Daryl Guppy: Dow May Crash to 7,500 If 10,600 Not Breached
Seeing there’s been quite a bit of interest in my recent comments on CNBC about the historical parallels between the Great Depression and the recent financial crisis, I thought it may be appropriate to elaborate further on the chart technicals behind the observation.
The causes may have been different, but the collapse of the U.S. markets in early 2008 followed the same behavioral patterns as the collapse in 1929. The recovery pattern seen in 2010, is also very similar to that developed in 1930.
The crash of the Dow Jones Industrials in 1929 was signaled by the development of a well defined head and shoulder pattern, seen most clearly in its monthly chart. It is a reliable pattern that captures the behavior of investors who are becoming increasingly disillusioned about the future prospects for economic growth.
The downside pattern targets in the 1929 Dow were exceeded with a fall of around 49% before the market recovered in 1930. The 2008 dow pattern targets were also exceeded with a market fall of around 52%.
In 1930, the market developed an inverted head and shoulder rebound pattern recovery that led to a 46% rise in the market. The Dow rebound in 2009 also developed from an inverted head and shoulder pattern. This was a powerful rise of around 69%.
The historical development of the recovery in the DOW in 1930 ended with a new head and shoulder pattern. This was followed by a rapid market decline that created the first part of a long term double dip pattern. This retreat also exceeded the pattern projection targets with a fall of 28%.
Fast forward to today, we’re seeing the Dow is developing a new head and shoulder pattern which indicates a beginning of a bear market. The rally peaks in the Dow appear in January and May and June. The downside projection taken from the neckline of the pattern sets a target at 8,400, or a 25% decline.
A very bearish analysis using the pattern of retreat behavior in 1930 suggests the Dow could retreat to around 7,500 in 2010.
The head and shoulder pattern in the Dow and its downside targets, are invalidated with a sustainable rise above 10,600. A move above this level does not signal a resumption of the uptrend, but it does reduce the probability of a double dip.
It must be noted that while the behavioral patterns in 1930 and 2010 are similar, they don’t necessary point to the same result. But it does sound a warning that markets could continue to stand on the edge of a precipice.
Source: 2010 CNBC, Inc.
Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.
Peter Lynch: 8 Simple Investing Principles
Peter Lynch ran Fidelity’s Magellan Fund from 1977 to 1990, beating the S&P 500 in all but two of those years. He averaged annual returns of 29%. That’s a mind-blowing figure. It means that $1 grew to more than $27; if you invested as little as $37,000 with him in 1977, you were a millionaire in 1990.
Fortunately for us, he’s willing to share his secrets. To achieve his stunning track record, he clung to 8 simple principles. Here they are:
1. Know what you own
Seems elementary, right? But as someone who talks to lots of investors, I can report that you’d be shocked at how few investors actually do their research. Scroll down to No. 7 for a good first step in getting ahead of the game.
2. It’s futile to predict the economy and interest rates (so don’t waste time trying)
After 2008’s crash, I noticed a distinct increase in armchair economists. We financial types do enjoy water cooler talk about interest rates, trade deficits, debt levels, etc. But there’s a danger in converting thought into action.
The U.S. economy is an extraordinarily complex system, with 300 million people acting in their own self-interest and responding to each others’ actions, government incentives, and external shocks. And that’s before we factor in our increasingly frequent interactions with the rest of the world.
Trying to time the market is futile. Set up a financial plan that allocates your assets based on your risk tolerance, so that you can sleep well at night.
3. You have plenty of time to identify and recognize exceptional companies
Lynch mentions that Wal-Mart was a 10-bagger — i.e. its stock rose to 10 times its initial price — 10 years after it went public. Even if you had gotten in after waiting a decade, though, you’d be sitting on a 100-bagger.
Some would argue that it’s still not too late to get in on Wal-Mart, decades after going public. While the company’s no longer a monster growth story, it continues to crank out 20% returns on equity year after year. That type of consistent ROE is a huge positive indicator of management’s ability to effectively allocate capital.
A similar tale can be told about Microsoft’s early growth years, right on down to its still-impressive current return on equity (42%).
And Amazon.com, though only 13 years old as a public company, has seen its stock double since its 10th birthday. Of these three, it’s the only company still trading at growth-stock valuations. Bulls are hitching their wagon to Amazon.com’s ability to expand its role as the premier online retailer, and its upside in the cloud-computing space.
The lesson of Wal-Mart, Microsoft, and Amazon.com? You don’t need to immediately jump into the hot stock you just heard about. There’s plenty of time to do your research first. See No. 1.
