players. The problem is that we don’t know what the big guys think and what they plan to do. This is the greatest myth of the stock market. With all the statistical tools employed by analysts, we still have no way to read the minds of the big players

Because the stock market runs on emotions and steroids, market excess cannot be avoided in either direction. That is why we see bubbles and busts and everything else in between. Many people think that the stock price is a result of supply and demand. Really? In fact, the price is auctioned to the highest bidder where the stock can be withheld or dumped by the holder. When a group of big players bid up the price on purpose, demand seems unlimited. When they cash out, supply seems unlimited, too. Therefore, the price you see is a fake, planned by humans. On the other hand, the price is also real because it either benefits or hurts you.

What about the news? Do they move the market? Yes, only on the surface. In fact, the news moves the herd, which comprises millions of small players who are lost but follow the news nonetheless. The big guys do not follow the news. If they do, they are no big guys. They use the news to drive the herd to buy or sell. Sometimes they like to create news through the analysts they employ in their companies to influence your thinking and action.

The Big Picture
The big picture is real but it is seldom clear due to all kinds of man-made confusion. What is the big picture anyway? It is about the economic environment, the business cycle, the characteristics of different industries, consumer demands, and market/product trends. The constant blurring of the big picture is also real. That is what we call uncertainties, which always cause the market to go down.

Why is the big picture important? Remember the saying: A high tide raises all boats. When times are good, even the bad stocks that you happen to own by mistake get a short boost. Conversely, when times are bad, what you buy does not matter because stock prices go down anyway.

You must be able to know where you are in the big picture. Is the economy now in a recession or getting out of it? Is there a bubble right now or just some speculation excess in the stock market? Why tech stocks are more volatile than others? If you cannot answer this kind of general questions, you are nowhere and you will incur great risks in the stock market. Like sailing in the ocean, you must know your direction on the rough seas whichever way the wind blows.

The big picture changes gradually and predictably unless thrown off by major events like war, or natural disaster. Once you are in tune with the big picture, you’ll be able to take advantage of the short-term ups and downs in the market while keeping a sense of direction.

How Right Do You Think?
You must recognize that you think only what you want to think, and see only what you want to see. Basically, everybody is living in an isolated world of his own cut off from the real. However, you can make a better sense of the real world depending on how open-minded you are. In the stock market, the more you open your mind to do critical thinking, the more benefits you are able to reap. To get in tune with the real world, your thinking must be tempered by simple reasoning and logic. Don’t succumb to fantasy or illusion when the real world is unfolding in front of you.

www.stockfessor.com
February 2010

Dangers and risks always exist even during a bull market. The key is to understand the nature of those dangers. Are they real or just fears? Do they portend a long-term trend, or just a knee-jerk reaction?

Despite all the daily ups and downs, a bull market winds up higher in a few weeks and beyond. On the contrary, a bear ends up lower and lower.

Economy & Jobs
Everybody worries about the current weak economy, but few think about where we have come from. Not long ago, the US economy hit rock bottom, bleeding jobs at the rate of 800,000 a month in early 2009. Twelve months later, the job loss was reduced to 85,000 in December 09. The situation is still bad but obviously we have turned a corner. At this rate of improvement, we may be seeing some job growth a couple of months from now.

As the public worries about job prospects, especially those who have been laid off, the stock market always looks forward. It sees an economic turnaround, albeit slow and fragile. This is a fact that actually counts, from worst to bad. No wonder the Dow and the Nasdaq indexes have risen more than 60% in 2009 as pointed out in my previous article (#66).

We may continue to worry about the economy. The fact is that we are going through a steady recovery since the dark days of the financial meltdown late in 2008. The fear about a second downturn is unwarranted. The economy may stop and pause for a while, but it is moving on slowly but surely.

At this stage, the momentum in the stock market does not originate from consumer spending. The reduction of corporate losses due to cost cutting, and merger/acquisition are enough to boost the market. So fearing a stock downturn is unwarranted except for short-term profit taking.

Interest Rates
The current recession requires the Federal Reserve to bring down interest rates to a historic low of 0.25% for a year now. Because the recession is so deep, the economy only responds slowly. It will take an extended period for the Fed to see good results before they start gradually raising interest rates back to normal again. In this environment, although the economy is moving slowly, the stock market is surging in anticipation of the near future. The stock market never goes according the present-day feelings of ordinary citizens.

As long as the economy remains fragile and is moving slowly like we see now, the Fed is unlikely to raise interest rates for fear of destroying what they have achieved so far.

Inflation
Inflation means rising prices. How can we have prices rising in a deep recession? In fact, the reverse is true because companies cannot raise prices for fear of losing sales that is hard to come by already. The talk about inflation right now is just fear or crying wolf.

Inflation is nemesis for the stock market. If inflation heats up, the Fed will get paranoid and start raising rates. The result is less cash flowing into the stock market, resulting in a precipitous fall. However, inflation does not come out of a sudden. Consumer demand has to increase first before we can even see signs of inflation. As long as the economy is fragile and jobs are hard to find, the ghost of inflation will have to wait.

Huge Government Deficits
The huge government deficits incurred for the past few years serves to fan the fear of inflation and the fall of the US dollar in the near future. The consolation is that inflation cannot occur now due to the fragile economy.

When the economy strengthens, inflation will come back, but the deficits may decline. Why? Tax revenues coming to the government will increase significantly when the economy picks up. To cut deficits, it all depends on the ability of the government to control its spending from now on.

Wild Cards
There always exist unpredictable circumstances that can play havoc with the stock market. The following lists some of them:

Central to inflation worries is the price of oil. The price of oil changes everyday on the world market. In the long run, we cannot escape from rising oil prices because of limited supply and limited alternatives. The fact that most of the oil reserves are located in the unstable Middle East renders oil prices volatile.

The banks are not out of the woods yet after all the damages they have done to themselves since late 2008. We may still be shocked by a major bank failure that can precipitate another crisis of confidence. But this is a remote possibility.

The fear of terrorism is real. A terror strike can be minor or significant. The stock market always responds negatively due to fear and emotions.

www.stockfessor.com
January 2010

As the year 2010 begins, let me try to identify the opportunities and risks for the stock market. It looks like this is going to be a good year with much more upside than downside. This article discusses the upside. The downside will be discussed in a later article.

You should never underestimate the ability of the stock market to adjust and rejuvenate. When economic conditions change, the market adjusts several months ahead of time. When a bubble has been created, the market will come down hard to destroy it. When stock prices plunge to a low level, big investors will move in to prepare for a rebound.

Low Starting Point
Many people fail to recognize that a strong bull is born when the market reaches a low bottom. The current deep recession has driven stock prices to real lows not seen for decades. This ensures that the bull will have a long time to run. The following figures show the opportunities that have already been realized in 2009:

————–March Low 09 ——–December High 09 ——-Per Cent Gain
Dow————6500———————– 10547——————-+62%
Nasdaq——– 1400————————-2291——————–+64%
S&P 500——– 930————————- 1128——————–+21%

The historic lows in March alone carry enough momentum for the bull market of 2009 and beyond, even though economic conditions still remain fragile.

Government Policies
Since the beginning of this recession, the government has tried to stimulate growth and intervene directly. In the US, the Federal Reserve has kept interest rates at below 0.25%, spent $800 billion to rescue some big financial companies, and another $800 billion to invest in infrastructure, green technology, and housing, etc. Many governments in other countries are doing the same to rescue the economy.

The huge government investments are flowing into the economy for several months now. Those companies benefiting from the government’s stimulus package will see their stocks rise.

Corporate Cost Reductions
When this recession began, most big corporations started cutting down production, employment and inventories to prepare for the worst. This results in a huge reduction of corporate expenses, thereby improving their bottom line and conserving cash. A decrease in corporate losses as realized in 2009 has stimulated the stock market, which saw it as a turnaround situation.

Merger and Acquisition (M&A)
M&A activities always buoy the market because of the hype. Companies with plenty of cash on hand want to acquire other companies struggling during the recession because they can be bought cheaply. You can see M&A on the rise since 2009 after the economy has hit bottom.

Consumer Rebound
Consumer confidence has been hurt badly due to millions of jobs being lost. It will come back depending on how soon the job market recovers. Consumer spending is considered a laggard in the economy because it always recovers last when the economy improves. The job loss in the US has been on a steady decline from 800,000 per month in January last year to 85,000 in December. Chances are we will see some job growth in 2010. When this happens, we will also see a rise in consumer spending that will stimulate corporate sales.

Corporate Sales Rise
Corporate sales cannot rise if consumer spending stays depressed. When the consumers come back to buy again, corporate sales will rise, which will lead to better earnings reports and higher stock prices. Consumer spending and corporate sales will be the last two pillars that sustain a stock market boom until a bubble reappears.

Market for Gold
The current recession has caused tons of investment money to flow into gold for safety reasons. This pushes up the value of gold to unprecedented levels. When economic conditions improve with the rise of stock prices as a result, some of the money will flow out of gold into the stock market.

Global Effects
We have to consider the rise of China and other Asian countries whose consumer demands will further feed the stock market boom.
The global effects can only grow stronger through each passing year.

Hypes, Bubbles, New Industries
Every stock market boom is stimulated by the hype about a particular industry, new or old. The last boom in mid 2000s was fueled by the housing bubble. Housing is not new but was hyped by sub-prime lending. The dot.com boom in late 1990s was fueled by the Internet, but the fad of Internet commerce was largely hyped at that time. The PC boom in mid 1990s was fueled by the real advance of electronic chips and the hype about multimedia products and the Internet.

What will the next ones look like in a couple of years? Let me cite some potential areas: hybrid and electric cars, rooftop solar, bio-fuels, biotechnology, and telecom bandwidth.

www.stockfessor.com
January 2010

Dow: -51 to 10857, volume 1.2 billion shares.
Nasdaq: -13 to 2398, volume 2.3 billion shares.
S&P 500: -4 to 1169, volume not available.

Stocks were down the whole day, falling to near the lowest range at the close for the three major indexes. Over the last two weeks, the up days number three times more than the down days, and the indexes have climbed slightly higher.

While the market is waiting for the unemployment figure due to be released soon, I’d like to draw your attention to this important factor.

The unemployment figure is important for the health of the economy, but it is not so for the stock market, which is always looking forward. The unemployment figure lags behind other business indicators so its direct impact on stock prices is much less.

On the other hand, unemployment has a direct impact on two things: inflation and interest rates. The fact that we have little inflation now is mainly due to the high unemployment rate of near 10%. Because of fewer jobs available, workers cannot demand higher wages. Since more than 50% of total production cost comes from the labor component, high unemployment means lower production cost and lower inflation.

The interest rates in the US are mainly controlled by the Federal Reserve. The Fed adjusts the rates according to how the economy performs especially regarding inflation. At present, we have high unemployment combined with low inflation. The Fed sees no urgency in raising the already low rates.

Since unemployment is a lagging indicator, it will take a long time for it to recover to the previous 5% level, maybe two years or more. That is why the Fed has said that interest rates will be kept low for an extended period.

Because low interest rate energizes the stock market, we can expect good conditions for the bull to continue running until full employment is restored.

Caveats: A bull run does not mean stocks cannot go down temporarily. Two wild cards may disrupt the market. The first one is a major terrorist strike on a big city. The second one is a sudden increase in oil prices that can unleash a vicious chain reaction of high cost-push inflation and slow economic growth.

3/30/2010 Tuesday

Dow: +12 to 10907, volume 0.9 billion shares.
Nasdaq: +6 to 2411, volume 2.1 billion shares.
S&P 500: +0.1 to 1173, volume not available.

The major indexes moved back and forth between positive and negative territories until they settled for some small gains at the close. The market chose to ignore some good news today such as steadily rising housing prices and improved consumer confidence. Apparently, it is looking forward to the corporate annual earnings reports due out next month.

Have you wondered why the three major indexes often rise and fall in tandem during the past year? Since they represent different sectors of the economy, chances are small for such close synchronization. Some major forces are at work here:

The financial meltdown in late 2008 has drastically reduced all stock prices. The consequence is that all stocks have been reset to a much lower base. Except for a few high fliers, the majority of stocks started out from single-digit levels when the economy began to recover. From this low bottom not seen for decades, the only direction of price movement is up except for temporary profit taking. That is why last year was a particularly good year for stocks.

You may think of 2009 as the year of building the foundation for the bull market. The big players have already gone in to buy at rock bottom prices. From there they will engage in a push-up and cash-out process that may last for a few years depending on how fast the economy is improving. Last year was mostly a trader’s market where the big players bought and played while most small guys were sitting on the fence. Many small guys were licking their wounds inflicted by the meltdown. Even those with cash to spend were unsure what to do given the bad economy and high unemployment.

This year promises to be a little different. We have already seen a significant retreat in the first quarter despite good earnings results. While the three indexes still rise in tandem, they will probably diverge later as some sectors are moving faster than others.

Another key factor is the amount of cash flowing into the stock market. More cash means more buying and the three indexes will continue to rise together. If the cash flow begins to dry out, a situation will arise where we will see robbing Peter to pay Paul.

After all has been said, I don’t think the three indexes will diverge any time soon. The economic recovery is fragile. The unemployment level will take time to come down. The bull market is in the process of being built and nourished. We may still have a couple of years to run before we arrive at a real peak.

3/29/2010 Monday

Dow: +46 to 10896, volume 0.95 billion shares.
Nasdaq: +9 to 2404, volume 1.9 billion shares.
S&P 500: +7 to 1173, volume not available.

