General market discussion

[David Randolph]

Quote from nullzero:

You dont think sediment can change very fast over the next 3 weeks going into January 1st? From what I hear from many other traders and analyst is we should see the market get some sense knocked into it after the holiday season. Heh just bought some QID the about 10 mins ago and im up .50% so far. I think the time is coming for the market to pullback at least a little.

EDIT

On another note the vix index is up over 6% today and just passed over the 50dma recently. The techincals of the vix index look like its positioned to break out. I will post under stock market talking with the chart and maybe we can have dicussion about the market over there.

My quote:

Good luck nullzero

I'm trying to stop betting on small fluctuations and stay with the big swing. Because betting on fluctuations will never make me rich. I've tried that for too long.

Man, if I can make 50% a year I'll be the richest man on earth 30 years from now. I don't need 50% a month. Trying to get, say, 20 or 30% a month was what made me make much less money than I ought to, given how right I was in the market.

I won't have 30 years in front of me forever, so I better start doing the right thing ... You know what I mean

Nullzero quote:

Yeah I know what you mean. I am just worried holding many things long these day because of the problems we face ahead; Weak dollar, housing bubble burst, losing the war in iraq and iraq turning into a proxy iranian state (which would lead to an oil crisis.) I can go on maybe its just me and im to negative but I feel that the perfect storm is brewing for a major recession and stock market pullback in the next year.

[David Randolph]

Weak dollar

A weaker dollar is the best thing that can happen to the US economy. The dollar has been weak since 2003 and that was a major help to bring some balance to the world economy, because you were consuming too much and not exporting enough. A weaker dollar will make import prices go up and export prices go down.

Since GDP = Consumption + Investment + Exports - Imports, the weaker dollar is having and will continue to have a positive effect on the US economy. Moreover, multinational profits will also be higher due to the weaker dollar.

[David Randolph]

housing bubble burst

I think that concern is overdone. It's behind us. Look at the international picture. For example, Portugal had an even bigger property bubble than the US (I mean bigger, housing prices are 5 fold higher now than 15 years ago, on average) and when the bubble burst, nothing serious happened. The market didn't collapse, it just stopped rising, maybe down 2 or 3% a year since 2002.

losing the war in iraq and iraq turning into a proxy iranian state (which would lead to an oil crisis.)

Iraq is non existent in the world economy. I see a lot of capacity in the pipeline for oil, mainly in Africa and Russia. I don't think Iraq will have any major impact on the world or the US, but it's a risk, you have a point.

My biggest concern is debt. But the market knows the issue for long, and it still a bull market. I prefer to concentrate on the benefits of globalization.

Since I read an extraordinary book on the economic history of the world, which is called "The wealth and poverty of nations" I know globalization will have an astounding impact on the world economy. We're not only exchanging goods and services anymore. We're exchanging knowledge, and that is the most powerful trend going on in the world now.

[nullzero]

I know a weak dollar is good for manufacturing and less consumption... however the U.S. federal deficit is at records levels and the world economy is sick of financing our excessive debt. I also was worried of the looming problems with the USD as the major world currency for trading and oil. Recently China and many other countries have been trying to get rid of there massive dollar reserves this could effect trigger a intense dollar selloff causing foriegn investors and the wealthest americans to flee holding dollars and sit their buying power in safe heavens.

I know this hasnt been talked about a lot but people dont realise that the dollar is unoffical backed by oil since we have been taken off the gold standard in the 70s with the last crisis. Not many people doubt that the war in iraq was done to secure future oil reserves... What happens if Iran turns iraq into a proxy state and in effect making Iran in control of the worlds largest proven oil reserves? (adding iraq and iran oil reserves I believe would come to this outcome.) Since the Iranians are planning to strictly trade their oil in Euros and other currency this can hit the dollar hard in the long run and cause a oil crisis back here in the U.S. Since we would lose are leverage of cheap foriegn oil and the declining value of the dollar would mean more dollars for a gallon of gas.  I know im rambling on at this point heh.. just stuff on the top of my head.

[nullzero]

Here is some facts about oil in Iraq and Iran.

