The Economy - 2007/02/15 11:50
Let's test this new board.
There seems to have been disagreement on Tuesday on what direction the economy is going and what we should do about it.
Some think that we should sell our cyclicals and invest them into preferred stock in order to avoid a market slowdown. People were saying that we have a maximum of 5% gains this quarter if we keep our money where it is. The reasons why we are about to hit a ceiling is because we are about to cross some psychological barrier. Also, some feared an oil shock. I disagree with all of this but let me look at each question in turn:
There is no reason for oil to spike now. If we look at the current oil news from the Wall Street Journal, we see that oil should be (and has been) going down because oil inventories are higher than expected. This is good news for stocks. http://online.wsj.com/page/commodities.html?mod=2_0030
Bernanke spoke to the Senate Banking, Housing and Urban Affairs Committee yesterday. Here are some pertinent quotes: "Consumer spending continues to be the mainstay of the current economic expansion." "All told, consumer expenditures appear likely to expand solidly in coming quarters." "Overall, the US economy seems likely to expand at a moderate pace this year and next with growth strengthening somewhat as the drag from housing diminishes."
As far as oil goes, Bernanke said that "Futures quotes imply that oil prices are expected to remain well below last years peak." however, he did acknowledge that "The prices of oil and other commodities are notoriously difficult to predict and they remain a key source of uncertainty to the inflation outlook."
We all know that oil is volatile. That is probably why we don't own it. The current indicators show no sign of a spike. If you truly think that oil is about to spike then put your money where your mouth is and propose that we buy the commodity.
As far as a cyclical downturn goes, I do not believe that we are going to see that this quarter. The psychological barrier that has been described to me comes from pure technical analysis (reading a chart without looking at underlying performance factors). The fundamentals of the economy show no cause for alarm. Unemployment is down, rates of resource utilization are high, growth in exports is up (9%) and growth in imports is down (3%). New and existing home sales have stopped falling and have flattened out in recent months and mortgage applications have picked up so the housing bust seems to be bottoming.
That is a report from the Department of Commerce that came out on 2-14-2007. It shows what retail sales have been doing. Pay close attention to the adjusted columns (they adjust for Christmas shopping). Retail sales were flat overall, despite a 1.3% drop at motor vehicle and parts dealers and a 1.2% drop at electronics and appliance stores.
Why should this report matter to us? If Bernanke is right and consumer spending is driving this market then I can't think of a stronger metric to look at than retail sales, since it tells us exactly what kinds of places consumers are spending their money on. From that we can begin to extrapolate what kinds of things they are spending their money on (vehicles, clothing, groceries, tech, etc.)
The retail sales report, coupled with the run on metals like gold and copper make me think that we should re-evaluate our positions in tech. Not only is it getting more expensive to buy the metal to build a chip, the demand for electronics is going down at the retail level. That's a double threat to tech margins. Q2 is probably only going to look worse for tech than Q1 does now.
Here are my ideas on where we could go from here: Re-evaluate TXN, Re-re-evaluate AMD and yes, even re-evaluate AAPL (they make hardware and their goods are sold in electronics stores). Department stores are showing the strongest growth in retail sales so perhaps we could increase exposure there. If we want to keep some tech exposure then maybe we could look (carefully) at some online retailers like Amazon since non-store retailers are showing some gains.
At any rate, these are just some ideas. I'm new around here so I apologize if I stepped on any toes or broke any protocols in this post.
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admin
Re:The Economy - 2007/02/16 20:14Let's test this new board.
There seems to have been disagreement on Tuesday on what direction the economy is going and what we should do about it.
I don’t think that there is ever an agreement on the direction of the economy. If there was ever an agreement then CNBC would be really boring and the discussion on the economy at this past week’s meeting was merely to gauge the thoughts of the team members.
