Stock Trends Reporter

What Does Greece Mean to You? - John Mauldin's Weekly E-Letter

2010-03-27T12:49:00.004-04:00

Always well-written, John Maudlin’s weekly newsletter is a joy to read. This week’s letter should be shared, though. It gives us all a view of the precarious economic moment we now face.

Sat, March 27, 2010 2:13:55 AM

In this issue:
What Does Greece Mean to Me, Dad?
Dear Kids,
Ubiquity, Complexity Theory, and Sandpiles
Fingers of Instability
Washington DC, Albuquerque, and Guy Forsythe

"To trace something unknown back to something known is alleviating, soothing, gratifying and gives moreover a feeling of power. Danger, disquiet, anxiety attend the unknown - the first instinct is to eliminate these distressing states. First principle: any explanation is better than none... The cause-creating drive is thus conditioned and excited by the feeling of fear..." Friedrich Nietzsche

"Any explanation is better than none." And the simpler, it seems in the investment game, the better. "The markets went up because oil went down," we are told, except when it went up there was another reason for the movement of the markets. We all intuitively know that things are far more complicated than that. But as Nietzsche noted, dealing with the unknown can be disturbing, so we look for the simple explanation.

"Ah," we tell ourselves, "I know why that happened." With an explanation firmly in hand, we now feel we know something. And the behavioral psychologists note that this state actually releases chemicals in our brains that make us feel good. We become literally addicted to the simple explanation. The fact that what we "know" (the explanation for the unknowable) is irrelevant or even wrong is not important to the chemical release. And thus we look for reasons.

How does an event like a problem in Greece (or elsewhere) affect you, gentle reader? And I mean, affect you down where the rubber hits your road. Not some formula or theory about the velocity of money or the effect of taxes on GDP. That is the question I was posed this week. "I want to understand why you think this is so important," said a friend of Tiffani. So that is what I will attempt to answer in this week's missive, as I write a letter to my kids trying to explain the nearly inexplicable.

But first, let me note to Conversations subscribers that we have posted a Conversation I recently did with Professors Ken Rogoff and Carmen Reinhart, authors of This Time It's Different, which has my vote for most important book of the last few years.

Last week we also posted a Conversation with two noted hedge-fund managers, Kyle Bass of Hayman Advisors (and his staff) here in Dallas and Hugh Hendry of the Eclectica Fund in London. Our discussion centered on what we all think has the potential to be the next Greece, but on a far more serious level.

That got a lot of positive response. Herb wrote, "Wow. What a great discussion. What smart guests, how little BS. Congratulations. It's the best of your Conversations that I've listened to."

And ACK wrote: "Wow!! Just the most important discussion I have been treated to as an investor and fund manager this year or last. Your product is dreadfully underpriced, as it delivers more value and education than almost any other subscription that I have... Thanks so much... This particular conversation was just mind-blowing!"

Actually, we get that last comment almost every issue, as we somehow seem to connect the dots for different listeners. When we started, I promised to do 6-8 a year, and we have already posted 5 timely Conversations in the first 3 months of this year, including my special Biotech Series as well as the Geopolitical Series with George Friedman.

For new readers, Conversations with John Mauldin is my one subscription service. While this letter will always be free, we have created a way for you to "listen in" on my conversations (or read the transcripts) with some of my friends, many of whom you will recognize and some whom you will want to know after you hear our conversations. Basically, I call one or two friends each month and, just as we do at dinner or at meetings, we talk about the issues of the day, back and forth, with give and take and friendly debate. I think you will find it enlightening and thought-provoking and a real contribution to your education as an investor.

And as you can see, I can get some rather interesting people to come to the table. Current subscribers can renew for a deeply discounted $129, and we will extend that price to new subscribers as well. To learn more, go to http://www.johnmauldin.com/newsletters2.html. Click on the Subscribe button, and join me and my friends for some very interesting Conversations. (I know the price says $199 on the site, but for now you will only be charged for $129 – I promise.)

And we are starting a renewal cycle with the subscriptions and have found a small bug in the software we purchased to handle them. Renewals are therefore not instantaneous. It may take a day, and for that we apologize. We are fixing it.

Oh, and by the way, since the Conversation on Japan was so well-received, the next one will be on China. Two brilliant managers (maybe three) with VERY divergent views. I may just toss in a few grenade-type questions and stand back and watch the show. And now on to this week's letter.

What Does Greece Mean to Me, Dad?

Tiffani had been talking with her friends. A lot of them read this letter, and they were asking, "Ok, I get that Greece is a problem. But what does that mean for me here?"

The same day, a friend told me about a conversation she had with her 17-year-old Cal Tech daughter and her daughter's boyfriend, who is also headed to Cal Tech. These are really smart kids, and they were asking her about some of my recent letters. "We understand what's he saying, but we just don't see what it means." (For what it's worth, the boyfriend wants to grow up to be Mohammed El-Erian of PIMCO. Go figure; I just wanted to be Mickey Mantle.)

Twice in one day is a sign, I am sure, so I will try and see if I can explain. And since all my kids must be wondering the same thing, this is kind of letter from Dad to see if I can help them understand why things are not going as well as they would like.

(A little background. I have seven kids, five of whom are adopted. A fairly colorful family, so to speak. Pictures at the end of the letter. Ages almost 16 through 33. Daughter Tiffani runs my business and, except for the youngest boy, they are all out on their own. Four are married or attached. It is not easy to watch them struggle to make ends meet, but Dad is proud. But listening to their stories, and the stories of their friends, help keep me in the real world.)

Dear Kids,

I know what a struggle it has been for most of you, and now three of you have a kid of your own. Expensive little hobbies, aren't they? I know that you read my letter (well, except for Trey) and wonder what it means to you trying to pay your bills. Let me see if I can make a connection from the world of economics to the world of paying your bills. Sadly, what I am going to say is not going to make you feel any better, but reality is what it is. We'll get through it together.

While life looks pretty good for Dad now, when I graduated from seminary in December of 1974 unemployment was at 8%, on its way to 9% a few months later. We lived in a small mobile home, which seemed wonderful at the time. I was proud of it. We scrimped and got by. My first job was a dead end, so I left after a few months. I guess I was lucky that no one would hire me, because I had to figure out how to make it on my own. All I really knew was the printing business I had grown up in, so I started brokering printing. Pretty soon I was doing just direct mail, and then designing direct mail. But there was never enough money. We were still in that mobile home six years later.

And prices were going up like crazy. We had inflation. I remember going to a bank in the late '70s and borrowing money for my business at 18%, so I could buy paper for a job I had sold. Forget about borrowing for a new home or car. All I knew was that I was struggling to make ends meet (with a new kid!). There were a lot of nights where I would wake up at two in the morning with panic attacks about whether I could make payroll or pay bills until someone paid me. I didn't understand that what the Fed and the government were doing was causing high inflation and unemployment.

I had a bank line I used to buy paper with. One day the bank abruptly cancelled that line and demanded their money, which I didn't have – all I had was a warehouse full of paper and a contract that said I had a year to pay for it. The bank didn't care. I told them they would just have to wait. I swear, they actually called my mother and told her they would ruin me if she didn't pay that $10,000 line. She was scared for me (after all, you had to be able to trust your banker) and paid it without asking me. Turned out the bank finally went bankrupt later in the year. They were just desperate and trying anything they could do to get money, so they wouldn't lose everything. They did anyway.

In short, times were not all that good, but we got through it. And now, 35 years later, it seems like déjà vu all over again. Every time we talk it seems like someone we know has lost a job.

And so how do the problems in a small country like Greece make a difference to you? There is a connection, but it's different than the old "hip bone is connected to the thigh bone to the knee bone" thing. It is a lot more complicated. Let's go back to a letter I wrote four years ago, talking about fingers of instability. One of the best analogies your Dad has ever written, according to many of his 1 million friends. So read with me a few pages, and then we'll get back to Greece.

Ubiquity, Complexity Theory, and Sandpiles

We are going to start our explorations with excerpts from a very important book by Mark Buchanan called Ubiquity, Why Catastrophes Happen. I HIGHLY recommend it to those of you who, like me, are trying to understand the complexity of the markets. Not directly about investing, although he touches on it, it is about chaos theory, complexity theory, and critical states. It is written in a manner any layman can understand. There are no equations, just easy-to-grasp, well-written stories and analogies. http://www.amazon.com/exec/obidos/ASIN/0609809989/frontlinethou-20

We all had the fun as kids of going to the beach and playing in the sand. Remember taking your plastic buckets and making sandpiles? Slowly pouring the sand into ever-bigger piles, until one side of the pile started an avalanche?

Imagine, Buchanan says, dropping just one grain of sand after another onto a table. A pile soon develops. Eventually, just one grain starts an avalanche. Most of the time it is a small one, but sometimes it gains momentum and it seems like one whole side of the pile slides down to the bottom.

Well, in 1987 three physicists, named Per Bak, Chao Tang, and Kurt Weisenfeld, began to play the sandpile game in their lab at Brookhaven National Laboratory in New York. Now, actually piling up one grain of sand at a time is a slow process, so they wrote a computer program to do it. Not as much fun, but a whole lot faster. Not that they really cared about sandpiles. They were more interested in what are called nonequilibrium systems.

They learned some interesting things. What is the typical size of an avalanche? After a huge number of tests with millions of grains of sand, they found out that there is no typical number. "Some involved a single grain; others, ten, a hundred or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. At any time, literally anything, it seemed, might be just about to occur."

It was indeed completely chaotic in its unpredictability. Now, let's read these next paragraphs slowly. They are important, as they create a mental image that helps me understand the organization of the financial markets and the world economy.

"To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, 'ready to go,' color it red.

"What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions.

"But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever."

Something only a math nerd could love? Scientists refer to this as a critical state. The term critical state can mean the point at which water would go to ice or steam, or the moment that critical mass induces a nuclear reaction, etc. It is the point at which something triggers a change in the basic nature or character of the object or group. Thus, (and very casually for all you physicists) we refer to something being in a critical state (or use the term critical mass) when there is the opportunity for significant change.

"But to physicists, [the critical state] has always been seen as a kind of theoretical freak and sideshow, a devilishly unstable and unusual condition that arises only under the most exceptional circumstances [in highly controlled experiments]... In the sandpile game, however, a critical state seemed to arise naturally through the mindless sprinkling of grains."

Then they asked themselves, could this phenomenon show up elsewhere? In the earth's crust, triggering earthquakes; in wholesale changes in an ecosystem or a stock market crash? "Could the special organization of the critical state explain why the world at large seems so susceptible to unpredictable upheavals?" Could it help us understand not just earthquakes, but why cartoons in a third-rate paper in Denmark could cause worldwide riots?

Buchanan concludes in his opening chapter, "There are many subtleties and twists in the story ... but the basic message, roughly speaking, is simple: The peculiar and exceptionally unstable organization of the critical state does indeed seem to be ubiquitous in our world. Researchers in the past few years have found its mathematical fingerprints in the workings of all the upheavals I've mentioned so far [earthquakes, eco-disasters, market crashes], as well as in the spreading of epidemics, the flaring of traffic jams, the patterns by which instructions trickle down from managers to workers in the office, and in many other things.

"At the heart of our story, then, lies the discovery that networks of things of all kinds – atoms, molecules, species, people, and even ideas – have a marked tendency to organize themselves along similar lines. On the basis of this insight, scientists are finally beginning to fathom what lies behind tumultuous events of all sorts, and to see patterns at work where they have never seen them before."

Now, let's think about this for a moment. Going back to the sandpile game, you find that as you double the number of grains of sand involved in an avalanche, the likelihood of an avalanche is 2.14 times as unlikely. We find something similar in earthquakes. In terms of energy, the data indicate that earthquakes simply become four times less likely each time you double the energy they release. Mathematicians refer to this as a "power law," or a special mathematical pattern that stands out in contrast to the overall complexity of the earthquake process.

Fingers of Instability

So what happens in our game? "... after the pile evolves into a critical state, many grains rest just on the verge of tumbling, and these grains link up into ‘fingers of instability' of all possible lengths. While many are short, others slice through the pile from one end to the other. So the chain reaction triggered by a single grain might lead to an avalanche of any size whatsoever, depending on whether that grain fell on a short, intermediate or long finger of instability."

Now, we come to a critical point in our discussion of the critical state. Again, read this with the markets in mind:

"In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size."

Now let's couple this idea with a few other concepts. First, one of the world's greatest economists (who sadly was never honored with a Nobel), Hyman Minsky, points out that stability leads to instability. The longer a given condition or trend persists (and the more comfortable we get with it), the more dramatic the correction will be when the trend fails. The problem with long-term macroeconomic stability is that it tends to produce highly unstable financial arrangements. If we believe that tomorrow and next year will be the same as last week and last year, we are more willing to add debt or postpone savings for current consumption. Thus, says Minsky, the longer the period of stability, the higher the potential risk for even greater instability when market participants must change their behavior.

Relating this to our sandpile, the longer that a critical state builds up in an economy or, in other words, the more fingers of instability that are allowed to develop connections to other fingers of instability, the greater the potential for a serious "avalanche."

And that's exactly what happened in the recent credit crisis. Consumers all through the world's largest economies borrowed money for all sorts of things, because times were good. Home prices would always go up and the stock market was back to its old trick of making 15% a year. And borrowing money was relatively cheap. You could get 2% short-term loans on homes, which seemingly rose in value 15% a year, so why not buy now and sell a few years down the road?

Greed took over. Those risky loans were sold to investors by the tens and hundreds of billions all over the world. And as with all debt sandpiles, the fault lines started to show up. Maybe it was that one loan in Las Vegas that was the critical piece of sand; we don't know, but the avalanche was triggered.

You probably don't remember this, but Dad was writing about the problems with subprime debt way back in 2005 and 2006. But as the problem actually emerged, respected people like Ben Bernanke (the chairman of the Fed) said that the problem was not all that big, and that the fallout would be "contained." (I bet he wishes he could have that statement back!)

But it wasn't contained. It caused banks to realize that what they thought was AAA credit was actually a total loss. And as banks looked at what was on their books, they wondered about their fellow banks. How bad were they? Who knew? Since no one did, they stopped lending to each other. Credit simply froze. They stopped taking each other's letters of credit, and that hurt world trade. Because banks were losing money, they stopped lending to smaller businesses. Commercial paper dried up. All those "safe" off-balance-sheet funds that banks created were now folding. Everyone sold what they could, not what they wanted to, to cover their debts. It was a true panic. Businesses started laying off people, who in turn stopped spending as much.

As you saw from my earlier story about my bank experience, banks may do what unreasonable things when they get into trouble. (Speaking of which, my smallish Texas bank, where I have been for almost 20 years, just cancelled my very modest, unused credit line last month, and told me that letters of credit will not be rewritten without 100% cash against them. Not to worry, Dad is actually in the best shape of his life, business-wise, knock on wood. I hadn't talked personally to a banker in years. When I asked the young clerk on the phone, "What's going on?" he said it was just an order from his director. I switched banks last week, as I can smell a bank in trouble. And I again have a credit line – which I hope not to use.)

But the fact is, we need banks. They are like the arteries in our bodies; they keep the blood (money) flowing. And when our arteries get hard, we can be in danger of heart attacks. And it's going to get worse, as banks are going to lose more money on their commercial real estate loans. Commercial real estate is down some 40% around the country.