The three major indexes moved within positive territory during the trading day. At present, the ground lost due to the sell off in early January has been made up. The market is now waiting for stimulation from the next earnings report season due to start in April. Will it trend up or down? Chances are it will go up. Why? The fact is that the indexes have quietly climbed back to the previous level. They did so for a reason, which is to break the next higher levels.

The US government announced today that it would cash out the 7.7 billions of common shares of Citigroup acquired as a result of the bailout in 2008. In the process, the government stands to gain tens of millions of dollars in profits. To those who argue against the bailout due to its cost to the government, their argument will now become moot.

After the government has completed unloading its shares within the next few months, we should note how the Citigroup shares move. If the price has not fallen significantly, it means there will be good support and the price will tend to go higher later. It also means that confidence in the financial sector has finally been restored.

3/26/2010 Friday

Dow: +9 to 10850, volume 1.0 billion shares.
Nasdaq: -2 to 2395, volume 2.2 billion shares.
S&P 500: +1 to 1167, volume not available.

Like yesterday, stocks went through an up-down cycle in less than one day, resulting in little changes at the close for the three major indexes. Prices moved up in the morning but the momentum could not sustain.

In this kind of environment where your stocks of interest move up and down intra-day instead of inter-day, what should be the right strategy? Day trading appears to be a logical conclusion. However, I would advise against that. Day trading is a practice discouraged by brokerage companies that require day traders to buy with cash rather than margin. Worse, day trading instills a habit where your vision is so limited that you don’t see the opportunities even a week ahead. I would advise keeping your stocks at least overnight and look beyond.

Another way to play is to find stocks that used to have a larger margin of variation during the day. These stocks also show larger variations over several days. These are good candidates for short-term play. You need to spend some time to discover them. Look up the stocks of your interest and compare their daily price ranges over a period of a few weeks. You will find out that some stocks are inherently more volatile than others.

3/25/2010 Thursday

Dow: +5 to 10842, volume 1.2 billion shares.
Nasdaq: -1 to 2397, volume 2.6 billion shares.
S&P 500: -2 to 1166, volume not available.

Stocks rose in the morning on improved news about jobless claims. The Dow at one time registered 120 points’ gain. However, the momentum could not be sustained. During the last hour before the close, prices dropped back down to where they started. The whole up-down cycle lasted for a few hours only.

This confirms my view about a holding pattern usually taking place before the next earnings report season due to start in April. Within the next few days, we can expect prices to vastly fluctuate daily without a clear direction of up or down trend.

This is an especially hard situation to play. It requires you to be satisfied with only small gains by selling some of your stock holdings. At the same time, when prices dip temporarily, you will be quick enough to buy some to position yourself for the next gain. In this case, the use of limit orders specifying a price and a quantity to sell or buy will help you save a lot of time watching the tube.

3/24/2010 Wednesday

Dow: -53 to 10836, volume 1.0 billion shares.
Nasdaq: -16 to 2399, volume 2.3 billion shares.
S&P 500: -6 to 1168, volume not available.

It looks like the market wants to adopt a holding pattern of back and forth movements after a steady climb during the previous two weeks. This pattern may persist for the rest of March in anticipation for the next earnings report season due to start in April.

The coming report season may be able to excite the market with better-than-expected earnings. What do you think are the prospects? Chances are good because the economy is slowly improving. Normally, people wait for the reports to come out and see how the market responds. This is how regular small people play. What about the big players?

What would you do if you were a big player having money, power, and insider connections? I would try to find out the results ahead of other people by employing my great resources. Never mind it is illegal. Stealing is illegal but people steal anyway. After having gotten all the information I want, I would position my stock holdings for maximum profits. My point is that the big players already have an idea of what the earnings reports will say a week or so ahead of time. How stock prices will move depends on how they want to make use of the earnings reports to maximize their profits.

My way of playing the market is to rely on my observation of the facts, not on what the experts say.

In early January this year, most earnings reports came out better-than-expected but stock prices fell anyway. The reason is that stock prices had surged to quite a high level in December and it was right time for profit taking. Thus, the big guys sold into the good news to replenish their cash. As a consequence, the three major indexes fell to lower levels within two weeks.

Now that the indexes have quietly climbed back and recovered, what’s next? You must ask why they crept back in the first place. They crept back because a sufficiently low level (determined by the big guys) has been reached. Secondly, they crept back because they are looking forward to break the next record.

Therefore, my thinking is as follows. The previous earnings season (Jan-Mar) was used by the big guys in a sell-off to replenish some cash. Part of the cash was pocketed as profits. The rest was reinvested back into stocks for a later push up, probably in the next earnings report season (Apr-Jun). So chances are the market will ignore the bad news and rise with the good news for the next three months. You’ll figure out what you need to do.

3/23/2010 Tuesday

Dow: +103 to 10889, volume 0.98 billion shares.
Nasdaq: +20 to 2415, volume 2.3 billion shares.
S&P 500: +8 to 1174, volume not available.

Stocks continued their steady climb today. Only during the last half hour did the major indexes doubled their increases. The sudden rise near the close may not last into the next day unless it is fueled by good news.

Yesterday, I talked about the benefits of the new health care bill for consumers. The sad thing is that many consumers are either ignorant or disinterested, thus subject to the sway of negative charges or fears induced by the opposition. Because the bill is complicated, many consumers fail to see the benefits provided to them by the new reform bill.

On the other hand, businessmen see the benefits clearly as the stock prices in the health care sector continue to rise. The major factor is the addition of 32 million uninsured Americans into the health care market.

Drug companies see this as a significant increase in demand. That’s why they are not totally opposed to the new bill. On the contrary, they are willing to forgo some of their current profits by agreeing to government demands to lower drug prices.

Private hospitals also benefit from the access of 32 million uninsured people. Even being uninsured, people get sick anyway. The uninsured must go to the emergency rooms in hospitals for treatment because they have no regular channel of access. In the emergency room, the hospital is obliged to treat the uninsured with less-than-emergency problems. The consequence is wasting emergency resources which are scarce and much more expensive than regular doctors access.

The new bill mainly directs its firepower on the irresponsible cut and run practices of the insurance companies. Even though opposing the bill, the insurance industry is quietly salivating on the new market of 32 million uninsured people. They will now be able to buy insurance with government mandate and subsidy. In effect, the insurance companies are being forced to abandon their cut and run practice but enticed with the prospect of an increased insurance market. They oppose to the bill because they are so greedy to want it both ways. As a general rule, the bigger is the market, the more profitable will be the insurance business. At any given time, there are always far fewer people getting sick than being healthy. Thus the healthy people subsidize the sick ones. This is the foundation of profits for the insurance business. The insurance companies should understand this better than anybody else.

The only concern about the new bill is its huge cost. The price tag may be huge but the huge US economy can shoulder this with little problem. This new bill is not about spending money only, it’s also about cutting wastes in the current system, such as digitalizing medical records, eliminating fraud, increasing competition, reorienting the current incentives for doctors toward better patient care, rather than over-prescribing drugs and expensive tests as a means for defensive medical practice against law suits.

Most people understand that cost reduction is the paramount factor in health care reform. Reducing medical costs will take time to realize because things have to work through the marketplace. On the other hand, increased access and consumer protection against cut and run must be done as soon as possible with government mandate, because it is a moral issue. We cannot wait for the market to fix them. Why? The market has failed to deliver during the last 50 years, and the situation is only getting worse everyday.

3/22/2010 Monday

Dow: +44 to 10786, volume 1.0 billion shares.
Nasdaq: +21 to 2395, volume 2.1 billion shares.
S&P 500: +6 to 1166, volume not available.

Stock prices turned around and continued their steady upward move after a landmark health care reform bill was passed on Sunday evening. Most companies in the drugs and hospital sectors registered gains due to the prospect of 31 million currently uninsured Americans getting access to the health care system as provided by the new law, thus effectively enlarging the size of the health care market.

On an issue so complex and controversial as health care reform, the opposition was expectedly fierce. The passage of the bill was slim (219 for and 212 against), which was expected, too. All kinds of negative charges were heard including a “socialist takeover”. The opposition was always boasting that America was the number-one capitalist country. Why have they suddenly become so scared about socialism? Has socialism gone down the drain after the Soviet Union collapsed 20 years ago?

As consumers, we don’t give a damn what other people say. We must look at what is good for us:

If you are poor and uninsured, you should be glad because the government will subsidize you for buying health insurance.

If you have been denied insurance due to “preexisting conditions”, the insurance companies are forbidden to deny you anymore.

If you are a small employer, the government will provide tax incentives for you to buy health insurance for your employees.

If you are currently insured, nothing will change in your insurance plans.

The things that matter to me most are as follows:
I can rest assured that my insurance company will be forbidden to cut and run on me when I get gravely ill, as it has been cutting and running away from countless other insured people before.

There will be no lifetime limits on my insurance compensation imposed by my insurer.

My kids can stay in the family’s insurance plan until they are 26 years old.

For the first time, I feel like I have a true safety net into which I dutifully pay monthly premiums.

I feel that this is a new bill that truly protects the consumers rather than the insurance companies.

This is what capitalism should do for society. This is no “socialist takeover”.

3/19/2010 Friday

Dow: -37 to 10742, volume 2.0 billion shares.
Nasdaq: -17 to 2374, volume 2.9 billion shares.
S&P 500: -6 to 1160, volume not available.

The stock market was very active today due to the so-called quadruple witching, which means the expiration of four different options/futures on the same day. All the major indexes took a dive after creeping up nicely for the past few days. Although the volumes are heavy, the price drops are only moderate.

Everybody wants wisdoms to play in the stock market because it is tricky territory. I see three kinds of wisdoms that people have: conventional, new, and true wisdoms.

Conventional wisdoms are those things considered right at a certain time until being proved wrong. The most glaring example is the belief that the earth is flat. Since day one, everybody believed so until some 500 years ago when a few brave ocean explorers proved that the earth is round.

The new wisdoms are those being invented everyday. Many of them gain traction and become conventional wisdoms. The rest just fade away after a while. You will find most of the new wisdoms in the areas of health sciences, economics, finance, and the stock market. Examples:
• The more drugs and physical tests, the better is your health.
• Certain vitamins and foods are good for this and that.
• The market will take care of everything.
• Lowering taxes will solve all kinds of economic problems.
• Some techniques will help you win in the stock market, such as sophisticated stochastic analysis, or some “insider information” from your friends who happen to work in a company.

What are the true wisdoms? You possess the true wisdoms if you are willing to question and reason what you see and hear everyday. You may not find the answers but you don’t have to believe and follow like a sheep. I am sure that in the old times, many smart people doubted that the earth was flat because they could see the curvature of the earth when they looked out into the ocean, or looked down from a high place. However, they chose to follow the long-held mistaken belief for one reason or another. Most of us are doing the same thing nowadays when we are bombarded by news and blogs with all kinds of conventional and new wisdoms. Do you want to apply your own reasoning to query in search for a better answer? It’s up to you.

3/18/2010 Thursday

Dow: +46 to 10779, volume 0.9 billion shares.
Nasdaq: +2 to 2391, volume 2.1 billion shares.
S&P 500: -0.4 to 1166, volume not available.

Today’s stock performance follows that of the last few days. The major indexes are slowly creeping up. It is a sign of cautious optimism about the current economic recovery that still seems fragile.

Tomorrow is the so-called quadruple witching when four types of expiration occur on the same day: stock index options, stock index futures, stock options, and single stock futures. It is expected that trading volumes will increase and that prices will fluctuate more.

Although I am not familiar with all these plays, I can see the advantages of big players in these games. The idea of having an expiration date is only attractive to losers. It is not wise to bet against time. So I never play anything with a time limit. When I buy a stock, I prefer to have plenty of time to hold and wait for a better price to sell. Imposing a time limit will prevent my plans from bearing fruits. I want to be able to sell whenever I want and at whatever price I like, with no time limit.

When you buy an option or future, you bet on a time in addition to a price target. Betting on a price is hard enough to win. Betting on both price and time is doubly hard.

The other reason that makes it hard for you to win is the following. When you buy an option or future, your bet is entered into the trading records of your brokerage firm. So your broker knows all the bets placed by you and other small guys. They all add up to be a significant amount of money.

Your brokerage firm plays options and futures too, doesn’t it? Will it play against its clients’ bets? There is nothing to prevent them from doing so. Your brokerage company will likely add up all the bets of its clients and find out how to bet against them to maximize profits. The only time you can win is that your bet happens to be contrary to most of the other small players whom your brokerage company decides to go against to maximize profit.

Your brokerage company may even share its records with some other companies too. The law forbids them to divulge your private account, but it does not prevent them from aggregating all the small private accounts and presenting them as a total betting amount for an option or future. When a big player like a brokerage company has this kind of “insider” information, it will act for its own benefit. It will either sell or buy to prevent the majority of the bets placed by the small guys from reaching the target price by the expiration date. As a consequence, the majority of the small guys will lose. Only the minority win because they happen to bet contrary to the majority of small players.

3/17/2010 Wednesday

Dow: +48 to 10734, volume 1.0 billion shares.
Nasdaq: +11 to 2389, volume 2.2 billion shares.
S&P 500: +7 to 1166, volume not available.

Stocks continue to rise steadily in moderate volumes of trade. This is a good thing because a bubble cannot exist in this condition. Furthermore, a steady rise means the up trend can go on for a longer time.

Today’s upbeat announcement by LSI Corporation regarding its first quarter results has led to a 9% rise in its own stock price. Other chip companies such as AMD and MU also rise with the tide. The chip industry is seeing larger volumes of orders for a wide variety of products. Pretty soon this uptrend will extend to chip equipment manufacturers, notably AMAT.