"Iraq's Oil Reserves: Untapped Potential
While its proven oil reserves of 112 billion barrels ranks Iraq second in the work behind Saudi Arabia, EIA estimates that up to 90-percent of the county remains unexplored due to years of wars and sanctions. Unexplored regions of Iraq could yield an additional 100 billion barrels. Iraq's oil production costs are among the lowest in the world. However, only about 2,000 wells have been drilled in Iraq, compared to about 1 million wells in Texas alone."

http://usgovinfo.about.com/library/weekly/aairaqioil.htm

Here is some info on Iran and its oil reserves
"As of late 2002, Iran held 90 billion barrels of proven oil reserves, or roughly 9% of the world's total."
http://www.globalsecurity.org/military/world/iran/oil.htm

So thats about 200 billion barrels of proven oil reserves together, if we assume in the distant future that Iraq turned out for the worse and turned into a proxy state for Iran.
I was wrong it comes slightly behind Saudi Arabias proven oil reserves of 262.7 billion barrels but very close http://saudinf.com/main/z002.htm.


So together Iran and Iraq make up about 20% of the total oil reserves which can effect the market greatly regarding oil prices.

[David Randolph]

Oil represents much less for the world economy now than it did 30 years ago, but those are good bullish arguments on oil, thank you.

And what about the 3 billion new consumers and investors showing up in the world with the fantastic growth of countries like China, India, Russia and Brazil? This is 10 times more population than in the US.

Those markets were incipient 20 years ago, but now they're big markets for America's products. And they can only get bigger (of course, there will be recessions along the way, but longer term). Why? Because they're opening their minds and learning from you guys in America how to do things right

Got to go have dinner, but I'll be back, perhaps you're right over the short term, I need to look at some indicators ... that VIX is a short term concern.

[nullzero]

yeah the vix is showing one big green candle today and is up over 8% today so far.

[nullzero]

Oil represents much less for the world economy now than it did 30 years ago, but those are good bullish arguments on oil, thank you.

And what about the 3 billion new consumers and investors showing up in the world with the fantastic growth of countries like China, India, Russia and Brazil? This is 10 times more population than in the US.

Those markets were incipient 20 years ago, but now they're big markets for America's products. And they can only get bigger (of course, there will be recessions along the way, but longer term). Why? Because they're opening their minds and learning from you guys in America how to do things right

Got to go have dinner, but I'll be back, perhaps you're right over the short term, I need to look at some indicators ... that VIX is a short term concern.

I disagree to a degree on oil not being as important on world economy as it once was. The demand is higher then ever for oil because of high and rapidly growing demand in China and India. Until we start using a widespread alternative to oil it will have major impact on the markets (Brazil has its act together.) The oil spike just a couple months ago put a dent into the U.S. economy and could be blamed for the slowing economy. When gas prices go higher Americans drive less and shop less.

Weakning U.S. dollar may help out defense and aerospace companies like Boeing, Lockheed, General Dynamics, General Electric, Northrop, etc. Other then that I can't see any strong industrial manufacturing companies that still having major operations in the U.S. everything seemed to be packed up and moved to foriegn countries. When it comes to made in USA consumers here and abroad have been shunning the auto industry and other parts of manfacturing. The only made in USA the foreign countries would rather have is oil drilling equipment, aircrafts, weapons, and infrastructure parts from companies like GE etc. I have seen a lot of activity with the exports in the defense industry and loosing restrictions in the aerospace and weapons category. Most recently I remember we sold some F-16s to India, Pakistan, and Taiwan.

[Michael]

What a great idea to have an to have a discussion about the big picture. When that is said I really don't share David's optimisme. To be honest David's track record is a lot better than mine but I am very proud of having been wrong about the US stock market for the last 7 months. The only other person I know of who has been wrong for such an extented period of time is Warren Buffett 

When I look at US today the only bullish thing I see is that the stock market goes from strength to strength. I kind of understand why because US stocks are not expensive based on historical earnings and there are a lot of liquidity in the market.

When I look at the US economy I am extremely pessimistic and as most US companies are depending on US demand that makes me wonder when this house of cards will crash.

I am convinced that we will have a major correction before June next year and most likely earlier.

