Soullfire's Mission: Financial Freedom!

Since the March 2009 market ultra lows, the market has been on a high octane tear moving ever higher. The Dow has recently moved past 11,000 reaching 19 month highs. The Dow has also enjoyed eight straight weeks of gains, giving it the longest winning streak since January 2004. The Nasdaq is also having an eight week winning streak and a third of the S&P 500 companies are at 52 week highs.

All bearish analysts are left in shock and awe as the market surges continually upward.

With all this market euphoria, shall we proclaim that the worst is behind us and that good times are here again?

If you've been reading my blog for any length of time, you'd see that I've been on the bearish side of the market.  I've also talked about a bipolar market that acts as if either everything is good or everything is horrible with no moderate in-betweens.

Okay, so am I guilty of being a "perma-bear", one who remains bearish regardless of what the market does and has an eternally gloomy outlook? I hope not because I can't stand perma-bulls or perma-bears as you can't trust what they say since they're always one-sided.

Anyway, here's my take on the market - we have a complete disconnect between the market technical data and longer term fundamental data. In short, I'm technically bullish on the market but long term fundamentally bearish. Here are my reasons:

Case for the Technical Bull:

One just needs to look at the ever climbing market for that. You can't argue with the market's upward movement. Companies are also seeing improving bottom lines from the lows of 2008/2009.

Case for the Fundamental Bear:




Does it make sense to you that the market has gone straight up in a "V" type recovery as if all the problems have been resolved? Have things improved that much so soon? Here's what we are still dealing with:

1) Decades high unemployment - shedding employees will give big business employers boosts in productivity and better profit margins in the short term, but on the long term will see decreased demand and declining revenue as there are less people with buying income.

2) Crushing debt - In the aftermath of the market melt down, several cities and states are suffering with budget shortfalls. Services are being cut across the board which include fire, medical, and police services. There are municipalities that are in danger of declaring bankruptcy.

Debt problems go beyond the state level. The US Federal Deficit is well over $12 trillion dollars and climbing fast. Spiraling out of control debt will have negative implications down the line with higher taxes along with reduced services and benefits. The US dollar will also be under devaluing pressure which means the likelihood of rampant inflation along with higher interest rates. We've seen $4/gal gas...$5/gal and $6+/gal are real possibilities if inflation takes off.


The US isn't the only country dealing with a huge debt problem. I've written about the financial crisis in Dubai  and predicted that other cities and countries may also be in danger of defaulting on their debt. Since that time, Greece has moved into the spotlight of being in danger of default. This begs the question as to what other cities/countries are on the ropes, but hiding it for now? A default of a major country can have severe economic and currency impacts.

Yet despite all these real problems, the market continues to ignore them and power upwards.


One thing we know for certain is that while the market may ignore fundamentals for quite a while, it will ALWAYS respond to it eventually. The only question is WHEN. Don't expect the main stream media to give you any advance warning....they never do.

Knowing this, the question becomes how does one invest in this market, or if they even should?

I would say yes, one can invest, but one needs to have a short term outlook, meaning being ready to move your funds to safer harbors if the market starts an extended decline. The higher the market climbs in the face of all these headwinds,  the greater the risk that we are moving into yet another bubble.

The main point here is to avoid going into zombie "buy and hold" mode as this could be the worst time for it. It's best to use technical analysis for determining when to buy or sell.

The markets reaction last Friday to the employment numbers proves we are in a bipolar market.

As you may recall, I discussed market behavior when October employment numbers were released:

The unemployment numbers were higher than expected and the national unemployment rate rose to a high of 10.2%, to which the market responded by rallying and moving higher. The reason given by financial main stream media was higher unemployment means interest rates will likely be kept low for a longer period.

So in their Bizzaro universe, higher unemployment is reason to celebrate in the stock market.

Now there has to be two sides to every equation, which means that if the jobs number showed lower unemployment, the market move should be negative (higher interest rates), right? Well, my Bipolar Market Theory predicts that the market will move in a certain direction independent of any new information.