Today I’d like to talk about the relationship between the stock price and the shares outstanding. Big companies used to issue more shares than smaller ones. However, some big companies deliberately keep their share numbers small so that they can maintain a high price. The following are some examples:

Companies——————Price 3/17/10—-Shares Outstanding
Berkshire Hathaway (BRK/A)——$123,757———–1.1 Mn
Google (GOOG)——————-$566———–244 Mn
IBM (IBM)———————– $128———-1299 Mn
Apple (AAPL)———————$224———-907 Mn
Coca Cola (KO)——————–$54———-2305 Mn
General Electric (GE)—————-$18———10670 Mn
Citigroup (C)———————-$4———-28477 Mn

The number of shares issued tends to drag down the stock price. A company can artificially boost its stock price by announcing a reverse split. For instance, a 5 for 1 reverse split of Citigroup means its shares will be reduced by five times to 5695 millions, while its shares price will increase five folds to $20. This can be achieved with just an announcement stating the effective date. In fact, AIG has done a 5 for 1 reverse split last year to raise its stock price five folds. As for the stockholder, there is no gain in value because your stock holding will automatically be reduced by the same amount even though the price has increased.

3/16/2010 Tuesday

Dow: +44 to 10686, volume 1.0 billion shares.
Nasdaq: +16 to 2378, volume 2.1 billion shares.
S&P 500: +9 to 1159, volume not available.

The stock market trended up today after the Federal Reserve announced its intention to keep the present low interest rate for an extended period. In addition, the Fed expressed some optimism about the job market and the economic recovery currently taking place.

I’d like to talk about dividends today. A company paying dividends must be a well-established one. It also has the confidence of being able to generate sufficient cash to pay the stockholders every quarter. Most high tech companies do not pay dividends due to higher risks inherent in the industry. Intel and Microsoft are two exceptions.

A company paying dividends attracts investors for the longer term. In that sense, the stock price will fluctuate less violently over the years. Mutual funds like to buy companies stocks offering dividends because they generate significant revenues when being held in large quantities for several years. As for individuals, the dividends may not add up too much if the quantities of stocks held are small.

An announcement for dividend increase usually raises the stock price as in the case of GE today (rising from around $16 last week to $18 today). On the other hand, an announcement for dividend cut has the opposite effect. This happened to some big bank stocks such as Citigroup and Bank of America during the financial crisis last year.

3/15/2010 Monday

Dow: +17 to 10642, volume 0.93 billion shares.
Nasdaq: -5.5 to 2362, volume 2.0 billion shares.
S&P 500: +0.5 to 1151, volume not available.

As in the previous week, the market continues in a holding pattern showing small changes and volumes at the close.

Two major events are likely to happen within this week. The first one is an impending vote by the US Senate for financial reform. The second is a vote by the US House to adopt the Senate Health Care Reform Bill passed last December. Both bills will have significant impacts on the consumers. No wonder both the bankers and health insurers stand in opposition to the Bills due to stricter regulations to be enforced.

To those who dislike regulations, they will say that the market will take care of itself. Why bother to regulate? To this reasoning may I add that the market only knows how to take care of some of its own self-interests. We consumers belong to the market, too. Have we asked what are our own self-interests?

The bankers have gotten away with $800 billion of bailout money from the taxpayers. Their executives have gotten millions in bonuses. The health insurance companies continue to raise premiums every year. When we get gravely ill, our insurers will likely cut and run by invoking “preexisting conditions”, or “see the fine prints”. In the current deep recession caused by the irresponsible bankers, millions of consumers are still licking their wounds due to job loss and belt tightening.

We must be stupid if we don’t demand what is good for us as consumers. For so many years, the government has kept a blind eye to consumers’ interests. They have been sleeping with the bankers and the insurers. Now it’s the time for the consumers to demand real protection for their self-interests against lack of commercial responsibilities.

3/12/2010 Friday

Dow: +13 to 10625, volume 1.1 billion shares.
Nasdaq: -0.8 to 2368, volume 2.0 billion shares.
S&P 500: -0.3 to 1150, volume not available.

The market today can be described as lackluster, with small changes and moderate volumes. It has been like this for the whole week except more active for the Nasdaq. Nevertheless, all the three indexes are creeping back up since their lows in early February as shown below:

Index——-Jan. High 1/19—–Feb. Low 2/8–—–Today 3/12
Dow—-——–10725————-——9908———–—-10625
Nasdaq———2320—————-—-2126——-—-—-2368
S&P500—–—1150——————-1057—————-1150

The recent sell-off lasted for about two weeks from late January to early February. It has taken the indexes to creep back up in twice the amount of time. Note that the Dow is within striking distance to break the January high. What will happen next?

A double dip is out of the question unless something really drastic happens. As you know, stock prices seldom look back after they recover. They recover because they want to reach a higher level than before. This is how the big guys play to push up the market some more after a temporary profit taking.

When March expires, a new earnings season comes along with Alcoa being the first major company to report results. There will be plenty of stimulants for the stock market besides better company earnings. Retail sales are slowly showing signs of life, the employment situation will improve a little bit, and more mergers and acquisitions will be floating around.

Even though the market is trending up, frequent price dips will occur because bad news are coming out concurrently in this kind of economic environment. It all depends on what kind of news the market wants to respond to. I would guess the ratio between up and down days is about three to one. This will allow the indexes to continually break previous levels.

3/11/2010 Thursday

Dow: +45 to 10612, volume 0.98 billion shares.
Nasdaq: +10 to 2368, volume 2.2 billion shares.
S&P 500: +5 to 1150, volume not available.

Stocks overcame the early downdrafts and ended up at the day’s highs with light volumes of trade. The financial sector gets a boost of confidence after Citigroup successfully raised $2 billion for paying back the bailout money to the US government. Incidentally, Citi stocks have been creeping back up from around $3 to $4.18 over the last few weeks.

Looking at the Internet-related companies that are hot these days, I see three areas that stand out: search, social networking, and multimedia products.

Search is an inextinguishable human instinct. What are we doing all the time if not searching for a way to improve our lives and experiences? These include searching for new knowledge, a job, a product, a business contact, a mate, or whatever. A company that provides a search engine will find an expanding market all over the world. The one that produces the best search engine will dominate this business worldwide. Well-known companies in this sector include Google, Yahoo!, and Ebay.

Social networking is not new but it has exploded in recent years with the arrivals of Myspace, Facebook, and Twitter. Human beings are social animals. A company that makes social communications fun and productive will have no problem finding markets.

The third area of growth is multimedia. This has been talked about since the early 1990s. No other company has been more successful than Apple, and to a lesser extent, Amazon.com. Multimedia is a vague term in everyday conversation. What does the consumers really want? Apple seems to have found the answers one small step at a time: first the iPod, then iPhone, and now iPad. There has been talk about merging the PC with the TV. That sounds like a good idea, but how to attract the consumers? There are already some nice technologies out there waiting for integration into a great multimedia product, such as the touch screen, voice recognition, movies on demand, virtual reality, etc. I think the keyboard and the mouse are probably on the way out when the PC has successfully merged with the TV.

3/10/2010 Wednesday

Dow: +3 to 10567, volume 1.1 billion shares.
Nasdaq: +18 to 2359, volume 2.5 billion shares.
S&P 500: +5 to 1146, volume not available.

The market oscillates but winds up with gains at the close. Note that the Nasdaq index continues to rage on, with high volumes too. This reflects the good potential of high-tech stocks in the current economic recovery.

Today marks the 10th anniversary of the dot.com bust. On March 10, 2000, the Nasdaq stood at an all-time high of 5049. Today it is less than half this level. Do you still remember those dead companies like Webvan and Pets.com? Are you puzzled why they managed to fetch a high stock price before they collapsed? What I can say is that when the market goes crazy, even an elephant can fly. Let’s put it another way: A high tide raises all boats, including the bad companies. So you have to prepare that a stock boom carries a lot of risks because nobody thinks, getting drunk in the so-called irrational exuberance.

Back to the present, we are nowhere near a boom now. Caution is replacing irrationality, that is a good thing. Consequently, there is less risk in the market even though it dips temporarily many times. Nevertheless, there will be another boom about another new industry, maybe solar, hybrid/electric cars, biotech and whatnot. When there is money to be made, people will be happy to bury the past.

The dot.com craze was about the potential of the Internet. Now we can see its potential and how much it has changed the world. So the craze was not wrong at that time, but it was too early too fast, unless you cashed out well before the crash occurred.

Right now, a share of Cisco is worth half of its price ten year ago. It is a survivor of the dot.com bust, and is riding the Internet boom for real this time. So is Apple, which knows what kind of multimedia products enabled by the Internet that the consumers want. We must not forget Google, which satisfies consumers’ desire to search for knowledge and pleasure. Its stock price may be very high, but its small number of outstanding shares justifies the price. These companies are riding the Internet wave really well.

3/9/2010 Tuesday

Dow: +12 to 10564, volume 1.1 billion shares.
Nasdaq: +8 to 2341, volume 2.5 billion shares.
S&P 500: +2 to 1140, volume not available.

Stocks could not sustain the surge in the morning hours but settled at the close with some small gains. Have you noticed that a steady climb in small steps has been occurring over the last two weeks? This is especially true for the Nasdaq index. A steady climb usually implies something is brewing, perhaps related to the strong demands for chips and other high-tech products.

Today I wish to talk about communications. For a traditional telephone, a dedicated wire transmits the voice using an electrical pulse. When somebody is talking, no one else can talk on the same wire due to interference. Thus a telephone company must install a great bundle of wires and maintain a big switching office in order to serve many people talking at the same time.

When people transmit data and videos, the voice wire is not “thick” enough to do the job. So we need bigger cables. As the market grows, we need faster medium to transmit more data and videos. Electric cables must yield to optic fibers made of glass filaments that transmit light pulses at the greatest speed. Thus we have underground optic cables for continental transmission, and undersea optic cables for intercontinental transmission. We all see the power and convenience of fiber optic cables when we are working on the Web these days.

Wireless frees us from the limits of dedicated wires and cables. The medium used is the air around us. The transmitting agent is light in some special wavelengths. The wonderful thing is that despite no “dedicated” air for transmission as in wires or cables, there is very little interference. With air as the medium, satellites are used to beam communication light pulses to anywhere on and above earth.

The only bottleneck for wireless transmission is bandwidth. It’s not speed because we have already reached the highest limit, which is the speed of light. Bigger bandwidth allows more data and videos to be transmitted through air. That is why increasing the bandwidth is a major project for the future of communications.

People in the telecom business are already talking about a “cloud” of data sent out on the Internet for your PC to pick and use. This cloud may contain your Google search results, your emails, your videos on demand, your medical record that get stored on the Web, and even the application programs that you want to fetch on demand rather than being stored in your own PC. All of these can be achieved only with increasing bandwidth.

3/8/2010 Monday

Dow: -14 to 10553, volume 0.9 billion shares.
Nasdaq: +6 to 2332, volume 2.2 billion shares.
S&P 500: -0.2 to 1139, volume not available.

Stocks take a break today. There is not much news to stimulate the market in either direction, but the Nasdaq index continues to move on.

Some sell-off in solar stocks occurs today. The frequent ups and downs in the stock prices of solar companies are normal because this is a relatively new industry with the attendant potentials and risks.

The prices for solar cells are coming down significantly. At a certain critical level, the price will bring about a growth explosion. The following factors play an important role: the progress of solar technology, the rise of oil and gas prices, the amount of tax incentives, the building of a smart electricity grid, and people’s desire for a cleaner environment. All these factors are moving forward slowly but surely. Some time in the near future, these factors will reinforce each other to produce a multiplier effect on the solar industry.

Like the PC industry, the solar industry has the potential of benefiting from the so-called distributed processing. For PC users, each individual does his own work without relying on a central mainframe computer as before. For solar users, each household (or building) generates its own electricity without relying on a central supplier to transmit power through wires.

After a smart grid is put in place, each household can even sell its own surplus electricity to the others, while relying only partially on the central supplier when not enough electricity is generated for its own use. This is equivalent to the working of the Internet allowing all PCs to share their work and information.

In the 1980s before the PC industry took off, everybody said the PC had its many limits. What has happened to the mainframe now? Today, we talk about all the limits for solar without realizing that this industry is dawning. All it takes is for retail gasoline prices to creep back to $4 a gallon like in the summer of 2008. Then everybody will be praying for solar to save us.

3/5/2010 Friday

Dow: +122 to 10566, volume 1.1 billion shares.
Nasdaq: +34 to 2326, volume 2.3 billion shares.
S&P 500: +16 to 1139, volume not available.

Stocks made solid gains the whole day. At the close, the Nasdaq broke this year’s record high achieved in January. The other two indexes are within striking distance. The following table shows:

Index——-Jan. High 1/19—-Feb. Low 2/8—–Today 3/5
Dow—-——–10725——————9908————-10566
Nasdaq———2320——————-2126————-2326
S&P500———1150——————-1057————-1139

It looks like the sell-off lasting between late January and early February is finally over. When a sell-off recovers, stocks seldom fall back again unless something dramatic happens. We can expect the surge to continue onward, but with intermittent short-term profit taking like usual.

The cause for the solid gains today is explained by the better-than-expected job loss for February (36,000 actual against 50,000 expected). The unemployment rate stays at 9.7% for the US as a whole. Although this is not a case for joy because people are still losing their jobs, the stock market doesn’t care and is moving on.

