Avoid the News, Find an Investment Strategy

The long-running Dalbar Financial Services study shows that funds routinely deliver bigger returns than investors actually get, because individuals only buy after a rise or sell after a decline. (MarketWatch)

What would also make an interesting study is to see how these decisions are correlated with the financial press headlines. True financial journalism is rare with most mainstream news happy to pump the market up and wish for better times when it dives. There is rarely any real analysis, especially on TV - you have to look online to find that.

All of this is in the context of the current market rally. Is this time to get back in? The simple answer is that, if you haven't done so already, then don't do it now! The S&P 500 is now sandwiched between its 200-day and 50-day moving averages. As the two indicators move towards each other there will come a crunch point. Is this a sucker's rally or the real thing? That will be the time to tell. Don't add to Dalbar's statistics. This is perhaps a good time to sit down and think of a real investment strategy. There are many strategies that work, you just have to find the one that's right for you, your level of assets and your time commitments. The worst strategy is to follow the news!

Gold Bugs Beat Bullish Drum

In recent years the gold bugs have beaten a bullish drum, especially during the dips in the rollercoaster ride. Having touched $1,000 again it has since drifted to $875. The uptrend support line is around the $750 level so no time to panic as yet.

But as Peter Brimelow says,"There is disturbingly universal expectation among gold-watchers that Federal Reserve monetary expansion must blow off into inflation." My concern too is that all this creation of dollars is actually masking the fact that so much dollar wealth has also been destroyed. If this is indeed the case then inflation will not necessarily take hold.

Gold markets are particularly prone to noise. Unlike stocks and bonds, gold yields no interest, and unlike crude oil gold is only marginally used as an industrial product. This means that profits of the buy-and-hold variety are only forthcoming in an uptrend. The other option is to just follow the charts and buy and sell accordingly. There are many large forces in this market that do not show their hand by writing newsletters. Look at the numbers, not the noise.

Ruff Rides the Rally with Caution

Ruff Times, edited by veteran Howard Ruff, is up 20.4% over the year to date through March, according to the Hulbert Financial Digest's count, compared to a negative 10.56% for the dividend-reinvested Dow Jones Wilshire 5000.

Ruff wrote recently: "The stock market has made a dead-cat bounce, even though the returns are spectacular for short-term investors, which I am not. The long-term problem with the stock market is two-fold: 1) its earnings will decline as business sags deeper and deeper into this recession which will depress stock-market prices; and 2) the price/earnings ratio (PE) is still way above the typical PE at the bottom of bear markets. The stock market will have its ups and downs and literally suck Wall Street investors into short-term rallies as they try to pick 'the bottom.'" (MarketWatch)

Ruff's conclusion: "Sell into these rallies. The stock market is toxic and will be for several years."

Well there's confidence for you! And this from a guy who's made 20% during the last year.

SEC Revisits Uptick Rules

The SEC is sheepishly back-peddling on the so-called uptick rule. Controversially, this rule was axed in 2007 after 70 years on the books. Unfortunately, the axing of this rule to mitigate short selling was also the cue for the worst bear market since the Depression. The uptick rule has nothing to do with disastrous corporate earnings, so I suspect this is another straw man held up as a scapegoat. However, red faces all around the SEC.

But is the uptick rule such a good idea? Just to muddy the whole argument the SEC has put up five different proposals for a 60-day consultation period. Whatever the outcome, any rule that tips the balance of supply and demand in one direction is not part of a free and fair market. If the idea is to increase stability and decrease volatility then perhaps having both an uptick and downtick rule would make sense. But looks like we're heading back to the days when pumping up stocks for no good reason is a great idea! The nightmare scenario for US stock markets is that they start to resemble their Japanese counterparts.

There are other ways to short stocks, such as using options. The real problem is from naked short selling, where someone sells a stock they don't actually own, as this effectively increases the apparent number of shares being traded. The SEC has proved itself completely useless at being a financial watchdog. Until wholesale changes are made, expect nothing more.

Analysts Clutching at Volatility Index

The CBOE Volatility Index, or VIX - which typically moves in the opposite direction of the S&P 500 - on Tuesday deviated from its norm and tilted mildly lower in a move one analyst attributes to a potential shift in the stock market's course, reports MarketWatch.

"Typically, if the S&P moves 3%, VIX will move 10% in the opposite direction And, when the VIX is stubborn, and doesn't move as much you'd expect, it is often forecasting a change in direction," said Randy Frederick, director of trading and derivatives, Schwab Center for Financial Research.

The VIX, a measure of the market's expectations of volatility over the next 30-day period, is often referred to as the fear gauge, but Frederick rejects the description.

"I don't like to use the term 'fear gauge' because then you're saying fear and uncertainty are synonymous. You can have uncertainty without having a lot of fear," he said.