There are a lot of books that try to pinpoint the cause of our current crisis. And some make for fun reading, like a good mystery novel. You can blame it on the Fed or the bankers or hedge funds or the government or ratings agencies or any number of culprits.

Let me be a little controversial here. The blame game that is now going on is in many ways way too simplistic. The world system survived all sorts of crises over the recent decades and bounced back. Why is now so different?

Because we are coming to the end of a 60-year debt supercycle. We borrowed (and not just in the US) like there was no tomorrow. And because we were so convinced that all this debt was safe, we leveraged up, borrowing at first 3 and then 5 and then 10 and then as much as 30 times the actual money we had. And we convinced the regulators that it was a good thing. The longer things remained stable, the more convinced we became they would remain that way. The following chart shows how our sandpile ended up. It's not pretty.

I know Dad always say it is never "different," but in a sense this time is really different from all the other crises we have gone through since the Great Depression that your Less-Than-Sainted Granddad used to talk about. What the very important book by professors Reinhart and Rogoff shows is that every debt crisis always ends this way, with the debt having to be paid down or written off or defaulted upon. That part is never different. One way or another, we reduce the debt. And that is a painful process. It means that the economy grows much slower, if at all, during the process.

And while the government is trying to make up the difference for consumers who are trying to (or being forced to) reduce their debt, even governments have limits, as the Greeks are finding out.

If it were not for the fact that we are coming to the closing innings of the debt supercycle, we would already be in a robust recovery. But we are not. And sadly, we have a long way to go with this deleveraging process. It will take years.

You can't borrow your way out of a debt crisis, whether you are a family or a nation. And as too many families are finding out today, if you lose your job you can lose your home. What were once very creditworthy people are now filing for bankruptcy and walking away from homes, as all those subprime loans going bad put homes back onto the market, which caused prices to fall, which caused an entire home-construction industry to collapse, which hurt all sorts of ancillary businesses, which caused more people to lose their jobs and give up their homes, and on and on.

It's all connected. We built a very unstable sandpile and it came crashing down and now we have to dig out from the problem. And the problem was too much debt. It will take years, as banks write off home loans and commercial real estate and more, and we get down to a more reasonable level of debt as a country and as a world.

And here's where I have to deliver the bad news. It seems we did not learn the lessons of this crisis very well. First, we have not fixed the problems that made the crisis so severe. We have not regulated credit default swaps, for instance. And European banks are still highly leveraged.

Why is Greece important? Because so much of their debt is on the books of European banks. Hundreds of billions of dollars worth. And just a few years ago this seemed like a good thing. The rating agencies made Greek debt AAA, and banks could use massive leverage (almost 40 times in some European banks) and buy these bonds and make good money in the process. (Don't ask Dad why people still trust rating agencies. Some things just can't be explained.)

Except, now that Greek debt is risky. Today, it appears there will be some kind of bailout for Greece. But that is just a band-aid on a very serious wound. The crisis will not go away. It will come back, unless the Greeks willingly go into their own Great Depression by slashing their spending and raising taxes to a level that no one in the US could even contemplate. What is being demanded of them is really bad for them, but they did it to themselves.

But those European banks? When that debt goes bad, and it will, they will react to each other just like they did in 2008. Trust will evaporate. Will taxpayers shoulder the burden? Maybe, maybe not. It will be a huge crisis. There are other countries in Europe, like Spain and Portugal, that are almost as bad as Greece. Great Britain is not too far behind.

The European economy is as large as that of the US. We feel it when they go into recessions, for many of our largest companies make a lot of money in Europe. A crisis will also make the euro go down, which reduces corporate profits and makes it harder for us to sell our products into Europe, not to mention compete with European companies for global trade. And that means we all buy less from China, which means they will buy less of our bonds, and on and on go the connections. And it will all make it much harder to start new companies, which are the source of real growth in jobs.

And then in January of 2011 we are going to have the largest tax increase in US history. The research shows that tax increases have a negative 3-times effect on GDP, or the growth of the economy. As I will show in a letter in a few weeks, I think it is likely that the level of tax increases, when combined with the increase in state and local taxes (or the reductions in spending), will be enough to throw us back into recession, even without problems coming from Europe. (And no, Melissa, that is not some Republican research conspiracy. The research was done by Christina Romer, who is Obama's chairperson of the Joint Council of Economic Advisors.)

And sadly, that means even higher unemployment. It means sales at the bar where you work, Melissa, will fall farther as more of your friends lose jobs. And commissions at the electronics store where you work, Chad, will be even lower than the miserable level they're at now. And Henry, it means the hours you work at UPS will be even more difficult to come by. You are smart to be looking for more part-time work. Abbi and Amanda? People may eat out a little less, and your fellow workers will all want more hours. And Trey? Greece has little to do with the fact that you do not do your homework on time.

And this next time, we won't be able to fight the recession with even greater debt and lower interest rates, as we did this last time. Rates are as low as they can go, and this week the bond market is showing that it does not like the massive borrowing the US is engaged in. It is worried about the possibility of "Greece R Us."

Bond markets require confidence above all else. If Greece defaults, then how far away is Spain or Japan? What makes the US so different, if we do not control our debt? As Reinhart and Rogoff show, when confidence goes, the end is very near. And it always comes faster than anyone expects.

The good news? We will get through this. We pulled through some rough times as a nation in the '70s. No one, in 2020, is going to want to go back to the good old days of 2010, as the amazing innovations in medicine and other technologies will have made life so much better. You guys are going to live a very long time (and I hope I get a few extra years to enjoy those grandkids as well!). In 1975 we did not know where the new jobs would come from. It was fairly bleak. But the jobs did come, as they will once again.

The even better news? You guys are young, still babies, really. Hell, I didn't have a good year income-wise until I was in my mid-30s, and that was an accident (I literally won a cellular telephone lottery). And it has not always been smooth since then, as you know. But we get through bad stuff. That is what we do as a family and as the larger family of our nation and world.

So, what's the final message? Do what you are doing. Work hard, save, watch your spending, and think about whether your job is the right one if we have another recession. Pay attention to how profitable the company you work for is, and make yourself their most important worker. And know that things will get better. The 2020s are going to be one very cool time, as we shrug off the ending of the debt supercycle and hit the reset button. And remember, Dad is proud of you and loves you very much.

Good times. I can feel the band warming up, so I am going to depart. Have a great week.

Your trust me, we will get through this analyst,
John Mauldin
mailto:johnmauldin@FrontLineThoughts.com

Copyright 2010 John Mauldin. All Rights Reserved
Note: The generic Accredited Investor E-letters are not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for accredited investors who have registered with Millennium Wave Investments and Altegris Investments at http://ce.frontlinethoughts.com/CT00323102MTAzODg0.html or directly related websites and have been so registered for no less than 30 days. The Accredited Investor E-Letter is provided on a confidential basis, and subscribers to the Accredited Investor E-Letter are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private investment offerings with other independent firms such as Altegris Investments; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Funds recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor's services or making an investme! nt in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.

You have permission to publish this article electronically or in print as long as the following is included:
John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore
To subscribe to John Mauldin's E-Letter please click here:
http://www.frontlinethoughts.com/subscribe.asp
To change your email address please click here:
http://www.frontlinethoughts.com/change.asp
If you would ALSO like changes applied to the Accredited Investor E- Letter, please include your old and new email address along with a note requesting the change for both e-letters and send your request to wave@frontlinethoughts.com

Portfolio management – an alternative

2010-03-15T08:33:00.001-04:00

Modern portfolio management theory emphasizes risk management through diversification. Simply put, investors are advised to spread their investments across sectors and asset classes, offsetting risk among component weightings. However, this rigid system of diversification avoids market timing aspects of risk and often exposes investors to drawdowns that could be avoided with an approach that better adapts to the market environment.

There are few money managers that employ more aggressive diversification strategies. One upstart investment firm is focused on systematic trading and has caught my eye – Acorn Global Investments Inc. of Oakville, Ontario. A recent paper explains Acorn’s approach:

Systematic Trading: Diversification Done Right

Stock picks in the security industry

2010-03-03T13:19:00.002-05:00

A fragile balance between global economic recovery, sovereign debt problems, and potentially threatening commodity inflation is the thematic market headline challenging investors early in 2010. However, the stock market is also reminding investors that security issues are a major business opportunity in our time. Threats to our economic security remain the primary driver of capital scurrying between asset classes, but a big challenge for economic well-being in our age is securing commerce - and the population - from threats big and small. Almost a decade after the history-altering terrorist act now referred to as 9/11 stewards of the global economy remain anxious to find systems and technological solutions to security risk. Judging by the performance of many of the stocks that represent this effort to make the world a safer place, the market is doing its job of accepting this challenge.

Although companies in the security industry range across a broad scope of service and systems – from typical security services to high tech applications of screening and warning devices – this loose grouping of enterprises devoted to reducing risks of harmful acts, as well as natural disasters, is worth watching. Recent stock market trends show that investors know the stakes are big, and that economic dislocation and crisis is a tremendous cost for failure to defend against security risk. Some of these security industry stocks are currently delivering trend trading opportunities.

One of the best performing stocks on the Toronto Stock Exchange since the market bottom almost a year ago has been Garda World Security Corp. (GW-T). This Montreal-based security services firm has a worldwide presence, but the 2008 recession pummelled its shares to a penny stock from much loftier heights. The stock took off last year, though, and became Stock Trends Bullish in early June after its initial rally more than tripled the share price from its 2009 open. Since its rebirth as a bullish stock GW has doubled in value again and is now scaling new 52-week highs as its shares approach $12. The share price would have to double again to challenge the highs prior to the stock’s 2007 perch, but trend investors can look toward an advance to the $15 area as an immediate objective.

OSI Systems, Inc. (OSIS-Q), a security scanning systems provider, saw its stock break out in early 2010. Although it has been Stock Trends Bullish for the past three quarters, OSIS upward sloping 13-week moving average is now helping the stock regain a footing above $30 (US). If the share price manages to push ahead of its January high, eclipsing $33, investors will look positively toward adding to their positions.

ICx Technologies (ICXT-Q) develops sensors and surveillance systems. Its stock, along with the shares of identity security firm IntelliCheck Mobilisa, Inc. (IDN-A), had a huge breakout in the short trading week before the New Year - the holiday attempted airline bombing a blunt reminder of the powerful lever terrorist acts have on these stocks. Share prices in both companies have since slipped back to their 13-week moving average trend line and are trading only lightly now. However, investors can again look at this as another launching pad.

Another bullish trending stock, American Science & Engineering Inc. (ASEI-Q), is currently trading at its 13-week moving average trend line and could also rally to its January high. The shares of this x-ray inspection systems firm would add in excess of 10 per cent on that move.

Analogic Corp. (ALOG-Q) makes explosive detection equipment, but its stock has been somewhat of a dud since its bullish breakout in the first quarter of 2009. For the past 11 months the stock has been in a trading range, struggling to top $40 and slipping back to the $34 area. Currently the shares trade at the ceiling of the range - $42 – and could provide a cue for buyers to pick up the stock if it breaks out of the long term trading range.

Other stocks that deserve attention include L1-Identity Solutions, Inc. (ID-N), maker of biometric identity devices, L-3 Communications Holdings (LLL-N), an intelligence and surveillance systems provider, and Cogent, Inc. (COGT-Q) a name behind fingerprint identification systems. Shares of L-3 Communications rallied off trend line support a month ago and are now making new 52-week highs. L1-Identity’s stock is a current Stock Trends Bullish Crossover (signalling that the 13-week moving average trend line has crossed above the 40-week moving average trend line. Cogent will also be a Stock Trends Bullish Crossover soon.

Security stocks not currently sharing in the positive price trends of their peers include Magal Security Systems Ltd. (MAGS-Q) (computerized security systems), FLIR Systems Inc. (FLIR-Q) (thermal imaging and broadcast camera systems), and Optelecom-NKF, Inc. (OPTC-Q) (advanced video surveillance). There may be other security-related stocks not mentioned here, but surely investors should look favourably on the opportunities in this important growth industry.

Emerging markets slipping below trend

2010-01-24T14:07:00.001-05:00

The market’s date with a correction is approaching. Whether that correction amounts to a short-term setback or an expiry of bull market trend that started ten months ago, investor anxiety ratchets up with each down day recorded in global stock markets. This week’s drop in stock prices challenges the bullish price trends that have propelled global markets in the last two quarters, with emerging and European markets taking the biggest slap in the face. Many of the exchange traded funds representing these markets are in, or in danger of, turning Stock Trends Weak Bullish – a signal that should alert investors to re-evaluate their position.

Drops in the prices of a number of BRIC funds, including the SPDR BRIC 40 ETF (BIK-N), iShares MSCI BRIC ETF (BKF-N), Claymore BNY Mellon BRIC ETF (EEB-N) and the Toronto Stock Exchange-listed Claymore BRIC ETF (CBQ-T) are tripping trend alerts. All slipped over 5 per cent on the week by the end of Thursday’s trading, falling below the trend line support of the 13-week moving average. Funds invested in European countries also shared in that decline. Although Canadian equities dropped significantly this week with the materials sector, only gold stocks are currently in a Stock Trends Weak Bullish trend. This retreat in emerging markets, as well as resource equities, hardly arrives unexpectedly – but investors should be concerned about whether this is the beginning of a more serious correction. Is this time to take money off the table in global markets? Or is this a new opportunity to increase exposure to commodity and emerging market equities?

The monetary condition that has re-inflated these equity classes is plainly stated: negative real interest rates. Cheap money is always the source of asset bubbles, and the equity rally that ignited from the depths of a global recession owes a great deal to the immense amount of liquidity pumped into financial markets. However, eventually this excess must come to an end. Markets have spent the last few months trying to figure out when that time will come. A recent retreat in the price of gold, a tentative oil market, and the seeds of a relatively revived U.S. dollar are possible signals that a low short-term interest rate policy (oh heck, it’s a zero-interest rate policy in the U.S.) may end sooner than we think. If the punch bowl is taken away, commodity stocks and emerging markets will not rebound from the current weakness.

If U.S. interest rate changes are due, investors will be quickest to hit the sell button on emerging markets. The BRIC and Latin American funds that have dropped in recent sessions, in particular, deserve attention. The iShares MSCI Brazil ETF (EWZ-N), for instance, dropped to the $68 level this week, a mark it also fell to at the end of October when a chill hit the global reflation trade. Although a 15 per cent rebound from here would entice short-term commodity bulls, this Latin American fund, as well as others, are now below a supporting trend line – unlike the autumn retreat. A rally off this level is possible, but investors should be concerned about this trend line violation.

Some trading slack still left

2009-12-10T15:00:00.002-05:00

Technical analysts like to look backwards. They look at chart patterns earnestly – hoping to decode the signs of change in a price level. Looking back to predict the future is the modus operandi of the market technician. Some like to say that “this time things are different”, that the forces acting on the market today are far different from the forces that moved the market decades ago. Most often, though, history proves to be a sage advisor. In truth, the market is evolving – like the world it reflects – and there are new and complicating variables that make it difficult, maybe impossible, for even the most revered oracle to see clearly through the fog. One changed factor that has made a difference in the markets is the tremendous expansion of capital and trading. Compared to the liquidity of today, the markets of a generation ago were homespun, almost quaint.