Energy prices are at historical high, The trade balance deficit is astronomical but most important: the housing market is breaking down and compared to Portugal the US spending spree have to a large extent been funded by the consumers perceived wealth based on the value of their real estate.

The pillars of the US economy is consumer spending so when that start to crumple....

The latest PMI and ISM data disappointed and even the upward revision of GDP was based on Government spending, inventory build up and increased import. Exports and consumptions were revised down.

It is correct that a weak dollar helps US export but please remember that most US companies are depending on the US economy and a weak dollar is basically a vote against the US economy. A strong economy have a strong currency a weak eco.....

Basically US has lost it competitiveness in my opinion. Look at economies like China and India. These countries are growing at a rate 3 to 4 times faster than US. They are taking over the back-bone of US economy - the industrial production capacity.

When the goods are manufactured in these countries you will start to see research and development pick up as well. I like design houses for electronics goods and Biotech's in China and India. The cost of developing drugs and new electronics is a fraction of the cost in US.

My biggest question is to what extent a US recession will drag down the rest of the world. Initially I think that will happen but I am looking towards Asia for a new leadership.

I know im rambling on at this point heh.. just stuff on the top of my head.

Well Nullzero you are not alone.........

[nullzero]

Im glad to see others share this view. I am pretty worried about a trigger happening soon that will lead to this. The perfect storm in my eyes is brewing.

[jorgegr]

Fully agree with you guys and thats why I invested part of my portfolio in QID
and DXD.  There is also a very particular ETF that could be in your radar =  EWO 

GLTA

jorgegr

[nullzero]

Interesting article to add to the discussion
http://www.bullnotbull.com/archive/stocks-11.html

Also a useful site to read daily on news articles related to a bad economy (updated daily).
http://www.dollarcollapse.com/

Yes I know the the title sounds bearish and negative haha. This site is simply a colletion of news articles showing the bear case. I know its one sided on the bear cause but its always useful to identify and focus on the news that could effect the markets in a big way.

[David Randolph]

1. Introduction

nullzero started this discussion on the general market and I see many people interested, which is great . I want to study some of the bearish and bullish arguments outthere and see if I can get to a conclusion of my own. Let's start by the bear's arguments.

2. Bear arguments
2.1. Oil



Many people have been bearish on the world economy and the stock market due to oil's bull market. This has been a theme ever since the war in Iraq started, in March 2003 (the bottom of the stock market).

As I see it, oil's bull market only happened because there was strong demand, not because of supply disruptions. The high oil price is attracting new investments to add to production. For example, Ramsburg's father is a major director at Atlas Copco and he says there's very high demand coming from new oil exploration and production companies for its industrial compressors. I've also been hearing OPEC oil ministers say that "at $60 a barrel I don't see many people willing to cut production".

Oil is down 22.5% from its top. I see it between $50 and $70 for years to come. The world economy can handle this, and it will continue to adapt and search for new energy alternatives.

2.2. Interest Rates



The FED rose interest rates for 17 times since June 30, 2004, from 1% to the current 5.25%.  It has paused since June 29, 2006. The 10 year treasury bond yield, currently standing at 4.48%, says the next FED move will be down, not up.

Moreover, the bull market from 1982 to 2000 was developed on a much higher interest rate environment. Interest rates are still historically low and they are bound to go lower, or at least, stay around current levels.

Bernanke saved the world economy from deflation back in 2003. You got to give the man credit.

2.3. Housing market

I think this concern is completely overdone. Housing prices went down, but didn't collapse. I used to have this bearish argument myself, but I don't have it anymore. In fact, home construction stocks were one of the best performers over the last 3 months, as their valuation is too cheap.

Also, interest rates are coming down over the last 6 months or so, and that will at least put a floor on the housing market. I don't see much new supply and demand will stabilize at current levels. That's my opinion.

2.4. Weak US Dollar



Come on, the weak US dollar was what got the US out of the recession in the first place. It is a major global re-balancing tool. The weak dollar makes US exports more competitive and imports less competitive. Everybody knows a weak currency spurs economic growth, because:

GDP = C + I + Ex - Im, that is, Gross Domestic Product is Consumption (private and public) + Investment (private and public) + Exports - Imports.