Exactly, the VIX measures uncertainty rather than fear. It is still stuck in the 40s, which is moderately high and what traders would like is to see it back firmly in the low 30s or even 20s. Ultimately, earnings will determine a successful recovery, and on this front there has been some little-publicised activity as stock indices shed their most pathetic performers for new, and hopefully better, companies.

Keep a watch on companies about to enter the S&P 500 as the mere fact of being in the index means their share price increases as funds tracking the index have to buy the stock to balance their portfolio.

How Rich Countries Die

This is a brief overview of a book report on The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities, by Mancur Olson at Philip Greenspun's Weblog. The full book review is fairly lengthy but well worth the read. Indeed the original book itself may have been better titled as "the Decline and Fall of Nations" as there seems little in it that is uplifting in the current situation, except perhaps a warning that many countries are going down a slippery slope towards permanently unproductive economies.

The main thesis is that Olson wants to separate productive and non-productive parts of the economy; something that traditional macroeconomics ignores. He sees government spending as largely unproductive. It does keep people employed but it is just a recycling of money taken from taxpayers and redistributed to activities that by their very nature do not yield a profit and hence do not contribute to economic growth and wealth.

The second attack is against the increased influence of special interest groups within developed economies. Olson sees both corporate lobbying and powerful trade unions as contributing to the decline of a nation's prosperity as they both seek to put their own interests above that of the nation. Surely, seeking a balance is what governments are there for, and yet once the lobbying becomes so ingrained it is almost impossible to find a politician untarnished by either corporate or worker support. The downward spiral of inefficiency and unproductiveness thereby continues as bigger and bigger government is need to monitor often conflicting market rules and regulations.

The book was written back in 1982 and Olson's thesis is that standard macroeconomic theory is basically useless in describing developed economies. Agreements between governments, companies and workers can work in rebuilding a country, as happened in Italy, Germany and Japan, but eventually such arrangements become negative in that they but the brakes on much needed changes demanded by new market conditions and new technologies. Just look at the US auto industry - both corporations and unions want to keep their cozy market and demand government bailouts rather than adapting to market changes ten years ago.

How does all this help an individual today? Well, the message is that if you wish to prosper then look for a new industry and a developing country. The mobility and flexibility of an economy unhampered by decades of nepotism may even be more important than the actual industry sector. Be flexible and mobile and smart!

One slightly depressing side issue is that Olson believes that people moaning about their political establishment should just ignore it and concentrate on earning more money. The special interest groups have significantly more funding than any individual, or even groups of individuals, and that the time wasted in seeking political solutions is better spent seeking personal economic solutions. Voting for change is an illusion - vote with your feet.

Jim Cramer Says "Depression is Over" - Laughing Stocks Rise

Megaphone mouth Jim Cramer is auditioning for a new job as Wall St clown. Below is a video with guru Jim announcing that the depression is over, the Federal Reserve are geniuses and that pumping over $1 trillion dollars into shell-shocked economies is going to be the Lazarus touch.



Now this guy is in serious need of his own oxygen tent as his own company lies on the slab next to his reputation. Calling a bottom every time there is a temporary minimum is just plain stupid. Everybody can do that. Eventually everybody will be right and ignore all the false signals. Selective amnesia means he can carry on being loud, but volume is no indication of truth.

The next shoe to fall will be the dollar. Maybe not today, maybe not tomorrow, but some day the Fed's bluff will be called. China has gained some increased power in the IMF and World Bank due to its reserves. It has been calling for the dollar to be scrapped as the world's default reserve currency. This may happen slowly as the IMF issues more SDR loans. SDRs are bizarrely denominated in dollars but are a pool of currencies in which the dollar has a weighting of just 44%.

A renewed dollar slide may help US exports in the long term but the short term effect will be to stoke up inflation. The monetarist knee-jerk reaction will be to hike interest rates thereby trampling on the new shoots of an economic spring. It will, however, give Cramer the clown another go at shouting "Bottom!" For the moment, watch the key resistance level at the 200-day moving average.

G20 Agree on Global Stimulus

The G20 meeting in London ended with a nine-page communique setting out a number of financial stimulus commitments to try and halt the global economy sliding into depression.

The headline figure most sources quote is $1.1 trillion, but this is on top of $5 trillion already agreed by individual countries. The extra $1.1tr will come from global institutions like the IMF and the World Bank. Looks like a bit of shuffling the cards with reserve-rich countries lending to those close to bankruptcy.

However, what the meeting refers to as trade financing is a pathetic $200 billion. So what is the rest of the money for? Plugging black holes in banks worldwide?

All of this, however, begs one huge question. This is yet again gambling the future on expected growth, whilst ignoring all the toxic "assets" - better known as liabilities - and how to deal with them.

Just the regulated derivatives markets (ignoring the OTC trades) are worth some $700 trillion. Even a small 10% loss would dwarf this whole global stimulus package. Where was the solution to this potential earthquake?

Stock markets rose on the news.