Some think that we should sell our cyclical and invest them into preferred stock in order to avoid a market slowdown. People were saying that we have a maximum of 5% gains this quarter if we keep our money where it is. The reasons why we are about to hit a ceiling is because we are about to cross some psychological barrier. Also, some feared an oil shock. I disagree with all of this but let me look at each question in turn:
The market is up about 70% since 2003, it increased I believe 15% last year. The market is already up 3% this year; my prediction is that the market will generate 10% returns or less for the entire year. I would rather make a sure 5-6% than to risk a lot more for the same amount of reward. The fact is that we are overweight equities and underweight fixed income, while the fixed income market is relatively unattractive with the current interest rates, my belief is that we should get more in line with the 65/35 allocation instead of the 75/25 and perhaps move more into fixed income (preferred stock and short-term treasuries).
There is no reason for oil to spike now. If we look at the current oil news from the Wall Street Journal, we see that oil should be (and has been) going down because oil inventories are higher than expected. This is good news for stocks. http://online.wsj.com/page/commodities.html?mod=2_0030
We live in an oil based economy, with really no other alternative for transportation and the production of plastics and other products. The US Government will do nothing to convert to an alternative energy because when you have Exxon reporting $40 billion in annual profits, you have the US Government receiving $23 billion in tax dollars. I don’t want to turn this into a political argument but besides the shareholders, the government is the primary beneficiary of high oil prices and record profits for Exxon Mobil.
Bernanke spoke to the Senate Banking, Housing and Urban Affairs Committee yesterday. Here are some pertinent quotes: "Consumer spending continues to be the mainstay of the current economic expansion." "All told, consumer expenditures appear likely to expand solidly in coming quarters." "Overall, the US economy seems likely to expand at a moderate pace this year and next with growth strengthening somewhat as the drag from housing diminishes."
Consumer debt is at an all-time high, obviously consumer spending is driving the economic expansion that is the basic principle as to why the Federal Reserve kept rates at 1% following the recession after the Tech Bubble. While interest rates have been relatively stable over the past couple months at about 5%, any sudden increase in interest rates will cut off the liquidity supply line. Inflation, while tame right now, could certainly be an issue, especially with Congress voting soon to increase the federal minimum wage to about $7.15, the price of goods will go up because when you increase the cost of labor, you get two things, unemployment and higher prices. While some will obviously argue that now the lower end of the labor pool will have more cash in their pockets, if the minimum wage increases 15% and a Big Mac increases by 15% to cover that increase in cost, then the minimum wage worker is no better off than they were before and the rest of society has to pay for this “increase”. Less money and higher prices leads to a recession and higher inflation.
As far as oil goes, Bernanke said that "Futures quotes imply that oil prices are expected to remain well below last years peak." however, he did acknowledge that "The prices of oil and other commodities are notoriously difficult to predict and they remain a key source of uncertainty to the inflation outlook."
We all know that oil is volatile. That is probably why we don't own it. The current indicators show no sign of a spike. If you truly think that oil is about to spike then put your money where your mouth is and propose that we buy the commodity.
The oil markets aren’t “free markets”, they are as free as China and the “floating” Yuan. When you have a limited supply of a good that is sparsely produced throughout the rest of the world and produced in the most hostile area, you get shocks. Politics obviously plays a role, Iran; the biggest oil producing country knows that it can do anything it wants to, because the world relies on them. War with Iran, while a low probability is very much a reality and the second that something happens you will expect the stock market to react negatively.
As I mentioned last night, we cannot purchase commodities outright, but we have made a bet in the energy sector and we are currently examining more companies in that area. Do I think we will see a huge oil shock…probably not, but the trend is up and oil will continue to rise whether Bernanke thinks it will or not.
As far as a cyclical downturn goes, I do not believe that we are going to see that this quarter. The psychological barrier that has been described to me comes from pure technical analysis (reading a chart without looking at underlying performance factors). The fundamentals of the economy show no cause for alarm. Unemployment is down, rates of resource utilization are high, growth in exports is up (9%) and growth in imports is down (3%). New and existing home sales have stopped falling and have flattened out in recent months and mortgage applications have picked up so the housing bust seems to be bottoming.
