Humor: How to Get People to Say YES

Dear Friends,

Here's a more cheerful way to end the month of October 2008. It is a video clip of the TV Series, "Yes, Prime Minister".

The topic is on Opinion Polls: Getting the Results You Want, and the focus is on How to get the People to say "YES", which seems most apt, in view of the 4th November 2008, US Presidential Election.

Enjoy!

Ooi

Birinyi: There's No Real Cure for Recession, Other Than Time

Dear Friends,

Here is a Bloomberg Interview with Laszlo Birinyi. In my opinion, he speaks great common sense. It is a common misconception of the public that a Government is able to "manage" an economic recession. Birinyi states that the real cure is time. I would add that the deeper the recession pain, the longer the time it takes to climb back to health.

Don't get me wrong. I am not saying that the US Government effort has not helped in reducing the economic pain. What I am explaining is that despite the US Government's effort, there will still be tremendous amount of economic pain, and only time can heal these wounds.

The key message here is to be careful, and not be too optimistic that there will be a quick economic recovery, based on the argument that the US Government and other Governments of the world has poured trillions of dollars into the problem.

In fact, we should be very worried that trillions of dollars are being spent, and yet, the problem is still extremely painful and protracted, and doesn't look like it has been solved. What are the implications of the Governments of the world spending trillions of dollars? Who will pay for these Government Debts eventually?

Best wishes,

Ooi

Bloomberg Interview with Herb Sandler on Sub-Prime

Dear Friends,

Did the Authorities have Ample Warning to Regulate the Sub-Prime Housing Mortgage Industry?

Here is a good interview by Bloomberg with 77 year old billionaire, Herbert Sandler, former CEO of Golden West Financial. With 40 years' mortgage experience, Herbert Sandler explained that he had written letters to Federal Reserve Chairman, Ben Bernanke, telling him of the "completely unregulated" firms that were doing the Sub-Prime Business, which ultimately triggered the current collapse in the housing market in the US today.

Mr. Sandler is upset that Ben Bernanke completely ignored his effort to prompt the Fed to take action back then.

From the information I have heard so far, it would seem that the authorities have been at fault on two counts, i.e. not regulating the Sub-Prime Business, and the banks who were operating at leverage of around 35 times to 1.

Why? Was it Ignorance, Negligence or ..........? You form your own opinion on the situation. If these two faults are true, then it is possible that Mr. Bernanke may not be around for long, once Obama wins the election.

If there is a vacancy to be the Most Powerful Man in the Financial World, who can fit the shoes?

In my opinion, the possible candidates for a new Federal Reserve Chairman are Bond King, Bill Gross and Professor Larry Summers. I believe Bill Gross has a lot of support on Wall Street, while Larry Summers is already the economic adviser to Mr. Obama.

Bill Gross had been voted one of the ten most influential man in the financial world by Fortune Magazine. It is interesting to note that in an interview with the media, Professor Roubini , also known as Dr. Doom, named Larry Summers as the man for the job.

Will Main Street or Wall Street win this potential vacancy?

Why is this important? Because the Federal Reserve Chairman is THE MOST POWERFUL MAN in the financial world. With a single slip of tongue, he can cause the world markets to collapse 10%. More importantly, a lot of promises (bailouts, rescue plans, economic stimulus packages, etc.) have been made by the Bush Administration, but they have not been carried out.

How many of these Bush Administration plans / promises will be implemented to completion, once Obama takes over, is any one's guess.

What's the difference in policy? Economic Management is about finding the money for the Government to spend. In listening to the McCain and Obama speeches, it has been claimed that Obama thinks that Bush has spent too much, and thus, he is intending to scrutinize the Government Budget with a fine toothcomb, to find the money to reallocate to the right areas, i.e. help the public in financial trouble today.

On the other hand, McCain has criticized Bush as not taxing certain people enough, and thus, he plans to raise taxes on those earning US$250,000 per annum and above. He does not seem to feel that there is anything wrong with the current Government expenditure.

Personally, I can't understand how the US Government can spend a hundreds of billions of US dollars every year, and yet, there are US Schools that are struggling to be properly equipped. Thus, I am of the opinion that Mr.Obama can do a lot, provided he is not worried about offending a lot of influential business people. When you cut down on a significant Government Budget Allocation, you DO OFFEND some influential business people in the process. Time will tell whether he can do it.

Is there a Price to the Presidential Campaign Donation?

I do not know how the real world works in the US, but in some Asian countries, a Presidential Election Campaign Donation of US$700 million is bound to require a lot of favors to be done in the next 4 years. When it comes to a Government,, any Government, favors mean allocation of projects, i.e. SPEND MONEY. So, I am very curious as to how Mr. Obama intends to deliver the goods, and cut down expenditure, or IF he has to deliver the goods at all.

Will it be a reduced Government Expenditure or the same total Government Budget Expenditure, merely reallocated, or will the actual Government Expenditure actually increase?

Lesson from President George Bush's Tenure

President Bush promised to reduce the Budget Deficit. But during his 8 years tenure, the US Government Debt rose from US$5.7 trillion to US$10.5 trillion. You can check how much debt is being accumulated every second by the US Government on my blog's National Debt Clock.

Will Obama increase this debt by another US$3 trillion in his tenure as President? Which President of the United States will do the right thing and work on reducing this debt? HOW?

Best wishes,

Ooi

Dow Outlook 081031 - Warning! Toby Crabel's Classic NR4 Trade in the Offing!

Dear Friends,

Do not be too happy with yesterday's upturn of 189.73 points. The Dow's Close at 9180.69 represents an Inside Day for Thursday, with Wednesday's Candle covering the whole range of Thursday's trading range. Coupled with the higher Low and higher High on Wednesday compared to Tuesday's Green Marubozu, and we have the Classic Toby Crabel NR4 Setup.

Based on my research, Toby Crabel was a prodigy of Victor Niederhoffer, and part of the Soros' Quantum Fund team. However, he eventually struck out on his own, and formulated his own Day Trading System. He became a billionaire as a result of his NR4 and NR7 System. This was in the 1990s.

At this stage, we have to perform one calculation before we can make the trading decision. We need to calculate the mid range of the Inside Day Candle, i.e. the High minus 50% of the difference between the High and the Low.

Thus, Mid Range = 9121.67 [9266.47 - 50% x (9266.47 - 8976.87)].

The Key now is today's Dow Open. If Dow Opens below the Mid Range of the Inside Candle, i.e. below 9121, then it is a Sell Order. Unfortunately, this is only a Sell Order, and there is no corresponding Buy Order to this setup, and thus, if you have a choice (profit), my opinion is to take it.

Again, there is no guarantee of success, but Toby Crabel disclosed that during his test period, he had a 80% winning percentage.

My advice - Don't argue with a billionaire who made his fortune as a trader by inventing and using the NR4 Trading System.

Frankly, I am no expert and I don't trade such Day Trading Patterns, although I have actually read quite a substantial part of his actual research work on NR4, NR7 etc. from his book., which costs US$900 for a second hand copy, on Amazon.Com. However, if I had a Long Position, I would get out. Better be safe than sorry.

May you be successful with this trade

I would state one of my favorite phrases here -

Dreams - It is good to build castles in the sky, but start working on the foundation. NOW!

Today's blog shows how important it is to do your research and develop the necessary competencies before you speculate (trade) in the financial markets. Luck favors the prepared.

Lastly, please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

KLSE Outlook 081031 - Bearish but Increased Probability of a Short Term Relief Rally

Dear Friends,

Let's start our analysis with the Daily Chart. Unlike the Dow (DJIA), the KLSE CI has not even started to form a Price Pattern.

It is still in a well behaved, Strong Downtrend, although the parabolic curve ball nature of the downtrend suggests that this steep fall cannot continue at such a drastic pace for too long.

However, from my personal experience looking at such a downturn (Parabolic Curve Ball), the technical rebound, also known as the Relief Rally, tend to be weak, i.e. maximum of 33% Retracement Value to the total Downswing Value, compared to 50% to 67% Retracement Value for some Correction Waves.

Subsequent to the Relief Rally, the resumption of the Primary Downtrend will take the market significantly lower, albeit a downtrend slope that is less steep in its fall.

