Will Sovereign Debt Default be the Primary Cause of the Next Economic Crisis?

Dear Friends,

I know that the Dow is up 191 points, to 10,099.75 as I email this (2.42am), which, on the surface, would seem to negate my gloomy outlook for the stock market and the US economy, but I am looking at the longer term strategic picture, rather than the day to day market swings. The bears are just starting to make their moves, while the bulls are still very optimistic, and thus, we have to give the market time, before our analysis comes true.

This is the reason why, we should not take Short trades at this early time of the downtrend, unless it is a trade for a very short timeframe. Bear traps are aplenty in the early phase of a downtrend. If anything, you may want to take advantage of this bullish upturn to get out on some of your Long Positions, if you still have them. From a technical analysis perspective, there is still no reason to enter a Long Position even with tonight's bullish move. Of course, this is just my opinion, and you have to take responsibility for your own investment / trading decisions. Ok, let's get down to business.

RISE IN CREDIT DEFAULT SWAP SPREADS FOR SOVEREIGN DEBT

Lately, the spreads on CDS (Credit Default Swaps) on Sovereign Debt have been rising. In layman's terms, the CDS spread is the insurance premium you pay, for protection against the failure of a nation's debt (Sovereign Debt). Even Australia's Sovereign Debt CDS spread has risen. This is because the Australian Government is highly indebted. For an analysis on Sovereign Debt of key countries like USA, UK, Japan, Australia, Germany, China, New Zealand, Russia and Singapore, please refer to my blog article entitled "Forex Fundamental Analysis 081112" which was written on 12th November 2008. Although a little dated on the statistics, it provides a basic but important overview of the strategic picture the world is grappling with today. Luckily for me, I did my homework, a year in advance of the problems today. :-)

http://praesciens.blogspot.com/2008/11/forex-fundamental-analysis-081112.html

Given the current global concerns over the risk of Sovereign Debt Default, the question we are trying to answer today is, "Will Sovereign Debt be the Primary Cause of the Next Economic Crisis?"

The short answer is "NO".


THE RATIONALE FOR THE ANSWER

Sovereign Debt, no matter how large, is not a phenomenon that just happened overnight. The world, and some of the highly indebted, developed countries have survived this situation for decades. So, why should the current levels of Sovereign Debt be the cause of a debt default crisis today?

The risk and fear of Sovereign Debt Default is the symptom of the root cause, not the cause in itself. If it is the root cause of an economic crisis, such a crisis would have happened long ago. In the end, the Sovereign Debts will not default, albeit a few scary moments and one or two Lehman type of collapse, but on the overall, the majority of the Sovereign Debt will stabilize eventually, no matter how indebted some of these countries are.


THE ROOT CAUSE OF THE NEXT ECONOMIC CRISIS - SHORT ANSWER

What makes me come to this conclusion? If so, what is the root cause of the next economic crisis?

The short answer ..... the artificially Low Interest Rates regime today. It is the fear of world interest rates rising that is causing the demand for Sovereign Debt to slowly dry up. Investors who normally would not blink an eye to invest in Sovereign Debt are now starting to question the Reward / Risk Ratio, and therefore, the wisdom of continued investment in Sovereign Debt, in light that they may stand to lose a lot of money, should world interest rates rise.

Why? Let's look at an example.

When an investor first subscribes for a Greek Government Bond at say, $1 per unit, the Interest Rate, called the coupon rate, is set at say, 4% per annum. However, because investors anticipate that interest rates will rise, the price per unit of the Bond may sell for less than $1, say, $0.90, i.e. the price falls by $0.10. This gives a bond yield of 4.4%, i.e. 4% divided by $0.90. In this way, the market is pricing in a rise of 0.4% in Greek Sovereign Debt Interest Rate, in the foreseeable future. Should investors believe that there is a high risk of default, even such a yield may not be sufficiently attractive for investors to lock in their money, for many years, and thus, the price of the Bond drops even further.

In a nutshell, the price of the Sovereign Bond drops if interest rates are expected to rise, or is rising. In this regard, investors lose money, by holding on to the bonds, and thus, less and less investors are willing to invest in bonds today, be it a Sovereign Bond, or a corporate bond, or a municipal bond. Why? Because the world believes that world interest rates will rise soon.

This lack of desire to invest in bonds is causing demand for bonds to dry up, bit by bit.