Another argument that will never be won, technical versus fundamental, it is just a matter of opinion. While the fundamentals appear on the outside to look good, on the inside, as mentioned above, Congress is changing policies that will have macro effects. Deny the existence of technical analysis, but should the S&P 500 reach 1550, there will be a noticeable top, especially since investors will finally be able to breakeven on their portfolios should they have gotten in at the top of the market in 2000. Yes, the fundamentals are different now, and I would wholeheartedly agree with you on that view, but investors, especially retail investors who trade with their emotions and some may have carried over losses from that point forward hoping just to breakeven and get rid of the position.
The market hasn’t seen a correction of greater than 9% since 2003, while in 1997-2000 there were noticeable drops of more than 10% in each of those years. Corrections are healthy to a strong economy, because the market tends to overshoot the efficient level, mainly due to emotions and when the news is positive the market tends to overperform and with bad news the market tends to underperform the correct level. Corrections bring the market back to reality and bring it back in line with the obvious correct market level, hence the name.
That is a report from the Department of Commerce that came out on 2-14-2007. It shows what retail sales have been doing. Pay close attention to the adjusted columns (they adjust for Christmas shopping). Retail sales were flat overall, despite a 1.3% drop at motor vehicle and parts dealers and a 1.2% drop at electronics and appliance stores.
Why should this report matter to us? If Bernanke is right and consumer spending is driving this market then I can't think of a stronger metric to look at than retail sales, since it tells us exactly what kinds of places consumers are spending their money on. From that we can begin to extrapolate what kinds of things they are spending their money on (vehicles, clothing, groceries, tech, etc.)
Consumers are overextended in their finances, consumer debt is at an all-time high and as seen in the past two weeks the mortgage brokers are already feeling the pain of defaults from their loans, both home equity and traditional mortgages. The liquidity bubble, which I believe we are, basically means that when the money is flowing things are great, but once the faucet is closed then people will begin to default on their debts. We are already seeing this, consumer spending will not be as strong as in years past because interest rates are higher and homeowners have already taken credit out on their homes to support their spending and now the question is how will they pay it all back.
The retail sales report, coupled with the run on metals like gold and copper make me think that we should re-evaluate our positions in tech. Not only is it getting more expensive to buy the metal to build a chip, the demand for electronics is going down at the retail level. That's a double threat to tech margins. Q2 is probably only going to look worse for tech than Q1 does now.
Good observation, again I’m not well-informed on tech to be able to make a prediction about the future of the components in the tech market. What will benefit from this?
Here are my ideas on where we could go from here: Re-evaluate TXN, Re-re-evaluate AMD and yes, even re-evaluate AAPL (they make hardware and their goods are sold in electronics stores). Department stores are showing the strongest growth in retail sales so perhaps we could increase exposure there. If we want to keep some tech exposure then maybe we could look (carefully) at some online retailers like Amazon since non-store retailers are showing some gains.
The Executive Board will review the updated information from the analysts who follow these companies and see where we currently stand.
At any rate, these are just some ideas. I'm new around here so I apologize if I stepped on any toes or broke any protocols in this post.
There is nothing wrong with a healthy debate/discussion, obviously we are all here to learn.
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bubblesort
Re:The Economy - 2007/02/24 21:54
Sorry it took me a little while to get back to you. Thesis week is crazy here at the Honors College.
The market is up about 70% since 2003, it increased I believe 15% last year. The market is already up 3% this year; my prediction is that the market will generate 10% returns or less for the entire year. I would rather make a sure 5-6% than to risk a lot more for the same amount of reward. The fact is that we are overweight equities and underweight fixed income, while the fixed income market is relatively unattractive with the current interest rates, my belief is that we should get more in line with the 65/35 allocation instead of the 75/25 and perhaps move more into fixed income (preferred stock and short-term treasuries).
That is the problem, right there. The 65/35 allocation is only supposed to happen in a raising interest rate environment. We are not in a raising interest rate environment. Ben Bernanke was dovish. He saw no reason to raise interest rates, so he kept them the same. Today I watched an interview on Bloomberg with William Poole who is the president of the St. Louis Fed, and a voter on the FOMC this year. He said that the CPI was not an issue. It was off from last year by only .02 (it's a difference between .24 and .26 so the most recent number rounded up instead of down). Let me give you a quote from the interview:
"The reason that we have this inflation objective is because we beleive that sustained low inflation maximizes employment and economic growth in the long run. It would not make any sense in the pursuit of the objective to drive the economy unnecissarily down. When you beleive that your best estimate is that the inflation rate will be tapering off, and I don't think that there's anything in today's news that changes that best estimate, when you beleive that you say that the problem is in the process of being taken care of and we're going to be alright."