4. Avoid long shots
Lynch claims he was 0-for-25 in investing in companies that had no revenue but a great story. Remember, the guy who averaged 29% returns went oh-fer on long shots. You and I are unlikely to do much better.
Use companies with proven track records as our baseline. ExxonMobil, IBM, and Procter & Gamble are selling for 9, 11, and 16 times forward earnings, respectively. This is what the market is charging for solid, low-to-moderate-growth companies that dominate (or at least co-dominate) their spaces. Expect to pay more for higher-growth prospects, but make sure the risk-reward trade-off on an unproven company is worth it.
5. Good management is very important; good businesses matter more
The pithier Lynchism is: “Go for a business that any idiot can run – because sooner or later, any idiot is probably going to run it.”
For a prototypical example of a so-easy-a-caveman-could-run-it company, think the aforementioned Procter & Gamble.
6. Be flexible and humble, and learn from mistakes
Lynch has said: “In this business, if you’re good, you’re right six times out of 10. You’re NEVER going to be right nine times out of 10.”
You’re going to be wrong. Diversification and the ability to honestly analyze your mistakes are your best tools to minimize the damage.
7. Before you make a purchase, you should be able to explain why you’re buying
Specifically, you should be able to explain your thesis in three sentences or less. And in terms an 11-year-old could understand. Once this simply stated thesis starts breaking down, it’s time to sell.
8. There’s always something to worry about.
Lynch noted that investors made a killing in the 1950s despite the very new threat of nuclear war. There are plenty of fears to choose from right now, but we’ve survived a Great Depression, two world wars, an oil crisis, and double-digit inflation.
Always remember, if our worst fears come true, there’ll be a heck of a lot more to worry about than some stock market losses. Lynch’s parting shot is that investing is more about stomach than brains.
Peter’s principles in action
So there you have it. These are the 8 principles Peter Lynch used to bring the market to its knees. They seem simple, but trust me, sticking to them is harder than it sounds.
Source: Motley Fool
Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.
WARNING!! Is The 2nd Tsunami Wave Here Or Is This Just A Normal Correction?
The 1st Tsunami wave in the stock market happened in 2008. Prior to that, bubbles were observed in February 2007(Singapore stocks dropped by 11.6% because of the 15% decline in China market) and July 2007(further 19.7% slide when MM Lee warned us about the U.S. sub-prime problems and government’s anti-speculative measures to cool the red-hot property market). The final bubble burst in October 2007 and that signalled the start of the 62% decline in STI!!
Since March 2009, we have seen a tremendous bull run, driven more by stimulus plans and bailouts from central governments around the whole world, rather than a solid recovery in the real economy. This year 2010 alone, we have just seen a 9.6% correction in January and till to date a 8.6% decline in STI in 3weeks. I believe the damage has been done, we MAY have just seen the start of the 2nd wave of Tsunami or very strong signals that we are not too far away from it. Several reasons:
1) PIIGS(Portugal, Ireland, Italy, Greece and Spain) debts crisis,
2) U.S. total funded and unfunded debt amounting to about US$130 TRILLION, it may go into double dip recession in 2011
3) China economy maybe over-heating and possible property bubble there
4) Goldman Sach criminal fraud charges imposed by SEC
5) Dramatic increase in Option Adjustable Rate Mortgage(OARM), Agency and Alt-A Monthly Mortgage Resets in U.S. 2nd wave of mortgage resets are around the corner and they are peaking in 2011, thus causing more foreclosures in U.S.
6) Terrorism (a major terrorist activity occur around once every 8-9 years, based on the book “The Great Depression Ahead” by Harry S. Dent, Jr. The last major terrorist attack was on 11 September, 2001.
Fundamentally, Singapore is well prepared for this financial crisis :
1) Opening of 2 Integrated Resorts (IR)
2) Youth Olympic will be held on 14 – 26 August this year
3) Possibility of General Election happening in 2010 (based on history, Singapore stock market has normally performed well prior to the election)
But we have to understand that Singapore is just a little red dot which relies very much on export, we will be badly hit if huge economies like U.S., Europe, Japan, China…etc were to run into crisis again, like what had happened in 2007 and 2008.
Personally, I believe we MAY have just seen the start of the 2nd wave of Tsunami or very strong signals that we are not too far away from it, rather than just any normal correction. I am not saying that the stock market is going to straightaway collapse from here, it may rally along the way and people should be selling into rallies, rather than buying aggressively into the market. If the market slides further, it will be a good time to start doing short-selling to ride the downtrend. Precious metals, like gold and silver are also good instruments for us to protect our wealth and hedge against inflation, which is slowly showing its ugly face.