The total market capitalization of the Toronto Stock Exchange – itself just a tiny component of a vastly grown global equity market – has increased from about $100-billion in the mid-1960s to over $1.7-trillion currently. But the size of the market, both locally and globally, implies a new variable only in so much as that growth in capital corresponds to an increasing propensity to trade. Trading is what creates price changes in securities. It is the force of change on valuations – and it expands market volatility. More trading demands better information, better pricing discipline, and more efficient markets.

Given the latest market meltdown that last statement may have you in stitches – we seem to move from one bubble to the next. However, trading expansion is undeniable and consequential to the movement of prices. On the TSX average daily trading volume is up almost 678% in the last 15-years. But average daily transactions are up over 3,179%! Clearly, a new type of investor has come to the fore. From a growing number of actively managed accounts under the wing of institutional portfolio advisors to the small retail investor trading from home computers, there is a tremendous force of energy fuelling stock price movements. The character of that trading shows that market timing activity – a heightened intensity of trading – in the plummeting average traded value in recent decades. Average traded value on the TSX was about $50,000 fifteen years ago – now it’s one-fifth that level.

The market downturn last year stalled out the growth in transactions. Looking back to the market bust of 2000 the TSX showed a similar decline and plateau of transactions. Not until five years later, did the number of weekly trades begin a new trajectory. Notably, the current market rally that has added 50% to the S&P/TSX Composite Index has been accompanied by diminished average weekly transactions. At the March market low the TSX recorded about 4.4-million weekly trades. Average weekly transactions over the last three months numbered only 3.7-million – a drop of 17%. Average weekly volume of shares traded, however, is only 4% below the March price level low. And although shares are transacting at a better rate now than when the S&P/TSX Composite Index peaked in Q2 of 2008 (up 20%), that growth is less than the growth of the volume of shares traded (up 23%).

What does the slipping transaction growth rate in the current rally suggest? Perhaps it is telling us that that despite worries that the market is overextended, the retail investor has not yet arrived at the party. There may be more room for either a continued uptrend or at least a flattening of the market trend as opposed to a severe pullback in the coming quarters. A rapid increase in the number of transactions is concurrent with a selloff, to be sure, but it can also occur in advance of that selloff – at a market price level peak. In recent market price level peaks the rate of transaction growth was significantly higher than the rate of volume of shares growth. Although this is consistent with the long-term trend described already, the current market conditions seem to offer relatively favourable support of a bullish outlook.

Metal Mining edge

2009-10-26T20:46:00.002-04:00

For all the angst about the collapsing U.S. dollar in the past few months, the greenback is now trading essentially at the same level it did before the financial crisis imploded capital markets and sent economies worldwide into recession. Although many financial institutions are far from sound, investors have taken apocalyptical risk out of the equation and have shifted back to their usual modus operandi of maximizing relative returns on capital. However, faith in the store of value represented in the international reserve currency is highly strained, and capital flows show the lost confidence could send the dollar spiralling further. This fear is currently driving commodity markets and the gold sector. The question for equity investors is how best to play this bet against the greenback?

Currency and commodity exchange traded funds are direct investments that small investors can now trade. There are funds, too, that specialize in markets of commodity strength – which would include Canadian equities – or non-dollar denominated markets, especially Euro-zone. Emerging markets, too, are a magnet for capital wary of the declining U.S. currency. Even the stocks of multinational U.S. corporations, like Coca-Cola Co. (KO-N) and Caterpillar Inc. (CAT-N), that derive much or most of their earnings from foreign markets are considered dollar-hedging investments.

In this monetary environment Canadian investors are again sitting in a sweet spot thanks to the heavy commodity bias of our market. The mining sector is outperforming the broad TSX market by 26 per cent since mid-summer and is not yet showing signs of relinquishing its leadership role. Gold stocks are comparatively unspectacular – up by no better than the 11 per cent that the S&P/TSX Composite Index has advanced over the period. However, “black gold” producers – the energy sector – are showing some relative strength, outperforming the market by 7 per cent. Investors should start to look at the relative movement of these sector plays on the falling U.S. dollar, which fell another five per cent against a basket of currencies represented in the U.S. Dollar Index (DXY-I) over the past three months. In times of dollar instability there are appreciable but varying effects on the stocks of the producers of both hard commodities and oil.

During the last Stock Trends Bearish trend of the U.S. Dollar Index from the summer of 2006 to the trembling of the financial crisis two year later metal mining stocks were largely in a strong bullish trend. Gold stocks, though, were in a flat trend throughout the period. So, too, with energy stocks – although they rallied strongly when crude oil prices peaked and put a stranglehold on global economic growth. Investors can learn from the last stint of dollar devaluation: commodity inflation can be largely benign until it hits energy prices. The current market stock market performances of these sectors suggest a similar scenario. Investors can continue to weight in the bullish mining sector, but beware the return of triple digit crude oil prices.

While the relationship of gold and oil is typically a commodity focal point of investors worried about currency fluctuations, metal mining stocks are also showing the relative value of other commodity hard assets, like copper and iron ore. Generally, these industrial-use commodities do not have the allure of traditional stores of value found in precious metals, and move cyclically with the global economy. Certainly, the strength of the mining sector is a strong vote of confidence in the economic recovery likely in place. But investors are also responding to dollar weakness by bidding up these assets even further. Mining stocks will continue to attract investment flows while the greenback remains in a bearish trend.

The relative performance of metal mining stocks versus energy stocks took an about face at the end of last year in the pit of the financial crisis. This shows that investors started to favour these industrial commodities over the bleaker energy fundamentals. In fact, mining stocks have performed much better than gold stocks since the March stock market bottom. Charts of the price movement of the S&P/TSX Mining Index versus the price movement of the S&P/TSX Energy Index show just how favourably investors have fared in hard commodities relative to investors weighted in another dollar denominated commodity – crude oil. When compared on the same basis, investors in gold stocks have not benefited as well during this period of dollar weakness.

Shippers leaving port?

2009-10-17T11:53:00.001-04:00

A notable lagging group in the stock market’s recovery has been marine shippers. While the rest of the transport sector shows the wheels of commerce once again turning, the shares of shippers have been stuck at port, victims of excess capacity and uncertainty about global shipping demand. The Baltic Dry Index, a measure of international shipping prices for dry bulk cargoes, has recovered from its 2008 low, but still remains 78% shy of its high in the summer of 2008. Although this price weakness reveals that marine transporters are still in a difficult position, investors seem to be awakening to a hope that the demand part of the equation is improving for the shippers. After months under water, some of these shipping stocks are floating again.

The Claymore/Delta Global Shipping Index (SEA-N) exchange traded fund tracks the performance of marine shippers, both dry bulk, container ships, and tankers. Although lacking the trading volume and price momentum that fuelled a rally in the second quarter, the ETF is Stock Trends Bullish. Of particular interest, though, is the dry bulk shipping stocks. The share prices of carriers of crude oil and liquefied natural gas have been comparatively buoyed – the stock of Teekay Corp (TK-N), for example, is up 37% in the last three months and is hitting new 52-week highs. A resurgence of the depressed dry bulk shippers (transporters of raw materials like iron ore, coal, and grain) and container ships (generally carrying consumer and industrial finished goods) - is a signal that the global economic recovery is real, and not an illusion of economic wishful thinking. Judging by a nascent recovery of some of these stocks, investors are gradually betting that reality will be catching up with our prayers.

Although it is too early to declare a solid shift in trend for the group, the appearance of certain dry bulk and container shippers in the Stock Trends filters for Weak Bearish stocks, as well as strong recent price moves suggests that investors should keep an eye on the progress of their developing trends. Among stocks currently alerting of trend changes are Seaspan Corp. (SSW-N), TBS International Ltd. (TBSI-Q), Paragon Shipping Inc. (PRGN-Q), and DryShips, Inc. (DRYS-Q). Recent price moves by Diana Shipping Inc. (DSX-N), Danos Corp (DAC-N), and diversified shipper Frontline Ltd. (FRO-N) reflect a sign of hope, too. International Shipholding Corp. (ISH-N), Overseas Shipbuilding Group (OSG-N), Navios Maritime Holdings Inc. (NM-N), and Safe Bulkers, Inc. (SB-N) have been trending bullish since mid-summer – all adding to the encouraging signal coming from the shippers.

Most of these names may be unfamiliar to the average investor. However, they represent an important bellwether of the vitality of the global economy. Although the precariously fragile U.S. economy factors heavily in a clean bill of health, the global economy and international trade to emerging markets will be a key indicator of demand factors that will continue to drive the materials and industrial sectors. The same factors that drive up the price of raw materials will eventually make its way to filling the shipping capacity that has dragged on maritime haulers since the 2008 global collapse. When the Baltic Dry Index and the stocks of dry bulk shippers start to trend bullish investors can begin to rest more comfortably.

Feelin’ healthy

2009-09-11T14:11:00.001-04:00

Lost amid the percolating anticipation investors have placed in the market’s advance is the quiet rehabilitation of health care stocks. Gold and oil stocks are under increasing pressure to bust loose, a trader’s dream – but investors should take a good look at the reassuring trends in a defensive sector that has its own building steam. U.S. health care stocks have been trending positively with the rest of the market since the March market bottom, despite the polarizing political debate about health care insurance in America. Only the financial sector, itself coming off life-support, has performed better than healthcare stocks over the past three months. The health sector promises leverage with its stable of biotech and pharmaceutical stocks, yet generally offers investors defensive cover in the event of a market reversal. Obamacare or not, the stock market is grabbing on to some traditional health care anchors.

During the bear market of last year the S&P Healthcare Index showed its relative price performance over the broad market through the last half of 2008 until the market bottomed in March of this year. When the financials took the market in a tailspin, health care stocks sank with the rest of the market – just not so badly. That is the desired outcome for a defensive sector: relative price performance. But now pharmaceutical stocks, north and south of the border, are showing a performance premium in a bull market. Almost all of the big cap pharma names are in Stock Trends Bullish trends and outpacing the S&P 500 over the recent summer months. Even with its massive acquisition of Schering-Plough Corp. (NYSE:SGP) in the works, Merck & Co. (NYSE:MRK) is up 18% since early June; and Pfizer Inc. (NYSE:PFE) is up 13%, a tidy vote of market confidence that was good cover for the company’s recently announced details of its $2.3-billion settlement of criminal charges. Investors can feel good about pharma’s solid footing in the current market environment.

The Health Care Select Sector SPDR (NYSE:XLV) represents the 13.4% weighting of health care stocks in the S&P 500 and is the most actively traded exchange traded fund in the sector. The next most transacted health care portfolio is the Pharmaceutical HOLDRs (PPH-N), which generally has less than 10% of the number of transactions XLV logs in every week. There are other funds specialized in biotech, medical devices, and healthy services, as well as leveraged Rydex health care ETFs, but XLV is the liquid center of investors’ broad exposure to the group. However, four key big cap pharma stocks account for 34% of the weighting of the fund – Johnson & Johnson (NYSE:JNJ), Pfizer, Merck, and Wyeth (NYSE:WYE). Wyeth is the best performer of the group – hitting new 52-week highs at the end of August – but all of these important stocks are currently in bullish trends, with both JNJ and MRK poised to rally off trend line support.

Stock Trends Bullish since early July, XLV has been quietly advancing along its price channel, making new 2009 highs during the summer as the U.S. health care political debate heated up. The ETF’s price pattern could see the sector add another 10% in the third quarter, especially as Congress works toward clearing uncertainty about health care insurance reform. The bullish trend of the sector indicates that investors are betting on calmer heads prevailing, and are looking for further upside if the broad market continues to advance. If a market correction is instead forthcoming, health care stocks should still be a good play.

Position sizing - fixed investments

2009-09-05T22:38:00.001-04:00

Most novice investors, and many experienced ones, do not develop a sophisticated money management trading plan. Last week this column highlighted the importance of an exit strategy, of limiting losses in individual trades, as a trading practice that improves investment returns over the long-term. But there is another question that should be asked when developing a trading strategy: how much should be invested in each position? Many investors know that they will not be so fortunate to have maximized investment in winning positions, and minimized investment in losing positions. Few will ever be so charmed. However, investors can attempt to optimize their money management so that they can most benefit from their trading strategy. Adjusting the amount invested in each position, within the limits of available capital, can affect your portfolio returns.

The Stock Trends TSX Portfolio trading strategy, a model portfolio that has been active for over 15 years, operates on a fixed investment premise. All 440 positions taken were bought for the same transaction cost ($10,000). Whether a large cap stock valued at $25, or a small cap stock trading at $2.50, all trades were limited to the same dollar value exposure. The implication of these equal investments is greater risk (and profits) on lower priced stocks. How would the overall investment return of this portfolio record change if the invested amount for each trade was variable, instead of fixed? This is the kind of question active investors should ask of their own money management.

If the trading history of the Stock Trends TSX trading strategy is replicated with either random or variable investment costs on individual positions, the investment returns of the portfolio change. A random quantity of shares (between 200 and 2,000, for example) invested shows us that portfolio returns can be considerably different. Although the average amount invested in this example remains close to the $10,000 invested in the actual model portfolio, a random sequence of shares invested (correspondingly changing the invested amount to random costs) produces a range of portfolio returns that differ considerably from the actual results.

While the fixed investment strategy of the Stock Trends TSX Portfolio has produced an annualized 39% return on average investment, the random invested amounts for the same trading record results in a range of annual returns from a low of 23% to as high as 59%. Remember, the individual trades only differ by the amount invested - prices and order of trades remain the same – and so does the individual percentage return on each trade. Only the dollar value of the gains and losses varies. Where increased invested capital in winning trades and decreased invested capital in losing trades more favourably reflect the best outcomes, the portfolio returns improve.

The reason for these variable results becomes more apparent when the trading record of the portfolio is adjusted instead to be a fixed number of shares. If we again keep the average amount invested over the 400 positions close to $10,000, but always trade the same number of shares – say 1,000, for example - the return over the entire period is comparable to the actual portfolio result, again about 39% annualized return on average invested capital. However, dropping the number of shares traded to 500, thereby halving the average amount invested on individual trades, reduces annualized portfolio returns to 32%. Doubling the average amount invested by buying 2,000 shares in each position, though, increases annual return over the period to 43%. Notably, annual returns maximized at 46% regardless of how high the average invested amount is adjusted to.

The result of the fixed number of shares example occurs because the varying amount invested is in relation to the price of the stock. Although the example of the random investments highlights that overall portfolio returns can be optimized if the trader is somehow weighted heavily in winning trades, this is an unlikely probability. An investor would have to know in advance which trades were going to be the big winners and increase the invested capital. More reasonable expectations are needed. In reality, we are never certain which stocks are going to be the best performers.

Varying investment amounts can improve portfolio returns based on the price of stocks, but only to a certain level. For that reason, Stock Trends maintains that it is best to use a fixed investment rule. However, that may not be the best case scenario for all strategies, and investors can look at their own trading records to see how their results would change with different money management rules. Position sizing is an under-appreciated aspect of trading.

A detailed trading record of the Stock Trends TSX Portfolio is found at http://www.stocktrends.ca/stonline/stp-tsx1.php

Money management and an exit strategy

2009-08-30T17:33:00.002-04:00

Investors serious about succeeding on their own need to learn an important lesson about trading first: stock picking is not the most crucial aspect of being a successful trader. Money management and a trading plan will determine investment returns over extended periods. Knowing how much to invest and how to take a loss, more than always picking winning stocks, are the skills that mark most professional traders. Of course, every trader wants to imagine they are going to be right most of the time, that they have a special gift for picking stocks. In truth, that expectation is unrealistic. In fact, novice investors learn quickly that being wrong – and taking losses – comes a lot easier than they imagined. For the unprepared, this awakening is brutal.