BASIC ECONOMICS IN ACTION

If supply of money to invest in Bonds is drying up, because of perceived higher risk of loss, whether through default or through drop in price of bonds invested in, then, there are only two ways that this decrease in supply can be countered, i.e. either

• the demand shrinks proportionately, and the price (Interest Rate) is maintained, or,
• Price (Interest Rate) rises to such a level, to induce higher supply, to cope with existing demand.
  

DEMAND IS INELASTIC -GOVERNMENT BUDGET DEFICITS NEED TO BE FUNDED

The problem is, unlike we mortals, Governments have always over spent, and have never practiced any financial self control / discipline. For example, for the year 2009, the US Government earns US$ 3.8 trillion but spends US$ 5.4 trillion. Thus, the US Government needs to borrow US$1.6 trillion to fund its excess expenditure. This excess expenditure is called Government Budget Deficit Spending.

If you and I were to do such things, we would be declared bankrupt within a few years, if not months, but the Governments of the world have been doing such ridiculous things for centuries now.

What is significant today, is that, like a drug addict, the Governments of the world is forced to continue this Budget Deficit Spending, despite being already highly indebted.

The key is that as long as investors with tons of cash are willing to continue lending money to governments to overspend, such governments can continue to borrow indefinitely. So, the governments never think of repaying, i.e. paying down the debt that is already existing, but instead, they borrow more and more. When a debt comes due, the governments just borrow more, to pay for the principal and the interest due, not unlike what you would do, if you were in financial trouble, and attempted to borrow from one credit card, to pay another credit card debt that has become due. Such an activity is called "Rolling over of debt". Most governments practice "rolling over of debt", and thus, government debts keep mounting.


THE IMPLICATION OF INELASTIC DEMAND DUE TO GOVERNMENT BUDGET DEFICIT SPENDING - HIGHER INTEREST RATE

The above discussion has one important implication. It means that DEMAND for investors' money to subscribe for Sovereign Bond is inelastic, i.e. cannot be changed, whatever the price. To understand the term inelastic, think "electricity" for your home. No matter what the price of electricity is, you will still use it. Similarly, demand for petrol is inelastic. You may cut down slightly on joy rides, but for the most part, irrespective of the price of petrol, you will still buy it.

Whenever there is a significant imbalance in demand and supply, as in the current situation on Sovereign Debt, where investors are starting to shy away from subscribing for Sovereign Debt, and thus, Supply of money is drying up, whilst Demand for money is inelastic, Price (Interest Rate being the price of money) will change (rise) to the extent that this imbalance becomes balanced once more, either because Supply is increased once again, because of the attractive interest rate, or because Demand is decreased as those who cannot afford to pay the high interest rates are squeezed out of the market.

Since we are talking about Sovereign Debt, Demand will not be squeezed out, with some minor exceptions. BUT, Price of Money, i.e. Interest Rate offered by the Governments have to rise.


EVIDENCE SUPPORTING A HIGHER WORLD INTEREST RATE REGIME

The recent stock market fall was sparked by a failed bid by the Portuguese Government to borrow Euro 500 million. Only 2/3 of the Government Bond was subscribed, i.e. around Euro 350 million. This is a small sum of money to raise, and yet, the Portuguese Government could not do it. The financial markets took it as a sign of what is to come, when other Governments of the world try to borrow money, in future. It is not that the world doesn't have the money to lend Portugal Euro 500 million, but rather, it is because the world thinks that the Interest Rate (price of money) offered to investors is too low, given the high risk environment for a loss on bonds today. The Portuguese Government Bond yield is around 4.3% per annum currently.

But, the world is more concerned with the Greek Sovereign Debt. What is the current Government Bond Yield for Greece today? It is around 6.6% per annum today, which is quite high for a Sovereign Debt.

The expected trend for the foreseeable future is that the governments of the world will be competing for investors to lend them money, and this trend is expected to push interest rates up, throughout the world. Thus, the days when the US Federal Reserve can keep its FOMC rate at 0.25%, thus, enabling the US Government Bonds to yield only 2.5%, is almost gone. Sooner or later, and investors are betting on sooner, even the Fed Rate will rise, not by 0.5%, but maybe 1% to 2%.

Imagine a world where Fixed Deposit Rates are up 1% to 2% from current level, and loan rates are up by 3% to 4%.


THE ROOT CAUSE OF THE NEXT ECONOMIC CRISIS - LONG ANSWER

The root cause of the next economic crisis is not Sovereign Debt Defaults. Whilst it is possible and conceivable that there will be two or three countries that will default, (maybe Argentina? But even then, only in conjunction with a currency crisis), the Governments of the world need only raise the Interest Rates they offer, to an attractive level, for investors to continue to lend them, and thus, avoid any debt default crisis.

