Monday, March 26, 2007

>China & Dollar

Zhou was quoted as saying: "... many people say that foreign exchange reserves in China are large enough. We do not intend to go further and accumulate reserves.”

China's vast and rapidly growing foreign exchange reserves accumulate because China does not sell the surplus US dollars that it receives from its trade surplus with the United States into foreign exchange markets, but buys US debt with them instead. Under normal circumstances China would have sold its surplus US dollars and not accumulated such a vast foreign exchange reserve; however, the United States' trade deficit is so large that if China, Japan and Europe were to sell their trade dollars into foreign exchange markets the dollar exchange rate would collapse.

Last year the Organization for Economic Co-operation and Development (OECD) determined that the dollar had to fall by 35% to 50% in order to balance the US current account gap. My calculations of the dollar's over-valuation based on the gold price also suggest that the dollar has to fall by about 35%.

China does not have to sell any of its existing dollar reserves to precipitate a decline in the dollar -- all it has to do is stop accumulating dollars. The current US trade deficit with that country alone is running over $20 billion per month, and that is not an insignificant amount. If China stopped accumulating foreign reserves those dollars would be sold and I expect that when that happens, the dollar will fall.

Other Asian countries that helped prop up the dollar by accumulating foreign reserves may follow China and start selling their surplus trade dollars as well.

The ramifications are that there will subsequently be less demand for US Treasuries and agency debt. That will push US interest rates higher regardless of what the Fed says, and higher interest rates will be detrimental to US economic growth and US equities. One would expect that higher US interest rates would be positive for the dollar, but with surplus trade dollars hitting foreign exchange markets we can expect to see the dollar fall in tandem with rising interest rates. A falling US dollar in the face of rising US interest rates is the key event that I am waiting for to indicate that a significant and sustainable rise in the gold price is occurring. Until then the gold price should continue to creep upwards as a result of fiat money inflation.

Why ULIP is not the best insurance product

ULIP in my view is the best way the Insurance industry and banks have found in to rake in huge mullah.
Many many many have fallen prey to this "scam".
Read here to know more.

What your insurance adviser won’t tell you??

<> Re: Why Insurance is not Investment - Show this to

<> Re: What we need-Insurance OR Investment..???

<> Re: Two Simple Steps to Have Your Insurance and ...

<> Re: Service by Insurance Agents

<> 12 insurance plans: A comparative study

Cheapest Term Insurance Links

Life Insurance scenario

Insurers rattled by new ULIP definition

and Finally an article from Rediff

Summary in brief
Shun ULIP despite the glossy sales template and presentation. (its mad & raw cheating)
Buy Term plan and Put rest in low cost MF or Index fund.
You will save more and your money will grow much more.

Friday, March 23, 2007

Bond Markets: Inverted Yield Curve Still Dangerous

Bond Markets: Inverted Yield Curve Still Dangerous

Drivers pay attention to yellow Yield signs on the road, because it's dangerous if they don't. They could merge right into 18-wheelers roaring down the main road. The same holds true for the financial world and the economy. We've got to pay attention to Inverted Yield Curve signs, because it's dangerous not to. We could get run over by a recession. Why? Because history shows that recessions follow a period when yields are inverted, that is, when short-term interest rates are higher than long-term rates.

Although former Fed chairman Alan Greenspan recently gave recession a one-in-three chance before the end of the year, a recent Bloomberg article (3/12/07) pointed out that the "probability the U.S. economy will shrink for two quarters has risen to 50 percent, according to a model created when Greenspan ran the Board of Governors of the Federal Reserve System. The formula is based on differences in yields on Treasuries."

Well, what do you know? Seems that the Fed's economists are worried, too, even more than their former boss is. The two Fed economists who designed the study are willing to bet that the inverted yield curve is a strong indicator of recession. According to Bloomberg, the Fed economists' study said, "Treasury yields are a better predictor of recessions than stock prices. That's because relatively high short-term rates slow the economy while lower longer-term rates reflect the outlook for weaker growth and inflation, they wrote."

Bob Prechter draws conclusions from the inverted yield curve, too, and in his most recent Theorist, he includes a chart that's worth a thousand words – although we've included about 275 words to go with it.

* * * * *

Excerpted from The Elliott Wave Theorist, February 21, 2007, by Robert Prechter

Inverted Yield Curve
Short-term interest rates have been above long-term interest rates—as measured by 3-month vs. 30-year U.S. Treasury debt—for six months. Such conditions occur at extremes in short-term lending for investment purposes. This condition in turn implies a peak in financial markets, which today more than ever rely upon speculative borrowing to keep them rising. Many observers have discounted the implication of the current “inverted yield curve,” because it has been in effect for a number of months with no reversal in stocks. History shows, however, that the indicator’s timing is almost always within a matter of months. Every passing month gives a reason to be more concerned about this condition, not less.