This is in view of the significantly bearish sentiment portrayed by the steep parabolic curve downtrend.

The good news is that the Candlestick on Wednesday, 29th October, was a Kanazuchi, also known as the Hammer, which is a Bottom Reversal Candle. Furthermore, Thursday, 30th October's candle resulted in a higher high and a higher low, compared to the Hammer Candle.

This price data suggests that Wednesday's Hammer Candlestick could be a Short Term Pivot Low. Also, the fact that the CI is at Gross Oversold Level, suggests that there is an Increased Probability of a Short Term Relief Rally.

However, it should be noted that the Kanazuchi (Hammer) Bottom Reversal Signal is not as reliable as its counterpart, the Hanging Man, which is quite a reliable Top Reversal Signal. In fact, Gregory Morris' backtesting showed that the Win Rate from such a trade is at only 44%, with a negative Reward/ Risk Ratio.

In view of the lack of reliability of the Hammer Candle Signal, it is unwise to take a Long Position in anticipation of a Short Term Relief Rally Upturn. This is despite the increased Probability of the Rally happening, and the likelihood that the Relief Rally may retrace to around the 975 level before resuming its Primary Bear Market Downtrend.

Why? Because the CI has significant downside risks as opposed to limited upside potential. In such a bearish environment, the CI tend to react badly to bad news, while good news tend to have minimal, shortlived positive impact. Thus, the Potential Relief Rally represents a Short Opportunity upon the Correction Wave running out of steam, rather than an immediate Long Opportunity.

This is because there are two types of key Correction Waves, i.e. a V Correction and a Sideways Consolidation Wave. If a V Correction Wave is encountered, then the Target High is likely to be achieved. On the other hand, if a Sideways Consolidation is experienced, then there will be limited upside compared to the risk taken. With the low Reward / Risk Ratio, it doesn't make good business sense to take such a risk.

The general rule is to trade only in the direction of the Primary Trend and the Secondary Trend; never against them. The only major exception to this rule is when the market has crashed significantly, as in the Dow's situation. For the KLSE CI, the Index did not crash, but instead have fallen steadily in a well behaved, Strong Downtrend, and such a price movement do not suggest a "Climb Back to Health" Scenario, as is the case in the Dow.

In conclusion, the Longer Term Outlook is Bearish. However, there is an increased probability of a Short Term Technical Rebound (Relief Rally). Should this Relief Rally happen within the next few days, the Target High will be around 975.

Nevertheless, this Target High assumes a V Correction rather than a Sideways Consolidation. Thus, we do not encourage taking a Long Position Strategy to capitalize on the potential Rally, but rather, to wait until the Rally run out of steam, to take a Short Position.

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Dow Outlook 081030 - The Spinning Top Hypothesis

Dear Friends,

VOLATILITY HAS REMAINED HIGH, BUT THE STOCK MARKET HAS SURVIVED THUS FAR.

Our Hypothesis of a Calmer, Progressively Narrowing Trading Range has not materialized to date. The Dow continues to trade in a wildly volatile trading range, and there were times on 24th (US Friday Market) and 27th October (US Monday), when some of us thought that another crash might be in the offing, especially when the Dow Futures went limit down. However, this was not to be; which is interesting.

WHO IN HIS RIGHT MIND WILL BUY AT 800 POINTS UP?

What is even more interesting was the 865 points rise in the Dow on 28th October (US Tuesday). Who in his right mind would be buying at 865 points up or even 800 points up, for that matter?

There are only two major Hypothesis in answer to this question. Either it is some Smart Money Hedge Funds who have poured in money to catch all the people who have taken Short Positions in the stock market, or it is the Government's Money starting to pour into the market.

What's the difference? If it is the Hedge Funds Smart Money catching the Shorts, this fantastic Rally will not last long. If it is the Government's Money, prices should hold steady from here onwards.

How can we know? There is NO CERTAINTY other than taxes and death. Even worse is the certainty level of forecasting stock market. There is no way to know for sure, but Technical Analysis gives us some clues as to which Hypothesis has a higher probability of becoming true.

Let's look at the Daily Chart. You will see quite a number of Black Arrows pointing both up and down, and you can also see two Purple Arrows pointing up in the month of June 2008.

The Arrows, irrespective of whether they are black or purple and whether they are pointing up or down, point to an interesting candlestick known as the Spinning Top.

WHAT IS THE SPINNING TOP CANDLESTICK?

The Spinning Top is a candle with a very small body, normally near the middle of the whole candle, including the wicks at the top and at the bottom. It doesn't matter whether the small body is green or red. A Red Body means that the Market Open is higher than the Market Close, while for a Green Body, the Market Open is lower than the Market Close, and thus, the market closed up compared to the Open.

WHAT DOES THE WEDNESDAY, 29TH OCTOBER 2008 SPINNING TOP CANDLE TELLS US?

Let's look at yesterday, Wednesday 29th October 2008's Spinning Top candle. It is a red body, and thus, the Market Close was lower than the Market Open. The Dow opened at 9062.33 and closed at 8990.96. What is interesting is that the Dow hit an Intra-Day Low of 8890.29 and a High of 9363.32.

This Spinning Top tells us that the Dow went up quite high from the Open; 300.99 points higher, to be exact, and then fell 373.03 points, a very substantial fall, to Close below its Open. This means that the Dow could not sustain the bullish sentiment. The market is now feeling indecisive once more about the future direction, in the Short Term of 3 to 5 days.

In fact, with the body of the candle positioned in the lower half of the candle, it suggests Short Term Bearishness. In summary, we have a Spinning Top candle suggesting Market Indecision with a Downward Bias.

HOW RELIABLE IS THIS SPINNING TOP SIGNAL?

If you look at the Black Arrows pointing down, you will see that most of the while, where there is a Spinning Top and the Market has risen, the probability is reasonably high that the market will fall in the Short Term of the next 3 to 5 days. Japanese Candlesticks signals are usually indications of the market for the very Short Term, unless we are interpreting a Weekly or Monthly Candlestick Chart.

On the other hand, if we look at the Black Arrows pointing up, we will observe the Spinning Tops at Pivot Lows, i.e. these candles form after the Dow has fallen, and in the next few days, the Dow rose.

Please note that the interpretation of Spinning Tops have to be made in context of where the Spinning Top is formed, in relation to the overall market movements. Thus, a Spinning Top may mean a fall or a rise, depending on what happened prior to the formation of the candle.

HAVE THERE BEEN SITUATIONS WHERE THE SPINNING TOP PROVIDED UNRELIABLE SIGNALS?

Yes. If you look at the two Purple Arrows pointing up, you will notice that the Dow fell, and Spinning Tops were formed, which would seem to indicate that the Dow should rise for a few days, but it did not.

Why? Because Spinning Tops tells us of Indecision, and when there is indecision, the market tends to go in the opposite direction. For example, when the market has risen, and the market hesitates, some people will sell to take profit, while the buying pressure dries up for a while. This brings down the market for the Short Term.

On the other hand, when the market has fallen, and the market hesitates, there will be "value investors" also known as Bottom Fishers, who will buy, thinking that a bottom has formed, whilst at the same time, the Bears / Shortists hesitate. This will bring the market up in the Short Term.

So, why did the Spinning Top signal per the Purple Arrows fail? Because there are times when the latest market news cause the market to resume its prevailing sentiment. In the case of the Purple Arrows, the Dow was in a bearish sentiment, but the Spinning Top suggested that the market could be oversold, and could have a few days of small rally. However, it is likely that bad news came into the market that pushed the Dow to lower levels.

SPINNING TOP - A WINNING EDGE CANDLESTICK SIGNAL

If you look carefully at the 9 months of Daily Candlestick data, you will notice that the Spinning Top gives more signals that are correct than wrong, and this is a Winning Edge Higher Probability tool for trading.

MARKET UPTURN WAS MOST PROBABLY MERELY A BEAR TRAP ACTIVITY

Based on the Spinning Top signal, I would submit that it is likely that the some Smart Money Hedge Funds had poured money into the stock market to buy and catch the Shorts in a Bear Trap. As the Dow rose past 500 points on Tuesday, 28th October, I am sure many people would have been extremely tempted to take Short Positions to take advantage of a Pullback in a theoretically Extremely Overbought Market condition. Once the Bear Trap Short covering is over, the market will fall.