The problem is, these governments cannot fund their inelastic budget deficit spending without increasing interest rate. This is a unique situation that the world has not experienced since pre-Greenspan era. Alan Greenspan was the Federal Reserve Chairman for the period from 1987 to 2004. He was able to manage the US economy in such a way that he was always in control of the Federal Reserve Interest Rate. Prior to his "reign" at Federal Reserve, there were occasions when countries including the US would go into severe recessions, and then lose control over the Interest Rate mechanism to free market forces.

How do we know that such things happen? Because it is in the interest of every government in the world to keep interest rates low, as long as it doesn't create an excessive asset bubble or high inflationary pressures. Why? Because almost all governments of the world are highly indebted today, and thus, no government wants to pay higher interest rates when it needs to keep borrowing, if it can keep the price of money low.

So, interest rates will always remain low, as long as governments can control it. The only time the governments of the world lose control over interest rate, is when there is an abnormally painful economic crisis, that continues to loom over our heads, like today. Whilst we are assured by the media that an economic recovery is on the way, the people around the world know better, because they are the ones feeling the pain.

So, the only time when governments of the world lose control, is when Supply of Money for Government Bonds shrinks .... like today.

This is what I mean when I said that "The key, the next shoe to drop is the Interest Rate Derivatives", in my blog / email article entitled "Singapore's Economy Shrinks 6.4% in Q4" dated 5th February 2010. I quote -

http://praesciens.blogspot.com/2010/02/singapores-economy-shrinks-68-percent.html

"My point .... no, the world is not falling apart overnight. But, every day, it is getting closer to economic disaster. We don't know exactly when it will happen, but we have a clue in the form of Interest Rates. The Fed has to raise interest rates significantly, at a very fast pace, too fast, and this will catch everyone off guard, and cause massive losses. But the Fed is resisting this move, knowing the next crisis to come, for as long as they can. So, when the Fed does make a move, you know that it is not voluntary in nature."


HOW WILL THE NEXT ECONOMIC CRISIS HAPPEN?

The crisis will come in two parts. First, the imbalance between demand and supply in investor money for bonds will cause the governments of the world, including the Federal Reserve, to lose control over interest rates. Of course, the Fed will give some form of excuse to raise the interest rate, but given the amount of money that the US Government needs to borrow, i.e. US$1.6 trillion per year, in addition to its existing debt of US$14.4 trillion, there is absolutely no reason for the Fed to raise interest rate, unless it has no choice. So, when the Fed raises Interest Rate, you know it has almost lost control, to the free market forces of demand and supply.

This will spark a raising of interest rates throughout the world, to match what the US Government is paying. Thus, world interest rates will rise. When world interest rates rise, this will cause Interest Rate Derivatives spread to widen significantly.

What is this Interest Rate Derivatives? It is made up of many things, but a simplistic understanding would be as follows.

Let's say you borrow money at a certain interest rate, say, 5% per annum. You are satisfied with the cost of borrowing because your business can generate a return on investment of say, 8%, from this money borrowed. However, should the loan interest rate rise, your business profit would be eroded. Thus, you buy insurance with a bank, called an Interest Rate Derivative, so that you fix the loan interest rate at 5%, irrespective of what the prevailing market rate will be in the future.

How can such a simple business strategy turn into an economic crisis, you ask?

Because, the Federal Reserve brought the FOMC rate down to 0.25% per annum in 2008, and loaned the US Banks a trillion dollars, ..... some say, two trillion dollars. The Fed did this to encourage the banks to lend money to spur economic growth in the US.

Borrowing at such low interest rate from the Federal Reserve obviously must be good for the banks, right?

The problem is, the banks did not lend the money out to normal borrowers like consumers or businesses. In fact, if anything, the banks squeezed the consumers and businesses to repay their loans as soon as possible, and curtailed further lending, due to the higher risk environment of debt default.

So, what did the banks do, since they are flushed with cash, not only from the borrowings from the Fed, but also from the loan principal collection?

The banks loaned the money to the US Government. Remember that the US Government needed to borrow US$1.6 trillion a year? The figures jive right? More or less it does.

Why not? After all, if you can borrow at 0.25% per annum and lend to the US Government at 2.25% per annum, why take a risk to lend to Tom, Dick and Harry or XYZ Incorporated?