If taking losses is such a big part of trading, how does anyone walk away from the market ahead of the game? A surprising revelation to the uninformed is that some of the best traders in the world are making a handsome living by picking losing stocks most of the time. They perform this magic by limiting their losses and maximizing their gains. In other words, their trading plan allows them to manage a string of relatively small losses before irregular big winning trades make up for the pain of an unforgiving market. When a trader’s account takes a dip – called a drawdown – he or she stays committed to their plan, largely because it forces the trader to respond quickly to a trade gone bad. This demands an almost inhuman capacity to set aside one’s emotions – our ego, our fears – and to pull the sell trigger. No insisting that the market is wrong, that it will get things right and see things your way soon. Instead, a good trading plan insists on a prescribed exit strategy before the trade is entered.

Stock Trends provides a good example of how a trading plan can help turn the reality of a miserly market into appreciable investment returns. Recall that Stock Trends is a system of categorizing stocks based on a moving average system of analysis. It is a rigid system, simple in its definitions, but consistent in its comprehensive application to the North American Stock market. For over 16-years the Stock Trends indicators have been published for stocks listed on the Toronto Stock Exchange. This has been an interesting testing ground for applying a mechanical trading system – a model portfolio derived from a trading plan with prescribed buying and selling triggers based on Stock Trends indicators and technical triggers. The Stock Trends TSX Portfolio has been filtering the weekly market activity and applying the same trading strategy since 1993 with positive results – a 39% annualized return on average investment.

The trading record for this strategy provides important insight applicable to every investor’s approach to the market. Over the almost 16-years of trading 440 stock positions have been taken. Each position is limited to a fixed investment of $10,000, with the buy criteria specified by Stock Trends’ Bullish Crossover trend indicator as well as minimum price and volume requirements. The important aspect of the buy strategy is the limited exposure – one assumes trading equity of at least $50,000. The second part of this attempt to limit exposure to losses is found in the exit strategy. One of the sell triggers is a stop loss provision (8% trailing stop on the highest closing price). Although the exit strategy is based on weekly trading, and has some implied exposure to abrupt daily stock movements, it has been relatively successful in managing trading losses.

In line with expected results, the Stock Trends TSX Portfolio trading record shows that only 40% of positions taken were winning trades. It turns this middling success rate into positive returns by keeping losing positions relatively contained. The average loss of losing positions is 10% (all results include trade commissions). The average gain of winning trades approaches 30%. Most revealing is the distribution of returns on these trades. The vast majority of returns are clustered between -10% and 10%, with the accompanying graph showing the skewness of the distribution curve. This should be the typical expectation of a trader: relatively few big winners compensate for the more numerous in-field hits.

Obviously, a big factor in every trading system is the order of the trades. Excessively long strings of trading losses challenge every investor, and can wipe out many unprepared investors. Stock Trends Portfolio loss runs have reached a high of 12 consecutive trading losses, however most losing strings end at four. The maximum drawdown on trading equity was 35% (in a period between late 1998 to mid-1999), not particularly great, but still better than the 45% drawdown that the TSX delivered after the 2000 peak – a crushing collapse that buy-and-hold investors did not recover from until five years later. The recent bear market hurt, too – another 49% drawdown!

Investors, big and small, should have a trading plan in place that helps remove some of the self-defeating aspects of our personal profile which handicap success. Dealing with trading losses is difficult, but learning how to act systematically with them will protect an investor from developing costly emotional attachments to individual trades. Keeping a detailed trading record is an important part of understanding how to make your trading plan work for you. As the Stock Trends model portfolio illustrates, you do not have to be a perfect stock picker to succeed in the market.

The market is not a level playing field, nor should it be

2009-08-30T11:16:00.003-04:00

There has been growing debate about institutional trading practices, with politicians and the public again demonizing moneyed players on Wall Street. These practices are facilitated by technology that has made speed of execution an advantageous and profitable backroom for dealing securities microseconds before they become available to the broader trading public. A recent article by MSN’s Michael Brush explains this high speed trading, flash trading, and black pools. Coming to the defence of these practices are investment professionals like Donald Luskin and Chris Hynes, co-authors of a Wall Street Journal op-ed piece that fuelled expected wrath from investors who smell rats on Wall Street again.

However, the anger of the public on these technologies and alternate markets is simply another form of populism. The notion of equality and a level playing field in the markets is misguided. Markets operate at many levels, from small investors with sleepy mutual funds held for years at their bank to highly capitalized banks with multi-million dollar trades executed many times a day. Markets now operate 24-hours a day in a broad range of securities and assets. The key growth for these tremendously important capital markets is liquidity – the ability of the industry to bring in capital to individual markets and spur trading. Without liquidity the world’s markets would collapse into the dark ages.

How could there be a level playing field in the high stakes game of investing? Without expanding institutional liquidity the markets would become extremely volatile. Without technology driving the growth of institutional liquidity the capital stock does not grow.

Too often critics of the market – markets where the best rise to the top based on human and capital resources – cry foul because their utopian desire for equality is transgressed. But the beauty of a free market is that it expands the pie, and gives every player a chance at growing assets. However, not every player is entitled to the same resources. Risk and reward are the underlying determinants of the playing field. The more you put at risk, the more resources – human and capital – demanded. Wall Street represents the the best, the brightest players in the market. It is capitalized accordingly. This has always been the case.

It is important that ordinary investors recognize the benefits of free markets and the way resources are allocated by pricing mechanisms. Yes, it would be great if everyone had access to the same computers, the same capital, the same acumen. But that vision is a corruption of the human condition, it is the disabling framework of socialism.

Every day trader knows that the propensity of making profits does not improve with the frequency of trading. High speed trading and back room dealing does not improve the prospect of success any more for the players, either. Every buyer must find a seller. Every winner meets a loser. That is the market.

The market should not be viewed as some egalitarian model. It is not. Instead, it is a mechanism for growth where every player has a role and an opportunity to build their assets commensurate with their human and capital resources. Fairness is not a single level playing field. If we try to make it so, we will handicap growth and violate our liberty.

Washington Stock Exchange

2009-08-29T13:30:00.003-04:00

The stock market is supposed to be the bastion of the free market – ownership of private enterprise swaying to the demand and supply of private capital. However, judging by recent trading activity that model seems strangely defunct. As last week’s trading record shows, quasi-government enterprises are the stocks most attracting investors. Fannie Mae (NYSE:FNM), Freddie Mac (NYSE:FRE), American International Group (NYSE:AIG), as well as government-beholden Citigroup (NYSE:C), and Bank of America (NYSE:BAC) are notably at the top of the market’s most actively traded stocks. The market seems intent on speculating that this public-private contract has a positive outcome. Whatever the result, this is where the trading action is.

Duh! … another zero level thinker

2009-08-09T17:48:00.002-04:00

The following is an excerpt from a speech by James Montier of Société Générale in London on the problems with the Efficient Market Hypothesis (EMH). (thanks to John Mauldin).

Montier shares again his 2004 replication of Keynes’ beauty contest, and shows us just how difficult it is to outsmart a market. A humorous example of the Nash equilibrium at work in an imperfect world.

--------------------------------------------------------------------------

The undue focus upon benchmark and relative performance also leads Homo Ovinus to engage in Keynes' beauty contest. As Keynes wrote:

"Professional investment may be likened to those newspaper competitions in which the competitors have to pick out the six prettiest faces from a hundred photographs, the price being awarded to the competitor whose choice most nearly corresponds to the average preference of the competitors as a whole; so that each competitor has to pick, not those faces which he himself finds prettiest, but those which he thinks likeliest to catch the fancy of the other competitors, all of whom are looking at the problem from the same point of view. It is not a case of choosing those which, to the best of one's judgment, are really prettiest, nor even those which average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees"

This game can be easily replicated by asking people to pick a number between 0 and 100, and telling them the winner will be the person who picks the number closest to two-thirds the average number picked. The chart below shows the results from the largest incidence of the game that I have played - in fact the third largest game ever played, and the only one played purely among professional investors.

The highest possible correct answer is 67. To go for 67 you have to believe that every other muppet in the known universe has just gone for 100. The fact we got a whole raft of responses above 67 is more than slightly alarming.

You can see spikes which represent various levels of thinking. The spike at fifty reflects what we (somewhat rudely) call level zero thinkers. They are the investment equivalent of Homer Simpson, 0, 100, duh 50! Not a vast amount of cognitive effort expended here!

There is a spike at 33 - of those who expect everyone else in the world to be Homer. There's a spike at 22, again those who obviously think everyone else is at 33. As you can see there is also a spike at zero. Here we find all the economists, game theorists and mathematicians of the world. They are the only people trained to solve these problems backwards. And indeed the only stable Nash equilibrium is zero (two-thirds of zero is still zero). However, it is only the 'correct' answer when everyone chooses zero.

The final noticeable spike is at one. These are economists who have (mistakenly...) been invited to one dinner party (economists only ever get invited to one dinner party). They have gone out into the world and realised the rest of the world doesn't think like them. So they try to estimate the scale of irrationality. However, they end up suffering the curse of knowledge (once you know the true answer, you tend to anchor to it). In this game, which is fairly typical, the average number picked was 26, giving a two-thirds average of 17. Just three people out of more than 1000 picked the number 17.

I play this game to try to illustrate just how hard it is to be just one step ahead of everyone else - to get in before everyone else, and get out before everyone else. Yet despite this fact, it seems to be that this is exactly what a large number of investors spend their time doing.

by James Montier of Société Générale

Position sizing

2009-08-09T17:12:00.001-04:00

Most of us enter the stock market burdened with faulty biases and misguided conceptions about how to succeed in our trading program. We think that we can beat the market by being smarter than the market. We think that we will establish a winning method of stock selection by way of superior information, that the road to profits will be paved by our consistent ability to pick winners. In short, we enter the market with an emotional commitment to our own judgement. Unfortunately, it is this highly individualized bias that is our ultimate nemesis. Experienced traders know that the key to market success has less to do with a uniquely developed style and method of picking stocks, and more to do with a disciplined execution of sensible and rigid money management principles.

These “judgement biases” are described meaningfully by Van K. Tharp, in his significant contribution to the business of trading, Trade your Way to Financial Freedom (McGraw-Hill,1999). Our trading systems are handicapped by the fact that we typically trade our beliefs about the market, we accept conventional representations of information, and adopt trading practices that undermine trading success by inadequately protecting against actual risk. Further, we consistently and foolishly bet against the odds and succumb to undisciplined approaches to trading.

What precisely are we talking about here? Let us assume that a trader has developed a trading system that generates a positive expectancy – a profitable trading strategy that either has a superior winning percentage (% of winning trades) or a superior profit factor (where the profits of winning trades far exceeds the losses of losing trades). There remains a variable that will, in fact, determine the actual long-term profitability and risk factor that results: the position size.

An often-cited experiment by Ralph Vince, who has been an seminal author of important trading analysis treatises (Portfolio Management Formulas and The Mathematics of Money Management), tested the gambling performance of 40 Ph.D’s on a simple computer game with a 60% chance of winning. Each were given $1,000 in play money and instructed to bet however much money they wished (or could) over 100 trials. The end result was that only two made money.

The undoing of this group of individuals, in fact, is the undoing of many traders: we tend to bet more when we think we are going to be right (or need to be right), and bet less when we are less certain of the outcome. In other words, our emotions have dictated our risk. If the 40 Ph.D’s had religiously accepted the mathematical probability that a constant bet of $10 over 100 turns would have resulted in a 20% gain. Yet, these individuals were inclined to vary their bets (risk) in hopes of achieving better results.

There are varying methods of determining what is an optimal position size. Some are related to drawdown. Some are related to other statistical variables that a given trading system produces. But for general purposes we can simply recognize some basic common sense principles. First, in order to trade properly one must remove emotional attachment to a position. The only way this can be done is if there is enough available trading capital to allow for actual risk. You cannot trade effectively with inadequate capital. Second, traders must limit risk in a quantifiable fashion. For the purposes of retail traders like the majority of Stock Trends followers, a benchmark of 1-2% of available trading equity should be at risk in each trading position (Where the risk is defined by a quantifiable measure. For example, the average loss per trade plus one standard deviation.)
Obviously, position size will be determined by available capital, so the money management guidelines will be predicated by sufficient funds available. Finally, constant position sizing will enable a trading system to minimize the hazardous effects of our inherent, emotionally charged biases.

The best analysis tools I’ve seen that provides position size guidance is the m3 Money Management Modeler, designed by trader Brian Ault of Fulcrum Shift Trading. Brian’s platform looks at trading as a probability assignment, taking essential input variables to determine HOW MUCH to trade on given positions – either stocks or options. Traders, advanced and novice, should learn how to incorporate this kind of risk analysis in their trading strategies. A good trading plan should factor in probability analysis.

[Most of this is post is a reprint of a Stock Trends Weekly Reporter editorial from 2003]

Golden time to take out some insurance

2009-08-06T20:13:00.001-04:00

If investors had a crystal ball that could map the market course ahead, they would want to know the answer to one critical question: whither the greenback? Although monetary excess and fiscal strains appear aligned for a humbling slide in the value of the U.S. dollar, an uncertain economic recovery and the timing of a dollar downdraft has the market conflicted. A picture of this angst is found in the gold sector, where dollar bears typically find a comforting lair. Gold stocks have been trending flat for months, lost in a trading range amid the broad market’s rally off its March low. The strength of emerging markets – many up over 30% in the last three months - may reflect some of the money flows that would have gravitated toward precious metals instead of dollar assets. However, as the global stock market rally becomes vulnerable to a pullback, investors should anticipate an approaching watershed moment for bullion and prepare for bullish price momentum in gold stocks.

After rallying from an October low of 150 to a February peak of 350, the S&P/TSX Global Gold Index has since bounced between its 2009 high and long-term 40-week moving average trend line. The 13-week average price level, at 315, seems to be the magnetic center for the gold index while base metal mining stocks rocket ahead at an impressive clip. A continued consolidation at this level suggests that a rally back to 350 could be ahead for the gold stock index – especially if bullion prices gain traction during this summer stock market rally.

The price of gold hit a two-month high early this week, dabbling with the $970 level. Investors should be keying on the metal over the coming weeks - advances in bullion prices that stretch toward the $1,000 high water mark will bring appreciable upside opportunity for investors weighted in gold stocks. A rally to this psychological barrier will be an important technical signal for the investment landscape, surely providing investors with enticing odds for doubling down on inflationary pressures built into the U.S. monetary structure. Tremendous liquidity has been pumped into the banking system and few market participants have full confidence that the Federal Reserve has the political will to deliver a winning exit strategy if the U.S. employment picture remains sour. Investors enjoying the market ride this summer would do well to hedge their bet on a prolonged bullish trend for equities with increased exposure to the gold sector.