VERY SHORT TERM OUTLOOK - DOW TO FALL IN THE NEXT 3 TO 5 DAYS

In summary, we expect the Dow to pullback in the Very Short Term of the next 3 to 5 days, based on the signal of this Spinning Top candle.

THREE TRADER DEVELOPMENT LESSONS - THE MOVING TRAIN, TECHNICAL INDICATORS & IMPORTANCE OF STOP LOSS

Three Trader Development lessons to be learned here.

First Lesson: - NEVER EVER stand in front of a Moving Train, i.e. don't take a Short Position just because you think the market run up is too much too soon. Always let the price movement tell you when to take a trade. If you don't have a trading system that triggers a trade consistently in these kind of volatile situations, don't take a trade. Believe me, I have learnt from experience as well. I survived the nightmare of a Bear Trap, but that is another strategy altogether, and one I don't recommend, except to the very desperate.

Second Lesson: - For all of you Technical Indicator lovers, here is the truth. Never take a trade just because the Market is at Gross Oversold or Gross Overbought Levels. Indicators are useful, or else I wouldn't be putting them on my charts. BUT, they serve as supporting evidence, NEVER as the MAIN TRIGGER for a trade to be taken. I've never been caught on this lesson because I did my research homework before I used the indicators.

What this means is that I wait for Price to tell me that a trade MAY be taken, i.e. the TRIGGER, and then, I check the Technical Indicators to ensure that there are no contradictory signals. If there are, I don't take the trade.

If there isn't, then I CAN take a trade, if I "Feel" right. My last Opportunity Filter is still an Intuition Factor. On the other hand, I don't take a trade based on "Feel - Intuition". My Feel Intuition is only to STOP A TRADE, and not to trigger a trade. I do use my Intuition to scan and watch for interesting Opportunities.

Third Lesson: - Always, Always have a Stop Loss Order in Place if you don't want to be caught in Bull Traps and Bear Traps. The idea is to preserve your capital at all times.

Live to fight another day. The only way to avoid big losses is to take small losses when you are wrong. This is probably THE MOST IMPORTANT LESSON of all lessons that a trader can ever learn. Believe me, I've been there. You don't want to sweat out the nightmare of sitting on huge losses that is wiping out 10%, 20% or even 30% of your capital.

It's the SURE THING trades that causes you not to put in your Stop Loss Order, and it's the SURE THING, that will lose you a lot of money in the process.

WHAT IS HAPPENING FROM A PRICE PATTERN PERSPECTIVE?

Let's zoom in on the last few days of the Daily Chart. This Price Pattern has been confusing to say the least. It looked like a Triangle that has been breached to the downside, only to have a long Marubozu taking the Dow back to almost the Key Resistance Level. So how are we going to translate the current price data into useful information that we can trade profitably with?

Due to the High Uncertainty, and Ambiguity in the Price Movements, we have to use some Scenario Planning techniques rather than merely forecasting on a deterministic basis.

Since the Critical Pivot Low of 7882.52, the Dow made a Critical Pivot High, i.e. at 9794.37. From this Pivot High, we can see that there has been one Pivot Low formed at 9305.89, on 20th October, which is the Green Candle, i.e. two candles after the Pivot Low of 8197.67 formed on 16th October.

The next Pivot Low was formed on 27 October at 8085.37, which is important because it is lower than the recent Pivot Low of 8197.67. Thus, we have a situation of two lower Pivot Highs and two lower Pivot Lows. This suggests a resumption of the Primary Downtrend, if not for the last two candles.

The last candle, i.e. the Spinning Top of 29th October broke through the Pivot High of 9305.89, with a new High of 9363.32, and this adds even more confusion to the situation. In fact, it is precisely this confusion in the market place that we continue to experience high volatility in both directions.

SHORT TERM OUTLOOK - CALMER, PROGRESSIVELY NARROWER TRADING RANGE IN SIDEWAYS CONSOLIDATION

I don't believe that Forecasting is the correct usage of Technical Analysis. However, if I were forced to take a best guess, I would say that the Dow will still be in a Sideways Consolidation Mode in the Short Term period of 3 Days to 3 Weeks.

Thus, we continue to persist in our Hypothesis of Calmer, Progressively Narrower Trading Range, despite being inaccurate thus far. We have been wrong in terms of volatility, but not in terms of the Dow's direction, which is sideways, albeit a much wider range.

The Market MUST calm down if it is going to perform a Corrective Medium Term Wave Rally back to the SMA200. Continued Volatility does not augur well for the market, and if it persists, it may be advisable to stay away, as the risk of another stock market crash grows with each passing "Wild" day.

THE SCENARIO PLANNING EDGE - LET THE MARKET TELL US WHAT TO DO

However, if I were to adopt a Scenario Planning Approach, I would view this situation very differently. Here, I adopt the view that I do not know where the Price is going, but there are some interesting signposts.

First, the Dow made an effort to breakthrough the SMA20, i.e. the Red Line which is sloping down in between the two Bollinger Bands which are also red in color. From a historical evidence, in a situation where there is a breach of the SMA20 with a close above it, Price has tended to move towards the SMA50 (Blue Line), sometimes even to SMA200 (Green Line), and thus, such a SMA20 Breach with a Confirmational Close, would be viewed positively.

Traders who adopt this approach would enter a Long Position, provided they feel that there is enough Target Reward / Risk Ratio to justify the trade from a logical business sense. If you keep a tight Stop Loss just below the SMA20, then the Reward / Risk Ratio should be sufficiently attractive, with a Target Profitable Exit of 10250, i.e. just below the SMA50.

On the other hand, if the Dow falls below the 29th October Low of 8890, then it is a Short Position that is taken, with a Stop Loss at slightly above the SMA20 level of 9087.

MEDIUM TERM OUTLOOK - CLIMB BACK TO HEALTH

The Medium Term Outlook depends on the evidence from the Price Pattern being formed. However, given the confusing Price Pattern, or the Sideways Consolidation Pattern, depending on what you see, and what will happen tomorrow, I maintain the view that there is no reliable signal from such a formation.

Traditional Technical Analysis Theory have stated that Sideways Consolidation tends to be a Trend Continuation Pattern, and if this Hypothesis is true, then, the Downtrend will continue after it has consolidated enough.

However, Market Bottoms are also formed on a Sideways Line Formation basis, and thus, how can we be sure?

I have done some Systems Backtesting work on the MACD, and here, I think that the Probability is Higher that the MACD Crossover in an Extreme Gross Oversold Position will lead to a Medium Term "Climb Back to Health".

Can the MACD be wrong? Yes, but it is extremely rare for the MACD to whipsaw in its crossover for more than twice, and thus, the Probability is in our favor, in terms of the Medium Term Outlook of 3 weeks to 3 months.

LONGER TERM OUTLOOK - PRIMARY BEAR MARKET WILL PERSIST

However, please note that this Upturn is a Medium Term Correction Wave within a Primary Downtrend, and once the Medium Term Uptrend Wave is over, the Primary Downtrend will resume, and the Dow should be much lower than 7882 eventually. That is the Longer Term Outlook.

The SMA200 is already in a Downtrend, and it is unlikely that the Dow will breach it any time soon in the next 3 months to a year.


CONCLUSION

Very Short Term Outlook (3 Days to 5 Days) - Bearish; Market will fall.

Short Term Outlook (3 Days to 3 Weeks) - Neutral; Sideways Consolidation with a Calmer, Progressively Narrowing Trading Range.

Medium Term Outlook (3 Weeks to 3 Months) - Bullish; Climb Back to Health.

Long Term Outlook - Bearish; Market will fall lower than the Critical Support Level of 7882.

Lastly, please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

CNBC - Jim Rogers: Inflation Down the Road

Dear Friends,

I respect Commodities King, Jim Rogers very much. This video is worth watching, if anything, it is by far, the most confrontational interview he has had with CNBC.

Mr. Rogers looked quite exasperated by the fact that CNBC commentators don't seem to understand his viewpoint on Inflation, and the error in bailing out the banks.

Investing in Commodities

In my opinion, despite my deep respect for Mr. Rogers' opinion, investing in commodities is wrong, at least for the foreseeable future of 2 years, from a fundamental perspective. Why? Because there is no way to forecast demand which is decreasing rapidly, in a fast deepening recession.