So we are not in a raising or lowering interest rate environment. Moving to a raising interest rate strategy will only loose us the opportunity to make money.
Where exactly are you getting your numbers from? 10% growth sounds like a nice round number to choose. I haven't heard that number anywhere else. To put it bluntly, I think you made it up. Perhaps I'm wrong, though. If you show how you arrived at such a number I'll admit that I was wrong.
We were not overweight equities or underweight fixed income. This is a bull market and the Executive Board has cut the top off of our potential gains by changing us to a bear market allocation. What made the decision worse is that the reallocation increased our exposure to financial firms, who I beleive will be going to be going thru a downward correction due to the fallout in the subprime loan market.
I also do not beleive that investing in mutual funds or any other basket of securities (such as the preferred stock investment portfolio) will perform better than well picked, individual stocks. To me, it does not matter whether the S&P 500 goes up or down this year. What matters to me is whether the stocks I bought go up or down. By buying investment portfolios and mutual funds our portfolio is more exposed to the entire market moving up or down, which makes it matter a whole lot more whether the S&P 500 goes up or down. If I thought that the entire market was going to move down I would pull out of mutual fund instruments and put it all into well picked individual stocks.
Bernanke spoke to the Senate Banking, Housing and Urban Affairs Committee yesterday. Here are some pertinent quotes: "Consumer spending continues to be the mainstay of the current economic expansion." "All told, consumer expenditures appear likely to expand solidly in coming quarters." "Overall, the US economy seems likely to expand at a moderate pace this year and next with growth strengthening somewhat as the drag from housing diminishes."
Consumer debt is at an all-time high, obviously consumer spending is driving the economic expansion that is the basic principle as to why the Federal Reserve kept rates at 1% following the recession after the Tech Bubble. While interest rates have been relatively stable over the past couple months at about 5%, any sudden increase in interest rates will cut off the liquidity supply line. Inflation, while tame right now, could certainly be an issue, especially with Congress voting soon to increase the federal minimum wage to about $7.15, the price of goods will go up because when you increase the cost of labor, you get two things, unemployment and higher prices. While some will obviously argue that now the lower end of the labor pool will have more cash in their pockets, if the minimum wage increases 15% and a Big Mac increases by 15% to cover that increase in cost, then the minimum wage worker is no better off than they were before and the rest of society has to pay for this “increase”. Less money and higher prices leads to a recession and higher inflation.
Consumer debt is not at an all-time high. We have no reason to beleive that we will see an increase in interest rates. As Poole said, there is nothing in the news that would warrant that.
So what you are saying about raising minimum wage is that prices will face upward pressure because labor costs go up but consumers will have less buying power. Wouldn't lower buying power put downward pressure on prices? So the real question is what exerts greater pressure, consumer spending or a small segment of labor costs? I say that it's a small segment because most people in this country make more than minimum wage.
The tech bubble was not driven by consumer spending. It was driven by investment in stupid business plans (perhaps that sounds harsh, but I worked at a few tech boom firms back in the day). Increased consumer spending was a byproduct of irrational exuberance in investment spending. During the tech bust Greenspan told Congress that he would have no problem lowering interest to zero if it stopped inflation from getting out of hand. He didn't do that, but he was prepared to do it if he had to.
As far as increasing initerest rates cutting the liquidity supply lines, you are absolutely correct. The Fed is thinking along the same lines. That is why interest rates will not rise any time soon. That is also why we need to go back to the 75/25 allocation.
Another argument that will never be won, technical versus fundamental, it is just a matter of opinion.
It is not a matter of opinion. If fundamentals don't matter then why do we waste our time with all of those numbers in our analyst reports? Most of our analyst reports do not have any information about technical analysis except for the chart at the bottom. If technical analysis was important at all then why do economists like Bernanke and Poole never refer us to lines of deviation or trend lines? The reason why is because technical analysis is bunk. It is usable for small movements in the short term where a stock is not trading off of new information. It simply can not be used to predict meaningful gains or losses.