Of course, these are major macro changes that take years to develop, but I see US exports picking up and imports slowing down. The rest of the world which saves too much and doesn't have the same consumption habits as the Americans, is adapting and internal demand is growing in countries like China, India, Russia, Brazil and even Europe.

The weak dollar is one of the strongest bullish arguments for the US and world economy. The market agrees with this view, since the USD is near its lows, and the S&P 500 is near its highs !

(of course, you or anybody can hedge your US Dollar exposure using Forex or currency futures)

2.5. US consumer debt

I share this concern with the bears. As I searched for information about consumer debt, I found this article on a mainstream media website: Spending our way to disaster

Now look at the date of the article. October, 2003. Yesterday there were some news on the subject: Consumer credit falls at fastest rate in 14 years

Everyday, I receive e-mails telling me to get out of debt. Every week, I see Oprah talking about the "America's Debt Diet". I think the trend is changing for lower debt, not higher and higher debt. Also, as we've seen, interest rates are going lower.

There are solid reasons to be worried about the US consumer debt load, but the argument is getting weaker as time passes, not stronger.

2.6. Inflation



The CPI came off sharply over the last several months. Core CPI is still a bit high, at 2.9% YoY.

10 year treasury note yield six months trend is down, so the bond market isn't all that much worried about inflation, why should you?

2.7. Terrorism/Iraq/War

You have to shut down your ears and eyes to the media (they need bad news to survive - because good news aren't news) to understand what's going on in the world right now, using a very, very long term perspective.

Since World War II we were afraid of the USSR and a possible World War III. That didn't prevent major bull markets in the stock market, in fact, the two biggest of the US history.

Now those fears are gone, because USSR was dismantled and Russia is as friendly as it has ever been. The European Union is a political process that is bringing long term peace to Europeans.

All big wars were fought for one thing: money. With the world economy opened as never before, let me rephrase this, as never before, no state needs wars to get rich anymore. The more world trade the less likelihood of wars.

Yes, Iraq may go into a civil war, I don't know, but it won't be able to develop anything dangerous for decades to come. Do you think Russia would let them? They're so near ...

Anyway, my point on this is: compared with World War II and the cold war period, the fear of terrorism is peanuts. Terrorism, especially religion related terrorism, gains strength on people's ignorance. With the advent of the internet, people in Iraq, Iran and other's of the "axis of evil" will see how the Americans and Europeans live and will want that too. Nobody wants to be poor and sad. The trend is for those people to open their minds, not to close them even more.

Short term there's a lot of resistance (as in any ideological confront), but longer term the positives win. That has been the world's history for millenniums.

3. Bull arguments
3.1. Long term chart



This long term trend chart tells me the S&P 500 had its bear market between 2000 and 2003. It is clearly in a bull market now. Of course, many people won't recognize it until the S&P500 makes a new all time high, above 1,553 points. But remember, the Dow Jones and the Russel 2000 are at all time highs. 

3.2. Medium term chart



Nobody can say the trend isn't bullish. You can say it is overbought, but you can't call it bearish. Unless you're trying to pick a top.

If you're doing that you need to learn not to do it. Trying to pick tops and bottoms in the general market is a futile exercise. Many people simply can't go with the flow, respect the trend, because it isn't natural for a human being to chase prices higher or keep selling them lower. To be a successful stock investor you need to behave contrary to your basic instincts, and respect the trend, because the voice of experience tells you that's the right thing to do, the only way to survive.

3.3. Short term chart



It doesn't get much more bullish than this. Of course, it may come down to test the 50 days SMA, because it is overbought (I never consider overbought/oversold indicators, they're useless), but the trend is bullish. It may continue for several months more. It may continue until the S&P 500 makes a new all time high, in mid 2007. It's just 10% away from that.

If you respect technical analysis, and I do, you have to be a bull.

3.4. Globalization

The internet and global trade is changing the world as it has never happened before. Never, ever, the world has been so close together. It has never been so BIG. Now we have these guys, the Chinese, the Indians, the Russians and others with buying power. Also we have eastern Europe and even Africa growing like never before. You can't ignore these major global trends.