Above is just my personal view and I have to admit that I may be wrong! I would rather be cautious and defensive now than to be an aggressive buyer into the market. The downside risk is much much higher than the upside potential at this point of the time. Please be careful!
Disclaimer: Please be informed that the above mentioned stocks/indexes/investment instruments are solely for the purpose of education; it is NOT a recommendation or an invitation to trade/invest. For trading/investment advice, please speak to your remisier, dealer representative or financial adviser. Please understand that there is risk in every trade/investment venture, know your risk first before you venture into any of them.
Gerald Celente-There Is NO Economic Recovery – Its A COVERUP!!
Gerald Celente, a trend expert, visionary, keynote speaker, is trusted worldwide as the foremost authority on forecasting, analyzing and tracking trends. Celente is the publisher of the Trends Journal® and author of Trends 2000 and Trend Tracking. He is on the record for accurately forecasting and naming the current “Great Recession”; for forecasting the 1987 Stock Market Crash, the Dot-com bust, Gold Bull Run to Begin, 2001 Recession, the Real Estate bubble, the “Panic of ‘08″, Tax Revolts, the coming “Greatest Depression” and many more social, economic, business, consumer and geopolitical trends…
Warren Buffett’s 8 Predictions for 2008 – And Beyond
We saw 10 of the WORST predictions in my previous post “The Worst Prediction About 2008″, now let’s take a look at the 2008 predictions made by Warren Buffett, the world’s greatest investor of our lifetime.
Warren Buffett became 1 of the wealthiest people in the world by making predictions and putting money behind those predictions. Every time he buys a stock or a business or some other investment, he’s forecasting the future. Judging by the incredible returns of his holding company Berkshire Hathaway, Buffett and his colleagues are very good at making those predictions. Of course, it helps when you can give your predictions plenty of time to come true. That’s 1 reason Buffett’s favorite holding period for investments in “outstanding businesses with outstanding managements” is “forever”. After all, ”We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.”
1. Recessions can’t be avoided forever. As 2007 was coming to a close, Buffett said if unemployment picks up significantly, the “dominoes” will fall and the U.S. economy will fall into recession in 2008. He was right, but not alarmed. “It is the nature of capitalism to periodically have recessions. People overshoot.”
2. We’ll survive current and future recessions just as we’ve survived past problems. As Buffett had said in August, 2007, (and repeated throughout 2008): ”We’ve got a wonderful economy… There’s never been anything like that in the history of the world. We live 7 times better than the people did a century ago on average… We’ve had problems all along. If you look at the last century, we had that Great Depression and World War II, we had the Cold War, we had the atomic bomb, but the country did well.”
3. Recessions will create opportunities. “I made by far the best buys I’ve ever made in my lifetime in 1974. And that was a time of great pessimism and the oil shock and stagflation and all those sort of things. But stocks were cheap.” Fast-forward to October 2008, and Buffett’s “Why I’m Buying U.S. Stocks Now”.
4. All stocks won’t be cheap. Like Ted Williams waiting for the right pitch, a successful investor waits for the right stock at the right price, and it doesn’t happen every day. “What’s nice about investing is you don’t have to swing at pitches. You can watch pitches come in one inch above or one inch below your navel, and you don’t have to swing. No umpire is going to call you out.” You get in trouble, Buffett says, when you listen to the crowd chanting “Swing, batter, swing!”
5. The crowd will make mistakes. Buffett cites this piece of advice from his mentor Benjamin Graham: “You’re neither right nor wrong because other people agree with you. You’re right because your facts are right and your reasoning is right—and that’s the only thing that makes you right. And if your facts and reasoning are right, you don’t have to worry about anybody else.”
6. Investors will mistakenly think falling stock prices are bad. ”If they reduce the price of hamburgers at McDonald’s today I feel terrific. Now I don’t go back and think, gee, I paid a little more yesterday. I think I’m going to be buying them cheaper today. Anything you’re going to be buying in the future, you want to have get cheaper.”
7. Good times will prompt bad decisions. In his 2000 Letter to Berkshire shareholders, Buffett compared the crowd that buys big when prices are high to Cinderella at the ball. “They know that overstaying the festivities – that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future – will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.”