Consumers are overextended in their finances, consumer debt is at an all-time high and as seen in the past two weeks the mortgage brokers are already feeling the pain of defaults from their loans, both home equity and traditional mortgages. The liquidity bubble, which I believe we are, basically means that when the money is flowing things are great, but once the faucet is closed then people will begin to default on their debts. We are already seeing this, consumer spending will not be as strong as in years past because interest rates are higher and homeowners have already taken credit out on their homes to support their spending and now the question is how will they pay it all back.
There is no liquidity bubble. There is softness in the financial sector from sub prime loans, but according to Bernanke, household finances are fine.
It is a good thing that sub prime loans are experiencing a shakeout. Bad loans never helped anybody. The subprime market is feeling some much-deserved pain right now. I liked the idea you had on Tuesday about investing in collection agencies to take advantage of the sub-prime shakeout. I'll try to get some research on that done this weekend.
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admin
Re:The Economy - 2007/02/26 00:22Sorry it took me a little while to get back to you. Thesis week is crazy here at the Honors College.
That is the problem, right there. The 65/35 allocation is only supposed to happen in a raising interest rate environment. We are not in a raising interest rate environment. Ben Bernanke was dovish. He saw no reason to raise interest rates, so he kept them the same. Today I watched an interview on Bloomberg with William Poole who is the president of the St. Louis Fed, and a voter on the FOMC this year. He said that the CPI was not an issue. It was off from last year by only .02 (it's a difference between .24 and .26 so the most recent number rounded up instead of down). Let me give you a quote from the interview:
"The reason that we have this inflation objective is because we beleive that sustained low inflation maximizes employment and economic growth in the long run. It would not make any sense in the pursuit of the objective to drive the economy unnecissarily down. When you beleive that your best estimate is that the inflation rate will be tapering off, and I don't think that there's anything in today's news that changes that best estimate, when you beleive that you say that the problem is in the process of being taken care of and we're going to be alright."
So we are not in a raising or lowering interest rate environment. Moving to a raising interest rate strategy will only loose us the opportunity to make money.
Moving to a 65/35 allocation is not for being in a raising rate environment, in fact, fixed income reacts inversely of interest rates, as rates fall, then bond prices go up and vice versa. The team is merely making a judgment that we would like to lower our risk in our portfolio. Since our benchmark, is a 65/35 mix, the team is moving more in line with the performance of our measure of standard. So basically what you are saying in your argument is that if the stock market falls 10% tomorrow, because of a terrorist attack, our portfolio would have more equity exposure than our benchmark and our fund will underperform by a large margin and that would call into question the team’s judgment and credibility with the Foundation. To back up my argument here are some return figures for the years 2000-2002:
Now you can see how the inverse relationship exists, plus the fact that bonds also pay interest on the principle, which continually adds to our available cash. I see nothing wrong with our decision to make the portfolio less risky and put it more in line with the benchmark that we are expected to follow.
Where exactly are you getting your numbers from? 10% growth sounds like a nice round number to choose. I haven't heard that number anywhere else. To put it bluntly, I think you made it up. Perhaps I'm wrong, though. If you show how you arrived at such a number I'll admit that I was wrong. The long-term stock market returns for the past 100 years is 6.5%, in any financial textbook you are given that equities have an expected return of 7%. Since 2003, we have seen a growth of 70%, or about 20% a year, which I would call great, but not sustainable. According to a study done at http://usmarket.seekingalpha.com/article/22944, only 20% of all fund managers expect to have the S&P 500 to return more than 10%, which means that 80% of all fund managers are expecting returns below 10%. I see nothing wrong with a prediction of 10% on my behalf, because obviously 80% of professionals believe the same rational return. In all of your criticism of my prediction, you have failed to state your viewpoint as to what you expect.