Now last Friday the jobs number was much lower than expected- only 11K jobs lost for the month and the national unemployment number dropped to 10%

How did the market respond? Well if you guessed it went down since this means interest rates will be going up, you'd be wrong. The market instead rallied to make another new high for the year and ended positive for the day. The financial media, as expected, linked the rally to positive signs of the recovery taking place, forgetting all about interest rates.

So in summing up we have the following:

1) Higher unemployment triggers a market rally.

2) Lower unemployment triggers a market rally.

3) The financial mainstream media will try to make both situations seem logical and expected.

From this we can conclude:

1) Bipolar market theory has been verified.

2) Financial main stream media are basically idiots and should never be looked at for insight.

3) The market isn't trading on fundamentals at this time, which makes it equivalent to Wyle E. Coyote running off of a cliff and not falling because he hasn't realized it yet. Technical analysis is best suited for use now and one needs to be alert to any signs of bipolar market sentiment shifting. Once the sentiment shifts negative, you will see the market continue to fall regardless of news in the same fashion as it did going up.

Fed Chairman Ben Bernanke is attending the Senate Hearings on whether he gets appointed to a second term. Kentucky Senator Jum Bunning had a few choice words to say on the matter.

Before I show the video, a little set up is needed...

Here's the low down on bailed out company AIG. When a company is in serious financial trouble, one of the first things they do is try to renegotiate the debt obligations to their lenders....as in pay them 60 or 70 cents on the dollar rather than the full value amount, known as "par value". The lenders may not like to take a loss, but they are motivated to negotiate because the losses could be far greater if the company goes bankrupt. Anyway, that's what normally happens- but it didn't with AIG. The Fed bailed out AIG and paid 100% of their debt (par value) to the lenders.....all with US taxpayer money and more debt. So basically AIG allowed other banks to engage in risky counter-party investments that went bust- and US citizens get stuck with the bill. So AIG and their lenders get the benefit of only gains and NO RISK of any losses. This, my friends, SUCKS and is NOT what capitalism is about.

This video starts in where Bunning is talking about the AIG bailout having no negotiated cuts to lenders:



Notice how Bernanke tries to weasel out by saying he was "powerless" to do anything and that the lenders had the upper hand. This is hogwash. If AIG went belly up, the lenders would have got squat, and had NO leverage. This is yet another example of Bernanke making excuses instead of taking accountability for his mistakes....that is, if you want to call this a "mistake". I think this was a deliberate move in favor of Wall Street cronies.

Here's the longer version of the video to see the full verbal smack down given to Bernanke:




Sen. Bunning (R-KY) to Fed Chair Bernanke: 'You Are the Definition of Moral Hazard'

With the dollar weakness, gold and the other commodities continue to trend higher.

This kind of dollar decline/gold appreciation can't be good for the economy in the long run and certainly threatens any hope of a timely recovery.

I wonder if the US Govt (Bernanke/Geithner) will continue to watch the dollar sink and do nothing while gold continues to make new record highs on an almost daily basis?

Although you could have easily missed it with all the news about Tiger Woods and his auto accident, or the White House party crashers taking up the majority of the air time, there was some very interesting financial news the past week.

Dubai, the play city for the wealthy, has run into financial problems due to plunging real estate values and has asked its creditors for a delay in its debt repayment schedule. Okay, so the fact that Dubai is in danger of defaulting on their debt and facing bankruptcy is just the first part of the interesting news.

The next part, which I find even more interesting, is the fact that none of the other United Arab Emirates (UAE) initially stepped up to "save the day" and even stated that they wouldn't be stepping in for any bailout. How about that? Forcing Dubai to take responsibility for their own debt problems - what a novel concept!