You should ask why the analysts are constantly playing with this “better or worse than expected” thing. The “expected” number is a human invention subject to manipulation. The actual number always lands on either side of the expected number. Rather than showing how much the analysts are wrong on target, this fact is instead used to explain the ups and downs of the stock market. This is a very smart trick, don’t you see? It is smart because people believe in them, not once, but all the times! (Fool me once, shame on you. Fool me twice, shame on me).

3/4/2010 Thursday

Dow: +47 to 10444, volume 0.96 billion shares.
Nasdaq: +12 to 2292, volume 2.1 billion shares.
S&P 500: +4 to 1123, volume not available.

A lack of direction still characterizes the market for today in view of both good and bad news. The three major indexes rose early in the morning. Then they dipped and stayed low for most of the day until the last hour when they surged back up again. The trading volumes are considered light.

Have you noticed that stocks have been slowly creeping back since the sell off between late January and early February? The following figures show:

Index——-Jan. High 1/19—-Feb. Low 2/8—–Today 3/4
Dow———–10725———–9908———-10444
Nasdaq———2320————2126———-2292
S&P500———1150————1057———-1123

It looks like the January highs will be eclipsed soon, especially for the Nasdaq and the S&P500. This means that high tech and small cap stocks have better prospects for growth in the coming months. It also means that the rise of the market will spread from the 30 large caps in the Dow to numerous smaller companies as the economic recovery takes root.

3/3/2010 Wednesday

Dow: -9 to 10397, volume 0.9 billion shares.
Nasdaq: -0.1 to 2281, volume 2.5 billion shares.
S&P 500: +0.5 to 1119, volume not available.

The market is taking a break for a second consecutive day. Both days started out with a surge for the three major indexes, but ended up with only small changes at the close.

Yesterday I was talking about the disruptive forces that you should pay attention to when you play stocks. These forces are so powerful that they can make or break major companies. They are most visible in high tech but they occur in other industries as well. The following are some good examples.

The trend away from carbonated soft drinks to bottled water came out of nowhere despite millions of advertising money being spent every year on promoting soft drinks. You would think that Coke and Pepsi must have a hard time. No, they saw the trend and they have bought some bottled water companies to create new markets for themselves.

How many telephone booths are left standing now? The cell phones have already taken over. They are taking over the cameras too. AT&T must have lost great incomes in the public telephone operation. To compensate for the loss, it has aggressively moved into the mobile business from a traditional landlines operation. With regard to cameras, we’ll see how Kodak handles the disruptive force of the cell phone.

How many bank tellers have lost their jobs? The devil is the ATM machine operated by electronic chips.

The PC has annihilated the entire typist industry. It has brought the mainframe industry and the publishing industry to their knees.

The most disruptive force is probably the Internet, yet with the biggest potential at the same time. The newspaper business is dying a slow death if they cannot find a way to profit from the news propagated through the Internet. The entertainment and record industry is suffering the same fate if they continue to complain about the illegality of downloading without figuring out how to profit from the increasing downloading trend.

I can go on and on about the disruptive forces. As a stock player, you must have some idea whether these forces have a big impact on your stocks.

3/2/2010 Tuesday

Dow: +2 to 10406, volume 1.0 billion shares.
Nasdaq: +7 to 2281, volume 2.8 billion shares.
S&P 500: +3 to 1118, volume not available.

The market is taking a break today. The surge in the morning cannot be sustained. Note that the Nasdaq volume has increased significantly for the past two days. This may suggest better prospects for technology stocks.

I happen to think about “change” today. People seem to demand real change right now because they are dissatisfied with how things are going, especially in economics and politics.

Change can be bloody such as a revolution, a war, or a terrorist attack. In this generation, we have seen monumental changes that occurred without violence or blood, such as the implosion of the Soviet Union, China’ reorientation from communism to capitalism, and the recent near collapse of the global financial system. All of these changes have caused tremendous disruptions for billions of people around the world, but they also present tremendous opportunities at the same time.

When you are in the stock market, you must tune into all kinds of changes because that is what the stock market is all about. You must try to understand the forces of change that can make or break companies and their stock prices. Let me identify some great forces that are impacting our lives:

Technology: This is perhaps the biggest force that changes our lives. Technology advances faster day after day. During the last 100 years, the world has changed more than the total of all the previous years combined.

Globalization. No country can now be isolated from the effects of what is happening elsewhere in the world. This is due to the forces of technology and the inter-dependence of markets that technology brings. The world is getting smaller and more connected everyday.

Oil supply. You may drill everywhere and discover oil underneath your house. The fact is that the world is running out of oil. The rising oil prices testify to this truth. Since the world’s transportation mainly relies on oil, there will be tremendous disruptions if nothing is being done fast enough. What can you do if you cannot move about? Right now, oil is worth around $80 a barrel. Wait until it gets to $140 soon and see the effects. We have seen this happening before in the summer of 2008. What if the price goes up higher and higher when the world has recovered from the current deep recession? Have you noticed that the big oil companies are now calling themselves energy companies? Are they seeing something that we don’t see?

Terrorism. This has become a major force after we have seen the destruction in New York, Washington, London and Madrid. The suicide bomber or pilot has proved to be a real lethal weapon because he kills whenever and wherever he wants without regard for innocent civilians. The problem is that the Western governments don’t know how to handle them. Look at their failures in Iraq and Afghanistan. To counter terrorism with force is not working well and has proved to be very expensive that cannot be sustained. The West has encountered another kind of terror before: guerrilla warfare in the jungles of Vietnam and Malaysia, and roadside bombs (IEDs) in Iraq and Afghanistan. What have they learned now that the enemies are coming to strike the homeland?

3/1/2010 Monday

Dow: +79 to 10404, volume 1.0 billion shares.
Nasdaq: +35 to 2274, volume 2.4 billion shares.
S&P 500: +11 to 1116, volume not available.

March starts out positively today with most stocks on the rise, especially for the Nasdag due to good reports about heavy January demands for electronic chips used in PCs, cell phones, autos and other equipments. In addition, a number of mergers and acquisitions (M&A) serve to buoy the market.

Talking about M&A, why does it push up the market so often? If you think deeper, M&A is just hype, it’s not real because most M&A do not work out, especially between big companies.

One good example is AOL and Time Warner, which merged in the 1990s and created plenty of big news. What happens now? They split recently.

Another one is Compaq and Hewlett Packard that resulted in a big conflict within the board of directors, and the eventual firing of Carly Fiorina, the CEO of HP.

There have been many mergers in the airline industry and none of them has proved successful.

M&A is thought to result in market consolidation, mass layoff to save costs, and more streamlined management and company structure. These cannot be achieved automatically after two companies merge. Above all, it requires tons of managerial talents to take advantage of the new possibilities that M&A can bring.

On the other hand, M&A between a big company and a small one usually works well. The small company will supplement the big one with its product line, expertise, and market share. An important factor is that the big company leaves the small one alone in day-to-day management while only keeping the small company in the planning and execution of its grand strategy.

Cisco has been very successful in the constant strategic acquisition of small companies over many years. The same can be said of Microsoft.

2/26/2010 Friday

Dow: +4 to 10325, volume 1.2 billion shares.
Nasdaq: +4 to 2238, volume 2.2 billion shares.
S&P 500: +2 to 1104, volume not available.

There is not much action today. The three major indexes fluctuate within a relatively narrow range.

I have watched the televised debate of Thursday’s health care summit. One idea I came around to believe is universal coverage, which has been vilified in the US as “socialized medicine”. What they fail to understand is that “socialized medicine” makes business sense too. The following is the logic:

When you buy health insurance, either from a company or from the government, you pay a reasonable premium every month. When you get sick, especially when gravely ill, you expect the insurer to stand behind you and pay the expensive medical bills. In the US, when you get gravely ill, the insurance company will likely cut and run with all kinds of excuses such as “preexisting conditions”. Therefore it is really a scam, not health insurance. If you are not stupid, you should ask what you are paying insurance for? Right now, the government does not protect the consumers. The insurance companies continue to cheat and scam.

The cut and run of the insurance companies are coming back to haunt them. More and more people are dropping out of the insurance market because they see no point in buying a scam. Those people who are healthy enough, especially the young, will stay away and take the risk that they will not get sick in the future. This leaves the insurers with a smaller market of old and sick people. In turn, this will cause the insurers to cut and run more because the business is not as profitable as before. At the same time, the insurers will raise the premiums to compensate for the dwindling market. So this creates a vicious circle, more old and sick people to insure, higher premiums, and more cut and run.

Every businessman understands that the insurance business requires a big market to be profitable. Why? Because you need to spread the risk. In health care, the healthy people pay premiums for the insurers to support the sick. When the healthy people get sick someday, other healthy people will pay for them. What makes the business profitable is that there are always many more healthy people than sick ones. If the healthy people leave the insurance market, the insurance business will be in trouble. They will have to raise premiums, or cut and run. In the US, the insurers do both.

It follows that the bigger the market, the better the insurance business, the lower the premiums, and the lesser the cut and run. The biggest market of course is universal coverage where everybody pays premiums to support a small segment of the population who are old and sick.

Don’t you know that the US insurance industry generally supports Obama’s health care reform? Although they are less enthusiastic, they begin to see the light, which is the logic I have described above. The reform bill involves government subsidy to enroll some 30 million people currently uninsured, who have been priced out of the market due to high premiums. In return for the promise of a bigger market, the insurers will be forbidden to cut and run.

Everybody knows that cutting health care costs is the overriding issue for reform. Enlarging the insurance market is no doubt a very important factor for achieving lower costs for the population.

One example supporting universal coverage can be found in Massachusetts. The state has introduced universal coverage in recent years. The health insurance premiums for the people have been reduced by 40%.

Some people say that they should be given the freedom not to buy health insurance. My answer is, you have the freedom not to buy anything such as a car, a PC, or a cell phone. You don’t have the freedom not to buy health insurance because it is a social issue, unless you live in an uninhabited island like Robinson Crusoe. Health insurance should be mandated to increase the insurance market and to lower costs.

Most adults in the US drive. The government requires you to pay for a license and to buy car insurance. Else, it’s illegal to drive. Thus car insurance is already mandated in the US. Why not health insurance that is even more important? You have the freedom not to buy car insurance because you don’t have to drive. However, you don’t have the freedom not to buy health insurance. Reason: Can you say you will never get sick, gravely ill, or get hurt in an accident?

2/25/2010 Thursday

Dow: -53 to 10321, volume 1.1 billion shares.
Nasdaq: -2 to 2234, volume 2.2 billion shares.
S&P 500: -2 to 1103, volume not available.

Yesterday’s up day is replaced by a down day today. The Dow plunged by nearly 200 points in early morning but has settled to a smaller loss at the close. The plunge was attributed to an unexpectedly large increase in jobless claims for last week.

Today President Obama and the leaders of Congress are holding a summit trying to reconcile their differences in the stalled health care bill. They should bear in mind what the public want. As a reasonable citizen, let me spell out what I want:

I don’t want my health insurance premium to rise more than the rate of inflation. If I get gravely ill, I want my insurer to pay for my medical bills because that is what insurance is for. The government should forbid insurers to cut and run from their insurance contract with the people.

I want my doctors to take care of my health, rather than to over-prescribe all kinds of tests and drugs just to fill their pockets. The existing system has all kinds of wrong incentives for doctors and other health care providers.

The government should set a limit for mal-practice compensation. Without a limit or taut reform, doctors will get very defensive in their practice instead of caring for their patients.

I want more competition in the insurance business so that I can shop for the best insurer. I want more competition in the services provided by doctors, hospitals, and drug companies. The government should mandate all fees charged to be posted on the Internet so that people can compare.

I want to be able to buy drugs anywhere I want. If a similar drug in Canada or Mexico is cheaper, it should be free for me to mail order.

For the millions of Americans who go without medical insurance, the main reason is high insurance premiums that price them out. If medical costs do not come down, there will be more uninsured people year after year. Government subsidy is not a permanent solution. The US government is broke anyway.

The key to medical reform in the US is bringing the costs down to reasonable levels. This is a very complicated thing. I favor letting the market work things out. In many cases where the market fails, the government should step in with better regulations to correct the system.

2/24/2010 Wednesday

Dow: +92 to 10374, volume 1.0 billion shares.
Nasdaq: +22 to 2236, volume 2.1 billion shares.
S&P 500: +11 to 1105, volume not available.

Down one day, up the next. Today’s gains almost cancel out yesterday’s loss. Volatility is in play. This happens when there are so much conflicting good and bad news out there. It is safer to take a quick profit after stock prices have risen a little.

Today I’d like to talk about brand names. When you are in business, you want to differentiate your products from others, especially when the products are commonplace. Branding a product is a means of differentiation that encourages customer loyalty and prevents price erosion. A brand name requires a lot of money to create and maintain, but guarantees good return for a long time. The following are some famous brands: Coca Cola, McDonalds, Heinz, Colgate, Polo, Levis, American Express, IBM, Mercedez, Apple, and Intel.

A famous brand name is a stabilizer for the stock price. As you can see, during the market crash between late 2008 and early 2009, the big brands did not plunge as much as the others. In fact, IBM and Apple were still flying high even during the depth of the recession.

Coke is probably the most legendary. The product is merely sweet carbonated water, but it has captured the consumer’s fantasy due to its brand. The market for Coke is worldwide and is till expanding after more than 50 years. If you happened to have owned 1000 shares of Coke in the mid 1980’s, you’re probably a millionaire by now.

Intel cultivates its brand in the most unlikely sector: computer chips. All high-tech products become commodities after a while because of short product cycles brought about by fast technological change. Besides constantly driving for the fastest chips, Intel cultivates a very powerful partnership with Microsoft, resulting in the so-called Wintel product. At present, around 90% of the global PC market is powered by Wintel.