So what's the problem? Isn't lending to Governments, especially the US Government THE SAFEST loan you can make? After all, the US Government Debt is rated Triple A and the Treasury Secretary, Timothy Geithner, had just recently reiterated that the US Government's triple A rating would stay.

In taking the easy way out, to make easy profits, the banks have committed a basic cardinal sin, that all accountants are taught when taking their accountancy exams ...... never finance a long term investment with a short term debt. For businesses, this translates to ..... never finance the purchase of machineries or land and buildings, with short term debt like bank overdrafts.

Two types of risks arise from such a financing mistake. First, what if interest rates go up? You will then have to pay higher and higher cost of borrowing, but your return on your investment will remain the same. In this case, if the Federal Reserve (FOMC) rate goes up to 2.5% per annum, then, the banks will lose money on the transaction because the Return on Investment is at 2.25%, maximum 2.5%, depending on what instruments they invested in. If the Fed Rate goes up beyond 2.5% p.a., then, the banks will surely lose money, on a long term commitment of between 5 to 10 years.

The second risk stems from a call to return the money loaned. What if the bank withdraws the bank overdraft facility that you used to pay for the machineries? You will have to close down your business because you will not have the cash to repay the bank, and sustain the operations of your business. For businesses, this is the greatest risk, in using short term financing, for long term investments. For the banks, it is possible that the Fed will be more accommodating, and this risk is not as great as in the case of normal businesses.

Given the risk of rising interest rates today, what would you do if you are the CEO of a bank that borrowed money from the Fed at 0.25%, and invested in lending money at 2.25% to the US Government for a tenure of 5 to 10 years?

You cannot unwind the position that you have got the bank into. You can try to sell some of the US Sovereign Debt, but so is everyone trying to do that today. The smarter CEOs bought insurance protection against upward increases in interest rates long time ago. This is called Interest Rate Derivatives .... what we mentioned earlier. Remember?

Here, no matter how smart you are, the risk will always be there. Remember the earlier crisis of the Credit Default Swaps that caused so much arguments over "Mark to Market Accounting", that caused the banks to lose billions of dollars?

At that point in time, some banks bought CDOs (Collaterralized Debt Obligations) i.e. high interest yielding bonds that were risky, but they also bought insurance protection through CDS (Credit Default Swaps), a derivative to protect against failure of payments by the borrowers. But too many borrowers defaulted because the debt was mostly sub-prime and Alt A loans (no documentation evidence loans), and thus, this caused too much losses on the insurers to the extent that Lehman collapsed, amongst the many other financial institutions, whose names have all but disappeared today.

This brings us to the million dollar question. When world interest rates go up, how much losses will the insurers who sold the Interest Rate Derivatives suffer? It is said that the open positions of the Interest Rate Derivatives is around US$140 trillion (US$140,000 billion) today. If the loss is 1%, this would be equivalent to a loss of US$1.4 trillion or US$1,400 billion ..... a lot more than the losses incurred in the Sub-Prime Crisis that started it all.

Which bank has the most Interest Rate Derivatives exposure? Do the banks that have significant exposure have enough capital to pay for the losses? I don't think the current capitalization of all the banks that wrote out the insurance policy on the Interest Rate Derivatives are any where near US$1,400 billion. This means that there will be massive defaults on some very large banks, and here we go again, on a 2nd round of financial and economic crisis, requiring an even bigger government bailout. This is assuming that World Interest Rates rise.

But we have already made a case, in explaining why the demand is inelastic, while supply is drying up, slowly but surely. Is it a sure thing to happen? Is it a Predetermined Element? No. But the probability of it happening is getting higher by the day.

I have explained the disastrous consequences of higher world interest rates from the Derivatives point of view. I have not even mentioned the devastation that a high interest rate regime will do to already cash strapped consumers and businesses, what more, the even more massive retrenchments to come, as a result of further cost cutting measures to cope with higher financing cost. I have also not bothered to complicate the analysis with the potential risk of currency devaluation crisis, which would aggravate matters to an almost inconceivable level of economic disaster.