This chart of Yield Ratio vs. Stocks demonstrates the utility of this indicator. When the yield curve was negative in 1978-1980, the stock market underwent three “massacres” and persistently lost value in real terms. The stock market peak of April 1981 occurred after six months of a negative yield curve. The peak of 1989 in the Value Line Composite and Dow Jones Transports occurred four months after this condition began, and the high in the New York Composite index of September 2000 occurred two months afterward. After each of these latter two junctures, at least one market index fell at least 47 percent. The yield curve has now been inverted for six months. Essentially, it is right in the normal area when a reversal in the stock market usually occurs. [The subscriber] who brought this relationship to our attention, points out, “It fits perfectly with the expectation of the top occurring within the 1st quarter of 2007.”

* * *

Wednesday, March 14, 2007

>Trader Discussion-1

The following is a discussion on Amibroker yahoo group.
I liked the ideas presented by Brian so have posted here.
The ideas from Brian are in response for to some questions fom Dave.
Read the lower part first.

This post may be modified/appended in future, depending on further discussions.
If you have a comment too, do write.

Hello Dave,

I hope you don't mind my uninvited comments; you aroused my empathy.
If you are not looking for advice don't read on.

Note! my comments are nothing to do with Mr Seward's site which I
know nothing about.

Loss of confidence is a fatal blow for most.
If the mentor you chose is a fake, your confidence will fall even
further, and you will almost certainly be finished.
Your honesty and search of a positive way out is your hope.

I have personally only paid for one trading seminar, and 2-3
electronic trading systems, or courses, and they were all duds.

I did recently meet an Australian trader who I would be happy to pay
the $3k for, if I needed a mentor (please - no one ask me for a name,
I couldn't bear being responsible for a trainer endorsement), so
there are some good ones out there.

The market does not beat us; we beat ourselves.
Attitude is at the root of the problem.
The most common attitudinal failing I observe is lack of patience.
Everything we do today is fast, fast, fast and we want it now.

New traders are going to actual trading far too soon.
It takes years to learn to consistently trade well.
Of course it is not a problem if you are playing with 10K and that is
only pin money to you.
Knowledge is power, power is confidence.
Lack of confidence is based on lack of knowledge.

In short, not with the desire to be cruel;
you didn't know what you were doing and you got found out.

Mechanical system trading, while being the easiest method in some
ways, is actually the hardestway to trade of all.
It is easy, because, like Amway, once the work is done it stays done
(you don't have to keep poring over company financials for example).
On the other hand, an understanding of EVALUATION AND MONEY
MANAGEMENT is crucial, and this is a very difficult subject.

If you follow this board, you will know how easy it is for seasoned
traders to get into a heated argument over the right and wrong way to
go about that.

MANAGEMENT but I added EVALUATION because when the techniques of
system evaluation are understood, MM falls into place automatically.

If you can come to understand E + MM like the back of your hand your
confidence will be back (after a lot of paper trading and

Another way out, might be to choose an easier method to start again
with e.g. Ed recently endorsed Techno-fundamental trading in the
forum, which I believe is a lot easier and more forgiving.

Finally, anyone who is starting out could do a lot worse than pay for
a mentor to start them on the right foot.
If they go it alone they will end up paying with losses and time
Provided of course a good mentor can be found; that is the rub.

I hope it works out for you and that you are not trading with money
that you can't afford to lose.


--- In, "davelansing2004"
> Has anybody purchased Bill Seward's course featured on the
> website? My trading has been dismal for quite awhile and so I'm
> willing to purchase a reputable methodology in order to get back on
> track, money-wise, while trying to get my confidence back.
> Thanks.
> Dave

Monday, March 12, 2007

>Defensive Investing

With all the recent investing disasters, I have been thinking about
defensive investing. Here are some of my ideas on that:

1) Avoid companies with large amounts of debt. This rule can be
broken for special circumstances, but insure that they are special.
For instance, a gas pipeline operator will carry debt to finance the
pipeline. That is understandable. But, an insurance company should
not have a lot of debt. As a general rule, only bad things can
happen with debt. Someday, those pesky, ungrateful lenders will want
their money back, and it is often at an inconvenient time.

2) Look for high quality earnings. The best companies are those
where you have very little need for capital, and all of their
earnings come home in cash. A money management company is a great
example of this.

3) If you can't figure out how the company makes its profits, don't
invest. This would have saved you from Enron. Who knows how Enron
made ( or didn't make ) money on its trades.