8. There will be more dancing at another wild party followed by another painful hangover. Looking back at the Internet bubble, Buffett is quoted as saying, “The world went mad. What we learn from history is that people don’t learn from history.”
Looking at the above 8 time-tested predictions and wisdom of Warren Buffett, he simply beat those clowns and jokers mentioned in “The Worst Prediction About 2008″ hands-down! No question about that! This is what I called: master versus amateurs 
Cheers 
Source: CNBC
10 Eventful Days in 2008
WHAT A YEAR FOR 2008!! In my 10 years of investing experience, I have never seen anything of this magnitude and severeness 
12 months of chaos and never-ending crises that destroyed wealth and shook the business and financial sector unlike anything since the Great Depression of the 1930’s. Let’s do a recap before 2008 draws to an end and a brand new year begins in 2009:
(1) 2 Jan – Asian market meltdown
ASIAN stock markets were battered, with STI plunging 187.1 points, or 6%, its worst one-day fall since October 1987. Similar carnage struck the region with HK’s Hang Seng Index suffering its biggest fall since the Sept 11, 2001 terrorist attacks. Traders blamed it on hedge funds trimming their positions across the region and intensifying fears of a US economic recession. 1 day later, the US Federal Reserve slashed interest rates to try to stop the global rout. It worked, as Asia’s stocks rallied sharply in reaction, with the Hang Seng Index soaring 10.7% in its biggest 1-day point gain ever. The turbulence was so great that equity experts dubbed that week as the ‘5 days that shook the market’.
(2) 16 March – Bear Stearns bailout
WALL Street and the rest of the world felt the year’s first major financial tremor when Bear Stearns, the fifth-largest investment bank, faced near-collapse. Bear Stearns had invested heavily in US sub-prime mortgage instruments and other securities, which had fallen sharply in value. It survived – sort of – when the US Federal Reserve stepped in to facilitate a fire sale to JP Morgan. The crisis also sparked fears and rumours that Lehman Brothers might also be in financial trouble and sent stock markets down sharply. In late May, Bear Stearns vanished into Wall Street history when its shareholders approved its sale to JP Morgan at US$10 a share. 1 year earlier it was trading as high as US$170 a share.
(3) 3 July – oil hits almost US$150
THE price of black gold soared to a record US$147 a barrel that day, fuelled by a larger-than-expected fall in US stockpiles and the threat of conflict with Iran. The slumping US dollar and speculation from hedge funds further aided oil’s dizzying rise and prompted a Goldman Sachs analyst to forecast that crude could hit US$200 in the next 2 years. But fears of shrinking demand caused by a global recession have sent oil plunging to near US$30 earlier this month – its lowest level in 5 years. The retreat has brought a smile to consumers and businesses BUT the the good times may not last for long, as the Organisation of Petroleum Exporting Countries(OPEC) has promised sharp supply cuts to push oil back to US$75.
(4) 7 Sept – Fannie Mae, Freddie Mac rescued
US MORTGAGE giants Fannie Mae and Freddie Mac were handed a lifeline by the US government, which committed up to US$200 billion (S$290 billion) to boost the much-needed capital the pair failed to get from private investors. The government also offered to buy back mortgage-backed securities and to provide Fannie and Freddie with a liquidity support facility of unlimited size. Their failure was not an option, as they own or guarantee almost half of the country’s US$12 trillion home mortgage debt. US Treasury Secretary Henry Paulson said they were ’so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe’. Asian financial institutions and central banks – especially in Japan and China – hold billions of dollars worth of debt securities issued by both firms. So the bailout brought lots of cheer to the region, with investors propelling markets from Tokyo to Singapore to their best showing in months.
(5) 15 Sept – Lehman Brothers goes under, Merrill Lynch sold
A FINANCIAL tsunami was sparked when Lehman Brothers – a 158-year-old Wall Street stalwart and the fourth-largest US investment bank – was brought to its knees by the sub-prime mortgage crisis. Facing a mountain of debts, it filed for bankruptcy protection that fateful day – making it the biggest such filing in history. Hours later, the third-biggest investment bank, Merrill Lynch, sought refuge in a US$50 billion takeover by Bank of America (BoA), shocking analysts worldwide. Merrill, a venerable 94-year-old Wall Street institution, agreed to sell itself to BoA for US$29 a share in an all-stock deal. These events created shockwaves around the world and sent stock markets into free fall as investors fled to the safety of government bonds and gold. Even investors in Singapore were not spared. Hundreds of people here, including housewives and retirees, had invested in structured products linked to Lehman, eg. DBS High Note 5…etc. Most have seen their savings largely diminished. Even eight town councils here had about $16 million invested in troubled structured products, which included Minibonds linked to Lehman.