Apple is a new legend after going through near death in the mid 1990s. Although supplying only 5% of the global PC market, Apple has developed a niche with a loyal following who are willing to pay a higher price. In addition, Apple has opened up tremendous multimedia possibilities with its iphones, itunes, and ipads that attract millions of young and hip. Multimedia products have been talked about for three decades now, only Apple seems to know what kind of products the consumers want.

2/23/2010 Tuesday

Dow: -101 to 10282, volume 1.1 billion shares.
Nasdaq: -29 to 2213, volume 2.2 billion shares.
S&P 500: -13 to 1095, volume not available.

Two days of consecutive losses have returned the three major indexes to about the same levels as last Tuesday when they began a four-day climb. This means that the market is not ready for a major push forward. Any small gains are negated by a quick profit taking.

Today’s plunge is attributed by analysts to an unexpected decline in consumer confidence level in the US. For what it’s worth, the consumer confidence figure is an inaccurate indicator at best. It measures the emotions of a sample of people who happened to be selected for questions about their consumption. Whatever they feel, it cannot cause other people to go out to buy or sell stocks. Personally, I do not sell or buy based on how other people feel. Do you? If you do, you’d better ask whether this is too risky a way to invest your money.

I can give you solid evidence that people don’t buy or sell stocks based on consumer confidence figures. From March to December 2009 when the major indexes rose by more than 60%, how did the consumers feel? They felt bad because thousands upon thousands were losing their jobs. They were in fact going through belt tightening that has continued through this year and maybe the next. How can you expect the consumers to feel good and confident about the future when unemployment still stands at a high 9.7%?

In fact, most consumers are very perplexed why the stock market has performed so well last year. The fact is that most consumers don’t play in the stock market. They have no immediate influence on stock prices. Ironically, how they feel is being used as a reason to explain the daily market ups and downs. It’s a weird world, isn’t it?

2/22/2010 Monday

Dow: -19 to 10383, volume 0.9 billion shares.
Nasdaq: -2 to 2242, volume 1.9 billion shares.
S&P 500: -1 to 1108, volume not available.

There is not much action in the market today. The three major indexes end up slightly lower. The volumes traded are also light.

Don’t you notice that most financial stocks got a boost today? They have stayed in the doldrums for quite some time. Maybe it is their turn to move higher now that the sector is largely stabilized. Fed Chairman Bernanke will soon give a regular testimony to Congress regarding the state of the economy. He is likely to emphasize the fragile recovery that requires the Fed to maintain the current low interest rates for the next several months. Although this is not new, the market may be tempted to respond positively.

2/19/2010 Friday

Dow: +9 to 10402, volume 1.0 billion shares.
Nasdaq: +2 to 2244, volume 2.1 billion shares.
S&P 500: +2 to 1109, volume not available.

The major indexes continue to climb for four consecutive days now. One cannot help become cautiously optimistic that the current correction may be ending.

I happen to think about timing in the stock market. Why is timing so important? You need two timing actions when you are into stocks: one for buy and one for sell. As a small player with no insider information, you can only rely on the big picture to make timing decisions. The following is what I see about the big picture:

We are coming out of a deep recession now. It will take longer for the economy to fully recover this time. The best indicator for full recovery is the unemployment figure. It has come down from 10% in December 09 to 9.7% in January this year. There will be no full recovery until the figure goes down to below 6%, which may take two to three years.

Nevertheless, the stock market has taken off well beforehand since early March 2009. That means stock prices have a long way to go before full employment is restored when a boom time will materialize. A boom time is characterized by people feeling good about the future, by higher inflation, rising interest rates, and by the soaring heights of the stock market. You must cash out well before the boom. Otherwise you will be hit by a sudden downturn. The bust may last for several months as the business cycle starts to slide downward.

Within this three-year timing framework determined by the upward business cycle, there are numerous short cycles of ups and downs when the stock market corrects itself because of excesses created. We have just seen the most recent correction lasting from mid-January to now. There will be more turbulence coming. You should not view this as a negative thing. If you know how to take advantage of the temporary ups and downs, you will be making a lot of money on your way to the peak.

The big picture I have just described can help you find the right stocks. You must look for those companies that fit into this big picture. In fact, most big and medium companies do. For small companies, I am not that sure because they are in constant struggle for survival.

I have a few words of warning. Many companies go bankrupt near the end of the recession simply because they have run out of cash and no banks want to lend them money. They have already become penny stocks (under $1). When the stock market started surging in March 09, they should have surged with it because a rising tide raises all boats. If they still remain penny stocks, these boats have holes in them. They are not worth buying or holding.

2/18/2010 Thursday

Dow: +84 to 10393, volume 1.0 billion shares.
Nasdaq: +15 to 2242, volume 2.0 billion shares.
S&P 500: +7 to 1107, volume not available.

The three major indexes gain for a third consecutive day. This looks like a recovery from the recent correction that began four weeks ago. The rebound can be described as cautious and slow with relatively low volumes.

I wish to talk about the insurance industry today. Warren Buffett once said that he liked the insurance industry because it collected money in advance and might not have to pay it back later. That is why insurance stocks are stable to own. This stability was shaken when the largest insurer, AIG, almost went under in late 2008 due to the sub-prime mortgage crisis. The reputation of the insurance industry is also tarnished, because AIG took the biggest chunk of government bailout while continues to pay its top executives billions of dollars in bonuses.

The insurance business can only be operated by the big guys because the government requires a large sum of cash for obtaining an insurer license. Unlike other business which must prove their worth with their products or services, an insurance company asks for money first from the consumer in the form of monthly premiums. It wants the consumer to bestow trust in the hope that when a disaster strikes, he will be reasonably compensated. If this trust is broken, the insurance business will be in trouble.

What makes the consumer so willing to pay first before receiving anything in return? Well, life is full of risks such as traffic accidents, cancer, fire, flood, hurricane, earthquake, theft, and vandalism, etc. In some cases, the consumer has no choice even if he wants to take the risk. In many places, the government requires you to pay auto insurance for driving a car. When you mortgage a house, the bank requires you to pay fire, flood, or earthquake insurance because it does not want to take the risk.

The insurance industry operates safely on a cost-plus basis. Each year, an insurance company estimates their total business cost (compensation plus administration), adds a “reasonable” amount of profit. That will become the total amount of money they will have to collect from the consumers in the form of premiums. The revenue base for the insurer is the number of people insured. The more people buying insurance, the higher will be the revenue.

The insurance companies also count on the profits they make from the interest-free money collected from the consumers. Like the banks, they loan or invest the consumers’ money for their own pocket.

In addition, the insurers can reduce their costs by using all kinds of delay and confusing tactics in paying compensation. If you know a friend who has suffered from the flood caused by hurricane Katrina not long ago, he will tell you how difficult it is to get compensation from the insurer.

As a consumer, you must be aware that the bigger is your insurance claim, the harder will be for you to get compensation. Insurance compensation is not automatic even though you have paid your premiums. Is this fair game?

The issue of fairness comes to a head in the area of health care. If you are insured now, you will come face to face with this problem when a grave illness hits. Your insurer may refuse to pay the doctor or hospital for all kinds of reasons: pre-existing conditions, some details not covered in the fine prints, and so on. In the worst case, your insurer may drop you from their policy altogether because you have become a burden to them. Is that fair after you have paid your premiums so dutifully all these years? How can the consumer find protection? No way, except when the government enacts new laws to protect the consumers in health care. What if the government goes to bed with the insurers? Then the consumers will all be raped.

So, for those who are buying insurance stocks, it’s a real good business. They collect money first without honoring their obligation to stand behind their customers. Tell me another business that is more profitable than this.

2/17/2010 Wednesday

Dow: +40 to 10309, volume 1.0 billion shares.
Nasdaq: +12 to 2226, volume 2.0 billion shares.
S&P 500: +5 to 1100, volume not available.

The surge continues today but with much less momentum compared with yesterday. You can probably guess what is likely to happen tomorrow.

For the past two days, I’ve been talking about the riskiest businesses such as airlines and retails. Let me add one more today: high tech.

The high tech industry is extreme because it can both be riskiest and most profitable at the same time. Why? Because technology is a game changer. It also changes the world. Just think about the computer chip, the PC, the Internet, and the cell phone. Any company, big or small, will fail if unable to handle the fast technological change. On the other hand, explosive profits await any company, big or small, that knows how to usher and harness the change.

Competition in high tech is fierce due to the short product cycle. A new market can be created within a short time, which may cause the old one to collapse rather than erode. New entry is easy, especially in software, aided by venture capitalists constantly looking for new opportunities.

For high tech stocks, it is not uncommon to see huge fluctuations in prices over a year. You should not rest on the good products that a company is selling, for this may change quickly. You should pay attention to the competitors and see how well they are doing. Furthermore, there exist some small companies that you may not even notice. They suddenly come out of the blue and change the whole business game with their new inventions.

2/16/2010 Tuesday

Dow: +170 to 10269, volume 0.23 billion shares.
Nasdaq: +31 to 2214, volume 1.9 billion shares.
S&P 500: +19 to 1095, volume not available.

Stocks were trading in positive territory in today’s session. They moved up even higher in the last half hour. Given that the volumes are low. I am concerned that the surge may lose steam tomorrow. It looks like high volatility will mark the rest of February when the bull is waiting for some real good news to continue running again.

Yesterday I was talking about the airlines being the most risky business. This makes me think about the retail business as another risky one. Have you noticed that retailers often change hands in the shopping mall? I have seen even the whole shopping mall close down. This applies to restaurants too.

Since new entry into retail business is easy, the market is saturated quickly. Then fierce competition ensues between retailers of similar products. In retail, there is no such thing as pie in the sky where everyone benefits. It’s a beggar-thy-neighbor battle where one retailer gains at the expense of another. Intense competition makes the business real tough. Only the big retailers are able to survive longer. Even so, the profit margin is exceptionally low, as exemplified by the supermarket chains.

Some big retailers have found a way to make better profits. Walmart is so successful mainly because it has developed a sophisticated low-cost supply source in China. McDonalds relies on its carefully cultivated brand name and marketing skills. Luxury retailers such as Luis Vuitton can charge a high price because they have created a niche market of their own.

In view of fierce competition, retailers have to apply more brains to stay alive. I have seen many ordinary retailers succeed. The common denominator is that they keep their business simple, their products cheap and appealing to the consumers. Some examples are: special drinks, sandwiches, noodles, exceptional services to consumers, going online, and so on.

2/12/2010 Friday

Dow: -45 to 10099, volume 1.3 billion shares.
Nasdaq: +6 to 2184, volume 2.2 billion shares.
S&P 500: -3 to 1076, volume not available.

Volatility is in vogue now. The Dow plunged below 10,000 but swung back 100 points to close at a smaller loss.

Talking about volatility, which industry ranks the worst? I’d say the airlines. The following are the facts:

What has happened to those premier brands such as Pan American, TWA, Eastern, and recently Japan Airlines? They have all gone under.

Which airlines are not struggling to break even despite some short periods of sunshine once a while?

The adverse market conditions are overwhelming: high overhead cost, high operating cost, rising oil prices, safety/security demands, cutthroat competition, overcapacity, complex orchestration of routes/schedules, terrorism, even bad weather gravely affects their business. No wonder the CEO of Eastern Airline once said that he would never buy airline stocks.

However, the airline industry still remains as glamorous as yesterday despite the no-thrill cheap economy class on which most people travel. Pilots always have a passion to fly. Young stewardesses are attracted to this profession because they want to see the world. More people like to fly if the fares are cheap enough, never mind the sardine conditions. All of these factors are sufficient to keep the airline industry afloat even though it becomes so difficult to squeeze some profit out of it.

2/11/2010 Thursday

Dow: +106 to 10144, volume 1.1 billion shares.
Nasdaq: +30 to 2177, volume 2.1 billion shares.
S&P 500: +10 to 1078, volume not available.

After falling for a while, the market turned around and kept its momentum. At the close, all the three indexes registered significant gains. However, volatility remains because there are all kinds of positive and negative news out there.

I’d like to talk about taxes today. Everybody hates taxes because we want the other guys but not ourselves to pay for government services such as roads, bridges, social security, defense, health care, etc. This is normal because people are basically selfish.

The fact is that we cannot avoid taxes even after we die. Our funerals are subject to service tax. Any properties left behind are subject to taxes too. The relevant point should be: How can we limit taxes so that the society is not overburdened by them? This is of course a perennial question because it has to do with finding a balance. And the balance point always changes depending on the circumstances.

I think the following principles regarding taxes are valid:

• In order for government to function, everybody should pay a reasonable amount of taxes. The devil is in the word “reasonable”.
• Taxes should be progressive. That is, the rich should pay more. But how do you define “rich” and “more”?
• The rich always find a way to avoid taxes. How? They have enough money to bribe government officials to write tax loopholes into the law.
• Taxes should be used as a means to limit the government bureaucracy. Since government takes for granted the tax revenues coming from taxpayers, more taxes means more bloated bureaucracy without higher efficiency. Government officials should be encouraged to do more with less because it is public service.
• Taxes should be more specific for its intended use such as social security tax, gasoline tax, bridge toll, airport tax, regulatory fees, and so on.
• Too much tax is a disincentive for society, especially for small business.
• Big corporations should be subject to a different treatment. Why? Big corporations have too much money and power to corrupt and intimidate government officials and ordinary people. There should be laws and regulations to limit their power, just as there are laws to limit government power. Corporations and government should not be allowed to gang together to squeeze the public. Otherwise, it will lead to a very unfair society exploited by the rich and powerful. The result? A bloody revolution as happened in many countries before.