This is why I say that the KEY, and the root cause of the next economic crisis will be the rising of World Interest Rates. This is why, I say that the Federal Reserve will not raise interest rates, until and unless they have no further option, i.e. they are on the verge of losing control of the situation to free market forces at work. When the world (governments especially) is consuming tons of cash, and supply of cash from investors (not central banks) is stagnant, as is the case today, price, the cost of money in the form of interest rate, has to rise. This is THE RARE HISTORICAL MOMENT in time, when governments of the world lose control over interest rate, the price of money, they have to borrow. This is why it is possible for the Dow to fall to 4,800 +/- 300, as stated in my blog article, "How Low will the Dow Go?"

http://praesciens.blogspot.com/2010/02/how-low-will-dow-go.html

In Malaysia, we experienced such a rare historical moment of uncontrollably high interest rate regime in 1986, when Fixed Deposit rates were at 12%, and bank overdraft rates were at 18% per annum. Federal Reserve Rate went to a high of 12.5% in the late 1970s, just after the Oil Price rose above US$100 per barrel, in 1974. That was when the Fed lost control of the interest rate mechanism, although they will never admit to such a hypothesis. Sounds like history repeating itself doesn't it?

I hope you enjoyed this analysis as much as I did, writing it.

Best wishes,

Ooi

How Low Will The Dow Go?

Dear Friends,

Assuming that the Dow doesn't do an unexpected turnaround, and rise above 11,000, then, I seem to be one of those very few people on earth that accurately predicted a Market Top on the Dow at between 10,500 to 11,000 level, since April 2009. I would like to say that I was lucky.

Having said that, I have been asked, "How Low will the Dow go?" in this impending downturn?

I can give you a quick and short answer, like 9,000, but I want my 5 mins of fame in return, to babble on about how great I am. Hahahahaha. I'm just kidding. Instead, I would like to share with you the story of two people, to put my answer in the right context.

Two men have been recorded in history, as having predicted the Great Crash of 1929, amongst the many millions who invested in the stock market then. But why do we even bother to know more about them?

Because it is in human nature that we like to see bad things happen to the heroes and heroines in a movie, but we don't want to personally experience bad things ourselves. There is a tendency to shoot the messenger of bad news when the predicted bad events really happen.

Of the two men who were prescient of the Great Crash of 1929, one ran down Wall Street wailing and babbling about a potential stock market crash, while the other said nothing to anyone about it. Roger Babcock told anyone and everyone who would listen to him, and even those who didn't want to listen, that the stock market would crash, less than a week before it did. Everyone who heard his prophecy thought he was a mad man, because this was a time when people thought that the stock market had reached a plateau where it could not fall lower.

Even after the crash had happened, people did not see Roger Babcock as a knowledgeable man, but instead, held inquiries as to whether he had any insider information to justify his ability to make such an accurate prediction. Possibly, in the 17th century, he might have been burned as a witch?

When the investigators found that he did not have any insider information, they concluded that he was merely a madman, who had "accidentally" predicted the stock market crash. No acknowledgment was made of his skill, neither was there any attempt to learn from him, so that one can be protected from future crashes.

This man, did not live to enjoy wealth and happiness, despite his attempt to protect as many investors as possible. I believe that Roger Babcock did not act on his words, and thus, he never profited from his analysis and market outlook. Almost 80 years later, I saw his book on the stock market being sold in the bookshop, not because there is a great demand for his book, but because it was an opportune time, to print a book written by one of the two infamous men, who had predicted the Great Crash of 1929.

Unlike Roger Babcock, who talked but didn't act, there was another, who acted and didn't talk. His name was Jesse Livermore, the legend of Wall Street. No trader worth his salt, has not heard of Jesse Liverrnore. In fact, no trader worth his salt, has not studied the methods of Jesse Livermore. Billionaire Trader, Paul Tudor Jones, has recommended "Reminiscences of a Stock Operator", written by Edwin Lefevre, as one of the key bibles on trading, that no trader can afford not to study. Reminiscences traces the thoughts and actions of Jesse Livermore, as a trader. Some have thought that Edwin Lefrevre is actually, Jesse Livermore himself, writing under a disguised name, whilst, most believe that Lefevre interviewed Livermore in writing the book. In any case, I have read this book 4 times over the past 15 years. It is a fantastic book.

When Jesse Livermore came home, on the evening of the stock market crash of 1929, his wife had packed and sent away the furniture in his big mansion, to a smaller home they own. He was bewildered as to why his wife had done such a thing, until Mrs. Livermore explained that having noted the stock market had crashed, she was prepared that Jesse would be badly burned by the crash. Jesse laughed at the thought process, and explained to his wife, that he had made more money than ever, in the Great Crash of 1929. In fact, Jesse Livermore made more than US$100 million in this stock market crash.

Jesse Livermore was so rich and powerful that he never had to wait for a traffic light in New York to turn green. Of course, in 1930s, the traffic lights were manually manned by policemen, rather than eletronically controlled. Thus, when the policemen saw him driving down the road, they stopped traffic on the other side, so that he never had to wait for a traffic light.

