Wednesday, April 22, 2015

Guest Post : Will Stocks Just Correct or Collapse in 2015?

Will Stocks Just Correct or Collapse in 2015?

By Chris Vermuelen

The question on everybody's mind for 2015 is when will the stock market start to correct in value and will it turn into a 50+% collapse?
Over the last 15 years investors has been through a lot in terms of market volatility. From the 2000 tech bubble bear market and the 2008 financial crisis bear market investors are far from having their investment psyche scars healing and is for good reason. Many sustained 50+% loss in their portfolio value more than once and are not willing to do it for a third time.

A large group of investors exited the stock market and has never returned. Unfortunately those who exited have missed the seven-year bull market rally to all-time highs. Those who remain in the market are in constant fear that a new bear market will emerge.
The stock market has a tendency to move in a 6 to 8 years cycle. With the current bull market now lasting seven years and was several indicators signaling weakness within the equities market it makes logic sense that a bear market is about to emerge.
The stock market cycle and technical indicators are not the only causes the trigger a bear market. A rising Fed funds rate can cause weakness in the equities market and if you know what to look for you can escape the next bear market and profit from falling prices.
Question: if you could put your money in a guaranteed investment not to lose any principle and receive a 1% per annum return on investment or receive potentially 7% per year but with no guarantee on your principle, which would you choose?
Most people would choose the 7% return option because they understand financial rewards almost always require some risk. Over the last 90 years the stock market has on average returned 7% annualized gains.
Obviously not all years will have a positive gain, but when averaged over many years, it is reasonable to expect an annual return of 7% from the stock market.
What if I told you there is a way to improve on this? For example, if you simply moved your equity investments to a large cash position at the start of each bear market?
The chart below showing the gain from your would have has from 1995 to 2015 by selling all stock holdings when the US stock market topped during 2000 and 2007 avoiding the last two bear markets.
100% cash position during bear markets would have generated 635% ROI, which is a 31% average annual return. The numbers are staggering to say the least. But obviously you cannot pick the exact top and bottom, but even if your timing was way off and you only pocketed half of those gains you would still be way ahead of game.
SPY 1995-2015
You may be asking yourself: How do I avoid a bear market?
I believe for investors this is not that difficult because a major trend change takes time and because the moves are so large you don't need to be perfect with your timing.
http://www.marketoracle.co.uk/images/2015/Apr/ebook-cv.jpg
Take a look at my analysis charts below. The first one shows the 10 year treasury price which is broken its short term resistance levels and is rocketing higher. We have seen this happen 6-12 months before the last two bear markets started.
10-Year Treasury Monthly Chart
S&P500 20-Year Chart
Let's take a look at the Fed rates. Not every rate rise turned into a recession, but nearly everyone has. Rising rates will lead to a market downturn.
Could the next bear market/recession occur when rates start to climb? After analyzing economic data provided by Brad Matheny I have a max rate at 2% over the next couple years.
Fed Funds rate 1952-2015 Chart
That combination of technical indicators, analysis above couple with the rising fed rate hikes had created the perfect storm for a bear market to emerge which I expect to last 1-2 years.
Bottom line, we are still in a bull market but only months away from a bear market. Do not ignore these warning signals.
Keep your eye on the 2 year treasury rates instead because they usually lead Fed funds, and will provide an earlier warning signal as to the markets down turn.
When rates start to rise, we may only be weeks, instead of months, before the stock market starts to collapse.

Guest Post : Five Total Wealth Stock Market Investing Principles to Use Today



Five Total Wealth Stock Market Investing Principles to Use Today


Keith Fitz-Gerald writes: I’ve talked to thousands of investors over the years who are absolutely convinced that they need to understand the market’s most complicated nuances to get ahead.
In reality, though, success comes down to just five things that I call the Total Wealth Principles.

Get ‘em right and you can make more money with less risk while enjoying a peace of mind that the vast majority of investors will never have. I know that sounds like a tall order, but it’s not. Or, at least, it doesn’t have to be.