The iShares S&P/TSX Global Gold Fund (TSX:XGD) is currently categorized as Stock Trends Weak Bullish – the exchange traded fund has been dancing along its trend line support for a month. Trading activity has been stable but uninspired through the last quarter, but now would be a good entry point for investors. The fund’s price pattern formed over the past four months is the technical framework for a trade. The triangular continuation pattern – share price has gradually converged toward its current mean at $19.60 - suggests that a breakout move toward the $21 level would be bullish. Sharing this chart pattern are big cap gold stocks Agnico-Eagle Mines (TSX:AEM) and Goldcorp (TSX:G), both showing leadership for the group.

Some specific gold plays are already showing strong bullish trends and tipping toward better things ahead for the rest of the group. Leading small cap gold stocks include Golden Star Resources (TSX:GSC), West Timmins Mining (TSX:WTM), Queenston Mining (TSX:QMI), and Lake Shore Gold (TSX:LSG) – all shining performers. If investors get spooked by a sharp correction when the summer stock market rally reaches exhaustion, these and other precious metal stocks will be fruitful insurance policies.

Good news from Media stocks

2009-08-02T11:04:00.001-04:00

A sign of an improving economy is the bullish turn of media stocks. The Stock Trends Picks of the Week report includes a number of them this week, including McClatchy Co (NYSE:MNI), and the Journal Communications (NYSE:JRN) – both breakout stocks advancing on high volume. Media General (NYSE:MEG) and the New York Times (NYSE:NYT) also have made surprising moves and appear in the report. Google Inc. (NASDAQ:GOOG) is in a Stock Trends Bullish trend and is poised to rally off trend line support. Expect continued advances from Liberty Media (NASDAQ:LMDIA), as well.

Investors can play the sector with the Powershares Dynamic Media ETF (NYSE:PBS).

Real estate stocks step out of the darkness

2009-07-30T21:06:00.001-04:00

If the recession is over, will real estate stocks turn out the lights? The stock market rally off of its March low has been both spectacular and global, leaving disbelievers with an empty punch bowl. What could have been a sucker’s rally is now threatening market bears and sideline-sitters with lost profits and an uncomfortable spell of performance anxiety. Everyone remembers the origin of the U.S.-made global recession – a collapsed housing bubble and a decimated over-leveraged financial system. Accordingly, investors can be forgiven if they find the reflation trade characterized by steaming hot commodities a suspect barometer of economic vitality. But the revitalized TSX financial services sector –up 23% in the last three months – and in particular, the positive trend in real estate stocks signal that the Canadian stock market is closing the door on the bear market.

The S&P/TSX Real Estate Index has been in a Stock Trends Bullish category since the end of June and recorded healthy gains in the last two weeks. Leading the group is Calloway Real Estate Investment Trust (CWT.UN-T), H&R Real Estate Investment Trust (HR.UN-T), and Chartwell Senior Housing Real Estate Investment Trust (CSH.UN-T) - all outpacing the advancing S&P/TSX Composite Index by over 15% in the past three months. Although there remains a general weakness in trading volume among many of the REIT’s listed on the TSX, almost all are currently categorized as Stock Trends Bullish. Boardwalk Real Estate Investment Trust (BEI.UN-T), among this positive trending group, is an attractive technical trade as it moves off its current support level to set up for a stronger finish to the summer.

RioCan Real Estate Investment Trust (REI.UN-T) has stalled since peaking in its spring rally two months ago, a sign of anxiety about earnings struggles that were spelled out in second quarter results released this week. But the technical signs show the units consolidating and perhaps ready to deliver price advances ahead. Economists have tempered their words about economic recovery – an upside surprise for resource driven regions in the country give room for optimism for these funds. Improved real estate conditions sprouted in the spring, a trend that should carry through the rest of the year.

Developers are also enjoying a snappy recovery. Melcor Developments (MRD-T) is up 65% year-to-date after the stock rallied off the 13-week moving average trend line and returned to the $7.50 level last week. Trend support provides investors with timely entry signals because it verifies an existing trend and reaffirms the market’s supply and demand dynamic for an advancing stock. An improving economy will expand earnings expectations and help extend the stock’s price momentum in the latter half of the year.

Stock Trends Bullish indicators have signalled good times for the stocks and units of Canadian commercial contractors, too. Churchill Corp (CUQ-T) and Bird Construction Income Fund (BDT.UN-T) are trading along their intermediate tend line and have the potential to rally above their spring highs with the improving economy. Churchill’s stock is up 48% in 2009, and may be cued up to advance ahead of its second quarter results to be announced in a couple of weeks. A build up of positive news in the sector, including the strength of SNC-Lavalin Group (SNC-T), could help these stocks keep pace with the rally in commodity stocks.

Transports sending positive trend signals

2009-07-22T21:43:00.001-04:00

If the market is right about its bullish commodity story, transportation and industrial stocks should be feeling some love. Investors know that the supply chain is an important barometer of real economic activity – when the goods are moving the companies that factor into the wheels of commerce enjoy a positive upside. That is why the trend of shipping stocks is a critical indicator of the market’s vitality. Dow Theory, for instance, links a bullish trend in the transports as a supporting measure of the trend in industrial stocks. Although this linkage is not an infallible measure of the market, it does provide us with a reason to focus on the emerging trends in transport and industrial stocks.

The Dow Jones Transport Index (DJT-I) has flat lined in the past two months after a rally off its bottom earlier in the year. However, it is a recent Stock Trends Bullish Crossover, indicating that the short-term 13-week moving average trend line has crossed above the long-term 40-week moving average trend line. Similarly, the S&P Industrials Index turned Stock Trends Bullish at the beginning of the month. Both indexes had been in Stock Trends Bearish trends since the beginning of 2008. The timing of this change in trend category follows the emergence of a Bullish trend for the benchmark S&P 500 Index.

Transport stocks that have been highlighted recently in Stock Trends screens include CSX Corp.(CSX-N), Overseas Shipholding Group Inc.(OSG-N), FedEx Corp. (FDX-N), and Union Pacific Corp.(UNP-N). Leading the Marine transports is International Shipholding Corp (ISH-N) which has advanced 19% since the stock’s Bullish Crossover in mid June. Although Canadian National Railways (CNR-T) and Canadian Pacific Railway (CP-T) are underperforming the group, Canadian truckers Trimac Income Fund (TMA.UN-T), TransForce Inc. (TFI-T), and Mullen Group (MTL-T) have been prized Stock Trends Bullish stocks. Stock Trends also gave a positive nod to logistics software supplier Descartes Systems Group (DSG-T) a couple of months ago.

Additional support for the bullish prospect for transports is found in the industrial sector. Leading the group is Oshkosh Corp (OSK-N) a manufacturer of industrial transports, is trading at a 52-week and outperforming the S&P 500 Index by 115% in the last three months. It turned Stock Trends Bullish at the end of May at $11.87 and is now making new 52-week highs above $26. Other land transport equipment stocks out-performing the broad market and in Stock Trends Bullish trends include Cummins Inc. (CMI-N), Greenbrier Cos. (GBX-N), and Trinity Industries (TRN-N). Caterpillar Inc. (CAT-N) is a current Stock Trends Bullish Crossover, and pleased investors this week with a positive outlook - beating earnings expectations. The stock jumped to a Tuesday high of $41.45 - 23% above last Friday’s close - before settling back its current level at $38.50. Investors are encouraged by the improved condition of these industrials. They are canaries flying in the mine shaft.

A quiet little canary Canadian investors can keep an eye on is Stella Jones Inc. (SJ-T). The stock of this industrial supplier of utility poles and railway ties has proven in the past to maintain consistent price trends. Before it turned bearish at the beginning of 2008, SJ had maintained a Stock Trends Bullish trend for over five and a half years. The stock had a Stock Trends Bullish Crossover at the beginning of June but has pulled back to its trend line support level. If the stock advances off support, investors can put another check mark next to their list of bullish indicators.

Under the Cypress Semiconductor tree

2009-07-22T16:09:00.001-04:00

One tech stock I wish was under my Christmas tree last year: Cypress Semiconductor (NYSE:CY). The stock hit another 52-week high today making this the 18th week since late February that the stock has climbed to a new high. The stock was a Stock Trends pick in early February when it traded at $5.23 and has been on a powerful rally since. Shares reached $10.55 today and look to advance further as the tech sector gathers momentum.

First Quantum leap

2009-07-20T11:05:00.001-04:00

Shares of First Quantum Minerals (TSX:FM) have been on a tear recently. They closed Friday up 20% on the week, and have added another 9% this morning. The stock is now trading at $68.50 - $20 more than the price the shares traded at when FM was a prominent Stock Trends Pick of the Week at the beginning of May.

DragonWave

2009-07-15T17:33:00.001-04:00

One of the current Stock Trends TSX Portfolio holdings is giving market surfers a gnarly wave today. Dragonwave (TSX:DWI) is up 15% and reached a high of $6.01 this morning. The stock had a Bullish Crossover on May 8 when it was picked up by the model portfolio. A rebound in the market may help add to the 63% unrealized gain now logged in by DWI.

Dragon slayer

2009-06-12T11:58:00.001-04:00

DragonWave Inc. (TSX:DWI) has moved through $5, reaching a high this morning of $5.05. DWI is a current Stock Trends TSX Portfolio holding, bought at the Stock Trends Bullish Crossover on May 8 at $3.58.

Canadian Corporate bonds continue upward trend

2009-06-12T11:25:00.001-04:00

On days when commodity shares take a bit of a pullback, its always interesting to see which stocks defy the market dip. Corporate bonds are notably strong and have given trend traders an option outside of the equity market. The iShares Canadian Corporate Bond E.T.F. (TSX:XCB) edged to another 52-week high today as the TSX dipped on retreating energy shares. XCB is 8-weeks into a Stock Trends Bullish trend. Although the ETF has underperformed the TSX over the past 13-weeks, investors should be exposed to corporate bonds.

Cott’s got a good fiz going

2009-06-01T11:11:00.001-04:00

Cott Corp (TSX:BCB) keeps giving shareholders a nice pop for their portfolios. The stock is up again today, reaching $6.75. BCB joined the Stock Trends TSX Portfolio when the stock had its Bullish Crossover at the beginning of May at $4.72. Here’s hoping this rally has legs.

A new day for Ford

2009-05-10T09:37:00.001-04:00

Thank goodness for the Detroit Red Wings. Without the hopes and excitement of another Stanley Cup playoff run, the denizens of this city must be dark and desperate. Bankruptcy and unemployment. Now the government and the unions are left holding an empty bag. But wait….a glimmer of hope! Ford Motors (NYSE:F) is now a Stock Trends Bullish stock. Its Bullish Crossover ends 84-weeks in the Stock Trends doghouse.

Beyond the Bull

2009-05-01T14:59:00.001-04:00

A colleague of mine, Ken Norquay of Castlemoore Inc., has published a new book – Beyond the Bull. Available at Amazon.

Synopsis of Beyond The Bull

The old stock market is dead. What worked in the 1980s and 1990s hasn’t worked in the new century. You don’t believe me? Check the 10-year rate of return on your equity mutual funds. What went wrong?

Old Paradigm: clients have financial needs. The industry has licensed salesmen to sell to those needs. Banks, mutual fund corporations, brokerage firms and insurance companies have financial products to sell to those clients. It’s a salesman’s world. It’s all about telling customers what they should buy and shy they should buy it.

New Paradigm: it’s financial war. There are winners and losers. Win, don’t lose.

Beyond the Bull helps modern investors understand the truth about modern stock markets. Ken Norquay, a 33-year veteran of the financial wars, applies ancient wisdom to modern financial markets. The “salesmen” aspect of the stock markets clouds the reality of modern finance; sugar coated reality exposes investors to unnecessary financial risk. Beyond the Bull will help investors see through the bullmanship.

But let’s not blame the salesmen. Beyond the Bull wants you to look at yourself first. It’s your money that’s at risk. Are you your own worst enemy in the financial wars? Is there a gap between the reality of today’s markets and what you think about today’s markets?

This is not a time for despair and inaction. Beyond The Bull will help its readers adjust their financial thinking to suit the reality of today’s financial markets.

Outline:

1. The dominant figure in the stock market is the salesman. The salesman’s art is persuasive bullmanship. In the salesman’s world, everyone wins.

2. But the stock market is more like military combat:

-Luck counts.

-Deception is a key feature of the stock market.

-It is complex, not simple.

3. Because our human nature is to seek pleasure and avoid pain, we can be our own worst enemy in the stock market.

4. The ‘Theory of Contrary Opinion’ illustrates why most investors lose money over the long term. We explain this in detail.

5. Beyond the Bull [BTB] explains in detail how to succeed in investing by understanding our own primitive brain functions and learning to think objectively.

6. BTB introduces a new paradigm of objective thinking about the markets and deal with the salesman’s bullmanship.

7. In financial combat, there are five key spheres we must master in order to be winners. BTB reviews these five things in detail and encourages readers to take more responsibility for their own financial fortunes.

Profits in a bottle

2009-05-01T12:08:00.001-04:00

A number of bottlers are popping. Cott Corp. (TSX:BCB) has moved aggressively off its bottom in the past couple of weeks and jumped another 41% this morning. The stock turned Stock Trends Weak Bearish after its move to the $1.91 close on April 17. It now trades at $3.40.

Also joining Cott in shifting sentiment for the industry is Pepsi Bottling Group (NYSE:PBG), PepsiAmericas (NYSE:PAS), and Coca-Cola Enterprises (NYSE:CCE) – all current Stock Trends Picks of the Week selections.

Percolating stocks

2009-04-30T14:28:00.001-04:00

Not hard to notice all the coffee stocks advancing nicely. Today’s movers include Green Mountain Coffee Roasters (NASDAQ:GMCR), up 39%, and Diedrich Coffee (NASDAQ:DDRX), up 28%. That’s hot coffee! DDRX was a Stock Trends breakout stock, recording a Bullish Crossover last week. It’s aggressive surge was in keeping with some other coffee stocks. Caribou Coffee Co. (NASDAQ:CBOU) is another that made the Stock Trends Picks of the Week report recently. Include in that group of java movers icon Starbucks (NASDAQ:SBUX), joining DDRX and CBOU as selections. GMCR was an earlier Stock Trends Pick of the Week selection at $41.50 in the early days of February. It’s trading at $73 today. That’s a real buzz!

TMX Group

2009-04-28T09:23:00.001-04:00

A Bullish Crossover stock at the end of March, TMX Group (TSX:X) rallied off support from the intermediate trend line (the 13-week moving average) last week. Look for X to move through price resistance at $38.19.

The trend roadmap

2009-04-28T07:53:00.001-04:00

When to be in a market, when to be out? This is the basic evaluation trend analysis attempts to deliver to investors and traders. The underlying assumption of this approach is that stocks trend as market sentiment builds in one of three possible directions – up, down, or flat. In the case of bullish or bearish trends, investors are best to harness these forces and allow the market to deliver profits. For that reason investors should gravitate toward Stock Trends Bullish (if holding long positions), or Stock Trends Bearish (if holding short positions, with qualifications).

Although there is no certainty to price action, trend followers must determine if the prevailing trend is waning and be alert for moments when sentiment is shifting. In Stock Trends parlance these moments of weakening trend are signalled by a Weak Bearish or Weak Bullish indicator. Investors should be watchful of these stocks and ETFs. The triggers for buying and selling are often being hit.

Quick reference Guide to the Stock Trends symbols

Extra bases for ONY, TUN

2009-04-27T20:04:00.001-04:00

Stock Trends Portfolio is overdue for an outlier winner. Infield hits and quick out innings hardly make for a profitable trading system. You need a home run every so often.