Not bad for a boy who came from a broken home, who ran away from home, at the tender age of 14, to try his fortune in this world.

The tragic part about the story of the two men, is that they did not have happy endings. Jesse Livermore eventually committed suicide by putting a bullet through his head. If I am not mistaken, Babcock ended in a mental asylum.

The point I am making is that when bad things happen to people, the same people who were warned, tend to shoot the messenger rather than thank him. Even Jesse Livermore had been investigated for market manipulation and insider trading, for making his US$100 million, although in his case, the investigations failed, and nobody called him a madman. I suppose you would call someone who predicted a stock market crash, and didn't profit from it, a mad man, whilst you would label a man who made US$100 million quietly, a genius ..... a villified genius, nevertheless.

Slightly more than 50 years later, Robert Prechter, the Elliott Wave Guru, stuck his neck out and made extremely gloomy predictions on the stock market in the 1980s. His prediction did not come true, and he has been ridiculed by most people, ever since.

A few days ago, Robert Prechter was interviewed by CNBC's Sue Herera. Prechter admitted that he made a slight error in forecasting that the Dow would climb to a high of 10,000 only, when it climbed to 10,700, but his message that night, was that the Dow was about to fall badly. Subsequently, a few hours later, another fund manager was asked what he thought of Prechter's comments, and he pooh-poohed it by saying that Prechter had been saying the same thing, since the 1980s.

My point - we hear what we want to hear, because we are usually biased. This fund manager heard that Prechter has been bearish since 1980s. I heard that Prechter was bullish until the Dow climbed to 10,000, and now, he has turned bearish.

My messages in this email -

1. Don't shoot the messenger.
2. Try to overcome your bias in listening / reading what is being said. Be objective in assessing what is being said.
3. I may be right the first time, but I can still be wrong the second time. Don't make me a hero when I am right, and ridicule me when I am wrong. Instead, focus on what you are going to do for yourself, in light of the information / arguments that I make.
   

Given the fate of the two men, I seem to be a fool, to attempt to predict a Stock Market Crash / major downturn, as I am doing, and even more foolhardy, to attempt to predict a market bottom. But I believe that whilst I may not yet have the necessary skills, to make me rich, I do have enough skills such that my opinion is worth considering. I also believe that I must have the faith and conviction in my own analysis, and the courage to share them, despite the risk of being belittled in the process when I am wrong. If I have helped some of you save yourself from some losses, or better still, helped you make some money in the process, my effort, and the risk I take today, would be vindicated. Thus, hopefully, if I predict this coming Dow Bottom correctly, I will have a much happier ending. :-)

Having conveyed the above, let's get down to business.


POSSIBLE DOW SCENARIOS

Based on the price movements to date, the probability is high that one of two scenarios will unfold for the foreeseable future. Foreseeable Future means "as far as I can see", until some form of market evidence compels me to revisit / change my prevailing view.

Right now, the Dow will end up forming a complex corrective pattern which I call the WSTR, or else, fall in a Primary Downtrend of a 5 wave impulse structure, in accordance with the Elliott Wave Theory.

For the WSTR, which stands for Wide Sideways Trading Range, the Dow will fluctuate wildly within the trading range of 7,800 to 11,000. This is a basic estimate, for want of more substantive data, which will ensue in the later months. I know that any fool can estimate a trading range that wide, but that's what the WSTR is ..... a wide sideways trading range.

The problem with WSTR is that we only know what will happen AFTER it has happened, and so far, I have not found a reliable way to trade this pattern formation. Unfortunately, this WSTR pattern can last 1 to 2 years, and this can represent opportunity lost, or worse, money lost, if we don't know what we are doing.

Jesse Livermore was caught in such a market condition when he was desperate to make money, and even he, could not make his trading system work, back then. Of course, he attributed some of his losses to the fact that a particular creditor were on his back, chasing his shadow at every turn, and under such pressurized financial conditions, he was not in the right frame of mind. Nevertheless, I believe that the WSTR market condition played a significant part in his losing money. The biggest challenge of WSTR is that by the time you see a trend, with a confirmation, the trend is over, and this goes on, up and down, up and down, for a year or two.