You see, most investors fight the markets instead of going with the flow. And in doing so, they doom themselves to pathetic returns that do nothing but pad Wall Street’s pockets.
I want you to understand these five Total Wealth Principles because they will help you harness the awesome power of the markets themselves. Then you’ll have the perspective needed to build the financial future and, specifically, the profit potential, that you so richly deserve.
Especially now, when weak economic data is building yet another wave of panic among the 99% of investors who will never understand what I’m about to share with you.
Here are five Total Wealth principles to invest by – and pitfalls to avoid.
Total Wealth Principle No. 1: Think Long-Term to Harness the Markets’ Incredible Upward Bias
I often joke during my presentations around the world that we are all born with common sense… and that it’s just bred out of us as adults. Usually that gets a good laugh, especially since we’ve all touched the proverbial “hot stove” at one point or another in our lives despite knowing better.
Nowhere is that more clear than when it comes to money.
That’s why investors assume that whatever is happening right now is going to happen in the future. It’s also why millions try to find patterns in random data that they believe are meaningful, while ignoring the information that actually means something.
Case in point: history. Data show very clearly that the markets have a tremendous upside bias over time. There are all kinds of reasons, but really it comes down to the fact that there is a constantly increasingly supply of money chasing a finite number of stocks. So prices increase.
If this doesn’t make sense, think of it by imagining eggs at the grocery store. If there are 1,000 eggs and only one shopper, the price of those eggs will be pretty darn low. But if the situation is reversed and there are 1,000 people who want the last egg, the price will go through the roof.
http://www.marketoracle.co.uk/images/2015/Apr/9-Bear-Market.png
So why is it that investors panic and do exactly the opposite of what they should be doing?
Simple… because they don’t understand what I’m telling you: namely, that capital is an expansive force. By its very nature, capital ties into the growth of the companies that make up today’s markets. Growth translates into revenue, revenue to earnings, and, ultimately, earnings into higher share prices.
Ergo, bear markets are not the excuse to run for the hills that everybody thinks they are. They’re nothing more than a short-term event that does not mitigate the larger, longer-term picture.
I realize that runs counter to conventional wisdom, but hear me out.
Even the dot-bomb blowout and the Financial Crisis of 2008 are nothing more than speedbumps in the grand scheme of things. In fact, if you had bought a fund tracking the S&P 500 on July 1, 2007 – the point at which it reached an all-time high before the Financial Crisis began – and held those shares, you’d still be sitting on total returns of more than 31% today.
http://www.marketoracle.co.uk/images/2015/Apr/9-SP-500.png
Source: Yahoo!Finance
To be clear, I’m not advocating “buy and hold.” What I am trying to demonstrate is that you can buy at an absolute peak and still have double digit potential if you have the right perspective. Buy and “manage” is always a better way to go… but that’s another Total Wealth Tactic for another time.
I want you to understand that periodic downturns are a fact of life. More to the point, bear markets are normal because what they really signify is opportunity in the bigger picture.
Buy low and sell high is how the game is most profitably played – especially when you confine your investments to growing companies in Unstoppable Trends like we do.
Total Wealth Principle No. 2: Be Mindful of Markets’ “Reversion to the Mean”
The second involves a concept called Mean Reversion.
Mean Reversion (in financial terms) states that stocks have an average rate of return, or movement, that they will deviate from and then return to over time.
For example, if stock ABC has historically returned 7% on average over the last 50 years, but it returns 15% this year, traders can reasonably – though not always – expect the stock’s price to record smaller-than-average growth the following year, to bring its growth for that period more in line with its mean return.
Of course, sometimes companies see “game changers” that enable the stock to see improved returns that are not just sudden, but sustainable. That means stocks can experience  a breakout (Tesla in 2012, Jazz Pharmaceuticals in 2009) from which there is no reversion to the old mean – merely the establishment of a new one.
Of course, this works in reverse, too. Stocks can see death blows that result in an unrecoverable decline. Like RadioShack, Blackberry, or even Kodak, for instance.
My point is that understanding whether you are above or below the trend line can tell you a lot about whether short-term market conditions favor buying or selling.
If you’re significantly above trend, the markets favor a retracement lower. If you’re below trend, an upward move.
http://www.marketoracle.co.uk/images/2015/Apr/9-DJIA-Index.jpg
It all comes down to perspective.
Speaking of which…
Total Wealth Principle No.3: Beware of the Market Timers
Understanding the historical returns of the markets and having a good understanding of whether a correction or bull run is likely should never be confused with market timing.
People who try to time the market – buying when they think the market has hit a nadir, or selling when they have a feeling it won’t get any higher – are wrong a staggering percentage of the time.