Perhaps one of the current holdings will deliver. Both Oncothyreon (TSX:ONY), up 26%, and Tundra Semiconductor (TSX:TUN), up 15%, had a great session today.

Technically speaking

2009-04-27T08:58:00.001-04:00

Tech stocks have been among the leading sectors in the rally since the market low. Currently, the S&P Technology Index is outperforming the S&P/500 by 14% over the past three months. Among these performing stocks are the likes of Corning (NYSE:GLW), Research in Motion (NASDAQ:RIMM), Cisco Systems (NASDAQ:CSCO), and Motorola (NYSE:MOT). Many of these holdings have been recent Stock Trends Picks of the Week.

An exchange traded fund heavily weighted in these stocks is iShares North American Technology - Multimedia Networking Fund (NYSE:IGN). It has traded actively in the past month as weekly share volume is now 5-times it’s previous average. IGN has been Stock Trends Weak Bearish since the end of March and has advanced from $17.35 to its current $21 level since that time. It has had a nice string of weekly higher highs and higher lows. Look for continued price momentum in IGN.

Food stocks shopping bag

2009-04-08T09:58:00.001-04:00

Although the market’s attention is oft in other sectors, consumer staples and related services are providing investors with a good trend trading opportunity. In the the current economic context this is an expected rotation, although the S&P Consumer Non-Cyclical Index remains in a bearish trend. A select group of food products and food retailers stocks outperformed the market in the last quarter and are showing up in the Stock Trends trend filters. Some stocks that are currently Stock Trends Weak Bearish and worth watching include Delmonte Foods (NYSE:DLM), Tyson Foods (NYSE:TSN), Food Technology Services (NASDAQ:VIFL), Whole Foods Markets (NASDAQ:WFMI), Cracker Barrel Old Country (NASDAQ:CBRL), and Diamond Foods (NASDAQ:DMND).

Canadian financials

2009-04-06T13:05:00.002-04:00

Canadian financial stocks are due to join any market revival. The sector flushing has left no country unaffected, but Canadian institutions should be poised for some relative performance gains if the current market rally has legs. The iShares S&P/TSX Financials ETF (TSX:XFN) is Stock Trends Weak Bearish and is in our watch. The share price ($15.47) is rapping the resistance overhead that dates back to mid-February.

An important component of the S&P/TSX Financials Index is Manulife Financial (TSX:MFC) – it has shown some prospect of battling out of its bearish trend in recent weeks, although the stock is still Stock Trends Bearish. MF will be an significant signal toward a qualified turn in the TSX’s financial sector. Clearance through the 13-week moving average trend line should allow the stock to regain the $20 level. Look for MF to turn Stock Trends Weak Bearish soon.

Encouraging trend signals

2009-04-06T10:25:00.001-04:00

The March rally has moved many stocks into areas above downside resistance, an encouraging prospect for the bottoming out process. Stock Trends monitors for price movements above the secondary trend and categorizes these as Weak Bearish. Currently, 47% of trending stocks on the NYSE are Weak Bearish – See the Stock Trends NYSE Trend Distribution table and graph. The Stock Trends Picks of the Week filter focuses on these breakout opportunities, where price momentum pulls the stock out of a long-term bearish trend. If the market continues to rally, these stocks will be primary drivers.

Nvidia chipper

2009-04-05T19:45:00.001-04:00

Thinking about the potential for Nvidia’s Ion and inexpensive Nettops and Netbooks? Nvidia Corp. (NASDAQ:NVDA) is a current Stock Trends Pick of the Wick selection. It has rallied with the rest of the tech stable, and is primed to move past $12. Trading volume has been consistently strong over the past month. The coming trading sessions will tell us a lot about the prospect of NVDA and a developing bullish trend. Support along the trend lines suggests continued price momentum. Stock Trends Bullish Crossover approaching.

Stock Trends TSX Portfolio out of hibernation

2009-04-05T10:25:00.001-04:00

A sign of the improving trend picture for the TSX is renewed activity in the Stock Trends TSX Portfolio. There are two new buys currently, the first since February. The bear market put the lid on trades for this trend following system. There have only been 20 trades from the summer of 2007 until these most recent buys.

Big Blue due

2009-04-04T18:54:00.002-04:00

Two elder statesmen of computing technology are lead performers of the Dow Jones Industrial Index in 2009. International Business Machines (NYSE:IBM) and Intel (NASDAQ:INTC) show the most aggressive price momentum going into Q2. IBM has outperformed the S&P 500 by 29% in the past 13-weeks, as it closed above $100 for the first time since early October. Look for this favourite tech blue chip to continue its move through to $110, as the price momentum is sustained.

Signs of spring - RONA, Canadian Tire, Home Depot, Lowes

2009-04-04T10:34:00.001-04:00

Investors can be encouraged by the movement of home improvement retail stocks. A key to economic recovery is the housing sector, and certainly the performance of stocks like Home Depot (NYSE:HD) and Lowes Cos. (NYSE:LOW) reflects the sentiment that consumers have regarding their primary assets. Both HD and LOW have rallied nicely off their March bottom along with the rest of the market. They are Stock Trends Weak Bearish and now serve investors a key trigger for a bullish trade as they challenge overhead resistance. Should these stocks advance through resistance in the coming weeks look for a continued rally in these important retail stocks.

Canadians can also look to Canadian Tire (TSX:CTC.A) and RONA Inc. (TSX:RON), also Stock Trends Weak Bearish. RON is a current Stock Trends Picks of the Week.

Mining stocks pulling a load

2009-04-04T09:55:00.001-04:00

The top two performing TSX blue chip stocks in the past three months are First Quantum Minerals (TSX:FM) and Inmet Mining (TSX:IMN). The mining sector is up 45% over the period, and is helping lift the TSX into a promising technical area. The S&P/TSX Composite Index is now Stock Trends Weak Bearish and challenging the channel resistance area of 9,200.

Money management trading application

2009-04-02T21:20:00.001-04:00

Too often investors come to the market table without proper money management training. They are keen to score, in hockey parlance, but not willing to backcheck. They are anxious to prove how smart they are, to bask in winning trades. Not surprisingly, these unrealistic expectations set investors up for a rude awakening. How many times have investors misunderstood the probabilities that are stacked against them. Good traders know these odds and manage their trades to minimize losses. Always.

There is no shame in acknowledging the truth: no trader will be right all the time. In fact, even the best traders will be wrong more than they are right. More sobering is another truth: every active trader will have extended periods of crippling losses. These drawdowns on capital are the true test of a trading plan. How does your trading deal with inevitable drawdowns? Would your capital be wiped out if you suffered 10 consecutive losses? Would your trading tendencies change? What does your trading plan direct to minimize the dangers of extended drawdowns?

These questions should be on the mind of every self-directed investor. Before entering a trade know your probabilities – probability of success, probability of meeting profit targets, and the probability of variable losses. Indeed, if a trader learns how to work with these probabilities and devises a money management plan, trading can become a manageable business. And a successful one.

A good starting point is your own trading record. Keep track of your trades. Learn about the basic metrics of your trading strategy and find tools to help turn these metrics into a systematic trading plan. Stock Trends followers should be versed in this kind of systematic trading, but an even more rigorous methodology will be advanced by Stock Trends colleague Brian Ault, whose Fulcrum Shift Trading venture will lend a powerful introduction to his M3 Money Management Modeler – a powerful application the guides traders through the risk/reward analysis of position sizing.

Visit the Stock Trends Traders Network and follow some of Brian’s informative tutorials on the M3 Money Management Modeler. Stock Trends would like to direct our trading audience to this extremely helpful and powerful money management tool.

Riding FAS Bull popular

2009-03-31T23:51:00.001-04:00

The hot potato in this market is the Direxion Financial Bull 3X ETF (NYSE:FAS). Last week it logged 1.788-million transactions, while weekly trading volume was 1.6-billion shares. Investors want to be bullish about the financial sector, and are willing to roll the dice - leveraged for winning big. The extreme volatility of this beast goes without saying, but the potential for a big move in FAS must be enticing for quite a few traders. Another 303-million shares traded today as FAS advanced to close at $5.50.

Spare change

2009-03-31T22:21:00.001-04:00

A current Stock Trends Pick of the Week selection is Coinstar Inc. (NASDAQ:CSTR). The stock’s secondary (13-week moving average) trend line has been trending positively since mid-December, advancing from the $16 level to its high today at $33 in solid fashion. It has been Weak Bearish since January 16, and has been in the Stock Trends sights since. If the current recession drags on expect CSTR to continue its run as hard-hit consumers dig deeper in their couches for lost change. It’s all good for Coinstar and its self-service coin-counting machines.

RuggedCom sends a message

2009-03-31T15:41:00.001-04:00

Another notable stock on the TSX making new 52-week highs is RuggedCom Inc. (TSX:RCM). This communications networking provider has been trending nicely, opening at a high of $26.89 this morning before tapering off to $25. The stock was a Stock Trends Pick of the Week on January 30 at $17.74.

China internet

2009-03-29T17:55:00.002-04:00

Technorati Tags: NASDAQ:ASIA

Big cap tech stocks have been among the better performers year-to-date. The Nasdaq 100 Index is in positive territory with a 5.6% gain over the last three months, thanks in good part to last week’s respectable move. However, the secondary trend line (13-week moving average) remains flat and uninspiring.

A more compelling industry segment of the tech sector, though, is internet infrastructure. Exchange traded funds weighted in this area are moving. The HOLDRs Internet Infrastructure Fund (NYSE:IIH) and HOLDRs Broadband Fund (NYSE:BDH) are examples of ETFs investors can trade. Alternatively, trading AsiaInfo Holdings (NASDAQ:ASIA) would be a more aggressive China play on internet infrastructure. The stock has broken out in the past month and now trades at $17.17, up considerably from its March low of $11.03 after a 25% lift last week. ASIA is a Stock Trends Bullish Crossover, and a worthy trade in this space.

Semiconductors conducting

2009-03-28T18:53:00.001-04:00

Tech stocks have delivered for investors in the recent rally (if we can call it that). Notable in this group are semiconductor stocks. The Philadelphia Semiconductor Index (SOXX) has outperformed the S&P 500 by 27% year-to-date. Comparatively, the broader sector index – the S&P Technology Index – has outpaced the S&P 500 by 15%. Among the better achieving exchange traded funds (ETF) in this space are the Proshares Ultra Semiconductor Fund (NYSE:USD) and the SPDR Semiconductor Fund (NYSE:XSD) and the iShares N.A. Semiconductor Fund (NYSE:IGW) – all besting the broad market by over 30% YTD. Lagging the performance of these ETFs is the HOLDRs Semiconductor Fund (NYSE:SMH) and the Powershares Dynamic Semiconductor Fund (NYSE:PSI). Investors can compare the trend and momentum of these exchange traded funds in the weekly Stock Trends Online listings.

Smith & Wesson gun play

2009-03-28T10:26:00.002-04:00

Technorati Tags: NASDAQ:SWHC

When the economy goes south and the government gets big the people know its time to hunker down. And they load up for bear. Not surprisingly, a stock like Smith & Wesson (NASDAQ:SWHC) is a big winner. It is up 170% in 2009. Indeed, from its low of $1.53 at the end of October (not coincidentally on the eve of Barrack Obama’s electoral victory) SWHC now finds its way to last week’s high of $6.89. Trading in the stock was especially robust in recent weeks. The stock has been a Stock Trends Pick of the Week selection and is a Bullish Crossover Prediction.

Pharma meds working

2009-03-26T15:21:00.001-04:00

Pharma stocks are finding traction in the current market. Some are hitting 52-week highs, including Immunogen Inc. (NASDAQ:IMGN). The stock advanced to $7.19 this morning before dropping back to $7. IMGN was a Stock Trends Pick of the Week selection February 6 after its breakout to $5.06. Another pharma stock hitting a high today is SXC Health Solutions (NASDAQ:SXCI). It was a Stock Trends Bullish Crossover on January 9 at $17.50 as its secondary trend line started to improve. The stock hit $22 in early trading this morning. Meanwhile, Myriad Genetics (NASDAQ:MYGN) also hit a new high ($46.74) today, a day in which the stock was split 2:1. The stock has been Stock Trends Bullish since its Bullish Crossover last summer. It was a Stock Trends Pick at $26.44 (post-split).

Aurizon horizon

2009-03-25T14:17:00.001-04:00

Gold stocks making some headway today. Among those hitting a new 52-week high on the TSX is Aurizon Mines (TSX:ARZ). It tapped above $6 today. ARZ is among a number of gold stocks that were highlighted in January and early February as Stock Trends Picks of the Week. It first hit our buy signals at $4.33 on January 23. It is also a new member of the S&P/TSX Composite Index effective March 23.

Promising Osisko

2009-03-23T18:10:00.001-04:00

Technorati Tags: TSX:OSK

Osisko Mining (TSX:OSK) continued last week’s press through resistance to make a new 52-week high today, the stock’s first day trading as a member of the S&P/TSX Composite Index. OSK is a current Stock Trends TSX Portfolio holding. It closed at $5.61 today, off from the afternoon high of $5.74.

Thinking about nationalizing?

2009-03-23T10:28:00.002-04:00

Yesterday’s news that Suncor Energy Inc. (TSX:SU) will merge with Petro-Canada (TSX:PCA) to create a $43.3-billion integrated energy giant brings Canada closer to the final chapter of the country’s unseemly dalliance with energy socialism. Petro-Canada’s origin dates back to the oil crisis of the 1970s and Pierre Trudeau’s nationalistic energy policy. The hands of government still remain on the enterprise, as the Petro-Canada Public Participation Act still regulates the control of Petro-Canada.

Given the considerable challenges the energy business must overcome, this merger reflects the expanded need for rationalization and integration to finance and produce energy resources like the oil sands. Suncor has picked an opportune time to buy PCA, and investors can expect more oil patch M&A activity. However, as a reminder of how invasive and controlling the hands of government are on nationalized enterprise free-market participants would do well to view the contents of the act that governs Petro-Canada. This is the language of control, this is the language of socialism. Beware “the Minister”.

Petro-Canada Public Participation Act

Alcoa spark

2009-03-22T20:30:00.001-04:00

The surge in commodity stocks last week following the Fed’s move to monetize U.S. Treasury debt was pronounced. Gold and silver stocks were the big winners, but industrial commodities also lit up. Alcoa (NYSE:AA) advanced 14% on unusually high volume of trading. Over 1.1 million transactions last week turned over 552-million shares. The stock remains Stock Trends Bearish, but the level of trading in AA was a positive signal for a breakout from the prevailing baseline.

Technorati Tags: NYSE:AA

Commodity markets take the helm

2009-03-22T16:26:00.001-04:00

Investors can expect renewed pressure on U.S. dollar assets as the U.S. administration monetizes its growing debt. A primary driver of emerging and commodity markets is the growth trajectory of the global economy. Has globalization been derailed by the financial crisis? Will it recover soon? The uncertainty surrounding the ability of the global economy to unhinge from the troubled fiscal and monetary predicament burdening the United States recovery is acute. Although deflation remains a primary immediate concern, the seeds for re-inflation are planted. Expect capital flows to reflect the dismal prospect for the U.S. dollar. Investors should keep an eye on performing international markets. Currently, commodity markets like Norway, Chile, Brazil, Canada and Australia are ascending. The Stock Trends ranking of Relative Strength for international markets helps sort the winners and losers.