Can we relate this phenomenon from a Global Macro perspective? Yes. For those people who believe that the US Economy will need some time, i.e. a few years, to consolidate before resuming a much more vigorous growth rate, then, the WSTR portrays the ups and downs of such an economy, as market participants grapple with the conflicting economic news as they unfold, thus, the short roller coaster rides within a wide trading range. Please note that whilst the trading range at the two extremes may be wide, the price movement need not necessarily move to the extremes, and this is what causes the WSTR to be extremely difficult market to profitably exploit. The only way to do this with any chance of success is to trade on lower timeframes of 1 hour or even 30 mins. Yet, the lower the timeframe, the less reliable, the technical analysis, despite the supposedly fractal nature of price patterns. This is because it is easier to influence / manipulate prices under very short timeframe.

The other scenario, for those who believe doomsday is round the corner, ...... people like me, then, the other scenario is one of a Primary Bear Market (Long Term Downtrend). Actually, I don't believe economic doomsday is round the corner .... merely that the US Economy, and therefore, the world economy, is going to experience some extremely strong, and bad economic storms that won't go away, any time soon, because it is structural in nature.

Whichever scenario that will finally unfold, will depend on the long term economic fundamentals. Right now, we think we know what the current strengths and weaknesses of the US Economy are. But, frankly, I believe no one knows. There are a few of the economic statistics that show an improved picture, but are subsequently, revised. With revisions that are significant, there is no way to know the true economic picture.

My point is .... if things are improving, why should there be some fairly wide variances between reported and revised economic statistics? To me, this signals a situation that things are not as rosy as it looks. Also, my Global Macro Analysis do not support a positive, rosy picture, although I must admit that I underestimated the strength in manufacturing, especially in the electronics sector. It is not easy to estimate how much inventory, businesses will build, under the present economic situation. What is certain today, is that the electronics sector is much more optimistic than expected, and thus, the heavy investments in inventory building. On the other hand, we can argue that it is merely inventory building, and thus, not sustainable, (my argument some time back), but then, inventory levels have remained low, despite the inventory building, which means that inventories are being sold much more than expected.

Certainly, there are conflicting opinions on the direction, strengths, and fundamental structure of the US economy, and I made one, in the paragraph above, just to illustrate the point. This explains why, both the scenarios I mentioned are plausible. The world is still trying to figure out where the US economy is heading, and this is reflected in the uncertainty in the price movement of the Dow.

This is why we need to continue to monitor the existing price behavior, to see if what we expect, i.e. our reference model which I have mentioned in my email / blog, "Whither the Dow 100205" will come true. If price starts to behave erratically, rather than fall and then rise, in an orderly manner, as in the reference model, then, the WSTR scenario is the more likely option. It doesn't matter what the analysts and fund managers say on CNBC. What matters is HOW they act with the money they manage.

In case, you haven't got the message absolutely clear, we are still at a very early stage where things are still highly uncertain. We need more price evidence, to understand what the market is thinking, and how it is behaving. What is for certain, as at today, is that fear is in the air. What we don't know at this stage, is how far, this fear will take the market down. This is because we don't know what further bad news will be announced in the next few months.

By giving two scenarios, am I not covering myself from all angles and playing the trick that I will be right, whichever way the market goes? No, that's not true. I am saying that there is very limited upside to the market at 11,000. Thus, should the Dow move past 11,000 in the next one or two months, then, obviously I have made the wrong call. At present, I believe that there is very little chance (5%?) that the Dow will go higher than 11,000, and there is a high chance, 65% (just a rough guide, not an absolute probability) that the Primary Downtrend scenario will materialize. This leaves the WSTR scenario with a 30% chance to materialize.

So, let's get down to the ultimate question on your mind. How low will the Dow go, under the Primary Downtrend Scenario?

In my opinion, 4,800 +/- 300 is the most likely bottom. I know it sounds crazy, but there it is.

Best wishes,

Ooi

USD Index Outlook 100112

Dear Friends,

This was an email reply dated 12 January 2010, in response to a friend's enquiry as to my view of the US Dollar Index. Though it is now almost a month, the view is still valid as at today, so, in my opinion, it is still worth publishing on this blog.


Chart is courtesy of Stockcharts.Com

My technical view of the US$ Index Chart is that the US$ is bearish, because its price is below the SMA200. BUT, since December 2009, it has been making a strong rebound, and has even broken above, past the SMA50, but still below the SMA200, which is currently standing at 78.99. Nevertheless, it is on a minor sideways correction on the 1st Wave up, at present, and has even broken below the SMA50 level of 77.53. Other than this, we should note that the SMA200 is still trending downwards. This is what we know.

