Inflation adjusted stock returns

I ran into this over at Business Insider.

A long term chart comparing the big bear markets.

The real story for todays markets is the loss of value in the indexes over the last 12 years. Your retirement account may look big, but it ain't gonna buy you as much has it did in the past.
And the story around the world is for continued central bank devaluation of currencies as every nation trys to be the exporter of choice.

See the remarks on the US Fed/ janet yellen over on B.I. also for an indication of the dollar weakness on the horizon.

Here is the big bear charts. The notations in red are my own.

"Entries & Exits"

 Just before Christmas I communicated with Dr. Alexander Elder regarding his first book "Trading for a Living". He said he will send me a copy of his book "Come Into My Trading Room". It has not arrived yet, but in the meantime I bought "Entries and Exits" and found it to be a good addition to my library of trading books.

In "Entries & Exits" Dr. Elder presents stories of the traders that he has come across in the course of the trading camps that he runs around the world. There are short chapters on 16 different traders. Most of them are semi-professional traders, at least at the time of the writing of the book in 2006.
The book has many color charts of the traders winners and losing trades. The traders give their rationale for putting on the trades and for getting out of the trades, whether winners or losers, and then Dr. Elder gives a short critique of each trade.

There are a variety of trading styles presented. For the most part I found the traders to be more short term focused than I like to trade. And most of them used mechanical trading systems that they had developed or that evolved from Dr. Elders teachings. Dr. Elder uses the MACD (Moving Average Convergence/Divergence) indicators that he developed along with his Force Index which measures the force of a move using volume and price as an input.

While most of the trades were short term, usually just a few days, the two traders that stand out in the book were William Doane and David Weiss. In particular Mr. Doane is a very long term trader. He looks at price charts in a variety of timeframes in order to locate the good investment/trading opportunities. I have found the long basing patterns to be very powerful patterns when trying to pick bottoms. The breakout to the upside can often be explosive as the sentiment of the market changes and as shorts are forced to cover. Myself all I look at is price and volume. I have found that when I look at the MACD and Force Index indicators they tell me the same things that I see by just looking at price and volume in different timeframes.

The trade advice in this book is of an intermediate level and is appropriate for anyone who wants to learn or reinforce the basics of market psychology and risk control. Which is the basis for successful trading and investing and is the basis for success in life for that matter!
A few charts follow. Some of the basing patterns discussed having taken place recently. The last two months have been a good time to trade although the last couple weeks have been dull as the market is in one of those in between times.
(I hope Dr. Elder did not forget to send the book he promised.)

A recap of some recent posts and good trades...
STP:

Is the dollar set to go down again??

Are interest rates set to rise? Still waiting!

And the RIMM story from some time ago....

Notice how volume tells the stories.

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CLNE

If this stock start to rise from here it may go for aways.........

As always control your risk with good mental management.

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Hagel nomination

As I write this the expectation is for President Obama to announce his nomination of Senator Charles Hagel for the position of Secretary of Defense of the United States. The battle is shaping up in Congress along party lines. Again.

The controversy this time is over comments by the senator regarding the "jewish lobby" and their influence over the United States support of and treaty arrangements with Israel. Republican spokesman Lindsey Graham of S. Carolina lambasted the Hagel pick as controversial and added that the Hagel pick is an "in your face nomination" to all who are supportive of Israel. Other republican critisism revolved around President Obama's pressure on Israel to negotiate with Hamas, the ruling party in Palestine and terrorist organization. But the crux of the latest republican obstructionism seems to be an attempt to paint Senator Hagel as an anti-semite. Senator Graham went on to say that there is no "jewish lobby" there is an "Israel lobby". I was relieved to hear that religion was not involved in our relations with Israel!

But I was left with other questions. If it is not on religious grounds that we support Israel, then why do we support Israel? They are a tiny country on the easternmost shore of the Mediterranean. They are surrounded by much larger countries and have been in various states of war with most of those countries over much of their 64 year history.

Israel was formed out of territory seized by the British after World War I. The Balfour Delaration in 1917 was a statement by Britain favoring the establishment of a jewish homeland in Palestine. The declaration also stated that the religous or civil rights of non-jewish citizens must not be harmed. The League of Nations gave Britain a mandate to oversee Palestine in 1923. Massive jewish immigration in the following years led to growing tensions between Arabs and Jews. After WWII jews were in open armed revolt against the British in Palestine. Their guerrilla tactics would have earned them the label of terrorists today. The United Nations recommended a plan of partition and in 1948 the state of Israel was formed. Almost immediately war began with the surrounding Arab states.

If history is any indicator one must believe that religion has a lot to do with the state of Israel. And I am quite certain that much of the support for Israel from the United States stems from our shared tradition of Judaism and Christianity. The fact is that Israel is a jewish country. The jews were persecuted on the basis of religion and their country was established on the basis of religion.