2/10/2010 Wednesday

Dow: -20 to 10038, volume 1.0 billion shares.
Nasdaq: -3 to 2148, volume 2.0 billion shares.
S&P 500: -2 to 1068, volume not available.

Stock prices came down in the morning, but managed to crawl back up to smaller losses at the close. The trading volumes are light. This is one of those days when there is little excitement.

After three weeks of correction, it is worthwhile to look at your stocks of interest to see how they fare. In this way, perhaps you can determine the bottoms from where they will climb back up later.

I look at my shortlist and I find the following:
Alcoa (AA): Down from $17.5, stabilizing around $13.
AMD (AMD): Down from $9.7, stabilizing around $7.5.
Ford (F): Down from $12, stabilizing around $11.
Motorola (MOT): Down from $8.2, stabilizing around $6.5.
Suntech Power (STP): Down from $18.4, stabilizing around $13.0.
Yingli Green (YGE): Down from $18.8, stabilizing around $12.2

You will notice that the correction for Ford is the smallest while the others are pretty significant. Furthermore, they seem to be stabilizing over the last few days.

When will they go back up? It is hard to tell. Do they need a reason to go back up? Not really. Why? They did not need a reason to go through this correction. Why should they need a reason to go back up? But remember, the reporters and analysts will find many reasons whichever direction stock prices go.

2/9/2010 Tuesday

Dow: +150 to 10059, volume 1.2 billion shares.
Nasdaq: +25 to 2151, volume 2.2 billion shares.
S&P 500: +14 to 1071, volume not available.

The market stayed in positive territory all day but there was a slackening toward the end of the session. Today’s gains for the three major indexes more than compensated for the loss of yesterday.

Is the three-week correction over by this time? It’s hard to say given the financial uncertainties lingering in Europe. Today’s up market seems to be stimulated by German announcement of a potential bailout for the Greek government in fiscal mayhem. Hopefully, the next few days won’t see a continued market slide because of some unexpected bad news.

Two major retail brands announced good quarterly earnings today, McDonalds and Coca Cola. This suggests consumer demands are on the mend as the employment situation slowly improves.

2/8/2010 Monday

Dow: -104 to 9908, volume 1.1 billion shares.
Nasdaq: -15 to 2126, volume 2.0 billion shares.
S&P 500: -9 to 1057, volume not available.

Stock prices resumed falling after pausing on Friday. Most of the plunge occurred during the last hour of the trading session. The Dow is now below the 10,000 mark broken since October last year. The other two major indexes have also fallen below their October highs.

This has been a significant correction over a short span of three weeks since the highs of January 19th. When will it end? It is hard to tell given the recent fiscal uncertainties in Europe regarding Greece, Spain and Portugal. The ghost of the global financial crisis that began in 2008 is still haunting us even though the banking sector has been stabilized.

However, all indications show that this market slide is a correction, not the financial crisis we experienced in 2008 when stocks were plunging toward a seemingly bottomless pit. Even during that fateful period, we saw a bottom reached in early March 2009. So there will be a bottom soon when all the excesses are eliminated. I venture to guess it’s probably around 9700 for the Dow.

2/5/2010 Friday

Dow: +10 to 10012, volume 1.6 billion shares.
Nasdaq: +16 to 2141, volume 2.8 billion shares.
S&P 500: +3 to 1066, volume not available.

Stock prices continued falling this morning until the last two hours when they suddenly turned around and registered some gains at the close. The volumes are relatively high both today and yesterday.

One factor is the improved job situation. The US unemployment rate dropped for the first time in six months from 10% in December last year to 9.7% in January. That means around 500,000 jobs have been added to the economy in one month. People have been worried about jobs for so many months now that the market has already priced in the high unemployment rate. It’s the turnaround from job loss to job creation that counts.

I think a bigger factor for today’s stock turnaround is the sudden reversal of the US dollar. Due to uncertainties in the financial situations for the governments of Greece, and then Spain and Portugal, the Euro is losing value in relation to the US dollar. A rising dollar instills confidence and reduces the risk of inflation for the US economy. This in turn boosts US stock prices.

Whether the news are good or bad, they can only be used to explain or theorize about what happens in the stock market. Will stock prices fall again next week? Have all the excesses in the stock market been eliminated after the recent sell-off? It is very hard to tell. You should ask the big players who still have plenty of stocks to sell and plenty of cash to buy to see if stock prices at the current levels are low enough for a rebound.

2/4/2010 Thursday

Dow: -268 to 10002, volume 1.5 billion shares.
Nasdaq: -65 to 2125, volume 2.8 billion shares.
S&P 500: -34 to 1063, volume not available.

Today’s market can be described as a blood bath. Most stocks just keep on falling until the last minute of the trading session. Remember the robust rebound on Monday and Tuesday? Today’s loss more than erases the total of those gains.

Two pieces of bad news have impacted the market. One is the unexpected rise in weekly jobless claims. This is not something new as everybody knows that jobs are hard to come by. The problem is when job prospects will improve. The other is the worsening financial situation of the governments of Spain and Portugal, and the uncertainty about the reaction of the European Union. This news reminds people that the global financial crisis may not have run its course yet. The potential for a major bank in Europe to run into trouble may cause the stock market to drop further.

Nobody pays attention today to the bright picture of Cisco, the largest manufacturer of Internet hardware. Besides a significant sales increase, the CEO also says that they will be hiring at least 2000 more people this year.

As I said before, the sell-off is not over until it’s over. I was thinking that the energetic rebound on Monday and Tuesday might have spelled the end of the sell-off. It turned out that I was too optimistic.

2/3/2010 Wednesday

Dow: -26 to 10271, volume 1.1 billion shares.
Nasdaq: +1 to 2191, volume 2.3 billion shares.
S&P 500: -6 to 1097, volume not available.

Today’s stock performance can be described as a pause after two days of energetic rebound. The Dow was down by more than 60 points earlier but it has recovered to a smaller loss at the close. Overall, I think the bottom has probably been reached after the sell-off in late January.

After the recent introduction of the iPad, I have come to think about the following important trends:

We are closer to the day when the wireless multimedia product merges with the desktop PC. This is a natural development because people want the desktop PC to be portable. That’s why we have the laptop now as an intermediate step to satisfy consumer needs.

What make this trend possible are the following technological advances:
• Better battery that lasts longer between recharges.
• More efficient circuitry that uses less electric power.
• Wider bandwidth for optical wireless transfer of data.
• Advancement in Internet technology for speed, security, search, server storage, and data transmission/retrieval.

Being an isolated system without the Internet, the PC still has an edge now because of its speed and big storage for a host of application programs. All these are changing very fast because of the arrival of the Internet.

At present, data moving between PCs and servers through the Internet are fast enough but can be made even faster. When the Internet achieves greater speed in the near future, the PC will be reduced to just a node for the user to tap into the Internet in order to do most of the work.

Another big development is Internet server storage. There will come a time soon when the user can grab an application program from the Internet rather than from his own PC storage where the program is pre-installed. When that time comes, the PC may not even need that much storage space because most of the application programs can be stored online. The facilitator here is an advanced operating system, a piece of software that grabs an application program on demand and delivers it to your PC, the same way as it delivers a movie on demand.

It will happen in our lifetime when a portable device like the iPad enables us to do computer work anywhere, watch movies/news, communicate with friends, and do all the other cool stuff. The only differences from the PC are the absence of a keyboard, and the smaller size of the screen. And I can guarantee you, that future portable device will cost even less.

2/2/2010 Tuesday

Dow: +111 to 10297, volume 1.2 billion shares.
Nasdaq: +19 to 2190, volume 2.5 billion shares.
S&P 500: +14 to 1103, volume not available.

This is a second consecutive day of stock rebound with volumes larger than those of yesterday. Although the index levels are still low compared with the highs reached on 19th of January, an additional day of rebound serves to inject some confidence into the market.

Wall Street likes to blame the recent plunge of stock prices on President Obama’s effort to limit the risky ventures of the big commercial banks. Certainly, the big banks do not like the idea of financial reform. The fact is, they are the ones who caused the financial meltdown and brought about the current deep recession in the first place. As a consequence, the government had to bail them out with $800 billion of taxpayers’ money. Should the government let them off the hook? Is financial reform overdue to prevent another disaster like this happening next time? Most people think that there should be adult supervision in the financial sector.

The financial reform proposed by Obama aims to do two things: First, to restrict the big commercial banks from risky ventures such as sub-prime loans, financial derivatives, bundled securities, futures trading, and other innovations created by investment banks. Second, to address the problem of too big to fail, the government may require some big banks and financial companies to divest some of their existing subsidiary businesses.

The big commercial banks exist to fulfill one overriding function. They lend money to all other sectors to promote investment, growth and jobs. Their source of money comes from depositors like you and me. The public wants safety of their deposits while accepting a low interest rate, currently 1% or less offered by the big banks. In return, we don’t want the banks to do risky business to jeopardize our deposits.

The commercial banks take our money and lend it to homebuyers, businesses, and credit card users. The lending rate varies from 4% to as high as 20% for credit cards. The margins between lending rates and depositors’ rates are big enough to enable the commercial banks to reap very decent profits. They should not engage in risky lending or speculation as do the investment banks and funds. Besides the profit motive, the big commercial banks have a special responsibility to the public, that is, to foster stability and growth by recycling our earnings back into the economy.

2/1/2010 Monday

Dow: +118 to 10186, volume 1.0 billion shares.
Nasdaq: +24 to 2171, volume 2.2 billion shares.
S&P 500: +15 to 1089, volume not available.

The market is doing better today after a significant plunge during the past two weeks. Do you think the worst is over? It is hard to tell because today’s advance could have been just a knee-jerk reaction. Look at the volumes of trade. They are light compared with the previous down days on 1/21, 1/22 and 1/29. The fact of high volumes on down days, and low volumes on up days does not seem to indicate good omen.

Throughout the latter half of January when the market was ripe for a correction, the good news did not matter because people just sold into the good news. Likewise, when all the profit taking is over, the market will turn around even if there is little good news coming along.

Therefore, my point is, it’s not over until it’s over.

1/29/2010 Friday

Dow: -53 to 10067, volume 1.6 billion shares.
Nasdaq: -32 to 2147, volume 3.1 billion shares.
S&P 500: -11 to 1074, volume not available.

January has been a down month when all the positive quarterly reports from big companies have failed to lift the market. Even today’s US GDP growth of 5.7% for the last quarter of 2009, which is the highest in six years, could not turn the major indexes around. The only numbers that have risen are the exceptionally high volumes of trade.

Many traders have said, if January goes, so goes the rest of the year. Are you ready to believe in this assertion? I can point out the fact that the rest of the year will see more robust economic recovery, and better company sales. The unknown factor is jobs. How fast employment will recover is anybody’s guess. We know that the negative employment news can spook the market anytime. On the other hand, the long-term growth prospects provide the true reasons for the market to advance.

Let’s look at the damage done in January this year:

Index———1/4/10——1/19/10——1/29/10
Dow———-10584——-10725——–10067
Nasdaq——–2308——–2320———2147
S&P 500——–1150——–1150———1074

The above has shown that in just ten days from 19th to 29th, the Dow has lost more than 600 points, and the Nasdaq over 170. This magnitude is big especially when the slide occurred within such a short time.

Let’s also look at a similar crash half a year ago:

Index—–6/12/09—–7/10/09
Dow——-8779——–8147
Nasdaq—-1859——–1756
S&P 500—-946———879

The earlier crash shown above has the same magnitude, but it took a longer time, about a month. The market started to slide well before the next quarterly report season beginning in July, but then it turned around as more and more positive earnings results came out. This looks like a classic case of short-term profit taking during a bull market.

Comparing the timeline of both crashes, the current one reflects a deliberate effort to quickly cash out all the excesses of the 2009 bull market. Why deliberate? They sell into the good news. Why excess? Both the Dow and Nasdaq have risen by more than 60% since early March 09. Why quickly? Because there is more money to be made later. This is the key to understanding the current crash.

Since the stock market has emotions, a bull always produces excess. Too much excess is known as a bubble. We cannot have a bubble right now because the economy will take years to reach boom stage. Stocks coming down from bubble to bust take over a year like previous busts.

At present, we only have a significant excess situation, because stock prices have climbed over 60% in ten months. Here lies a good reason for quick cash-out or profit taking. Do it quickly so that you can move on with the real thing. That is why it takes only 10 days for the Dow to fall 600 points.

At what point will the excess be eliminated? We hope this is enough but it could be further more. Who determines the excess in the first place? You have to ask the big guys who are cashing out right now. When they are done and start to move back in, the market will turn around. For the rest of us, we just sit tight and watch for the bottom. As long as there is money to be made due to price differences, the big guys will continue to play up the market. It will be a long time before a bubble is created with this kind of slow economic recovery. So just watch the drama unfold.

1/28/2010 Thursday

Dow: -116 to 10120, volume 1.1 billion shares.
Nasdaq: -42 to 2179, volume 2.8 billion shares.
S&P 500: -13 to 1085, volume not available.

After pausing for three days, stock prices resume their significant declines.

One explanation is the uncertainties about the pace of the current economic recovery, especially the job market. The economy will take months to recover because it does not operate by turning on a switch. Many things have to happen in natural sequence. Eventually they will all converge to produce more jobs. A recovery is also subject to disruptions including natural disasters that may cause further delays for the good times to come.