Biovail fails

2009-03-22T13:58:00.001-04:00

Biovail (TSX:BVF) pressed above the key $15 resistance level last week but failed to hold, dropping 5% on Friday to close at $13.84. The stock drew our attention in January when it was a Bullish Crossover. But last week's failed move signals an exit from this trade.

Financial mustard seeds

2009-03-21T21:57:00.001-04:00

Up among the swelling gold stocks on the TSX is National Bank of Canada (TSX:NA). The stock has out-performed the S&P/TSX Composite Index by 43% over the past 13-weeks - an impressive standard amid the crippled financial sector. The big Canadian banks lag NA's bouyancy, but investors can consider this a mustard seed for the sector. Include in that hopeful spin the improved trend picture of TMX Group (TSX:X) and Canaccord Capital (TSX:CCI).

Silver slipper

2009-03-21T18:13:00.001-04:00

As the market turns increasingly to commodities and precious metals investors can look for some leverage in silver. The price of silver has risen 23% since the beginning of the year, closing Friday at $13.65. Silver stocks have enjoyed an even better ride. Silver Wheaton (TSX:SLW) is up almost 50% in the past three months thanks to a big pop last week. The stock is one of several precious metal stocks on this week's Stock Trends Picks of the Week.

Bearish sentiment will not easily dissipate

2009-03-11T11:33:00.006-04:00

Don't be suckered into another bear rally yet. Hungry bottom feeders have got a lot of buying ahead to make yesterday's move sustainable. The foundation is far too weak to put all your marbles down. No need to look further than the Stock Trends distribution of trending stocks: it remains highly bearish. Stick with the winning sectors: precious metals, long bonds, and technology. Investors eager to call this a bottom for financial stocks are brave risk-takers.

The Big Board gets a Bell Curve

2009-02-25T09:25:00.004-05:00

Not surprisingly, the NYSE had to change its market capitalization listing rules in the current bear market. With stocks like Citigroup (NYSE:C), General Motors (NYSE:GM) and Ford (NYSE:F) all flirting with a share price level that would trigger delisting - a $1 minimum - the exchange temporarily suspended its minimum rule late last year and lowered the minimum market cap to $15-million last month. Now the lower standard is being floated as a more permanent fix. This is a sign of the time, but surely raises some questions about standards going forward. The Big Board ain't so Big anymore.

Eldorado

2009-02-23T12:34:00.004-05:00

It's always telling to see a stock hit a new 52-week high while the rest of the market suffers. Eldorado Gold (TSX:ELD) scaled to $11.60 this morning. The stock was a Stock Trends Pick of the Week on January 9 at $9.25. It turned Stock Trends Bullish a month ago.

Nova's Middle East saviour

2009-02-23T12:23:00.004-05:00

Maybe we need a lot more foreign vultures at the table. Abu Dhabi's state owned IPIC has swooped in to offer $6 share for downtrodden Nova Chemicals Corp. (TSX:NCX, NYSE:NCX). Trading in NCX was notably slim last week as the stock stabilized after several weeks of heavy trading and gruesome losses. This offer was likely very swift in the making.

Tech relative strength

2009-02-23T11:31:00.004-05:00

Most investors are running for cover. The question they should ask, though: what cover? most of our trend signals point toward precious metals - and for good reason. But technology stocks are also garnering a stalwart reputation in the market downdraft. The Nasdaq 100 index has outperformed the S&P 500 over the last three months by 12%. The Powershares Nasdaq 100 ETF (NASDAQ:QQQQ) is currently Stock Trends Bearish, but its relative strength has been on an upward trend since November. Investors should feel reasonably comfortable weighting some of their holdings in tech.

Out with the plastic, in with the cheese

2009-02-05T10:27:00.003-05:00

First it was doughnuts, now it's cheese - Canada's blue chip club is slowly becoming a food emporium instead of an industrial complex. Replacing the beleaguered plastics and chemicals firm Nova Chemicals Corp (TSX:NCX) in the S&P/TSX 60 Index is Canada's largest cheese maker, Saputo Inc. (TSX:SAP). SAP now joins Tim Horton's (TSX:THI) as the latest consumer stock added to the blue chip index. Oh, I may be forgetting about the addition of T-shirt maker Gildan Activewear (TSX:GIL), but the message remains the same: Canada's economy is exceedingly lightweight when it comes to the consumer sector. The TSX will remain the domain of the resource and financial sectors.

A healthy advance

2009-02-04T12:14:00.003-05:00

Bright spots on the TSX are few and far between, but the performance of SXC Health Solutions (TSX:SXC) is notable one. It reached an new 52-week high today, climbing to $25.40 in the morning session. SXC has been Stock Trends Bullish since June of last year, but made its significant move in November. The 13-week moving average trend line offered support last week, giving investors reason to stick with this bullish trend. Today's move rewards the trend traders.

Investors coming out of hibernation

2009-02-03T19:14:00.003-05:00

Relative market stability is starting to bring back anxious investors. January was the first month since August to have net inflows into Canadian mutual funds. Much of that went to fixed income funds, but stocks also benefited from this gradual renewal. This is another sign of hope.

Mega Brands scores

2009-02-03T18:59:00.004-05:00

Mega Brands (TSX:MB) spiked 182% today after its deal with Microsoft was announced. Mega Brands will be producing construction toy sets for the Halo Wars video game franchise. Trading in the stock had been unusually light in recent weeks, so this deal was kept under wraps. Still, MB remains in a bearish trend and has more to prove before it deserves Stock Trends attention.

Money manager cat fight

2009-01-30T23:28:00.003-05:00

It's like a cat fight between Peter Schiff's adversaries and beleaguered Mr. Schiff. Last week there was the fire bomb. Now Schiff sends his lobby back. His gold message rings true with Stock Trends.

Open Text reads well

2009-01-29T12:39:00.003-05:00

Hitting a new high today on the TSX is Open Text Corp. (TSX:OTC, NASDAQ:OTEX). The move takes out the previous resistance level and should allow the stock to build on existing price momentum. Although OTC is Stock Trends Bullish, OTEX is still in a Weak Bearish category. Today's advance of the NASDAQ-listed stock back to $35 puts OTEX back to the level it was at before stock's precipitous drop in October.

TSX Group

2009-01-28T16:22:00.004-05:00

Financial stocks had a good day. Many of the big banks have advanced over 5% today - a welcome relief echoing the jump in financials south of the border. Still, this is a sector investors should stand clear. One exception may be the exchange stocks, though. TSX Group (TSX:X) was one of the few financials stocks that fizzled today. The company announced improved profits in its Q4 performance - something the market clearly has already discounted. The stock fell 2% to close at $31.36. But X is Stock Trends Weak Bearish with a good chance to build upon the relative price performance of recent weeks. Today's poor showing in a positive day for financials should be seen as more opportunity than warning. South of the border both the NYSE Euronext (NYSE:NYX) and the CME Group (NASDAQ:CME) logged healthy gains today.

Gold pullback

2009-01-28T14:42:00.004-05:00

Gold stocks are off today, dropping over 3%. Perhaps a good time to pick up more iShares S&P/TSX Global Gold Index Fund (TSX:XGD). The ETF is now trading at $18.54, but has a good chance to rally off support here.

Maple Leaf Foods (TSX:MFI)

2009-01-28T11:18:00.004-05:00

Traditionally, investors flock to the consumer staples stocks in a recession, and among this group are food processing companies. Not surprisingly, many of these food product stocks are showing positive price trends in the midst of an economic slowdown. Stock Trends alerts for these improving trends with a Weak Bearish indicator – a sign that the short-term price trend is improving against the long-term bearish price trend. On the NYSE many familiar food product stocks are now Weak Bearish, including Chiquita Brands International (NYSE:CQB), Dean Foods (NYSE:DF), Del Monte Foods (NYSE:DLM), Kraft Foods (NYSE:KFT), and Smuckers (NYSE:SJM).

Canadian names are also hitting Stock Trend alerts. Maple Leaf Foods Inc. (TSX:MFI) suffered more than most last year – the listeriosis outbreak in one of its plants was nothing less than devastating for the company. But there is mounting evidence that the stock has started to respond to the company’s repaired image. A recent report on insider buying by corporate officers of Maple Leaf gives added fuel to the improving bullish picture for MFI. The stock is projected to be a Stock Trends Bullish Crossover next week – signifying the start of a new long-term bull trend. This is a good buy signal for investors looking for exposure in this relatively strong sector.

The important trend line for MFI at this moment is the short-term (13-week) moving average. It should offer investors key support signals moving forward. The trend line support is at the $9.90 level, also a price support level framed by the stock’s price pattern last September and its breakout to the plus-$10 region in early December. Shareholders of MFI should be expecting a bounce off this level and valuations above $12 as the sector continues to attract capital. Trading volume in MFI has been weak recently, but will have to improve to fuel this bullish scenario. Every bullish trend needs strong and improving trading activity.

Barring another unexpected announcement about listeriosis, MFI should perform in a predictable pattern. If the stock fails to rally off the support level, the premises of the trade fail. In that result this could be a position of short duration. A stop-loss order at $9.70 would limit losses, and also force the trade to perform quickly. The Bullish Crossover is a helpful entry signal, but the crucial trend element guiding this trade is the support level isolated by the short-term trend line (13-week moving average) and the previous price pattern. Investors should learn to establish these specific types of parameters to a trade before buying. Doing so will limit losses and foster specific expectations of the way the stock will perform. No trade has certainty on its side. But traders can develop certainty of their actions – that is, when they buy and when they sell.

IBM

2009-01-27T10:45:00.004-05:00

International Business Machines (NYSE:IBM) opened above $91.60 and hit a high of $91.95 this morning before dropping to $90.50. Will be watching to see if the stock can regain the morning losses. IBM is categorized as Stock Trends Weak Bearish and has a chance at a triple digit share price on tech strength. Looking for $95+ before entry.

Poof! More smurf than stone

2009-01-26T21:42:00.004-05:00

Smurfit-Stone Container (NASDAQ:SSCC) filed for Chapter 11 today. A sad ending that completes a precipitous decline, but a good reminder of how far corporations can fall. SCCC stock and bonds traded feverishly in the past couple of weeks - the writing clearly on the wall. Bond holders will be ready hat-in-hand. Last week the Smurfit-Stone Conatiner junk bonds yielded 61% and advanced on active trading. The stock, meanwhile, evaporated. Whatever. Stock Trends said goodbye to this dog back in September of 2007 when it turned Stock Trends Bearish.

Gold/Oil Ratio spikes

2009-01-26T17:32:00.009-05:00

Milton Friedman underscored that "inflation is always and everywhere a monetary phenomenon." The current economic recession has made deflation the primary concern of central bankers, and rightfully so. The risk of systemic failure of the international financial system weighs heavily on the best and brightest bankers and economists. They may lead us out of the current financial crisis, but investors should be forewarned about the ugly consequences of the current fiscal and monetary plans in place. Look no further than the shifting crude oil and gold pendulum for a glimpse of the future.

The Gold/Oil Ratio has started a steep climb that is starting to look ominously similar to the the period leading up to the great stagflation of the 1970s. Alternatively, it could be the more benign shift to a period of weak crude oil prices, as in 1986 when the Gold/Oil Ratio also skyrocketed. Investors are hoping for the latter scenario, but there has to be considerable concern about the busy U.S. printing press. Inflation is obviously not an immediate concern, but the sudden shift in the relationship of gold and oil commodity values tells us that an unwelcome monetary storm may be brewing ahead. If the gold/oil ratio rallies further it will be concerning.

Below are graphs of the growth of U.S. monetary base and U.S. core-CPI (excluding food and energy). The grey bars represent recessions.

Golden opportunity

2009-01-25T23:24:00.003-05:00

Gold stocks advanced again last week, finishing with a 10% gain after a strong trading session on Friday. The gold sector has outperformed the S&P/TSX Composite Index by 96% since the sector’s October low. Investors are clearly gravitating toward the portfolio insurance afforded by precious metals. Poor broad market performance – both the Toronto market (down 7%) and the S&P 500 Index (down 5%) have lost ground in the last quarter – has investors turning to gold as an anchor in the market downdraft. With the price of bullion tipping $900 again there will be even more buying presence lifting the sector. The S&P/TSX Global Gold Index has been categorized as Stock Trends Weak Bearish since early December, signalling the sector’s move above the short-term trend. In the absence of any competing strength in another sector, momentum traders will extend the current rally.

Investors can either trade gold stocks or use a number of bullion commodity funds. The iShares COMEX Gold Fund (TSX:IGT) has been categorized as Stock Trends Bullish since early December, and shows the quality of the asset even in the face of a weakened Canadian dollar. The bullion fund, denominated in Canadian dollars, is up 19% over the past three months – well below the 81% return gold stocks have generated over the same period - but solid ballast in the stormy waters. However, if the loonie has bottomed, or at least stabilized, Canadian investors can expect to get more traction out of their bullion fund investments as we move further into the first quarter of 2009. Another fund that gives investors heavy exposure to bullion is Central Fund of Canada (TSX:CEF.A). It currently sports a Stock Trends Bullish Crossover indicator, a signal that the short-term (13-week) average price has moved above the long-term (40-week) average price. This intersection of trend lines is a primary buy signal for trend traders with an investment time horizon of two-months and beyond.

The iShares S&P/TSX Global Gold Index Fund (TSX:XGD) joins a growing list of TSX gold stocks that are triggering Stock Trends buy signals. Among these are Iamgold Corp. (TSX:IMG), Eldorado Gold (TSX:ELD), Kinross Gold (TSX:K), Barrick Gold (TSX:ABX), and Agnico-Eagle Mines (TSX:AEM). Kinross failed to advance last week, in contrast to the rest of the big cap gold stocks, but it is the first of this group to have a Bullish Crossover. Only 3% of TSX stocks are currently categorized as Stock Trends Bullish, so the addition of every new one should not go unnoticed.

Risk tolerant investors should consider the leveraged gold funds listed on the TSX: the Horizons BetaPro Global Gold Bull Plus Fund (TSX:HGU) and the Horizons BetaPro COMEX Gold Bull Plus Fund (TSX:HBU). These funds deliver 200% of the daily return of the respective underlying bullion and stock funds. More active investors betting on continued short-term performance of the sector can take a more aggressive gold position with these funds.

More education

2009-01-25T14:21:00.003-05:00

Two other education stocks are Bullish Crossovers: Career Education (NASDAQ:CECO), and Capella Education Company (NASDAQ:CPLA). Trade on industry strength.

Vocational schools looking smarter

2009-01-22T17:51:00.005-05:00

Educational stocks again faired well in a down market. Devry (NYSE:DV), Apollo Group (NASDAQ:APOL), Corinthian Colleges Inc. (NASDAQ:COCO) and ITT Educational (NYSE:ESI) hit new highs today. It's not a bad idea to go with strong swimmers in the face of stormy waters.

Small caps showing better

2009-01-21T15:58:00.009-05:00

Small cap stocks will likely be the most promising segment of the market over the next quarter. Big cap stocks withstood the bear slide of last year better than the vast majority of stocks. Stock Trends Relative Strength Indicator for the Dow Jones Industrial Index, for example, ran positive through Q3 and Q4 of 2008. The RSI of the Russell 2000 Index, though, underperformed the S&P 500 Index for most of that same period. Now things are changing. Blue Chips are starting to lose ground to the recent performance of small cap stocks. The Russell 2000 RSI is trending up. The Dow Jones Industrial Index RSI is trending down.