So how does this U.S. government that "shall make no law respecting an establishment of religion", as the First Amendment to our Constitution states, resolve questions of our support for Israel? If our interest in the well-being of Israel is not based on religion, what is it based on? How does it benefit the United States to support Israel? And can we ask them to modify their behavior in exchange for our support?

It would be conducive to peace in the middle east to have a Secretary of Defence who held our allies accountable when we are the guarantor of survival. I do not think it is too much to ask for Israel to maintain a dialogue with their enemies. The only way to have peaceful relations is to talk to each other. The only other final solution is all out war and destruction. And that must remain the LAST option. And this latest tactic by the republicans is yet another cynical attempt to divide the American people along religious lines.　

Will Atlas shrug

Thinking about the United States and the debt.

We don't want to pay the debt back.

We are divided politically.

We can print our own money.

Result: we will devalue our currency to devalue our debt, even as we claim to be doing the right thing.

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gold weakness

This chart :

Aurico?

I always pay attention to what the commodities are doing. They are the fundamentals of the broader economy. So as I am watching companies that are affected by the underlying commodity I pay attention to the strength or weakness of the company in relation to the strength or weakness of the commodity.

Gold has been weak lately. But Aurico Gold (AUQ) has held up well. That makes me take notice. This stock has a good chance to go higher in price if it can break out of the recent range.

control risk
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Looking forward

I make no predictions. As a trader my mindset is that anything can happen and I will manage accordingly.

With that in mind I will admit that there are things that I expect may happen. These are the things I will be looking for. I will not be making bets on these things until they get underway, and even then will be alert for signs that I may be wrong on the strength or durability of any trends that may seem to be developing.

One of the continuing themes of world affairs will be the efforts by the major central banks to weaken their currencies. These include the U.S., Japan and China. The European experiment hopes to hold the Euro together as a viable entity and the Germans will continue to insist on high interest rates, so the Euro will remain strong vs. the US dollar. China will gradually allow the Yuan to appreciate vs. the USD as they move to create a stronger domestic consumer. The Chinese will continue to diversify their foreign exchange holdings, as many others will do, away from the U.S. dollar which will continue to undermine the status of the USD as the reserve currency of the world. The US Fed will continue to keep interest rates low until well after the economy improves, undermining confidence in the dollar. Japan seems to be attempting to run the Yen off a cliff, probably an attempt to gain market share from China as they recognize the Chinese' need to fight inflation and stimulate domestic demand. China also will be reaping the harvest of a three generation "one child" policy that leaves a demographic bulge of an elderly population, with the inherent need to use more Chinese savings for the support of the elderly. Over the longer term China will need to cash in some of the U.S. Treasurys it owns, putting pressure on interest rates in the U.S. and putting more US Dollars into the world economy. I expect those dollars to make their way back to the U.S. in exchange for U.S. products. Food may become an increasingly important export of the U.S. in the coming years, which would support the dollar, but in the shorter term I would expect a weakening of the U.S. dollar against the major world currencies. Although most currencies will tend to depreciate against assets. Precious metals may be volatile as they sort out the conflicting signals of currency depreciation vs. rising interest rates and rising asset prices. I do expect gold and silver to go to new highs, probably later in the year.
Equity markets have been strong even with all of the angst of the "fiscal cliff". I do not think that the U.S. population has any stomach for the effects of fiscal austerity and the deflationary aspects of those policies. Whatever solution there is for the deficit spending of the U.S. government will most likely be a paper solution that will put off till tomorrow a real solution. Having said that I think that we are entering a period of inflation that will surprise us and at first will entice us into thinking we have solved our problems. If inflation comes to pass we may have a chance to erase a large part of our debts, but only if we collect taxes. I think this is why there is the strong effort against raising taxes by the corporate lobby. They see an improvement in the velocity of money and do not want to pay taxes on their coming windfall. If we as a country want to be successful in debasing our currency to erase our debt the benefits of the operation must go to erasing or debasing the consumer and private debt. In this way we will put those dollars in the hands of the larger population and they will circulate many more times than they would in the hands of a few billionaires or corporate vaults. They will get them in the end, but in the meantime we need the "debt holiday" of the inflation. Whether by tax and spend, social security, wage growth, health care spending on a single payer system, the dollars must make their way to the general population in order to resolve our problem.

So I will be looking for the dollar to go down, the stock markets to go up for a year or so, interest rates to go up as bonds go down, and asset prices in general to rise. Inflation will be mistaken for prosperity again and we will reset to another level.

Here are some annotated charts of these general themes....

And if none of these things happens I will take note and live and trade accordingly!

Happy New Year!

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Looking back

I suppose I should post something to celebrate/reflect on the passing of another year.

Here is a family picture of an Indian named Samuel Little Crow, taken about 1925. He is holding my fathers sister. Taken on an reservation near Chamberlain, So. Dak. My father tells of this man visiting his father frequently and relates stories of the hardscrabble life they led in those days growing up.

 To me this picture emphasizes the relentless passage of time. The old is inexorably swept away as the world of humans evolves at a faster and faster pace.

May the new year be prosperous and happy for everyone.

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