We were not overweight equities or underweight fixed income. This is a bull market and the Executive Board has cut the top off of our potential gains by changing us to a bear market allocation. What made the decision worse is that the reallocation increased our exposure to financial firms, who I beleive will be going to be going thru a downward correction due to the fallout in the subprime loan market.
How is this a bear market strategy? We were overweight equities and underweight fixed income, our allocation that is set forth in the Foundation Guidelines is 65/35, we are currently 75/25, we are moving more in line with our expectations. It is easy for you to criticize a change in strategy, because you aren’t the one who has to stand in front of the Foundation and explain what went wrong. And by you stating that the Executive Board is cutting the head off our potential gains is absolutely unwarranted, because we are still 65% invested in stocks, it would be flip-flopped if this were a bear market strategy. Another comment is that now that we are in line with our benchmark, if bonds go up 5% and stocks go up 10%, and then we will still perform in line with that benchmark should we have similar performance. The large financial firms will not be affected by the sub-prime loan fallout, because they are required by law to have a certain percentage of assets in different asset classes and asset ratings. Sub-prime lenders exist because banks cannot lend to this risky individuals at reasonable interest rates; therefore, you have companies like Novastar (NFI), New Century (NEW), and Countrywide (CFC), which meet that demand.
I also do not beleive that investing in mutual funds or any other basket of securities (such as the preferred stock investment portfolio) will perform better than well picked, individual stocks. To me, it does not matter whether the S&P 500 goes up or down this year. What matters to me is whether the stocks I bought go up or down. By buying investment portfolios and mutual funds our portfolio is more exposed to the entire market moving up or down, which makes it matter a whole lot more whether the S&P 500 goes up or down. If I thought that the entire market was going to move down I would pull out of mutual fund instruments and put it all into well picked individual stocks.
I agree with your point here, I’m not sure what mutual funds you are speaking of, we have to hold bond mutual funds and the two new investments are not mutual funds, but ETFs that have a low correlation to the returns of the overall stock market. The mutual funds and ETFs that we hold in our portfolio are for strategic purposes, we have an international ETF because the risk in investing in individual international stocks is too much for a portfolio as small as ours. We utilized the preferred stock investment portfolios because we cannot go out into the market and purchase individual preferred stocks because of the structure of our portfolio at this time. I will add that our international allocation has been the best performer of all of the asset classes because the team identified that it was important to have some exposure to the large companies of the world.
Bernanke spoke to the Senate Banking, Housing and Urban Affairs Committee yesterday. Here are some pertinent quotes: "Consumer spending continues to be the mainstay of the current economic expansion." "All told, consumer expenditures appear likely to expand solidly in coming quarters." "Overall, the US economy seems likely to expand at a moderate pace this year and next with growth strengthening somewhat as the drag from housing diminishes."
Consumer debt is not at an all-time high. We have no reason to beleive that we will see an increase in interest rates. As Poole said, there is nothing in the news that would warrant that.
Please look at the historical information of consumer credit, which is used to fund consumption, not investment here: http://www.federalreserve.gov/releases/G19/hist/cc_hist_sa.html. When you adjust for inflation you see that consumer credit has risen 70%, with 90% of the growth in debt being built up since the 1990s to today.
So what you are saying about raising minimum wage is that prices will face upward pressure because labor costs go up but consumers will have less buying power. Wouldn't lower buying power put downward pressure on prices? So the real question is what exerts greater pressure, consumer spending or a small segment of labor costs? I say that it's a small segment because most people in this country make more than minimum wage.
At the lower end of the market you will have an increase in prices, due to labor costs and while this might not be seen as a problem, just like oil and its non-effect on consumer spending. The idea here is that the majority of the consumption is being driven by debt, so the effect is not immediately felt, until you start to see something like the sub-prime mortgages and debt dries up and then the consumers will have to find a way to repay the debt. I read a study the other day that the average household is $20,000 in debt, excluding mortgages, I will try to find it. It just shows that the average household is leveraged and that is not safe, especially when you have a force pushing prices higher.
The tech bubble was not driven by consumer spending. It was driven by investment in stupid business plans (perhaps that sounds harsh, but I worked at a few tech boom firms back in the day). Increased consumer spending was a byproduct of irrational exuberance in investment spending. During the tech bust Greenspan told Congress that he would have no problem lowering interest to zero if it stopped inflation from getting out of hand. He didn't do that, but he was prepared to do it if he had to.