4) If earnings are too good to be true, they are neither true nor
good. The key here is experience. By following many companies,
especially in the industry under consideration, the investor should
be able to determine when earnings appear excessive. If you can't
determine why the company is more profitable than it should be,
avoid it. A key way of determining this is to compare the profits of
the company to its role in the economy. If it is doing something
that seems of little value to the economy as a whole, yet showing a
huge profit for doing so, become suspicious.

5) Avoid companies making a lot of acquisitions in a rush to get
big. Tyco and WorldCom are excellent example of this, but there are
many more. Good acquisitions are hard to make, and most acquisitions
should never happen. They are usually more about the ego of
management than about providing returns to shareholders. One of the
best ways to evaluate management is to watch it for several years,
and study its allocation of capital. If they build new factories, or
buy companies just to get bigger, then avoid them, they are a Tyco
or WorldCom waiting to happen. Since management usually likes to
talk about its acquisitions, and gives its rational for them, I have
found this to be one of the best methods to evaluate the quality of
the management of a company.

6) Avoid companies where the manages are paid huge amounts of money
even when the company is not doing well.

7) Buy companies that have a sustainable competitive advantage, or a
moat. Moats come in all kinds of sizes and shapes, so you must learn
how to identify them. Study the acquisitions of Warren Buffett; he
is a master at identifying moats.

8) Buy companies that do not need to reinvent themselves every two
years just to stay alive. Microsoft is one of the few companies that
has been successful doing this. But Bill Gates himself said that
Microsoft faces a major challenge every three years or so. If you
must reinvent yourself, you do not have a moat, or a least a moat
that does not require huge amounts of maintenance.

9) The three laws of moats:

1) The width of its moat, the depth of its moat, and the size and
ferocity of its resident reptiles is directly proportional to the
profitability of a business enterprise.
2) When an enterprise with a properly functioning and sustainable
moat is presented with a choice between generating higher current
profits, or strengthening the defenses of its moat, the decision
should always be made in the favor of the moat.
3) The ability to differentiate between moats that have an
expandable life and utility and therefore deserving of maintenance
expenditures, and moats that are failed or failing, is the beginning
of wisdom.

The first two laws come directly from Warren Buffett. The third law
seems to logically follow the first two. A company that follows
these three laws is showing good quality management.

10) Look at what a company does, not what it says. Words are cheap,
actions are dear.

11) As a general rule, avoid companies that seem obsessed with
providing and meeting earnings expectations. They are playing Wall
Street, not Main Street.

12) Look for humility in managers. Is the company run for the
benefit of management's' ego and desire for power, privilege and
prestige, or is it run as a business enterprise? Look at what seems
to motive the people at the top.

13) Look for "one-time," "nonoperating," "extraordinary" charges.
Some companies have "one-time" charges every quarter. Watch for the
scams. Often these charges are neither one-time, nonoperating or
extraordinary. Excess amounts of charges show a management that is
either making a lot of bad mistakes, or is trying to manage its
financial numbers.

14) If the company is all about "me," make sure the "me" is worth
being about. Buffett is, but few others are.

15) Never underestimate the ability of bad managers to damage an
otherwise strong and healthy company.

16) We all know about a margin of safety in the purchase price of
the stock, but is there a margin of safety in the operation of the
business? Look at the attitude of the management towards business
risk. The more risk in the business, the more those inevitable
management mistakes are going to hurt.

17) Is the company in denial? As you read its annual report, do you
have the feeling that management will be the last group to discover
that it is a troubled enterprise?

18) Avoid whiplash. If Strategy B, last year's road to glory and
replacement for Strategy A, is now being replaced with Strategy C,
don't wait for the new fix to end all fixes: Strategy D.

19) Is management ever at fault? Does management always blame others
for the problems of the company, or does management take
responsibility for its own actions and results. Don't tolerate
behavior in the managers of the company that you would not accept
from your teenage son.

20) Beware of noncash income. Does the company recognize large parts
of its income before it receives the cash? Look at the footnotes to
the financial statements for evidence of this. They will also show
up on the balance sheet as intangible assets.

21) Beware of deferred charges. These can occur when expenses are
not recognized even though the cash has been expended. Look at the
footnotes and the balance sheet for these.

22) The problem with large amounts of deferred charges and
intangible assets generated from the recognition of income before
the receipt of cash, is that they have a tendency to disappear
as "one-time," "nonoperating" or "extraordinary" charges; and we
know how we feel about them. They may also indicate an aggressive
accounting treatment. But also think about what they do to cash flow
and income. Either the cash is spent but not expensed, or the income
is recorded but not collected. In both cases, profits benefit when
cash flow does not, resulting in low quality earnings.

23) Look at the footnotes for deferred and prepaid income taxes.
They will show differences between income and expenses reported for
tax purposes and book purposes. This is a place that may tip off
aggressive accounting treatments.