In such a situation, commodities are goods that are not differentiated, and tend to be the worst hit goods in terms of price falls. Don't get me wrong. I do agree that due to the arguments of Peak Oil, and inelasticity of demand (to a certain extent only, because even consumption of oil is dropping), the longer term demand for oil will cause price to rise. However, that is in the longer term, when the world economy picks up again, and thus, I believe that Mr. Rogers is way too ahead of this demand curve this time.

Having said that, I do agree with Mr. Rogers that the end of the downturn, from a Secondary Medium Term Wave perspective, which he calls a Selling Climax, should be about here. Oil at US$63 is too low, too soon. There should at least be a Secondary Uptrend Correction to the Primary Downtrend Wave. Thus, don't be surprised to see Oil Price rise in the Medium Term, more from a technically oversold position than from fundamentals.

What's the difference? A rise from fundamentals is a trend that is consistent with the Primary Trend, i.e. the Long Term Trend. However, technically, the Long Term Trend is a Downtrend today, and thus, Oil is already in a Primary Bear Market. Any rise in Oil Price from here, is a Technical Correction of the Secondary Medium Term Wave, which will most likely, go near the Price at SMA200 which currently stands around US$110 per barrel, but will not likely breach it, before resuming its Primary Downtrend.

The Medium Term Correction Wave will be a result of overreaction in the market, and thus, Price will reverse and start to move back towards the fundamental consensus of US$110. If you remember, it was only "yesterday" (more like a month or two ago), that "investors" (if you can invest in a commodity), were of the general opinion that Oil at US$90 was a good buy.

However, due to the distress selling by Commodities Hedge Funds, the picture has been severely distorted.

From the angle of the Law of Mean Reversion to the SMA200, i.e. the fact that Oil is technically grossly oversold, a Medium Term Long Position Trading Strategy is not wrong, and in fact, is possibly the sane and right thing to do.

Thus, whilst I disagree with Mr. Rogers on the 2 Year Outlook i.e. I am bearish from a two years' perspective as opposed to his bullishness, I am bullish in the Medium Term of the next 3 weeks to 3 months.

I am not so bullish on the rest of the commodities, not even Gold. Although the Medium Term Correction Wave may be forthcoming as well, as Gold tend to rise with Oil, my opinion is that it should not move as strongly as Oil. This is because Gold is only valuable in two situations, i.e. "Flight to Safety" in times of abnormal crisis, and "Hedge Against High Inflation", which was the case for the last few years, but no longer the case in the foreseeable future of next two years. Gold will fall further from US$700 to even US$600 in the longer term.

Inflation as a Future Economic Problem

As for Inflation as a future economic problem, I have already discussed this issue in my blog entitled Inflationary Holocaust - The Problem of Printing Too Much Money. Such a situation may, or may not arise - no one knows. We have to prepare for such an eventuality, but let's not cry wolf too fast.

Of course, by the time we see it coming, it will be too late to do anything but damage control, which is probably why Mr. Rogers is so passionate about this issue, which is not understood by the rest of the world.

My opinion is that the Federal Reserve has to watch their economic action steps very carefully. The idea of economic stimulus / infrastructure spending is to spend very wisely for job creation, and not spend, for the sake of buying GDP numbers, but not at the benefit of the average man on the street.

This was why I don't agree with economic stimulus packages that merely return money to tax payers. It is the 2nd most costly form of Government Spending, that is ineffective. Of course, the most costly form of Government Spending is to build a white elephant monument at huge expense at no benefit to anyone but a few contractors.

Bailing Out of Banks

Lastly, on the issue on the "Bailing Out of Banks". Mr. Rogers is proposing that there is a difference between what Mr. Bernanke, the Federal Reserve Chairman is doing, i.e. Bank Bailouts, and what was needed in 1929 Great Depression Era. He explained that Mr. Milton Friedman, the Nobel Prize Winner in Economics, had showed that one of the biggest issues that aggravated the Great Depression was the lack of and withholding of liquidity by the Federal Reserve then.

Mr. Rogers is making a case that the provision of liquidity is not the same as bailing out of banks. This is a very interesting proposal, and I must admit that I had always thought them to be the same, as was the view of the rest of the world economists.

If I understand correctly, the proposal of Mr. Rogers is to let the banks with toxic assets fail. Why put in good money (taxpayers' money that has not even been paid by taxpayers) to buy toxic assets? Instead, the US Government should focus on providing liquidity to banks that are well managed and will not fail due to toxic assets.

I agree that this proposal would certainly limit the amount of money to be printed to a much lesser extent, and thus, burden the Government and taxpayers, a lot less. From this perspective, this proposal is desirable to bailing out banks with huge losses. The argument that the Government MAY come out of the banking and economic crisis with a profit is irrelevant.

When has it been the objective of any Government to use taxpayers' money, which has not even been paid yet, to speculate in toxic assets in the hope of making money?

However, Mr. Rogers' proposal does not solve the problem of consequences of bank collapses, and with it, the evaporation of the lifetime savings of many normal, conservative people. Without confidence in the banking system, there would be many "runs" on banks, both the bad ones who should fail, as well as good ones, merely the victim of circumstances or wild rumors.

In my opinion, there is a need for US Government to recapitalize the banks, but not pay for toxic assets. In this proposal, the idea would be to let the banks fail, and then come in and put new capital at the discounted valuation. In this case, taxpayers would be owning a "clean" bank at asset value net of all the needed provisions for losses.

However, such a proposal also has a flaw in that it still does not deal properly with the shortfall in amounts due to depositors. Here, the Government has to make good whatever monies that is guaranteed by FDIC. For the amounts exceeding the guarantee, the Government will have to consider the amount exposed, and then decide when more information is at hand. What is important is not to buy toxic assets at a price higher than necessary, and bail out existing shareholders for their loss.

In any case, the discussion is academic since the Bank Bailout Plans have been rolled out. Or is it? I think the bailout is not set in stone, and if Mr. Obama wins, he may actually push against such a plan after he has access to more information, like how much it will REALLY cost in total? The figures might be so staggering that he may decide against the bailouts. I don't know. I'm speculating.

It is not possible for us to know exactly what is going to happen. It is our job to consider the various scenarios and cater for them in our decision making process.

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Bloomberg Edge: TIPS Pricing in Deflation

Dear Friends,

In my earlier blog entitled Asset Deflation Strategy dated 12 October 2008, I mentioned that in general, the world is now in an Asset Deflation Era, i.e. a Negative Sum Economy Game.

On 27th October, Bloomberg Edge released the video below entitled "TIPS Pricing in Deflation". There is a difference between the Deflation mentioned in my blog, which is on Assets, as opposed to a Consumer Price Deflation, i.e. the drop in CPI (Consumer Price Index), which measures the price of consumption goods, and not assets.

Generally, a Consumer Price Deflation corresponds to an Economic Recession, although in unusual economic situations, we can experience inflation in a recession, for example, a Stagflation Environment, where both inflation and unemployment are high.

According to the video, TIPS (Treasury Inflation Protected Securities) is signaling that investors are pricing in a deepening recession that will last 5 years. It is very likely that this economic recession will last longer than what most people expect, and thus, you should be very careful to plan for the worse, rather than be optimistic.

Best wishes,

Ooi

The Fate of Hedge Funds

Dear Friends,

Here is a good video clip explaining the Hedge Funds situation. A potential crisis looms where Professor Roubini believes that a few hundred Hedge Funds will close down.

On the other hand, it was stated on CNBC that Hedge Funds are holding US$600 billion of cash, waiting to invest.

Who is right? BOTH. The turmoil in the financial markets is bound to culminate in a shakeout of a number of hedge funds, some say, hundred, others say, thousands.

The Hedge Funds with the cash, are those doing well relative to the Hedge Funds Industry, which, on average, has lost 17.6 % for their clients thus far this year. The poor performance coupled with market uncertainty are the reasons why clients are pulling out and cash redemptions are causing distress selling.

However, irrespective of what happens in the next one to two years, in my opinion, the Hedge Funds Industry will survive, and eventually be one of the industries to thrive, even before the general economy moves in a significant way.