How would lowering the interest rate to zero stop inflation, doing that would lead to inflation, interest rates are raised to keep inflation in check? Interest rates were lowered in the early 2000s because the Feds policy was that they wanted to lead the economy out of a recession and restart the growth and there was very little inflation at the time. Low interest rates lead to consumer borrowing and business borrowing, one for consumption and the other for investment, two factors that are go into growing GDP.
As far as increasing initerest rates cutting the liquidity supply lines, you are absolutely correct. The Fed is thinking along the same lines. That is why interest rates will not rise any time soon. That is also why we need to go back to the 75/25 allocation.
Another argument that will never be won, technical versus fundamental, it is just a matter of opinion.
It is not a matter of opinion. If fundamentals don't matter then why do we waste our time with all of those numbers in our analyst reports? Most of our analyst reports do not have any information about technical analysis except for the chart at the bottom. If technical analysis was important at all then why do economists like Bernanke and Poole never refer us to lines of deviation or trend lines? The reason why is because technical analysis is bunk. It is usable for small movements in the short term where a stock is not trading off of new information. It simply can not be used to predict meaningful gains or losses.
Fundamentals are important, they are what we base our investments off of, the technical analysis is used sparingly and only to identify enter and exit points, most large financial firms use a similar strategy. Exactly, we use technical analysis for short-term trading, because I would rather identify a small trend where we can save ourselves a few dollars and get into a position at a lower price, then to pull the trigger today, if the writing is on the wall for a near term price trend. Bernanke and Poole do use technical analysis, they are using statistics, which takes into account past data to form a future prediction, which is exactly what technical analysis is.
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short_seller
Re:The Economy - 2007/02/26 21:30We were not overweight equities or underweight fixed income. This is a bull market and the Executive Board has cut the top off of our potential gains by changing us to a bear market allocation. What made the decision worse is that the reallocation increased our exposure to financial firms, who I beleive will be going to be going thru a downward correction due to the fallout in the subprime loan market.
Mike, the first thing I would like to say is that the number Bryan came up with was a speculative figure, using current analysis and comparing that with past performance. The market has had a wave of growth since January 1, 2007 and as Bryan has stated, it will be difficult to sustain this growth throughout the whole year. Your observation of the economy currently being in a bull market I fully agree with, but cutting the top off is a pure overstatement. We have analysts whose duties are to analyze the fixed income sector, pick winners, and bank on dividends (which we plan to do). We also have a plan to take $130,000 of the 200,000 and invest it into individual securitiess. Once you learn the entire process to evaluate companies, I believe you will be less opposed to our strategy and more diversified.
HOW MUCH HAS THE SUB-PRIME LOAN MARKET FALLENOUT? HOW BIG IS THE SUB-PRIME LOAN MARKET?
Okay. These are a few question I would like to answer. "The subprime mortgage market, by itself, is not large enough to constitute a systemic risk to the banking or financial system unless a “contagion effect” boosts rates on all mortgages." The most 'down to earth' definition of a Sub-Prime Loan is a loan to a person who hasn't the financial stability of a person with AAA creditwothiness. These are people who could face losing their homes in a rising interet rate economy. Are the interest rates rising?
Secondly, these loans on make up approximately 10% of the entire mortgage market. 10% of 9.5 trillion or approximately 960 billion. How much are we spending in Iraq? How about Iran? Not to worry, though, we can almost be assured that not all of those 10% are going to default on their homes. Some people are more financially prone to defaulting but we will just consider that a fact of human nature.
Lastly, the Sub-Prime Market has nearly come to a end since intrest rates have risen slightly and property values have stopped increasing (two important model characteristics in SPL), so this market is basically un-enterable because too great of risk lies on the lender. But, remember, there is currently a market, and yes, it has fallen, but it is not dead!
So I feel that if our bond analysts believe that the position we are going to allocate our funding to should be in the finacial sector, we should take the most of their knowledge and using to our advantage.
BMM
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