24) Read management's discussion of operations in the annual report.
Do they give a plausible explanation of why income, expenses, or
sales increased or decreased, or are they vague and general?

25) At least skim through all the footnotes to the financial
statements, looking for unusual items. If there are accounts on the
balance sheet that you don't understand, look to the footnotes for
an explanation. The more confusing the balance sheet is, the more
cautious the investor should be.

26) Read the letter to the shareholders on several levels. Look for
information, but also look for style and for what was not said. Does
it sound like the CEO wrote it himself, or does it read like the
work of a PR firm? Does the CEO sound like someone from this planet?
I once read the letter to shareholders for a company that was
reporting a billion dollar loss for the year, and not once was it
mentioned in the letter.

27) EBITDA and pro forma earnings are large neon warning signs to
the investor. Do not look away! If you ever see a company reporting
EBITDARES, Earnings Before Interest, Taxes, Depreciation,
Amortization, Rent, Entertainment and Salaries - go short. "

Thursday, March 08, 2007

>More Fibonacci Enhancements

The following information will be appreciated most by Elliotticians but those of you who know nothing about Elliott should not ignore this information. From time to time, we have to deal with "rogue" patterns like the expanded flat correction. Don't get the wrong idea, it's not really a rogue wave because it is in the catalogue of regular Elliott wave patterns. It's just that when one develops, it confirms about 30% of the time (according to a couple of well known Elliotticians). Of course, the only way to confirm this pattern is in the rear view mirror. I'm sure you can appreciate the fact that this fact doesn't do any of us much good right about now.

Nevertheless, for those of you who are not trained at Elliott, here is what an expanded flat is. A bearish E.F is where you have a bull market which tops (like the January 2000 high in the Dow). You have an A wave down (like the bear market in the Dow from 2000-2002). Then you have a TREMENDOUS rally which takes out the OLD HIGH. It's really a B wave (MAYBE LIKE THE WAVE WE'VE HAD IN THE DOW FROM THE 02 LOW UNTIL NOW). Those of you who don't know Elliott, the B wave makes a new price high even though it is a correction and NOT part of the 5 wave impulse of the main trend (1982-2000). Old school Elliotticians would still call January 2000 the "orthodox top." The B wave in normal expanded flats usually either measures 1.27 or 1.38 times the price length of the A wave down. Thus my bullish rant two weeks ago. The Dow bear market was 4553 points. As I already told you a 1.27 extension of the bear market would have been 5782 points and taken us to 12979. As you know, we came awfully close. The print high I have on my own Prophet charts is 12795.85. We came within 184 points of a 1.27 extension of the bear market.

Now here's where this gets interesting. It's fairly obvious we are not going back to the high tomorrow. Part of my analysis in covering these markets is to set new standards and enhancements in the study of Elliott and Fibonacci. If we didn't have a 1.27 extension, what did we have? Well, let's see. Punching a few numbers, when we take 4553 points and do a 1.23 extension (A LUCAS RATIO EXTENSION) we come up with 5600 points. When we take the new all time high in the Dow of 12795 and subtract the bear market low of 7197 we come up with (DRUMROLL>>>>>>>>>>>) 5598 points!

So I may be excused for following common Fibonacci extension points and retracements just a couple of weeks ago. Common relationships are the higher probability. As you know, the markets don't roll things out for us neatly nor do they ring a bell at the top. Finally, I know you realize we are dealing with the tooth fairy. It seems that the Dow has given us a different technical relationships other than what most Fibonacci analysts expected. Instead of a common Fibonacci extension, IT HAS GIVEN US A LUCAS RATIO EXTENSION!

None of us has any idea if the rally of the past 5 years is a B wave to new all time highs that is about to be totally retraced. In terms of extension ratios, the 1.23 is compelling. IF we didn't understand Lucas relationships in this column, we'd ignore it off as another piece of evidence that these common FBI relationships are not reliable and therefore should be ignored. But that's not the case. Its important. That's why I've written the articles as well as the book.

So while we have fallen short of larger time and price targets (we also came really close to the 38% retracement in the NASDAQ) we do have a couple of compelling pieces of technical evidence at the Dow high. The other of course is we topped on the 1597th calendar off the old bear market bottom. But since we topped in the 229th trading week off the October 2002 low, it remains to be seen if the 233-236 weekly window is going to produce a low. If it does NOT, we may be falling for many, many weeks. The next major time window is at 250 weeks and then at 261 weeks. That's in the fall.

About that expanded flat, if we are dealing with one, it would be a C wave for the Dow which implies a new bear market. Unfortunately, we won't know that until the fullness of time.

-Fibonacci Forecaster by Jeff Greenblatt