Why? Because there will always be rich people looking for better returns than Fixed Deposits on their money. And as long as there are rich people, there will always be Hedge Funds who will serve their needs. It's a question of which Hedge Funds Strategy that the clients believe in. And also, it's a question of timing, as to when the markets will be considered sufficiently safe. When the cat (market turmoil and uncertainties) is away, the mouse (the Rich and the Hedge Funds) will come out and play ..... again. :) This is the reality of life.

Best wishes,

Ooi

Why Are the Financial Markets Still Falling?

Dear Friends,

This is the biggest problem facing ALL financial markets right now, from stock markets all over the world, to Gold Market, to Oil and other Commodities Markets. The cash redemptions by the rich and margin calls due to falling prices, are forcing some of the Hedge Funds to sell at low prices, causing the markets to go even lower.

There is no way to assess when the selling will stop, from a statistics viewpoint, because there is no such data freely available, and in any case, by the time the funds report their position, it will be a number of days old.

Thus, we can only rely on Technical Analysis as the only "feel" for the market situation.

Best wishes,

Ooi

More than 60,000 Jobs Lost in the US in Less than 3 Weeks

Dear Friends,

This latest NBC News Report states that more than 60,000 American jobs have been lost in less than 3 weeks. Unemployment is now at 6.1% which excludes discouraged workers who have given up looking for a job, and economists are speculating on 9% total unemployment, which would be very severe pain for the average American. In the Great Depression, Unemployment Rate went as high as 25%, i.e. 1 in 4 people were not able to find work during that era.

This is a key economic indicator to monitor. The US and World Economy will not turnaround until the Unemployment Rate in the US turns around. Right now, this rate is increasing at an exponential speed, and thus, the US and World Economy is going to get a lot worse, from here. If there is pain today, we have seen nothing yet, compared to the pain of tomorrow.

Jack Welch, the world famous former CEO of General Electric, has estimated on last night's CNBC Interview, that the GDP (Economic Growth) will be NEGATIVE 3% to 4%, and this negative GDP (Recession) will last 2 years. Personally, I think this is an optimistic estimate.

In the meantime, all we can do is offer our prayer, for those that have lost their jobs, that they will be able to find a job, any job, soon. It needs to be understood that everyone, from a billionaire to the Average Joe, from a banker, a hedge fund manager, to teachers,, to retirees are suffering from losses, whether directly or indirectly. The only exceptions are those who have their entire net worth in liquid cash, sometimes called SOLID CASH.

Best wishes,

Ooi

Greenspan: Credit Tsunami

Dear Friends,

Here is the latest speech from Mr. Alan Greenspan, retired Federal Reserve Chairman, for more than 2 decades, before Mr. Ben Bernanke took over from him. Unfortunately, I am rushing for an overseas trip, and am unable to contribute value added analysis to this 9.5 mins speech.

Best wishes,

Ooi

S&P500 Outlook 081023 - Similar Symmetric Triangle Formation as the Dow

Dear Friends,

In my opinion, the S&P500 is showing the same signs as the Dow Outlook as per the Daily Chart attached below. Even the Stochastics Divergence is the same, i.e. the Stochastics has moved up ahead of the S&P. Thus, my Outlook on the S&P500 is exactly the same as the Dow Outlook i.e. Short Term Symmetric Triangle Formation.

I would warn that the Stochastics is not a very reliable indicator because it is overly sensitive, and thus, I would not encourage reading too much into this divergence.

I also would not trust the Resistance Level of the Triangle, which may retrace a little further upwards than current levels, especially in the later part of the consolidation period as it nears the apex, meaning that if you use the Resistance Level as is, you may get False Breaches, because the slope is too steep compared to the Support Slope, so I would put the order a little further away than currently shown. The market has a way of changing its price pattern lines occasionally. So, in my opinion, I would rather get a slightly more expensive price than to be caught in a number of False Breaches as the Pattern Lines change.


Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Dow Outlook 081023 - Short Term Swing Trading Opportunity

Dear Friends,

The Dow fell by 514.45 points or 5.69 % to 8519.21 yesterday. Don't Panic! A further downturn at the next opening could represent a short term buying opportunity, at the right time.

It would seem that our hypothesis of a calmer, progressively narrower trading range is not working. However, let's take a look at the Daily Chart of the Dow to get a strategic perspective of the situation.

We can see that the Dow has merely fallen within its Triangle, which is much deeper in the process of formation.

Of course, if you compare this chart with the previous one in our Outlook of 081019, you will notice that I have broadened the Triangle's Support & Resistance Lines to cater for the latest price information.

If we believe in the Hypothesis that the Dow will trade in a calmer, progressively narrower trading range within this almost Symmetric Triangle, then, we may consider taking a Long Position on a Day Trading Basis, as it nears the Support Level of the Price Pattern. Our Initial Stop Loss would be just below this Upward Sloping Support Line, taking into account the potential for False Breach.

Let's take a closer look at the Daily Chart with all its Key Support & Resistance Levels plotted in, to see how we can prepare for a Swing Trade.

The lowest Support Level for the Triangle was at 7882.52. The next higher Support Level was 8197.67 whilst the latest Low set last night is at 8335.3.

I do not deem the latest Low as a firm Support Level yet at this stage, and thus, the more relevant Support Level is at 8197, i.e. the 8200 level. Thus, if we take a Long Position at close to 8350, and put an Initial Stop Loss Order at 8150, this would give us a trade risk of 200 points.

On the other hand, our Target Profitable Exit Level would be at 8950, just short of the 9000 Psychogical Resistance Level, and if everything goes well, this would yield a Target Profit of 600 points, for a Reward / Risk Ratio of 3 times, which is acceptable.

Of course, in life, there is no such thing as a sure thing, and here, we are working on a High Expectancy Trade, in terms of probabilities of success, and Reward / Risk Ratio.

Given the recent crash, and the number of government actions being put in place, I believe that the downturn is over done at present, at least from a fundamental perspective. Yes, problems continue to exist and drag the economy even lower in future, but perhaps the Dow has overeacted ahead of its time? Thus, from a Fundamental Perspective, i.e. for the Medium Term of 3 weeks to 3 months, I am inclined to adopt a Long Strategy rather than a Short Strategy at this stage.

From a Technical Perspective, the Dow is still in Price Formation mode, and if we MUST trade, then the trading strategy is one of Swing Trading within the Triangle. Of course, as the trading range narrows to a level where the Reward / Risk ratio becomes non meaningful, we should stop our Swing Trading Strategy and adopt a Volatility Breakthrough Trading Strategy, i.e. start looking for Breakout or Breakdown from the Symmetric Triangle.

The Short Term Trend is one of a Triangle Pattern Formation. The eventual move out of the Triangle will be for a longer duration, i.e. a Medium Term Trend.

So, the million dollar question is "What will be the direction of the Medium Term Trend after the Triangle Breakout?"

From a Technical Perspective, there have been two schools of thought on Symmetric Triangles.

The First school, the older, Traditional School, believes that Triangles are Trend Continuation Patterns, and if you believe this Hypothesis, then, the Dow is set for further downside, once it breaks down from the Triangle.

The Second School of Thought, whom I call the Scenario Planning School, believes that it is not possible to guess the future direction of the Symmetric Triangle, since it is symmetric in nature, and thus, the Bulls and the Bears are equal in strength. Thus, traders in this school of thought, are market direction agnostic, and puts in a Long Order just above the Resistance Level while at the same time, they put a Short Order, just below the Support Level.

In this sense, the Scenario Planning Traders plan for both scenarios and are not deterministic (biased in one direction) in their approach. They let the market take them through a trade as it unfolds. It is my opinion that this Scenario Planning School has superior ideas to the Traditional School. However, I am biased because I teach Scenario Planning in MBA course.

Anyway, this is my idea of the day, for a Day Trade / Swing Trade if we continue to believe in the Hypothesis of a Calmer, Progressively Narrower Trading Range within a Symmetric Triangle.

I have some last words of wisdom I would like to share before you decide to take the trade. Make sure you wait for a Short Term Market Bottom to form in the Lower Timeframe Charts of say, 4 Hourly or 1 Hourly before you take the trade. This should be the correct entry position of the trade, and not based on the rough figure of 8350 which I merely plucked from the sky as I have done in this example. I was merely giving an illustration of a possibility, and the actual number will be one that the market will tell you, and not me.