Whatever reason we try to advance regarding price movements, the stock market never follows the economic recovery or the job market. Instead, it anticipates and leads it by looking forward as shown in 2009 and before.

The game is to get in there before the herd does at low prices. Load up the boat before the good time comes. Then unload the boat of stocks to the herd in exchange for cash. That is why we have stock boom and bust every few years.

Then what happens in between? Well, besides making money every few years, don’t you want to do it weekly or daily? This explains all the short-term fluctuations during boom and bust. They are all profit related but can be explained by any good or bad news. That means, during a bull run, we will see stock prices falling many times for a while for whatever reason, and vice versa during a bear market.

What happened during the month of January reflects a short-term decline in a bull market. If you look back to the period of May-July 2009, a similar situation occurred with equal magnitude. The key is an intelligent guess as to how low prices can go before they turn around.

1/27/2010 Wednesday

Dow: +42 to 10236, volume 1.3 billion shares.
Nasdaq: +18 to 2221, volume 2.5 billion shares.
S&P 500: +5 to 1098, volume not available.

For the past three days, the market has been subject to daily gyrations from positive to negative, and vice versa. Today’s indexes were mostly in negative territory until the last two hours when they began to turn around. This shows the atmosphere of uncertainty that I talked about yesterday.

Today’s boost to the stock market was the Fed’s announcement to keep interest rates at the current low level for an extended period due to the fragile economy and little signs of inflation. Could this be a temporary boost only? Bear in mind that most of the big companies exceeding profit expectations have failed to stimulate the market since the beginning of January.

I think the key factor is the price levels. When stocks have fallen back to low enough levels after recent profit taking, they will go back up again because there are sufficient fundamental reasons for the surge to go on.

1/26/2010 Tuesday

Dow: -3 to 10194, volume 1.1 billion shares.
Nasdaq: -7 to 2204, volume 2.4 billion shares.
S&P 500: -5 to 1092, volume not available.

Today’s stock movement is similar to that of yesterday’s. Prices rise earlier then fizzle later. All the three major indexes wind up with a small loss. The bull seems tired and cannot even last for a day. If this situation continues, it will require another crash to make prices more attractive again.

More good news are added to the list today such as higher consumer confidence and more big companies such as Apple, Du Pont, and Verizon reporting better results. However, they all fail to stimulate the market.

A cloud of uncertainty is hanging over Wall Street including high unemployment, political gridlock in Washington, and the talk for tighter banking control. The market is waiting for some definite direction on those major issues while relegating all the good news to the sideline.

1/25/2010 Monday

Dow: +24 to 10197, volume 1.1 billion shares.
Nasdaq: +6 to 2211, volume 2.1 billion shares.
S&P 500: +5 to 1097, volume not available.

The market pauses after three consecutive days of triple-digit losses. There was some momentum for a rebound early in the morning, but the indexes finally settled to only small gains. I hope that the plunge will not resume after this pause.

Despite all the news about companies making good profits, the uncertainties persist regarding the housing market, job prospects, the reappointment of Fed Chairman Bernanke for a second term, and last but not least, the tug of war between the big banks (and Wall Street) with the Obama Administration pushing for tighter banking regulations.

One consolation is that the market has tried to shake out all the worries in a short period of three-day plunge. This plunge has about the same magnitude as the slow crash between May and July last year. A fast crash is better than a slow one because after all is done, it quickly sets the stage for the next rebound.

1/22/2010 Friday

Dow: -217 to 10173, volume 1.5 billion shares.
Nasdaq: -60 to 2205, volume 2.8 billion shares.
S&P 500: -25 to 1092, volume not available.

This is the third consecutive day of big declines for all the three major indexes. Also notice the higher volumes.

A high volume signifies three things: (a) more public participation, (b) additional shorting in anticipation of further declines, and (c) additional bottom fishing.

Only (a) is easier to tell. At present, the public is mostly sitting on the fence either due to lack of cash or uncertainty about the economy. The recent sell off is mostly done by the big players. Besides, they have also pushed up the market so far since March 09. Therefore, this is all planned and organized.

One obvious reason is that the big guys have to take short-term profits before they reinvest the cash to push the market higher. So they sell into the good news when many companies report good profits this quarter. The other reason is that they are really angry this time. Why?

Wall Street is angry about the intrusion of the government in limiting executive pay. They are also angry about Obama’s push to limit big banks’ risk-taking ventures that have caused the financial meltdown. How dare the government tries to mess around with their sacred cow! When a rich guy gets angry, he throws his antique collections at you. In this case, pushing down the stock market to flex their power. This deliberate crashing of the market can bring a spineless politician to his knees. However, Obama has said he wants to fight if he has to. Let’s see what will transpire between the fight of these two elephants.

For those who are worried, let me tell you this is not the end of the world. When there is money to be made, the big guys will eventually want some kind of truce with the government.

Let’s see how much damage has been done to the market:

Index—–Jan09 Hi—Mar09 Lo—May09 Hi—Jul09 Lo
Dow——-8300——6500——8900——-8000
Nasdaq—–1600——1300——1850——-1750

We had two significant crashes last year. As shown above, the big crash occurred between January and March. A mini crash occurred between May and July. The mini crash occurred during a bull run while the big crash just preceded the bull.

The current crash is a mini that has lasted for three days so far from the January high reached on Tuesday 19th as shown:

Index—–1/19/10—1/22/10
Dow——-10725—-10173
Nasdaq—–2320—–2205

Compared with the previous crash (May-July 09), the Dow has a smaller crash this time while the Nasdaq has a bigger one. But the current crash is too small to compare with the other one (Jan-Mar 09).

My point is that the current crash may go down further, but we had a similar one only six months ago during a bull run. Therefore, just hang in there. Things may get worse before it gets better.

1/21/2010 Thursday

Dow: -213 to 10390, volume 1.5 billion shares.
Nasdaq: -26 to 2266, volume 2.9 billion shares.
S&P 500: -22 to 1116, volume not available.

Today’s market can be described as carnage. Some analysts attribute this decline to President Obama’s announcement to limit risk taking for the big banks. Some fear that the economic growth in China may trigger high inflation and more stringent controls. Well, you may advance all kinds of reasons that seem plausible, but they can hardly explain the cause and effect of stock movements.

Let’s focus on some numbers. A decline close to this magnitude happened on September 1 last year. One month later, the major indexes bounced back to a September high:

Index——-9/1/09—-9/28/09
Dow———9311——9789
Nasdaq—— 1969——2131
S&P 500——-998——1063

Then the surge continued to achieve the following monthly highs:

Index——-10/19/09—-11/25/09—-12/30/09
Dow———10092——-10464——-10548
Nasdaq——-2176———2176——–2291
S&P 500——-1098——–1111——–1126

Some momentum was lost in December that culminated in today’s big decline. Today, the three major indexes are coming close to the October and November highs. They may even try to test the September highs should stocks fall some more. However, a further downward movement is a remote possibility based on the results of last year.

Stocks must fall in order to rise again. This happens time and time again during an uptrend. You may call that consolidation. Why? The big investors must take profit in the process before they reinvest the money to push them further. All of this is happening against the background of a fragile and slow economic recovery.

1/20/2010 Wednesday

Dow: -122 to 10603, volume 1.1 billion shares.
Nasdaq: -29 to 2291, volume 2.3 billion shares.
S&P 500: -12 to 1138, volume not available.

One day up, the next day down — This is the kind of gyrations that you have to put up with in the current market environment. When yesterday’s gain erased the previous day’s loss, today’s fall almost negates yesterday’s gain. So we are back to square one.

The market is heavily influenced lately by the fear about China’s economy. Some reporters go as far as saying that China is the “mother of all bubbles”. Are they jealous or what? Do you really believe in this crap? A famed writer, Thomas Friedman, has said, “Do not short a country with over $1 trillion of foreign reserve.” You’d have a better chance if you short America because it is broke: fighting two wars and incurring more than $1 trillion deficit.

In any case, the continued boom in China has caused the government to raise interest rates and restrict lending to cool down the economy. This should be seen as a wise move to maintain the boom and prevent inflation. This new policy causes the value of the US dollar to rise compared with the Renminbi. A rising US dollar hurts oil and material prices, which explains why oil and material stocks are falling recently. Besides, it may hurt US exports like airplanes and electronic chips.

However, the falling and rising of the US dollar is always a short-term phenomenon. The situation may reverse in a few days. Why? Currency movements are subject to whatever is blowing in the wind. Furthermore, all multinational corporations engage in currency trading because of the requirements of their international operations. Their activities will push the dollar one day up, and another day down.

1/19/2010 Tuesday

Dow: +116 to 10725, volume 1.0 billion shares.
Nasdaq: +32 to 2320 volume 2.0 billion shares.
S&P 500: +14 to 1150, volume not available.

The three major indexes spring back today, having more than erased the losses suffered in the previous trading day on Friday. Please note that this kind of rebound has seldom happened in a bear market.

For those who want to make short-term gains, you have to look at the following factors:
• Shares outstanding (SO)
• Volume of shares traded, daily average (STDA)
• Price per share (PS)
• Average daily price range (ADPR)

The following examples will illustrate:

Company——————SO(Bn)—-STDA(Mn)—-PS($)—-ADPR($)
Citigroup, C—————–22.9——522——–3.5——0.15
Intel, INTC——————-5.5——-70——–21——-0.25
Google, GOOG—————0.24——–5——-580——-14
Alcoa, AA——————-0.97——-50——–15——-0.3
Goodyear Tire, GT————0.24——–4———15——-0.4
Adv.Mic.Dev., AMD———–0.67——-25———9——–0.4
Yingli Green, YGE————-0.15——-5———15——-0.7
SunTech Power, STP———–0.15——-5———16——-0.7

From the above illustration, you can profit within a few days or even within the same day by picking those stocks that have a bigger daily price range such as GT, AMD, YGE and STP. The reason is that these companies have a small amount of shares outstanding, especially for GT, YGE and STP. Also, they have a small average daily volume traded. Lastly, their prices are neither too high nor too low, that is, between $10 and $20.

Google has a very big daily fluctuation. But that is due to its high price more than anything else.

Intel could have a big daily fluctuation but is weighed down by its large outstanding shares and daily turnover.

Citigroup has the biggest outstanding shares among all companies. No wonder its daily turnover is so high. As a consequence, the stock moves very slowly. It will be difficult for the stock to reach double digit unless doing a reverse split to reduce its huge outstanding shares.

1/15/2010 Friday

Dow: -101 to 10610, volume 1.4 billion shares.
Nasdaq: -29 to 2288, volume 2.6 billion shares.
S&P 500: -12 to 1136, volume not available.

Many people are puzzled today by the negative market reaction to Intel’s good performance. The whole chip sector came down with it, together with many high tech companies associated with chip production. The reason given is that investors are concerned that Intel’s performance may have peaked.

If you stop and think a little, this explanation is totally without basis. We are still in a recession, not a boom. How can the performance of a company have peaked at this time? On the contrary, we are likely to see better performance ahead as the economy emerges from the current recession.

My view is that the high tech sector has gone through a run-up in December when the Nasdaq index went from 2176 to 2308. Those people who bought shares earlier wanted to take profits first before they reinvest their money again. Most of them are big players. This is how they play up the stocks. They buy and play while profiting and reusing their capital again and again. Their method is not the same as that of small players, who can only buy and pray like sitting ducks.

Another way to describe is, sell on the good news and buy on the dips. You can follow this rule in a bull market for this year. However, when the economy is booming again and the bull is getting tired, you can only sell on the good news. It would be foolish to buy on the dips because the price may continue to dip further and further if the bull turns into a bear.

1/14/2010 Thursday

Dow: +30 to 10711, volume 0.89 billion shares

Nasdaq: +9 to 2317, volume 2.2 billion shares.
S&P 500: +3 to 1148, volume not available.

The stock market has been moving within relatively narrow margins for a couple of days, apparently waiting for the earnings report from Intel.

Intel’s quarterly report came out better than expected today. Revenues increased by 29% to $10.6 billion, while profits rose to 40 cents per share as compared with 26 cents in the same period of last year.

Intel’s share price was higher by 49 cents at the close to $21.45. After the earnings announcement, it rose further to $21.65 in after hours trading.

This looks like a positive signal for the recovering economy. Intel’s result is a good indicator for other companies in the high tech industry. Let’s see how the market will react tomorrow.

1/13/2010 Wednesday

Dow: +54 to 10681, volume 0.97 billion shares.
Nasdaq: +26 to 2308, volume 2.3 billion shares.
S&P 500: +9 to 1146, volume not available.

Stock prices snapped back today and almost erased yesterday’s losses for the three major indexes.

Tomorrow will be an interesting day because Intel, the world’s largest chipmaker, will release its quarterly earnings. Intel is the bell-whether for the electronics industry, and maybe for the economy as a whole because electronics leads most other industries in an economy recovery.

If the earnings result of Intel is well received by the market, many other electronics companies will benefit due to the optimism generated. We’ll see. One word of caution: Sometimes the market may take a couple of days to let the earnings results sink in before it makes a big move.

1/12/2010 Tuesday

Dow: -37 to 10627, volume 1.1 billion shares.
Nasdaq: -30 to 2282, volume 2.4 billion shares.
S&P 500: -11 to 1136, volume not available.

Stocks opened down and stayed in negative territory until closing. The Nasdaq was particularly hard hit. This is due to disappointment with the earnings result of Alcoa, whose profit fell short of analysts’ estimate by $0.05 per share, even though sales increase beat estimates.

The fact that the first earnings report coming from a Dow company has caused a downward movement, what does that mean for the rest of this earnings season?