(6) 17 Sept – AIG nearly collapses
ANOTHER instance of the financial crisis hitting Singapore’s shores came when troubled US insurer AIG American came to the brink of bankruptcy after ratings agencies cut its debt ratings. That forced the already cash-strapped firm to immediately raise a further US$14.5 billion to cover its obligations. Scores of Singaporean policyholders besieged AIA’s customer service centre in Finlayson Green to surrender their insurance policies and get their money back. But disaster was averted a day later, when the US government intervened with a US$85 billion rescue loan, saying the insurer’s failure could hurt already stressed financial markets and the economy. Back home, AIA Singapore also assured policyholders that it has enough funds to meet its obligations. It also moved with the Monetary Authority of Singapore(MAS) to calm fears that AIG was so short of ready cash that it would reduce the capital of its subsidiaries or tap into its booming Asian operations for cash.
(7) 27 Oct – Bloody October
STOCK markets, especially those in Asia, were savaged in late October. The carnage was especially bad on Oct 27, when investors dumped regional stocks on fears that government action would not be enough to stave off a deep global recession. HK’s Hang Seng Index saw its biggest drop since 1997, while Japan’s Nikkei 225 index plunged to a 26-year low. In Singapore, $123.5 billion was erased from the market value of stocks that month, with the STI plunging as low as 1,473 points. According to financial information provider Standard & Poor’s Index Services, world equity markets registered their worst month in history, as investors lost an estimated US$5.79 trillion in that time.
(8) 1 Dec – US officially in recession
ARGUABLY the world’s worst-kept secret was confirmed when the National Bureau of Economic Research (NBER) – a private, non-profit research body – concluded that the US has been in recession since December last year. The last time the US was in a recession was in 2001, and this would make it the longest contraction since 1982. If the recession lasts for 5 more months, it will become the most lengthy since the Great Depression. Unusually, the NBER does not define a recession as 2 straight quarters of shrinking economic output. Instead, it looks for a decline in economic activity, spread across the economy, and lasting more than a few months. Some economists predict that the US economy will contract by as much as 5% in the current 4th quarter. The US joined other economies officially in recession, including Singapore, Hong Kong, Japan, New Zealand, Ireland, Italy, Germany and Britain. The euro region and Japan both fell into a slump in the 2nd quarter of this year, making it the first simultaneous recession in all 3 regions in the post-war era.
(9) 11 Dec – Madoff scandal
INVESTORS big and small were rocked when top Wall Street broker Bernard Madoff was arrested and charged with fraud in one of the biggest-ever such cases. This allegedly involved a loss of up to US$50 billion in cash and securities. The ex-Nasdaq chairman was accused of running a ‘giant Ponzi scheme’ – a pyramid scheme in which early investors are paid their promised high returns with money pulled in from newer investors. Big names caught in the scam included Britain’s Royal Bank of Scotland, HSBC Holdings and Man Group, France’s BNP Paribas, Spain’s Grupo Santander and Switzerland’s Union Bancaire Privee and Benbassat & Cie. Even local insurer Great Eastern Holdings said it has $64 million of indirect exposure to Madoff’s funds. Earlier this week, a French fund manager who lost more than US$1 billion of his clients’ money in the scam committed suicide at his Manhattan office.
(10) 16 Dec – Fed cuts interest rate to near ZERO
THE US Federal Reserve made an unprecedented move, cutting its target rate for overnight loans between banks to the lowest level since it started publishing the target in 1990. The Fed slashed rates from 1% to a target range of 0% to 0.25%, and said it would keep rates ‘exceptionally low’ for some time. With no room to cut rates further, the spotlight has now shifted to stimulus packages, particularly the ambitious one being drawn up by US President-elect Barack Obama. Economists expect the FED to expand its purchases of assets to enlarge its balance sheet. This could include buying corporate debt or state municipal bonds to ease the credit squeeze in those markets. However, they also warn that the near-zero interest rate could push the US into a liquidity trap like the one experienced by Japan in the 1990s, when the economy simply refused to respond to rate cuts.
Will 2009 be a better year than 2008? I certainly hope so!! My heart hope so, BUT my head think otherwise. Nevertheless, it is always good to be positive-thinking, right? Wishing everyone of you guys out there a Happy, Healthy and Prosperous 2009!!
Cheers
Source: Straits Times
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