Happy Trading, and may you make lots of money on this opinion.

Lastly, please be reminded on the Liability Exclusion Clause, which is at the top of my blog page, i.e. that the final trading decision is yours, and I will not be responsible or liable for any losses you may incur from whatsoever reason. :)

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Bird & Fortune on Sub-Prime Crisis

Dear Friends,

Amidst all this doom and gloom news that keep hitting us on a daily basis, we must not forget to breathe. Take a deep breath and breathe. There you go, that was much better wasn't it? If you don't know what that was for, please read the book entitled, "The Importance of Living" by Lin Yutang.

The book was published in 1937 and it exhibits a different perspective of life from a man who is both a Chinese, but lived the Western Culture. A brilliant man, who was born in Shanghai in 1895, Dr. Lin obtained his Master's Degree at Harvard University, and later, his doctorate at University of Leipzig. He was also nominated for a Nobel Prize for Literature for his humanitarian writings.

It is amazing how this man, from China, a country who hardly speaks English, can go so far as to be nominated for a Nobel Prize for LITERATURE, writing in a language that is not his native tongue. What is even more amazing, are his ideas and unique wit and perspective of life that compares the cultures of Western and Chinese societies.

In a nutshell, for those of you who do not want to spend your precious time meditating on this special intellectual's thoughts, I give you his message in two sentences, in my own words, not his :-

• Take time off to smell the roses; enjoy life at a pace that is eternal.
• A few Laughs a Day, keeps the Doctor Away.
  

Of course, in these modern times, one should never forget the rich, aromatic experience of Starbucks Coffee, as you take your first sniff, and then, your first sip. That, my friends, to me, is life at a pace that is eternal. Hahaha, nope Starbucks didn't pay me for that advertisement.

With this in mind, I share with you a witty video clip which is on the lighter side, which was brought to my attention by my good friend, Victor, which, according to him, was shown on 2nd May, 2008, in a Berkshire Hathaway meeting.

I'm sure all of you know Berkshire Hathaway, but just in case, you don't, let it be said that Berkshire Hathaway is the flagship investment company of Warren Buffett, the richest man in the world today, and one of the few billionaires with billions of dollars to buy anything worth buying, including Goldman Sachs.

Well, if it's good enough for Mr. Warren Buffett, it sure is good enough for me. Haha. Enjoy!

Best wishes,

Ooi

Why Obama Will Win the Presdential Election?

Dear Friends,

If you are wondering how Mr. Barrack Obama won my heroine, Mrs. Hillary Clinton, whom I thought should be THE right President to lead US to greater heights, watch this video of Mr. Obama's latest speech, "The Economic Pie is Shrinking".



Now, watch Mr. John McCain's latest speech "Obama won't have the right response", and decide as a voter who you will vote for.



I am wondering what Mr. McCain, who is in the same party as the current President George Bush is saying when he said that he will ensure that the Government will not help the banks but the people who are suffering. Does it mean he intends to veto the bank bailouts rescue plans that have been put in place thus far? I don't know.

I admit it. I'm biased. Anyone who beats Hillary Clinton deserves to win. My concern is what will happen AFTER Mr. Obama wins. He has made a lot of promises, some of which, in my personal opinion, he will be very hard pressed to deliver.

Based on statistical evidence, the US Stock Markets usually perform badly, or at best, in a lethargic manner, for the first two years of any presidency, all the more so, when there is a new President. Possibly the saying,"new broom sweeps clean" has something to do with it? :)

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Who Am I?

I am one who is sharing the same fate as Jiang Ziya; who will also achieve his destiny.

For my destiny is written in the commentary of Confucius on the I Ching's "Fourth Nine, Yao Text" of the First Hexagram "Qian": -

Firmness is doubled and not central.
It is not in the position referring to Heaven above,
Nor at the place relating to the ground below,
Nor at the post associated with humans in the middle.
Then it is in perplexity.
And being so, it hesitates to make a decision.
No fault can be made.

The superior person is in harmony:
In virtue, with Heaven and Earth;
In brightness, with the sun and the moon;
In orderly procedure, with the four seasons;
In good fortune and bad fortune, with the gods and spirits.
He may precede Heaven, but not oppose the principles of Heaven.
He may follow Heaven by aligning with the timing of Heaven.
If Heaven will not act in opposition to him, How much less will men?
And how much less will gods and spirits?

The word haughty indicates
Knowing to advance but not to retreat,
Knowing to maintain existence but not to let perish,
And knowing to gain but not to lose.

It is only the holy person who knows
When to advance and when to retreat,
And how to maintain existence and how to let perish,
And does not lose appropriateness,
The holy person alone can do this!

(The Complete I Ching, The Definitive Translation by the Taoist Master Alfred Huang, page 37.)


The Paradox of My Life

I have more than 15 years stockbroking experience, managed 600 people and turned in millions of dollars of profit per annum for my former employers, yet I am still awaiting for a good employer to work for.

I have a doctorate in business administration, and am technically competent; many seek my advice, yet few follow them.

I have worked hard with professionalism and integrity, yet such virtues are not known nor well appreciated.

For a boy who could not afford school textbooks nor the fees to attend university, I am rich. For a man who can stand amongst the rich, I am very poor indeed.

For a man in his forties, I have more drive than a young man in his 20s, embarking on a new career.

To some, I am very successful; to others, I am a failure. To me, I am at the foot of Mount Everest, about to make the journey of my life towards success beyond my wildest dreams.

Who am I? I am the Sleeping Dragon, awaiting and preparing for his destiny.

For the I Ching has spoken,

He may precede Heaven, but not oppose the principles of Heaven.
He may follow Heaven by aligning with the timing of Heaven.
If Heaven will not act in opposition to him, How much less will men?
And how much less will gods and spirits?

So it is written, so shall it be done.

Best wishes,

Ooi

"We will either find a way, or make one." (Hannibal)

Inflationary Holocaust - The Problem of Printing Too Much Money

Dear Friends,

This CNBC Interview with Jim Rogers, the Commodities King, and the first partner of George Soros' Quantum Fund, during the time when they broke the Bank of England, is really worth investing some of your time.

I have tremendous respect for Jim Rogers, which is why I continue to consider the Inflationary Holocaust / Hyper Inflation Scenario, which may happen if US "prints too much money".

"When you print gigantic amounts of money, and you flood the world with money, throughout history, that has led to inflation. ....... they (US Government) is setting the stage that when we come out of this (crisis), of a massive inflationary holocaust." (Jim Rogers)

The CNBC Interview was taken a few days ago, so this is quite a recent discussion.

Extremely deep thoughts from Jim Rogers. Can you see how far he has thought ahead of the situation? That is why he is a multi millionaire, if not a billionaire, and THE UNDISPUTED COMMODITIES KING.

TThe Hyper-Inflation Scenario is THE MOST SCARY SCENARIO of ALL ECONOMIC SCENARIOS even worst than the Perfect Storm Scenario where we get merely a GREAT DEPRESSION. Why? Because when Germany experienced Hyper Inflation, it cost 1 million Marks (German Currency) to buy one loaf of bread, when one or two years before, it cost only 1 Mark.

This means that if you are a millionaire today, and we experience Hyper-Inflation, your one million dollars will just buy you a loaf of bread. This is what Jim Rogers is talking about when he mentions the words, "Inflationary Holocaust".

The actions of a government printing too much money can make you, a millionaire, a poor man. If you are already poor, then, you will become much poorer. How much poorer? Well, just think about it - a million dollars to buy a loaf of bread? That's how poor.

But what if you don't have the money? People who didn't have the money during the Hyper Inflation times just drop dead and died on the streets from starvation, winter cold, and diseases. That's why Jim Rogers refers to Hyper Inflation as a HOLOCAUST.

Right now, the Governments of the world, especially the US Government is solving the financial banking crisis by printing money - tons and tons of money. What is the ultimate consequence of this desperate measure, is left for the world to experience in the next decade to come.

Most people think Jim Rogers is a bit nutty, in sharing such a view. These same people thought he was nutty when he told everyone to buy Oil at US$18 per barrel, and told them, you will never see this price again.