Nobel Laureate William Sharpe observed in a 1975 study that a market-timer would have to be correct 74% of the time to outperform a simple index fund. SEI Corporation updated Sharpe’s work in 1992 with a much longer time frame, dating from 1901 to 1992, and found that timers would have to be right a staggering 91% of the time.
But that doesn’t stop people from trying and, I might add, with predictable results. It’s no coincidence that DALBAR data shows that the average investor who tried to time the markets achieved an annualized return of just 2.53% for the 20 years from 1993 to 2013, in contrast with the average annual return of 9.02% that the markets generated over the same time frame.
The bottom line?
People tend to overestimate their ability to predict where the market will be heading, so they make knee-jerk decisions based on how they feel about things instead of using cold, hard logic to guide their behavior.
Get emotion out of the equation, quit trying to time things, and you’ll be miles ahead of the herd.
Total Wealth Principle No. 4: Understand Volatility – and “Black Swan” Events That Shape It
Very few investors understand that volatility has a “shape,” and an extremely specific one at that.
Prior to the financial crisis, volatility was modelled around an equal set of expectations using standard distribution models taught in every high school statistics class.
Most commonly used for options, the price models are commonly depicted as a “volatility smile” that shows you the relationship between volatility and price.
http://www.marketoracle.co.uk/images/2015/Apr/Implied-Volatility-1.png
While a complete discussion is beyond what we can do here in a single column, what you need to know is that as volatility rises, options prices rise along with it. In the old days it was a relatively evenly distributed relationship, as you see above.
However, since October 19, 1987 – a day traders refer to as Black Monday – when stock markets around the world crashed and the Dow lost nearly 22% in a single day, there’s been a change.
That’s because the markets are now viewed as having very small but permanent odds of a catastrophic failure. This is known as “skew,” and makes buying protection more expensive than it theoretically should be, and makes buying upside cheaper than it appears.
Imagine the “volatility” smile turned a bit, and you’ll get what I am talking about.
http://www.marketoracle.co.uk/images/2015/Apr/9-Implied-Volatility-2.png
Figure 1: Safehaven.com
This is important even if you don’t trade options.
That’s because the skew is indicating that prices can get out of control on any downward move faster, and the move itself can be more violent, compared to similar downside moves before 1987.
So, you’ve always got to have a risk management plan in place ahead of time.
To me that means some combination of 1) only picking the best stocks following unstoppable trends, 2) having trailing stops in place at all times and 3) keeping risk to razor-thin levels. The stuff we walk about all the time here at Total Wealth.
There are a number of reasons why this is the case, but much of it has to do with the increasing computerization and indexing most of the major trading houses engage in today, not to mention the interconnected nature of our financial markets.
Incidentally, that brings me to…
Total Wealth Principle No. 5: Trade with Wall Street’s Big Boys – Not Against Them
The machines are here. The percentage of trades in the U.S. that were made by algorithmic programs rose from 25% in 2004 to more than 50% by late 2009, according to Aite Group. Some estimates suggest as much as 70% of total stock market volume is now machine-driven, with the heaviest concentrations in the U.S. financial system.
http://www.marketoracle.co.uk/images/2015/Apr/9-Rise-of-the-Machines.gif
Most investors believe this to be a disadvantage, but I disagree for the simple reason that you have advantages as an individual investor that big traders don’t.
For instance, you can move in and out of the markets, adjusting your positions at will in accordance with your specific profit objectives and risk tolerances. Big traders have no choice but to keep their money moving. So they’ve got to play games even if they don’t want to, and even if the markets are working against them.
If that’s hard to believe, think about it this way. You can buy or sell a few thousand shares of Microsoft and the markets won’t even notice. But an instructional trader can’t just waltz in and buy a few million shares without other traders noticing and beginning to trade against him.
This is why, for example, a JP Morgan trader named Bruno Iksil got sideways and cost the company at least $6.2 billion in 2012. Once competing traders heard he was in trouble, they began to bet against him and profited even as he lost.
That’s why I recommend using limit orders, trailing stops, and even options. It’s not that I want you to do anything crazy.
Just the opposite, actually.
I want you to understand the big picture, along with all the tools at your disposal, so you can protect yourself from Wall Street’s manipulation and beat them at their own game by exploiting trading conditions to your benefit… not theirs.
The way I see it, investing is a thinking game, and the more strategically you approach it the more successful you will be, especially if you keep these five Total Wealth principles in mind.
To that end, I’ll be back with a look at several of the most commonly used order types you can put to work immediately.
Until next time,
Keith Fitz-Gerald

