Economic Update.

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The original economic forecast from Craig Alexander at TD Bank that I blogged about generated a bit of interest, so I thought when I saw him give an update on BNN that I would include it here. 

He says it is not a question whether Greece will default, but a question of when, and that sovereign debt is the number one issue for the global economic outlook, at the moment.  Second would be the political unrest in the middle east, if oil prices get too high.

In Canada, he sees a major correction in oil prices as being bad for Canada's economy.  Another potential issue would be reduced commodity demand from China.  Currently he sees the Canadian GDP slowing to 2 to 2 and one half percent in the second half of 2011.

Personally, I still think the U.S. has a long way to go before they will see any real, lasting, economic growth.  As long as that is the case, I think our economy will suffer since we are so closely tied to them.  The government stimulus has been very good for the stock markets, but it remains a major question as to how long they might be willing to throw good money after bad.

LinkedIn

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The video pretty much says it all.  We have learned nothing from history, the same people are in charge that ruined the financial sector last time, they are playing games with our money, the rich get richer, and it will all end badly.

What else do we need to know?  Have we not seen enough unbridled greed, already?  Why do I feel like they will stop at nothing to make a buck?  Is there nobody watching these people (anyone that cares)?  Does the whole system not seem rigged?

Although, I do think there is one thing different this time around - there is nothing left to pay off the bankers with.  We may already have robbed the next generation, does anyone want to play double or nothing?

Beating The Pro's.

Myth #9
People have been so brainwashed by the marketing efforts of the financial services industry that they cannot accept the idea the little guy has any hope of competing with professional fund managers.  They refuse to believe the assertions of people like myself when we say it is more than possible.  So I wonder what they say to Gary Kaminsky, possibly one of the best money managers in recent history.  In his recent book, "Smarter Than The Street", he writes about a number of myths.  The ninth myth involves the idea that individual investors can't beat the pro's.

Beating The Street
Kaminsky talks about the herd mentality adopted by many managers making them little more than "closet indexers".  He also talks about retail investors not having to focus on how to beat a particular index, or get more and more people to put their money into their fund.  He also discusses the benefits of being an independent investor rather than one having to answer to multiple constituencies.

Size Matters
The key advantage, he says, is how much more nimble the individual investor can be compared to the institutional money manager.  Unless you are already independently wealthy, your portfolio is probably small enough that you can allocate ten, or twenty percent of it by purchasing thousands of shares, compared to the millions of shares needed in the case of major fund managers.  Instead of unwinding positions in a matter of a day, or so, portfolio managers can take weeks.

Following The Footprints
Learning that is what attracted me to technical analysis in the first place.  Except for the use of so called "Dark Pools", there is no possible way for fund managers, especially those engaged in herd-like behaviours, to hide their trades so they don't affect chart trends and patterns.  After all, it is the institutional managers that make the markets, not the retail investor.  By identifying the trend, the individual investor can jump on it as soon as they spot it.  Not only that, they can exit the trade just as quickly.

The Usual Suspects
We all know the reasons why jumping in and out of the market doesn't work.  They include too much overhead in commissions, tax costs that are too high, churning of accounts which compounds the errors the non-professionals are prone to.  Are you kidding me?  There is only one reason we are supposed to believe that trading our own accounts will not work, and that is because the professionals want us to believe we have to give them our money, or risk wasting it ourselves.

Capital Is King
A couple of my own rules include never, ever, lose money trying to avoid the cost of a commission charge.  Another is, while you can defer taxes, you can't avoid them.  Yes, there can be better times than others to take some tax losses, but if we are saving a couple of tax dollars at the expense of the capital in our portfolio, what are we gaining?

Why Try?
Given the fact that a successful money manager like Kaminsky thinks that one of the greatest advantages of retail investors is being nimble, it always amazes me how many people refuse to even try to take advantage of it.  Instead, people buy all of the misinformation and marketing ploys put out by the financial services industry and don't even try.  Perhaps it is just as well.  If people can't see past the marketing machines designed to brainwash them into handing over their life savings, what possible chance do they stand against the sell-side analysts and talking heads in the media who are hyping stock picks out of their own self interest?  People like that are probably better off spending their time doing other things.

How do you feel?  Can the little guy beat the "experts"?

Limits To Commodity Growth?