The million dollar question is not whether he will be right, but rather, "What if he is right some time in the future?" It is a question worth considering but not losing sleep over. It is a question that we need to prepare an answer for, and put our contingency plan into action before the situation becomes ugly.

If you remember, since July 2007, some smart people (with hindsight we call them smart, but back then, we had many nasty names like pessimists, doomsayers, idiots, nutty, etc.), these people were already warning us of the consequences of the banking crisis and the impending economic crisis. Looking back with hindsight, we could have been more prepared, did a few more things that we didn't do, and we would be in a better position than we are today.

This is what this post is about. The Hyper-Inflation Scenario is a long, long way off, but when Hyper Inflation hits a country, you would not even know what hit you, and poof, you are now super poor.

The billion dollar question in my mind now is, "How can I be constructive and offer some form of a solution or action plan?"

Frankly, Hyper Inflation Scenario is so rare that there are very few experts in this field, and whilst Mr. Ben Bernanke, Federal Reserve Chairman is THE Great Depression World Expert, he is not a Hyper Inflation Expert. He is now putting into place the solutions he concluded upon, way back in the 1980s when he did his research work on the Great Depression. However, I doubt if he has considered the consequences of his solution in terms of Hyper-Inflation. This is systems thinking modeling. The solution of one problem leads to the creation of other problems.

So, what should we do? What CAN we do? I think we must not jump the gun and become paranoid. Right now, the problem is one of severity of recession, not Hyper Inflation. In desperate times of crisis, we must focus on solving problems we currently face; not problems we may face.

BUT, the difference is that we need to monitor the situation very closely. The inflation numbers will start to tell us something, and the US$ movements will give us further tell tale signs. In my opinion, if there is going to be a Hyper Inflation Scenario, then the US$ must devalue like crazy, and thus, we need to look for potential cracks in the dam. This will be the trigger of a Hyper Inflationary Environment.

In my opinion, a US$ Devaluation Crisis by itself will trigger a Great Depression, but not necessarily a Hyper-Inflation Environment. BUT, for a Hyper-Inflation Environment to happen, it is my opinion that the US$ Devaluation Crisis MUST happen first.

If it is going to happen, how will it happen? If we cannot visualize the scenario happening, we cannot prepare for it. First, the US$ Devaluation Crisis will lead to a Great Depression. With the Great Depression being experienced, the Government will become desperate to solve the economic problem as tremendous pain is being experienced.

Conventional Economic Theory, i.e. Keynesian Theory, has it that the Government has to spend even more money, usually on infrastructure projects then. If too much money is spent, whilst the effect of the government spending is not converted into cash in the hands of the general consumer, but instead, only in the hands of the already rich, then, the Government will need to keep spending even more money. This vicious cycle causes the whole financial system to be flooded with printed money not backed by any real assets like Gold Reserves, and eventually, the excessive amount of money in circulation becomes worthless.

This is the real danger. It is important for Governments to spend on infrastructure and other projects, but in my personal opinion, there is one very important condition that is not clearly stated in the economics textbook. Governments must spend in order to create jobs, and not spend for the sake of spending.

Job Creation is the KEY to an economy growing out of a recession or depression. There is a need to minimize the damage caused by overspending, by spending wisely, or else the dangers of Hyper Inflation sets in.

This is why some people are calling for the US Government to leave the economy and the banking crisis alone, and not bail out all the banks. The problem is ...... in the Great Depression of 1929 to 1939, President Edgar Hoover refused to bail out the banks, and as a result, 10,000 banks collapsed in the US alone. Thus, not bailing out the banks would mean another Depression; the question of whether it is a GREAT Depression or a normal Depression is academic. You don't want to live in any era of Economic Depression, I can tell you that for sure.

I believe that the US Government is walking a very fine line between solving the banking and housing crisis problems from turning into an Economic Depression, and doing too much and thus, create a Hyper-Inflation Environment, which would be "The Mother of All Economic Pains".

In this respect, I am strongly against another US stimulus package, and against spending on infrastructure at this early stage of the economic crisis, which is just beginning, and nowhere near the bottom, as some people seem to think.

Those people that think that we are already reaching an economic bust bottom are basing their opinions on statistics rather than actual analysis of the situation. This, in my opinion, is faulty thinking in these very uncertain times. Statistics are useful in improving the probability of success, but only in normal situations. We must know what to use, under what circumstances, or we will be basing our decisions on wrong analysis.

So, what do we do, if we really believe that there is going to be Hyper-Inflation?

My solution of the moment, and I admit that I am no expert, is to convert cash into income generating assets eventually, i.e. properties in the form of land, preferably plantations.

In times of Hyper-Inflation, you can expect crimes and social unrest to be extremely high, and insurance policies will never cover you if your property gets burned to the ground. You will then be left with nothing, for all your financial prudence and planning.

For plantations, you could still see it burnt to the ground, but at least, your land is more fertile than before. Haha. No laughing matter, but no one can take the land away from you, unless Communism sets in. So, I am inclined to buy plantation land, with whatever little money I have AND with whatever little I can borrow, to hedge against Hyper-Inflation.

The best times to borrow money is in times just before Hyper Inflation sets in. Interest rates will skyrocket to 40% to 60% p.a. but your assets producing goods will inflate in price at the rate of 100% per month, so why worry about paying 60% interest rate per annum? Yes, borrow s much money as you can, but make sure they are employed in high return assets, and not used in consumption expenditure, which would be the ultimate financial disaster. With the money already spent, and interest rate at 50% p.a., how not go to bankrupt?

BUT, not today, when Asset Deflation is the name of the game, and not Hyper Inflation. This is only a contingency plan to survive and thrive in a Hyper-Inflation Scenario, and not THE Game Plan of today. Today's Strategic Game Plan is to SHORT the markets as asset prices will continue to drop in the foreseeable future, taking into account short to medium term Dow Theory Wave uptrend fluctuations that may provide some reprive to the Bulls.

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Credit Default Swaps - The Main Wave of the Financial Tsunami

Dear Friends,

I have mentioned that Credit Default Swap (CDS) is the MAIN WAVE of the Financial Tsunami, and what we experienced last week, i.e. the World Stock Market Crashes, are nothing compared to the CDS Crisis that is still to come.

So what exactly is a Credit Default Swap? Check out this video from Youtube.Com.



In my opinion, this is THE MAIN REASON why the banks are not lending to each other. A normal economic recession and housing correction with mortgage defaults would not cause such a massive crisis of confidence amongst the banks of the world.

Governments and Central Banks all over the world are trying to untangle this mess and solve the problem before it blows up.

Why is the CDS an even bigger crisis and the MAIN Wave of the Financial Tsunami? Because there is about US$60 trillion of it floating around the world. This dwarfs even the US Housing Mortgages total loans of only US$11 trillion.

What is this CDS financial product? Effectively, it is a type of an insurance policy, but it has been traded all over the world, with absolutely no regulation by any authority. Just imagine the hedge funds, banks, and all the rogue speculators running wild with this financial product for the last few years, quietly doing all the deals on the sidelines, without the authorities knowing about it (REALLY???), and you have a very, very scary scenario on your hands. Do invest 5 minutes to find out what it is.

Please note that at this stage of the banking crisis, there is still "hope" that the CDS Crisis will be averted. This would be like the Tsunami which was right on target to hit you, suddenly turning in a different direction. What a relief this would be. However, we cannot rely on good luck alone. It is wise to "Hope for the best, but be prepared for the worst."

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Here are two other videos entitled "Credit Default Swaps the Next Crisis" including an interview with Mr. Jeff Greenberg, possibly one of the Kings of CDS, who have made more than US$500 million trading the CDS market.



The 2nd part of the Credit Default Swaps - Next Crisis Video.

Housing Situation - IMF Perspective

Dear Friends,

In the video clip, Advisor to IMF Research Department, Mr. Prakash Loungani. states that in general, a Housing Upturn Cycle lasts about 6 years, with prices rising by about 45%, while in the Housing Downturn Cycle, it usually lasts 4 years, and prices drop by about 25%.

Right now, house prices in US have dropped by 25 % on average, depending on the areas we are looking at. However, before you rush to buy, do invest some time to listen to Professor Roubini, (in my earlier blog) who is of the opinion that housing prices will correct by 40% this time around.