Guest Post : Stock Market Boom and Crash: Cause and Effect


Stock Market Boom and Crash: Cause and Effect

by Wim Grommen

This article explains, based on transition properties, why a stock market boom occurs during the acceleration phase of a transition, inevitably followed by a stock market crash in the stabilization phase of a transition.

Transitions
Every production phase, civilization or other human invention goes through a so called transformation process. Transitions are social transformation processes that cover at least one generation. In this article I will use one such transition to demonstrate the position of our present civilization and its possible effect on stock exchange rates.

A transition has the following properties:
  • it involves a structural change of civilization or a complex subsystem of our civilization
  • it shows technological, economical, ecological, socio cultural and institutional changes at different levels that influence and enhance each other
  • it is the result of slow changes (changes in supplies) and fast dynamics (flows)

A transition process is not fixed from the start because during the transition processes will adapt to the new situation. A transition is not formulaic.

Four transition phases
In general transitions can be seen to go through the S curve and we can distinguish four phases:
  1. a pre development phase of a dynamic balance in which the present status does not visibly change
  2. a take-off phase in which the process of change starts because the system starts to shift
  3. an acceleration phase in which visible structural changes take place through an accumulation of socio cultural, economical, ecological and institutional changes influencing each other; in this phase we see collective learning processes, diffusion and processes of embedding
  4. a stabilization phase in which the sociological change slows down and a new dynamic balance is gradually achieved

A product life cycle also goes through an S curve. In that case there is a fifth phase: the degeneration phase in which cost rises due to over capacity and in which the producer will finally withdraw from the market.

When we look back into the past we see three transitions, also called industrial revolutions, taking place with far-reaching effect:
1. The first industrial revolution (1780 until circa 1850); the steam engine
2. The second industrial revolution (1870 until circa 1930); electricity, oil and the car
3. The third industrial revolution (1950 until ....); computer and microprocessor

The emergence of a stock market boom

In the development and take-off phases of the industrial revolution many new companies emerged. All these companies went through more or less the same cycle simulataneously. During the second industrial revolution these new companies emerged in the steel, oil, automotive and electrical industries, and during the third industrial revolution the new companies emerged in the hardware, software, consulting and communications industries. During the acceleration phase of a new industrial revolution many of these businesses tend to be in the acceleration phase of their life cycle, more or less in parallel (Figure 1).
Figure 1. Typical course of market development:  Introduction, Growth, Flourishing and Decline
There is an enormous increase in expected value of the shares of companies in the acceleration phase of their existence. This is the reason why shares become very expensive in the acceleration phase of a revolution.
There was also an enourmous increase in price-earnings ratio of shares between 1920 – 1930, the acceleration phase of the second revolution, and between 1990 – 2000, the acceleration phase of the third revolution.
The increase in the price-earnings ratio is amplified because many companies decide to split their shares during the acceleration phase of their existence. A stock split is required if the market value of a share has grown too large, rendering the marketability insufficient. A split increases the value of the shares because there are more potential investors when they are cheaper. Between 1920 - 1930 and 1990 – 2000 there have been huge amount of stock splits that impacted the price-earnings ratio positively.
In the acceleration phase of a revolution there will always be a stock market boom.