Look at 3 Stocks on Fire, for example. I'm a Portuguese fellow, writing stock market analysis not only for Americans, but for people of every part of the world (check our member map)

Those dots in Asia, South America and Africa will grow more and more over the years. This is a global market place now. Investors from all parts of the world can buy stocks anywhere they want. The available pool of money to invest is bigger than ever.

The US is the best prepared country to benefit from globalization trends. It's not by chance that Google, Ipod, Amazon and many other global trademarks were born in America. You're more used to think globally than other countries.

I'm not saying that China won't be a larger economy than the US. I think it will. But that only helps the US. This isn't a race. You don't have to be the first to win.

Everybody benefits when another country grows. That country will be able to import more of your goods. It's good when others are getting richer, it's good for you. They will be able to pay you higher wages, or buy anything you want to sell them.

3.5. Market Sentiment

I used to rely on market sentiment indicators, like the VIX, the Investors Intelligence Survey, the Commitment of Traders Report, but not anymore. I think market sentiment is only important at major market tops and bottoms.

I've lived through two bull markets and two bears markets (not in the US market). I know how people feel when we're close to a top (although I would always wait for a technical confirmation to start selling) and close to a bottom.

At the top everybody is bullish and it is extremely hard to think of bearish arguments. Nobody or almost nobody wants to sell stocks. People got tired of trying to sell to buy on reactions, they've decided "this time I will buy and hold".

I see the media bombarding bearish news. I see people going short or selling all their shares. I see them worried about oil, interest rates, housing market, weak US dollar, consumer debt, inflation and terrorism/war in Iraq.

I don't see the crowd sharing my bullish arguments. And yet, the market has been saying, and I expect it to keep that way "you're right David, hold on to those shares".

4. General overview

Of course, I expect corrections and retractions, and perhaps one is unfolding now, I don't have a clue. But we're in a bull market. And all a man has to do in a bull market is to buy and hold fundamentally attractive stocks to make an above average return.

I won't try to sell stocks to catch them lower. I did that in past bull markets. It didn't work, that is, I could have made much more money if I just sit tight.

Don't misunderstand me, I've been a short term trader and a day trader for years. I'm not, what do you call them, Mom and Pop investors, am I right? I don't mean buy and hold forever, I mean buy and hold for as long as it is a bull market. Not every company, but the good ones.

Because if you make 50% a year you'll be a very, very rich man/woman. If 50% a year isn't enough for you, you should get a job.

I know my English isn't good, especially when I get out of specific stock's talk. But this is what my 11 years of experience in trading the markets, of reading everything I could about them, of talking to thousands of traders and investors over the years has taught me.

I've been wrong in the past and I know I'll be wrong again in the future. But I'm humble to change my opinion if I have to. For now, I'm a long term bull in the S&P 500.

Good luck for all

[usedcasting]

Nice overview, thanks Dave. The debate that I found most interesting regarding the US was between Alan Greenspan and Warren Buffet. Buffet accused the US of being a Sheercroper country (having sold off all their assets and being left with nothing) and Alan Greenspans belief that America's investments (Assets) outside the US are what will give the US its future strength. The verdict is still not out, but I sort of side with Greenspan.  Great thread, thanks again.

uc.

[fous]

Great market debate guys, i loved reading this whole thread just now I still have a lot to learn on the fundamental side

Im about 90% technical, 10% fundamental so i dont look into the economy too much. As a short term trader all everything starts and ends with the chart. I may like a stock fundamentally, but im not gonna continue holding it if the chart falls apart.

the only thing i need to know about a company is if there is bullish news recently, and earnings and revenue are expected to increase. Match that with a hot chart and im set to go. I find that if pay too much attention to fundamentals i may persuade myself not to enter a stock because i find something thats kinda shady when really its irrelevant to the 1-3 weeks i plan on holding. Or i may hold for too long because i have faith in the fundamental value of the stock and i watch it tank ending me in a losing position, I've taught myself to avoid these factors and stick to my game plan. Anyways i digressed somehow into my trading theory lol. Keep this discussion goin i enjoy reading and learning about the bigger picture. Cuz like you David i don't plan on being a short term trader forever

Ive got a long road of learning ahead of me. Ive only been trading since when, May of last year?? lol

-fous