Could that be a lesson for how the US and Europe should regard corporate debt problems? It would seem it's a lesson they still aren't ready to learn as the financial markets responded by falling last Friday and the major complaint/question repeated over and over again by the talking heads on financial and news media was "why wasn't the UAE going to bail Dubai out?"

This type of mindset angers me to no end. How is it that banks and corporations feel they are entitled to special consideration and being bailed out for the "good of the markets", and yet these same banks show little to no mercy for their own individual customers like homeowners who fall behind on their debt payments. Their level of hypocrisy knows no bounds, and is a clear example that the harsh realities of accountability don't appear to apply to rich corporations. It disgusts me.

Meanwhile, the news media would rather keep you updated on fluff news like Tiger Woods, and White House parties instead of news that could actually have an impact in your life. This is why you should NEVER depend on the news for advance warning- by the time it's becomes "worthy" of their attention, it will be too late to do anything about it.

Here are some of the questions you should be asking about the Dubai situation since most news media isn't doing it:

1) How does this affect me or my investments?

Just because Dubai is half a world away is no guarantee that their actions have no global impact. The failure of US investment bank Lehman Brothers last year should make that very clear.

2) Could this crisis impact my country?

All investors in Dubai could be impacted - which includes many international banks and investment firms. How much have these corporations loaned to Dubai- which translates into how much of their capital is at risk?

3) What does this say about the remaining "systemic risk" out there?

Think Dubai is the only city-economy in dire straits? Think again. Could there be other cities or nations on financially shaky ground?

4) Why does the news ignore this story for the most part?

You can find news on Dubai if you're on the financial news network or online service, but good luck finding it on regular TV news, where they would rather compete with Entertainment Tonight or TMZ, rather than give you useful information.

5) How does this affect overall market risk in general and risk to my investments in particular?

By effectively gauging risk, you will be ahead of the curve in keeping your long term investments safe from severe market turmoil.

Friday, 27 November 2009

*** Attention Bulls ***

*** Attention Bears ***

It should be obvious by now that the market will often behave independently of what the current market forces and economic conditions are. This can leave one at a loss for how to engage such a market rationally while still limiting the level of risk.

On the Bullish side:

Many of those who have subscribed to "buy and hold" have been burned badly as the market plummeted. Parts of the market has bounced back from the March lows, but other segments are still languishing.

On the Bearish side:

Many shorting or expecting the market to collapse have been stymied by the continued run up from the March lows with no sign of weakening. Anyone attempting to short this market has most likely been in a losing campaign.


In both the bullish and bearish scenario's listening to the news would not have helped you make sound decisions in the short term as there has been a mix of both positive and negative information, and not only that, the market seems to ignore the information most of the time.

In my research, I've found that the best way to invest in this market is to accept that fact that the market is bipolar, meaning its normal state isn't rational- either everything is great, or everything is rotten.

The next step is read the current financial data and make your own projections where the market "should" be going. You'll have to determine this yourself as the news always presents conflicting information and will only confuse you if you don't have a good grasp of the current state of the economy. This will tell you where the market is headed eventually- and here, the key word is EVENTUALLY- it could take some time for this to happen so consider it an "extended forecast".

The last step is to understand "Trend Line Analysis" and "Support and Resistance" areas specifically as well as the art of technical analysis in general. You will need to know this area in order to determine when to buy or sell.

So putting it together, we have three main components to achieve success:

1) Accept the market is irrational (Bipolar)
2) Determine the "extended forecast" of the market.
3) Know Trend line and Technical Analysis

This is how you put them together for more successful investing experiences:

Knowing the "extended forecast" of where you think the market is headed will be invaluable for your long term (at least 1 year or more) investments. It will provide you with an early alert on whether you should be adding to your position or reducing it and moving it somewhere else. If done right, you should be able to avoid being caught in major market crashes as well as keeping your assets in stronger investments.