Figure 2. Two industrial revolutions: Shiller PE Ratio (price / income)
The consequence of a stock market boom is a market crash

The third industrial revolution is clearly in its saturation and degeneration phase. This phase is characterized by the saturation of the market and the increasing competition. Only the strongest companies can compete, or take on the competition (like for example the take-overs by Oracle and Microsoft in the past few years). This puts many of the newly created companies in the stabilization phase or decline phase of their life cycle, decreasing their growth potential and the expected value of their shares. This means that the price-earnings ratio of shares will go down. This trend started in 1930 during the first industrial revolution and has started repeating itself from 2000 on.

Depending on the behavior of the central banks, the future will tell whether and at what rate the price-earnings ratio of shares will continue to drop. Aristotle's law of cause and effect also applies to a stock market boom and a stock market crash.

Thursday, April 9, 2015

Gold Price History In 16 Major World Currencies During The Past 10 Years

Gold Price History In 16 Major World Currencies During The Past 10 Years
April 8, 2015
http://www.gold-eagle.com/sites/default/files/vronsky040815-1.jpgDuring the past decade the gold price performance has truly been amazing. To demonstrate this we will show gold’s percent appreciation in 16 major world currencies since 2005.  This will be compared to the performance of 15 major world stock indices.
The criteria used to select the currencies was based upon a country’s high percent of its population that purchases gold.  The selected country currencies are:
Although the Gold Price section at Gold-Eagle provides values for periods of:
24 Hours…5 Days…1 Month…6 Months…1 Year…5 Years and 10 Years, our analysis here will only use the gold price performance for the 10-Year period.   
Price of Gold in US Dollars soared 181%
gold price US dollar
Price of Gold in Australia Dollars soared 190%
gold price australia dollar
Price of Gold in Canadian Dollars soared 185%
gold price Canadian dollar
Price of Gold in China Yuan (Renmini) rose 110%
gold price China Yuan
Price of Gold in Euro soared 240%
gold price Euro
Price of Gold in Hong Kong Dollar soared 179%
gold price Hong Kong dollar
Price of Gold in Indonesia Rupiah soared 293%
gold price Indonesia Rupiah
Price of Gold in India Rupee soared 300%
gold price India Rupee
Price of Gold in Japan Yen soared 221%
gold price Japanese Yen
Price of Gold in Malaysia Ringgit rose 170%
gold price Malaysia Ringgit
Price of Gold in Pakistan Rupee soared 383%
gold price Pakistan Rupee
Price of Gold in Russia Ruble soared 473%
gold price Russian ruble
Price of Gold in Saudi Arabia soared 181%
gold price Saudi Arabia
Price of Gold in Singapore Dollar rose 135%
gold price singapore dollar
Price of Gold in UAE Dirham soared 181%
gold price UAE Dirham
Price of Gold in UK Pound soared 262%
gold price UK pound
Since 2005 the gold price performance in the world’s 16 major currencies has soared an average +230%.   This is more than amazing….actually it’s astounding when one compares this stellar appreciation to what global stocks have done during the same 10 years. 
Stock Market Performance of Major Global Regions
Below are the Stock Market returns of 15 major Stock Indices:
http://www.gold-eagle.com/sites/default/files/vronsky040815-t3.jpg
The average performance of the above major world stock indices during the past 10 years was a miserly 57%.   Consequently, the average gold performance during the past 10 years was more than  FOUR TIMES GREATER than stock market returns….(i.e. 230% for gold vs. only 57% for fiat paper investments) .
The above performance data are irrefutable…but this begs the question:  What may global investors expect form gold during the next five years?  The following study will provide insightful observations to answer that vitally important question:  Gold Price Forecast Of Plausible $12,600 By Year 2020
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