In my opinion and experience, Housing Prices have never gone any where without the stock market having gone up substantially first, and the Unemployment Rate usually comes down. in the process Both these factors add to the liquidity and wealth of the general public, and with this new found wealth, only then will people start to think about longer term financial commitments like properties.

There is no hurry to buy any property at this stage. Watch out for the US Unemployment figures to drop first, and the US Housing Prices to stabilize. The distress selling of properties is expected to continue for another 6 months to a year, at the very least. In any case, the key indicators are that

• the US Housing Mortgage Defaults will have to slow down drastically,
  
• before the actual Mortgage Distress Selling starts to slow down.

I will try to get some data on these indicators and monitor them for the appropriate strategic timing to first, buy stocks, and make a good return, and then, eventually, move into properties, at the later stage of the Positive Sum Game in the Economy.

Three key areas in US are worth monitoring for price stability, i.e. Los Angeles (California,) Las Vegas (Nevada) and Miami (Florida). These are the hardest hit cities / states in the US, but they are also the darling stars of the housing speculative bubble a few years ago. If these areas are not recovering, other areas' property prices will not go very far from where they are today, even though they have been less hit by the housing crisis.

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008

Professor Roubini's Summary of the US Economic Situation (October 2008)

Dear Friends,

New York University Professor Roubini's words of wisdom on Open Exchange, Bloomberg, is worth listening to. Although he is generally regarded as the man who views the glass as half empty, i.e. a pessimist, he has been absolutely right for the last 1.5 years.

Best wishes,

Ooi

Some issues discussed -

• Bottoming of US FOMC Interest Rate to near Zero,
  
• higher cost on US$ in the long term,
  
• L Shape Economic Stagnation Scenario would be very lucky,
• This is the worst severe recession in last 40 years, and
  
• markets are going to stop rising in their rallies.

"We've had so many bubbles that we are running out of bubbles to create". "Our (US) manufacturing base has been significantly impaired." (Roubini)



In the second segment, the following issues were discussed -

• Not worried about inflation - the least of the problem for Federal Reserve to worry about.
  
• Six months from now, we're going to be worried about deflation rather than inflation.
  
• This recession will be much deeper and protracted than the others.
  
• Housing prices have fallen 25% and will fall another 15% to a total of 40%. E
• stimate of US$1 trillion of total bank losses is now the floor not the ceiling of total bank losses. (Roubini)

This is the 2nd part of the Video Interview of Professor Roubini.

Praesciens Youtube Channel

Dear Friends,

I am sorry. The Praesciens Youtube Channel Gadget was working until a few hours ago yesterday, but seem to have broken down today. I hope Google / Blogger.Com fixes it soon. In the meantime, please ignore the instructions for the Praesciens Youtube Channel Player until you can see a chart image instead of some words concerning the malfunction of the gadg.

You can still check out my Youtube Channel by clicking the website link below

Praesciens Youtube Channel

I'm also going to try to embed the video clip to this post. Wish me luck!



Best wishes,

Ooi Hun Pin

Latest US Housing Situation - What Can the Federal Reserve Do?

Dear Friends,

Check out this video clip that discusses the latest US Housing situation. As long as the US Housing Prices continue to fall, there will not be any hope of the US economy coming out of the recession.

The Lowering of Federal Reserve Rate to 1.5% Does Not Help Lower the Housing Mortgages Rate

What is interesting is that Ben Bernanke has just lowered the Federal Reserve FOMC Interest Rate to 1.5%, and yet, the 30 Year Housing Mortgage Rates has just gone up to 6.74% p.a.

The FOMC Interest Rate is the interest rate that the Federal Reserve (US Central Bank) lends to banks. So, whilst the banks are getting cheaper and cheaper interest rate, they are charging the people who are suffering from high home mortgage interest rates, even higher mortgage rates. Something just doesn't jive here. No wonder the US economy is not functioning properly.

The Lowering of FOMC Rate has the General Impact of Reducing the Interest Income to Depositors

What's more, the reduction of the FOMC Interest Rate normally translates to lower interest rate for depositors. When banks get cheap interest rate from the Government, they will then tell depositors that the fixed deposit interest rates have to be lower, since the borrowing cost from the Central Bank is now lower.

With even less interest income, this causes depositors to earn less, and thus, spend less, which aggravates the economy even further. This interest rate policy is especially damaging to retirees who rely on interest income to survive.

The Government Should Encourage People with Money to Spend More, Instead of People Without Money to Spend


What the US Government seems not to understand is that there is a need to get people with fixed deposits, who can earn more interest income to spend more, and not get people who are already way over their head in debt, to borrow more, so that they can spend more. Again, something doesn't jive. The solution here seems logical, but perhaps it is due to the fact that such people are the minority in the US, and thus, the whole US Economy is reliant on people who are already way into debt.

Is it Appropriate for the Government to Encourage People with Insufficient Money to Spend More and Go Deeper into Debt?

If this is true, i.e. that the US Economy is reliant for the most part on people in debt to spend more, then the world economy is in DEEP TROUBLE. The solution of getting people who are already way in debt to spend more doesn't work; unless we want a short term blip upwards in the economy, at the expense of an even bigger problem in the form of a much more severe recession / depression in the longer term.

The Government Should Instead Encourage People to Manage their Personal and Family Finances Well, as a Long Term Solution to Economic Growth

I notice that many people in the US Government keep on talking about more credit being given to the US public so that they can spend more. I think that this is the most unhealthy activity the Government can do. The Government should instead encourage people to manage their personal and family finances well, and when this happens, the economy will be in a very good shape.

Why? Because when people are in good financial shape, and like most human beings who have money (Warren Buffett being a significant exception, haha ), people will eventually spend more, without having to be told by their Government to do so, when the right time comes.

In summary, the Economic Solution of Lending to Consumers so that They Can Spend More is an Unhealthy Practice. The Government should Encourage Prudent Personal and Family Financial Management, and this will eventually translate into more Consumer Spending once the Consumer's Financial Position is in Better Shape.

What about Increasing the Federal Reserve Interest Rate instead of Lowering it?

An increase in the FOMC rates will send the housing mortgage rates and business loan rates even higher up the stratosphere. Unless the Federal Reserve is willing to set up some new laws to manage the spread between bank loan rates and the FOMC rate, the banks are at full liberty to do anything they want.

In normal circumstances, the situation is not too bad because if one bank charges exceeding high loan rates, the consumer is smart enough to shop around, and go to the bank next door. However, today's situation is such that practically all the banks NEED to charge high interest rate to cover for their losses, and thus, an even higher FOMC rate will only mean HIGHER loan rates, but a lower FOMC rate will also mean HIGHER interest rate. Heads, I win, Tails, I win. Pay up!

So, what can the Federal Reseve do?


In normal circumstances, a central bank has control over the interest rate policy of banks because the banks tend to set their deposit rates and loan rates in accordance with standard spreads to the FOMC Rate. This is one unique situation where a central bank has lost control of the situation. As mentioned, the only way is to legislate, regulate and control the spread.

The Mother of All Negative Economic Situations - The Perfect Storm Scenario has been Averted Thus Far

The situation is bad, but there is an even more worrisome scenario where a central bank can lose control over the bank interest rate, i.e. where the central bank itself is forced to set very high interest rate. Such a scenario would arise where, due to a bank liquidity crisis AND a currency devaluation crisis, the central bank has no choice but to keep the central bank interest rate high.

Thus, far, the US$ seems to have averted a currency devaluation crisis, and if anything, the world banking system claims to have been very short of US$ in the last few weeks, due mostly to losses on investments made in US$.

Should the Perfect Storm Scenario arise, i.e. one where there is a banking liquidity crisis, housing property crash crisis AND a currency devaluation (Hyper Inflation due to the printing of too much money by a Government) crisis, then, we have no choice but to be prepared for a Depression; not necesssarily a Great Depression, but a Depression none the less.

So far, this has not been the case. Let us pray that the current Financial Tsunami Situation is the only adverse situation we face. This is my value added analysis to the informaion on the video clip.

Best wishes,

Ooi

© Copyright of Praesciens.blogspot.com, 2008