For short term trading/investing, knowing where the market is headed with your financial extended forecast information won't be as helpful due to the bipolar nature of the market. The market has the uncanny ability to keep moving in one direction regardless of the current financial conditions. There is also an abundance of automatic computer trading going on which makes decisions on other things besides current news. The media, looking to explain any market movement with current news only adds to the confusion and you wind up with ridiculous "can't lose" scenarios. Here's one example:

The national unemployment numbers for October went up to 10.2%, which was higher than expected, but the market was seemingly unaffected and rallied. The financial news media stated that the market rallied because that higher unemployment number means interest rates will remain low. This makes no sense as the negative of a higher unemployment rate is of a higher magnitude that the positive of lower interest rates. Now on the other hand, had the unemployment number been lower than expected, the market would have rallied and the media would have proclaimed that it was due to signs that the recovery was taking hold, ignoring the interest rate angle altogether. Therefore no negative scenarios exist in this case that would result in a negative market move. This makes no sense in a rational market, but behaves as expected in a bi-polar market.

The way around this situation in the short term is to focus primarily on technical analysis (TA) instead of the news. If TA dictates the trend is up, go long. If TA points down, go short. In each case include a protective stop loss trigger as a risk limiter. This technique should keep you on the right side of trades in the short term while you're waiting for your long term forecast to come to pass.

Long time readers know my investment philosophy subscribes to the old axiom- "If you want something done right, you have to do it yourself."

At the end of the day, the person who has the most to gain or lose from your investment nest egg is you- not a financial adviser or any other person offering investment help.

Well, a study was done that compared the investment returns of those who used investment advisers and those who didn't, and the results were very interesting. On just the surface view and analysis, those who had a financial adviser manage their assets appeared to have superior performance and lower risk compared to those without an adviser. However it was found that financial advisers are more often paired with older, richer clients rather than younger, less affluent ones. Taking these differences into account results in a different outcome. From the study:

"Once we control for different characteristics of investors using financial advisors, we discover that advisers actually tend to lower returns, raise portfolio risk, increase the probabilities of losses, and increase trading frequency and portfolio turnover relative to what account owners of given characteristics tend to achieve on their own."

Now this makes sense when you think about it. Financial firms are going to give their older, wealthier clients their best financial advisers to keep them from going to another firm. The newer, less experienced/seasoned advisers are more likely to be assigned to smaller accounts that correspond with a younger investor with smaller assets. This results in these accounts being the "training grounds" of newbie/inexperienced financial advisers, with often mediocre or poor returns to show for it.

When it comes to investing talent, not all financial advisers are the same.       

The study concludes:

"Based on the findings, it should not be taken for granted that financial advisers provide their services to small, young investors typically identified as in need of investment guidance. Indeed, the opposite is true. Even if advisors add value to the account, they collect more in fees and commissions than they contribute."

The bottom line is you are not automatically well served letting someone else manage your money. If you don't want to manage your money, the key is picking a good financial adviser, and to do that, you need to have at least a solid basic understanding of investing yourself. I know it's easy to say we're too busy and to ignore boring things like finance and basic investing skills, but then again, we ALL want to retire early with lots of money- we can't have it both ways.

How to Invest

As a start the easiest thing to do is invest in the index funds like those that follow the S&P 500 or NASDAQ. Your investing will then directly follow the market indexes for better or worse, with no financial adviser needed. From a long term perspective, the market has been historically bullish so it works out.  That would get you started as you learn more about the market and investing. The best time to use a financial adviser is when you are savvy enough about investing to know what you want to do, but don't have the time to do it, so you can give your financial ideas to the adviser and let them execute it for you.

How to Spot a Good Financial Adviser

How can you tell if a financial adviser is good or not? You can ask to see their track record of performance. As a quick check, you can ask them how they fared in the market from 2007 - now. We have seen some turbulent times in the market which serves as a great litmus of the true skill set of the financial adviser in question. Compare their performance to that of the market index funds. If they can't beat the index fund performance, then they aren't adding any value with their management skills, and should be avoided.