Biovail Corp. (TSX:BVF)

2009-01-21T09:51:00.006-05:00

Although the stock market has yet to deliver convincing evidence of a bottom, there are opportunities for brave investors to once again enter the water. Gold stocks attract most of the trend and momentum crowd, but another sector has shown relative strength gains in recent weeks: health care. Among the growing number of stocks that have signaled short-term trend improvement are pharmaceuticals. A leading Canadian name in this space is Biovail Corp. (TSX:BVF). The stock’s recent strength has triggered a Stock Trends Bullish Crossover indicator – signalling a crossover of the 13-week moving averge above the 40-week moving average. Intermediate to long-term traders and investors can use this crossover as a buy signal.

One of the most important measures of a stock’s performance is how it is doing relative to the benchmark market index. Regardless of the market direction, a stock should be performing better than the market as a whole. The Stock Trends Relative Strength Indicator (RSI) helps identify these performers. The ajacent graph shows how the Stock Trends indicators categorized the trend and price momentum of BVF over the past two years. The Relative Strength Indicator revealed the building market support for BVF dating from last September when the Stock Trends RSI started trending positively. This rising RSI pattern reveals the stocks stalwart appeal in the face of a tough bear market. The share price of Biovail held fairly steady in the autumn while the market floundered.

The Stock Trends trend indicator shifted to Weak Bearish in December, alerting investors of the stock’s modest move above the intermediate-term trend line (13-week moving average). However, it was the price breakout to $13.50 in the first full trading week of 2009 that moved the trend line upward. This price advance through resistance at $11.75 was a crucial move that opens up the stock’s bullish trade potential.

If BVF’s breakout is to be sustained, improved trading volume will lend a helping hand. Look for increased trading activity in BVF as we move further into this quarter. The bullish prospects of BVF improve with the market, and especially with expanded leadership potential from other names in the sector. On the blue chip end, Pfizer Inc. (NYSE:PFE) has outperformed the S&P 500 by 14% over the past three months and is one of only two Dow Jones Industrial stocks currently in a Stock Trends Weak Bearish trend. While continued relative performance gains for PFE will help push stocks like BVF, it is the small cap resurgance of biotech stocks that will attract additional money flows to the sector. Investors now holding BVF can hope to book a 30% gain if the stock achieves a sustained rally to the $18 level.

As much as the breakout past $11.75 opened the lid on a BVF trade, resistance at the $14.75 level could be a tough ceiling to move past. The stock may simply extend its trading range of the past year. Only a strong advance through $15 will diminish this concern. Nevertheless, BVF’s chart gives investors key price points to monitor. Failure to move above $15 should signal an exit.

Pharma stocks attractive

2009-01-19T17:08:00.003-05:00

The predominant theme emanating from the trend and momentum constellation points investors toward gold and biotechnology stocks. A good number of the current Stock Trends Picks of the Week report are pharmaceutical stocks, some of which traded quite actively last week. On the large cap side of the ledger stands Pfizer (NYSE:PFE), a Dow Jones Industrial entry that ranks number 6 amid the Blue Chip’s 13-week momentum ranking. It has outperformed the S&P 500 by 4% in the past three months and until this week’s entry of Kraft Foods (NYSE:KFT) was the only Dow Industrial stock to have achieved a Stock Trends Weak Bearish indicator. PFE also held steady in last week’s market drop. However, traders are turning hot on junior stocks in the space. Among the NASDAQ Picks of the Week report are a number of biotechs.

Back to school

2009-01-15T20:36:00.000-05:00

Swelling jobless rates are never a pleasant figure to face. But unemployment does put educational providers in a sweet spot. Some of these stocks have been performing quite well in the hovering recession. A Stock Trends Bullish Crossover last week, Devry Inc. (NYSE:DV) has been a bit of a yoyo around the 40-week moving average for a while. The secondary trend line, despite the crossover signal, is not showing an attractive uptrend. However, there is some supporting evidence in the educational services group that makes DV and its peers attractive trades. Others in the group include Apollo Group (NASDAQ:APOL), Corinthian Colleges (NASDAQ:COCO), Strayer Education (NASDAQ:STRA), and ITT Educational Services (NYSE:ESI). The volatility of these stocks is hazardous, but their potential makes them interesting trades. ESI stretched for a 52-week high today, while the others all enjoyed a nice rebound after Wednesday's stumble.

PIMCO Muni Income Fund

2009-01-14T13:40:00.005-05:00

Another fixed income fund that has performed well in the early days of 2009 is PIMCO Municipal Income Fund (NYSE:PMF). It turned Weak Bearish in last week's Stock Trends reports after its 35% pop - aided by the renewal of a suspended dividend payment. On the theme of US Treasuries losing their appeal, PMF and its ilk offer investors handsome yields as a hedge against market weakness. The stock is off 5.75% to $10.30 amid the stock market's fumble today. Perhaps a good opportunity to enter PMF.

Grocery shopping on a bad day

2009-01-14T13:29:00.003-05:00

The market has dropped 3% today, but no matter for Loblaw Cos. (TSX:L): it hit a new 52-week high. The solid move to plus-$37 leaves behind resistance and spells a good chance for $40 on the next leg.

Biovail teases

2009-01-13T22:23:00.004-05:00

The bear trend of Biovail Corp. (TSX:BVF) dates back 74 weeks, but there seems to be some hope that the stock is breaking out of its rut. A move above $14 would be a good signal that the trading range that has shackled BVF over many months has been breached. The stock reached a high of $13.77 today and is a current Stock Trends TSX Pick of the Week selection.

Some bond funds beckon

2009-01-13T21:06:00.003-05:00

Last week's NYSE Picks of the Week report included several fixed income funds. Included in the group were: iShares Investment Grade Corporate Bond Fund (NYSE:LQD), iShares Aggregate Bond Fund (NYSE:AGG), iShares 1-3 year Credit Bond Fund (NYSE:CSJ), iShares Government Credit Bond Fund (NYSE:GBF), iShares Inter-Government Credit Bond Fund (NYSE:GVI). The US Treasury market is in a precariously overbought position, with yields likely to rise in the current monetary and fiscal constellation launched by Washington. The spread on corporate yields have risen to attract investors in this tight credit market, so some of the funds that focus on these areas have attracted a yield-hungry crowd.

Little chirps from Bird Construction Income Fund

2009-01-09T16:38:00.003-05:00

Another contractor is starting to wake up, as Bird Construction Income Fund (TSX:BDT.UN) has advanced in healthy fashion in recent weeks. Today's lift back above $21 shows that BDT.UN will hold on to the gains of the previous week. This is another issue highlighted in last week's Newly Weak Bearish report - a filter report investors can use to help identify stocks breaking out of a long-term down trend.

Paladin Labs hits new high

2009-01-07T17:50:00.004-05:00

A Bullish Crossover stock in last week's TSX reports, Paladin Labs Inc. (TSX:PLB) soared to a new 52-week high in early trading today before settling back to $12.65. The Bullish Crossover (13-week moving average moves above the 40-week moving average), although a lagging indicator, is often a good timing signal for entry into a stock and is the core trend indicator used by the Stock Trends TSX Portfolio trading strategy. However, PLB had insufficient trading volume and underperformed the S&P/TSX Composite last week - important sets of criteria in this mechanical trading system. Still, PLB is an interesting play in the pharmaceutical space.

Gold stocks dip

2009-01-07T16:00:00.004-05:00

Gold stocks dropped today, but traders might want to take this opportunity to buy the S&P/TSX Global Gold Index Fund (TSX:XGD). The retreat to $16.50 should find support over the short-term. Gold stocks lead the market presently, so we can expect periods where the sector pulls back. The weakness in crude oil and commodities in general weighs heavily on gold, and today's draw on crude prices factored in the drop in gold stocks. However, investors can reckon on monetary factors keeping the ball in gold's court. Gold is a bet against the US Dollar, a bet that many will be willing to make.

Some life in Ultralife (ULBI)

2009-01-07T12:31:00.003-05:00

The Stock Trends Picks of the Week reports are starting to become active again. These filter reports look for stocks that are showing signs of breaking out of a bearish primary trend and give investors a short list of stocks to monitor for buying opportunities. One the stocks in the current NASDAQ Picks of the Week report is Ultralife Corp. (NASDAQ:ULBI). It has surged over the past two months and now trades at $13.44 and tipped the $14 resistance level that dates from Q2 08. The stock still has some work to do, but last week's high volume indicator adds to the interest.

Agra-chem stocks offer opportunity

2009-01-07T10:40:00.006-05:00

The change in trend distribution has brought quite a few trading opportunities to our attention. Among the newly Weak Bearish stocks are the agra-chem stocks that had fallen precipitously last year. Potash Corp. (TSX:POT, NYSE:POT), Agrium (TSX:AGU), and Mosaic Co. (NYSE:MOS) all show promise of being in the advanced stages of a bottom, moving in an extended trading range but giving investors a good opportunity to play the upside on limited downside risk. Seasonal factors as well as improved broad market conditions should help these stocks.

And joining the group in a positive move today is Monsanto Co. (NYSE:MON), jumping over 15%.

Loblaw ready to move

2009-01-06T22:14:00.004-05:00

Of the 60 stocks in the S&P/TSX 60 Index only George Westin Ltd (TSX:WN) and subsidiary Loblaw Companies (TSX:L) is currently in a bullish Stock Trends category. Loblaw's stock has outperformed the broad market by 39% over the past three months as it has battled with price resistance at the current level since early December. The Bullish Crossover (the secondary trend line has penetrated above the primary trend line) should be a good opportunity to buy L given the strength of the consumer staples sector and the clear signal a move above $36 gives. The stock has been trading in a range for a year, but will attract capital flows as conservative investors move back into stocks cautiously.

Manulife advancing

2009-01-06T12:19:00.003-05:00

After lagging Sun Life Finanial (TSX:SLF) in Q4 of 2008, Manulife Financial (TSX:MFC) has logged in a good start in the new year. Although MFC still has a Bearish indicator, if it maintains its current plus-$24 level the stock will be in Stock Trends Weak Bearish territory - a positive alert for Stock Trends followers.

SNC-Lavalin

2009-01-06T10:56:00.003-05:00

Among the best performing big cap TSX stocks in the final quarter of 2008 was SNC-Lavalin Group (TSX:SNC). Its strong 13-week price momentum shows the market's interest in this global engineering firm's prospects - not surprising since infrastructure spending is the big element in governments' recession fighting arsenal. Trading volume in SNC should build over the coming weeks, a required element if the stock is going to move past the price resistance at the $40 level. A quick move to $45 will bring SNC further into our spotlight. It hit the Stock Trends Weak Bearish category on December 12, and bas been battling with resistance since. Improved broad market conditions should help.

15-year Trading stats

2009-01-06T09:03:00.004-05:00

The Stock Trends TSX Portfolio has been active for 15-years now. Last year was a losing year, with losses totaling about 20% on average investment. Trading activity was low, reflecting the bearish market conditions, and helped avoid the market downturn to some extent. By comparison the S&P/TSX Composite Index dropped 35%. The lifetime annualized return on investment of ST Portfolio, though, remains at 40%.

The following table provides some pertinent trading statistics for the trading strategy:

ST TSX Portfolio Trading Startegy Trade Analysis

Total Gain: $ 240,164 607%
# of weeks: 788
Total # of trades: 419
Winning Trades: 169
Losing Trades: 250
Winning %: 40%
Average # of weeks each position held: 7.5
Average # of positions held each week: 4.0
Average Gain: $ 2,922 29%
Average Loss: $ (1,015) -10%
Average Investment: $ 39,566
Average trade: $ 10,000
Maximum Drawdown (%): -34.2
Largest Gain $: 40,880 409%
Largest Loss $: (3,542) -35%
Maximum losing trades in Succession: 12

Losing Runs Frequency

2 losers in a row: 22
3 losers in a row: 11
4 losers in a row: 9
5 losers in a row: 4
6 losers in a row: 1
7 losers in a row: 2
8 losers in a row: 1
9 losers in a row: 0
10 losers in a row: 3
11 losers in a row: 1
12 losers in a row: 1

Sharpe Ratio: 5.2

Martin Ratio:4.2

Ulcer Index: 9.2

Profit factor: 1.95

Pessimistic Return Ratio: 1.92

Shifting sentiment shown in trend distribution

2009-01-05T20:13:00.000-05:00

The market remains in a Bearish long-term trend, but the fact that a full 60% of NYSE stocks are now sporting a Stock Trends Weak Bearish indicator suggests, if the constellations align, we could be in for a more hopeful year ahead. The TSX, too, has its share of stocks now in a more promising trend category, with 35% of trending TSX stocks now categorized as Weak Bearish.

More embarrassment for the TSX

2008-12-17T23:02:00.003-05:00

The Mickey Mouse operation of the TSX defies belief sometimes. Yes, the impressive trading volume that passes through a modern exchange like the TSX goes without much heralding. Performance, no matter how active the market, is expected. Failure is not. When a market is unable to function properly, even for a short period, it is not acceptable. When it is halted for a whole day - well, that is absolute failure. Gone are the days when you can blankly blame the technology and the people behind it. This is a management problem. After today's failure, heads should fall.

A little sweetener in your portfolio

2008-12-09T21:12:00.003-05:00

According to a recent Businessweek table there are some commodity prices that have actually risen in the past year. While wheat prices have fallen almost 30%, the prices of refined sugar are up over 20% over the past year. Some may take this as proper incentive to cut down on fattening sweets and sweeteners, but investors like to follow the pricing power. Not surprisingly, Rogers Sugar Income Fund (TSX:RSI.UN) is showing signs of a change in trend. It is now a Stock Trends Weak Bearish stock and is one of a few encouraging trading opportunities in the consumer staples sector.

S&P/TSX Composite drops below 8,000

2008-11-20T12:56:00.004-05:00

It's been 5-years since the S&P/TSX Composite Index scaled the 8,000 level. Today it dipped to sub-8,000, a mark that tells us a bottom has not been found yet. We may be at risk for another 20% slide to the 2002 low. Worse, bullish stocks on the TSX now only number about 5% of trending stocks. This brings us back to the bearish depths of the previous commodity stock bottom in 1998.

NT, meet GM

2008-11-13T11:11:00.003-05:00

It cannot be a surprise to investors to wake up to reports of impending bankruptcy. It has been a predominant theme in the last quarter. Adding Nortel Networks (TSX:NT, NYSE:NT) to the list is hardly newsworthy...but here it is: a fresh report.

Beat the odds, standing still

2008-11-12T20:13:00.005-05:00

Are you a deer caught in the headlights? Maybe its not such a bad idea in a bear market to embrace your inactivity. Here's an article that reviews the results of a study of the action bias of elite soccer goalkeepers. There is something to be said for standing still when everyone else is running about in a panic.

GM a lost cause

2008-11-07T12:31:00.004-05:00

Trend traders should have bailed on General Motors (NYSE:GM) long ago. Stock Trends dropped this stock with its Bearish Crossover at the end of 2007. With today's announced 3rd quarter loss of $2.5-billion the future of GM is as dark as ever.