My take is that January and February will see stocks reaching higher as more companies are releasing their earnings report. It will be a repeat of the situation occurred in April, July, and October of last year. The bull is alive and kicking. What we see today is the usual short-term profit taking, especially for high tech stocks. You will also notice that Alcoa was around $13 in early December, climbing to $17.45 only yesterday. This profit taking may drive the stock down some more. Are you planning to buy some on the dip?

1/11/2010 Monday

Dow: +45 to 10664, volume 1.0 billion shares.
Nasdaq: -5 to 2312, volume 2.1 billion shares.
S&P 500: +2 to 1147, volume not available.

Stocks drifted downward in the morning but they picked up later in the day. The three major indexes register some gains except the Nasdaq with a small decline.

Alcoa is the first major company to report earnings after the close. Its results may enliven the stock market in either direction depending on how one looks at it. The company has turned a profit of $0.01 per share below analysts’ expectation of $0.06. On the other hand, sales rose to $5.4 billion higher than the $4.84 billion forecast by analysts. Comparing the significance of both facts, the increase in sales is more important because that is where profit is eventually derived from. The increase in sales for companies in the material industries (aluminum in the case of Alcoa) carries hope for gradual recovery of the entire economy.

I see both results described above as a turnaround for the company, which should push up its shares in the weeks to come. However, I have no idea what the market will react tomorrow.

1/8/2010 Friday

Dow: +11 to 10618, volume 1.0 billion shares.
Nasdaq: +17 to 2317, volume 2.1 billion shares.
S&P 500: +3 to 1145, volume not available.

The three major indexes were falling the whole day until the last half hour when they shot back up to register a small gain. Over the course of this week, the indexes have inched up after the big surge on Monday January 4, the first trading day of the year.

The US unemployment rate of 10% for December is released today, which is unchanged from November. It provides little stimulus to the stock market except that the situation has not worsened.

However, if we look at the job losses in the non-farm sector, there is steady improvement:
• From December 08 to March 09, job loss of over 600,000 per month.
• From April to July 09, job loss between 300,000 and 500,000 per month.
• From August to December 09, job loss of less than 150,000 per month.
• Job loss for December 09 is 85,000, the smallest since the recession began in late 2008.

If you happen to have lost your job, the above figures do not provide any consolation. For the country as a whole, it seems that the bleeding of jobs are slowing down quickly over the last twelve months. Does this say anything about the current recession? Does it explain why the stock market has been rising since March 09?

1/7/2010 Thursday

Dow: +33 to 10607, volume 1.2 billion shares.
Nasdaq: -1 to 2300 volume 2.3 billion shares.
S&P 500: +5 to 1142, volume not available.

The stock market was in red territory during the early morning hours but has turned positive at the close, except a slight loss for the Nasdaq.

It seems that buyers are in a holding pattern waiting for the employment figures to be released tomorrow.

Although employment is the slowest to recover, major retailers such as Sears and Target have indicated a positive recovery for December sales.

Total US retail sales in November stood at $352 billions, which is higher than any previous months in 2009. It is also much higher than the depressed level in November 2008 when the economy seemed to be in a free fall.

When the figure for December retail sales is released several days from now, it will look much better compared with the depressed level in December 2008. This will tend to give the stock market a boost because it shows the consumers are coming back to buy.

As consequence, there will be yet one more signal that the economy is recovering slowly but surely. This is what the stock market wants to see.

1/6/2010 Wednesday

Dow: +2 to 10574, volume 1.1 billion shares.
Nasdaq: -8 to 2301, volume 2.3 billion shares.
S&P 500: +0.6 to 1137, volume not available.

The market takes a breather for a second day with little change. It looks positive when there is no profit taking right after a big surge two days ago. Let’s hope that the buyers are consolidating their gains in preparation for another big push upward. On the other hand, there is concern that the unemployment figure due to come out on Friday would be worse than expected.

Today I happen to think about the stock market’s propensity to create extremes, and its overreaction to self-correct. Therein lie the great opportunities for you to take, and the dangers for you to avoid.

You must always keep in mind that the stock market swings like a pendulum. There are always cases of overbought (peaks). They only last for a relatively short time, followed by a sudden and prolonged decline, leading to cases of oversold (bottoms). Then the process repeats itself. Since there are thousands of companies out there, their share prices follow a unique pattern of movement that you have to understand before you take a plunge.

In short, you must ask yourself when an overbought and oversold for a stock has occurred before. If you have no idea of such extreme cases, it is hard to get out of the market alive.

1/5/2010 Tuesday

Dow: -12 to 10572, volume 1.2 billion shares.
Nasdaq: +0.3 to 2309 volume 2.4 billion shares.
S&P 500: +4 to 1137, volume not available.

Today the market takes a break from yesterday’s jump. Note that the trading volumes are getting a little bigger. All the three indexes have broken last year’s highs. It seems they will continue to break more records when the economy is slowly recovering.

Some analysts say that market performance for January usually sets the tone for the rest of the year. How much higher can we expect for January? Let’s look at what happened during previous months:

Month—Oct Low—-Oct High—Nov High—Dec High—Today
Dow——-9488——-10081——10451——–10548——10572
Nasdag—-2048——-2165——–2176———-2291——–2309
S&P 500—1025——-1093——–1106———-1126——–1137

From the above table, today’s levels are not much higher than the December highs. The differences between November and December highs are also small with the exception of Nasdaq. That means the indexes were not moving that much during the year-end holiday season.

January is different because major companies will begin reporting their quarterly earnings. If the past months can be used as a guide, the movements during October 2009 when the quarterly reports came out should be considered. Thus the differences between the October highs and lows are:

Dow——-+593
Nasdaq—-+117
S&P 500—+68

Add the above differences to today’s levels will yield the probable highs for January:

Dow——-11165
Nasdaq—-2426 (Maybe higher due to momentum built up in December)
S&P 500—1205

1/4/2010 Monday

Dow: +156 to 10584, volume 1.0 billion shares.
Nasdaq: +39 to 2308 volume 1.9 billion shares.
S&P 500: +18 to 1133, volume not available.

The stock market starts the New Year with a bang mainly due to the good news reported by the Institute for Supply Management (ISM). The PMI index they publish measures orders received by supply managers on a monthly basis. The results for 2009 are as follows:

Mar—Apr—May—Jun—Jul—Aug—Sept—Oct—Nov—Dec
36.3–40.1–42.8–44.8—-48.9—52.9-—52.6—55.7–53.6—55.9

A monthly index over 50.0 for a period of time represents growth for the manufacturing industry. Thus, since August 2009, the manufacturing sector has been growing for five consecutive months.

In addition, a monthly index over 41.2 for a period of time shows an expansion for the general economy. Thus, since May 2009, the US economy has been expanding for eight consecutive months.

This piece of good news does not apply to the US alone. Similar indexes in China and some major European countries also show expansion. In other words, we may be seeing a surge of business activities globally for the months ahead. This must have great implications for stocks since the market is looking forward several months ahead.

]]> http://stockfessor.com/2010-jan-mar-daily-insights/feed/ 16 http://stockfessor.com/65-a-shortlist-of-your-own-stock-trading-strategy/ http://stockfessor.com/65-a-shortlist-of-your-own-stock-trading-strategy/#comments Fri, 25 Dec 2009 23:56:55 +0000 fung http://stockfessor.com/?p=935 A Shortlist Of Your Own – Stock Trading Strategy (#65)

A successful stock trader knows what he is doing. Focusing on a few stocks is essential. Why? Nobody has the time to follow thousands of stocks out there that move everyday. Jumping from one stock to another based on news or rumors without a clear strategy is a fool’s game. You must narrow the list down to a few that you can manage. How do you make a shortlist? What should be your criteria?

Price
The easiest decision is to define a price range based on the amount of money you have to invest. Two kinds of stocks you can rule out immediately. On one extreme are the high flyers: Berkshire Hathaway Class B ($3300 per share), Google ($595), or Apple ($195). They are likely winners for the long term, but can you afford them?

How about penny stocks at the other extreme costing $1 or less? You can afford to buy plenty of them. However, can you sell them at the price and quantity you want? Companies becoming penny stocks are not accidental. They have degenerated to near-death status. I don’t want to bet on a dying man if I were you. How much confidence do you have for a revival?

The best price range for a small player is from $5 to $20 per share. This price range presents downward safety and upward potential. When you find a stock with the right price, you have to know when was its recent high and low points. For instance, if a stock is currently worth $7, you find that six months ago it was at $2 and two years ago at $55. It definitely looks like a good buy because you have seen a peak falling to a bottom followed by a sustained recovery. If this continues, the upward potential should be great.

Industries
Picking a stock for the shortlist requires you to know something about how different industries are performing. As you know, money flows into the stock market through the funnels of hot industries that are benefiting from the current economic situation. When an industry booms, most stocks in that category will rise except some real bad ones. When that industry reaches a peak, money will flow out from there into another one. You must have some idea about which industry is hot now and which one will be later.

Different industries have different dynamics of growth. Some industries compete with each other (online shopping against retail shopping). Some new industries disrupt and even kill older ones (PC against typewriter). Most industries complements others (high-tech avionics boost aircraft/space)

Focusing at the industry level enables you to narrow down to a small range of stocks to be selected for your shortlist. It also increases your understanding about the dynamics and relationships between industries.

Updating
The world is changing faster year after year. You have to constantly review your shortlist to see which industries and companies are getting hot and which ones are fading. In addition, some stocks you are holding may have risen above your price range. After you sell them, you will have to buy some others at a lower price. That means you have to find good substitutes.

My Shortlist

Banking: Bank of America (BAC), Citigroup (C).
Reasons: Meltdown in late 2008, recovery since March 09. Big banks are the first to recover when the general economy picks up.

Materials: Alcoa (AA), Goodyear Tires & Rubber (GT).
Reasons: Recovering after hitting bottoms in March 09. Materials demands and prices will rise when the economy picks up.

High Tech: Advanced Micro Devices (AMD), Motorola (MOT), Applied Materials (AMAT).
Reasons: High tech industries are very sensitive to the general economic situation, especially chips and cell phones. It will be one of the first to advance when conditions improve.

Solar: Yingli Green (YGE), Suntech Power (STP).
Reasons: Largest solar companies in China listed in NY Stock Exchange. New industry play. Also tend to go up when oil/materials prices rise.

Auto: Ford Motor (F).
Reasons: Ford is the only American automaker left after the fall of GM and Chrysler. It also benefits from increasing US market share.

Now you see that my shortlist covers 5 industries and 10 companies at the present time. This shortlist will change as things develop. The objective is to focus on the hot industries and affordable companies.

www.stockfessor.com
December 2009

After viewing my many videos, you should appreciate by now what kind of effort is required to profit from the stock market. Most people lose money because they have the wrong mindset and the wrong effort to start with. Once you set out in the wrong footing, whatever you do will not matter. You are just wasting your time and will continue to lose. Let me help you with the following:

The Right Mindset
1.    The stock market is not a gamble. Winning requires 40% vision, 40% effort, and 20% luck. Vision comes from your long-time observation of relevant facts.
2.    You are not an investor but a free rider. What’s wrong with that?
3.    The stock market is the least competitive market. It is manipulated by a small number of big players whom you cannot resist but must follow closely.
4.    The big players have the ultimate weapon: plenty of cash to buy and plenty of stocks to sell. They have access to insider information. They employ all the stock analysts. Consequently, they can push the market in either direction they want. They can influence how you think, too!
5.    The big players create the bottom of a stock when they move in. They also determine the peak when they cash out. It’s a market governed by a manipulating hand.

Small Player’s Strategy
1.    If you cannot beat the big players, join them!
2.    Follow the big players closely by observing the unique pattern of movements of your stocks of interest.
3.    Get in tune with the general economic situation. Questions to ask: Has the market bottomed out for you to go in? Is a bubble developing for you to cash out?
4.    The best time to play is when a stock has recently bottomed out. Why? The bull will last for at least several months for you to profit.
5.    The worst time to play is when everybody says the stock is good. Why? This is the time when the big players begin to cash out.
6.    Spend an hour or so everyday to review the movements of your stocks in a historical context. If you don’t know when were the previous bottom and peak, you are nowhere.
7.    Don’t buy penny stocks. Only a fool bets on a dead man. However, if a big company recovers from penny stock status, it may be worth a second look.
8.    Your best situation is when you have some cash to buy and some stocks to sell on any given day (like a big player but with limited capital). Your worst situation is when you hold plenty of stocks on margin without any cash left. Why? Because you are just a sitting duck.
9.    Act short term in order to build the long term. The many small gains you make when you sell will add up handsomely for the long term.
10.     Apply your reasoning and critical thinking. Don’t rely totally on your friends and experts. Observe and think!

What I do
1.    I open more than one trading accounts. Why? See my Video #35.
2.    I maintain an updated short list of the stocks I want to play based on price and upward potential. Why? Nobody has the time for thousands of stocks out there.
3.    I buy and sell frequently. I sell a stock for a reasonable profit after holding it for a short time. I trade short term in order to build the long term. I count on frequent small profits to add up. (See Videos #60, 61)
4.    I seldom do day trading because the brokerage company imposes restrictions on day traders. I keep my stocks overnight to avoid being marked as a day trader. Besides, you profit more by holding longer.
5.    Like all small players, I have limited capital in my multiple accounts, but I trade like a big shot. Due to my high frequency of trades, the total turnover adds up to about one million dollars per year, of which the profit amounts to 10 per cent.
6.    I spend little time listening to friends or experts. I rely on my own observation, reasoning, and critical thinking.

www.stockfessor.com
December 2009