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Michael Casey thinks the rebound in the U.S. dollar, and the declining equity and commodity markets are all related.  He refers to a "short squeeze" which is how I described it myself, last week.  As Qualitative Easing (QE2) comes to an end, I think people are anticipating a rise in interest rates.  Rising interest rates are bad for markets and good for the dollar.

Do you see the U.S. dollar continuing to go higher?  Do you think commodity markets have peaked? 

Commodities



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Volatility
Unlike investing in the stocks of companies which we can calculate a value for, commodities are purely a technical play.  Still, because it involves the perceptions of many, many market players, trends inevitably show up.  The current volatility creates many opportunities, but ones mostly of a shorter duration. 

Inflation/Deflation
Some advisors see gold as a long term hedge against inflation.  Despite the rise in energy and food prices, I am not worried about the effects of inflation on my portfolio as long as unemployment remains higher than normal.  This combined with the baby-boomers turning into savers from spenders would suggest demand, in general, should be lower than what we have experienced over the last couple of decades.  Until governments world wide have dealt with the massive debt issues, I remain concerned about the prospect of deflation, as we just witnessed in the prices of commodities as a little deleveraging took place. 

Commodity ETF's
Many Exchange Trade Funds (ETF's) based on commodity futures contracts (as opposed to ETF's based on the shares of companies that produce the commodities) have become very popular and seem to be having an effect on commodity prices.  Do you invest in commodity ETF's?

April Portfolio Update



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 We now know the market peaked early in April (if not March).  Seasonally, the peak normally occurs early in May.  The current correction should not be much of a surprise given the long run up since late last summer.  Thinking the correction was already underway, I ended up getting caught in the short squeeze just prior to Easter as we saw the market make one last gasp.  Now that a deleveraging process is taking over, stocks are getting sold to pay for losses in commodities.

As the market normally comes back to touch it's 200-day moving average at least once a year, I would not be surprised to see that happen before this is done. 

The good news for me is, since the end of April, I am making gains as the market is giving them up, which means my results are not nearly as bad as what they were at the end of the month.  I was early, caught by the fact the market didn't reverse until after the end of the month.

Four month return for TSX @ Apr. 29, 2011 = 3.94 percent
Four month return for Basic Timing Model using XIU = 3.14 percent
Four month return for Advanced Timing Model (my returns) = -5.78 percent
Money for charity = $411.27

Technical Analysis - Research In Motion



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Troubling Chart

Despite the fact that, fundamentally, Research In Motion appears to have value at current prices, the chart points out a significant problem.  The weekly chart shows the stock has been in a multi-year downward trend.  The region between the green lines I drew on the chart is known as a trend channel.  The closer we get to either boundary, the greater the chance of a reversal.

While the chart does not indicate RIM is a good longer term investment, buying at a reversal near the bottom of the channel could result in a healthy shorter term profit.  What does not appeal to me about this option is where the channel leads in relation to the blue line which appears close to the top of the channel.  That line represents the 200-day moving average.  It is the result of the average of the preceding 200 days, and the average of the preceding 200 days one day prior to that, and the average of the preceding 200 days one day prior to that, and so on.  I always hesitate to own stocks which are trading below their 200-day moving average because they have a greater probability of downside surprises.

Technical Indicators

For most people, it would be too lengthy to go into an explanation of all of the technical indicators I use.  The ones I rely on include Volume, Moving Averages, the Relative Strength Index, Keltner Channels, Percentage Price Oscillator, and Stochastics.  For more information on these, I recommend http://www.stockcharts.com/.

For more of an introduction to Technical Analysis, my favourite is an older classic called Secrets For Profiting In Bull And Bear Markets by Stan Weinstein.  It is a well written book that covers the basics.  I had thought it was out of print, but recently found it to be available on Amazon.  Investigating the Stockcharts website listed above can help in understanding various technical indicators and overlays not covered in that book.



I have also recently read Trend Trading for a Living by Dr. Thomas Carr.  I like the way in which he steps his readers through his process, step by step by step.  This is for more advanced traders, as he also describes his methods for options trading later in the book.  Even without the parts on options, the information is quite helpful.

Not This Time

For now, the technicals are telling me I should not be buying Research In Motion for my portfolio.  That's okay.  While there are not that many tech companies in Canada the likes of RIM, there are many, many good, growth companies I can make money with.  I like great companies I can invest in, but I love great companies whose shares are at the extremes of what they should be selling for when the charts are signalling the start of a new trend.  That is the advantage gained by combining Fundamental Analysis with Technical Analysis.