Now, for the application of Elliott Wave Theory general principles and guidelines. First, this is a new trend, and we don't know how far this new trend will go. But, there should at least be a 3rd Wave upward, before it is all over, after the 2nd Wave Minor Sideways Correction is completed. My timing calculation is still not very reliable, but it should be about now that the 3rd Wave should resume. As for Price Correction, I expect it to reach a Low of 76.75, and in fact, as at yesterday, it did a low of 76.79. This means that there is very little downside left, if I am right.

Please note that this is in contradiction of the signal we are receiving from the MACD which has crossed over to the downside, while I am thinking that the downside is limited. It is possible that the MACD will whipsaw upwards if I am right.

This is why you may want to wait for a breach back above the SMA50 as confirmation of my analysis, and put a stop loss just below the bar low of the breakthrough bar. Of course, this doesn't protect you from whipsaws, but if the trend is resuming, then, it should break above the SMA200 this round. If we are wrong, you lose one bar for this bet.

But let me put some words of caution to you. First, some technical traders prefer not to play when price is between SMA50 and SMA200, mainly because the trend is still weak, and thus, upside is limited, before another correction sets in. A strong trend is confirmed only when SMA50 is above SMA200 that is RISING. But, if you want to play, this is how I would play it, i.e. wait for the confirmation of a breakthrough bar above SMA50, and place a stop loss just below the breakthrough bar low, in case, the market changes its mind.

From past observations, this type of market situation will lead to a rise above the SMA200, but will then fall again, to either just about the SMA200 and mark time, till the SMA200 turn around to an uptrend, or even breach below the SMA200 one more time, before it goes into a longer term uptrend. This is one key scenario .... a breach above SMA200, and then, a fall to around SMA200, or even slightly below, before going on a longer term uptrend.

Another key scenario is where it goes above the SMA200, and then, it is game over, as it falls back straight down, quite fiercely, catching all the bulls by surprise, as it resumes its EXISTING long term DOWNTREND. At this moment in time, we don't know which one it will be. This is where our stop loss management covers us for the uncertainty.

Again, a technical trader thinks very differently from a technical analyst. Whilst the technical analyst thinks in terms of correctness of his outlook, and is expected to be decisive in view, the technical trader does not assume he is correct in his analysis, but instead, focuses on risk management that he can be wrong, although probability is slightly in his favor, over the long term. This is why I am not so focused on wave counting, but rather, the identification of scenarios on what can happen, and what is likely to happen, and what I will do, if I am wrong, including, where I will admit that I am wrong .... the stop loss.

The last question which I need to answer is "How far will the 3rd Wave go up before it falls in another correction? I estimate the 3rd Wave to have a maximum upside potential of 84 +/- 0.5, before falling.

As for your question on 85-90, I don't think the USD Index will break past 85 by the 3rd Wave. When we get to around 82 to 83, we can reassess the situation, depending on what the MACD and Stochastics are telling us by that time, to see if there is a 4th and 5th Waves in the making, but I doubt it, based on what I see on the chart at present. I will revisit my outlook when nearing the end of 3rd Wave.

Best of luck in your trading.

Ooi

Whither The Dow 100205

Dear Friends,

On 22nd January 2010, I wrote the email entitled, "SMA50 Breach on the Dow", and effectively, the message was, "Get OUT Now!". The Dow stood at 10,389 then. At that point in time, two scenarios were possible, i.e. the increasingly high risk of a crash or a major 5 wave downturn, OR a complex pattern formation which I call "WSTR", i.e. Wide Sideways Trading Range. However, there was no way to decide which of the two scenarios would be the reality of tomorrow, at that point in time, and thus, I did not mention them then. I needed more data, to be accumulated from observing the market / price behavior for further clues before deciding on the higher probability scenario of the two. This is inspite of my highly negative Global Macro perspective of the US and Global Economy.


In this respect, the price movements of the last 3 days on the Dow, especially last night's were the crucial acid test of what is to come. The Dow was grossly oversold as at 3 days ago, and this was evidenced by the Stochastics. But the Stochastics is not a very reliable indicator, and is merely a short term signal, of up to 3 days (bars) reliability, based on my past observations. Thus, I expected some form of rebound, but that it would be shortlived. In fact, the rebound was stronger than I expected, and lasted two days, which raised questions on whether this time around, the situation will be valid. Had it gone on a 3rd straight day of upward trend, of another 100 points, I would have had to admit that the WSTR scenario is the more likely scenario of the future. As fate would have it, the Bears showed the Bulls its ugly teeth, and the Bulls capitulated surprisingly easy, by 268.37 points last night. This is confirmation of the weakness of the Bulls, and the overall market sentiment, which has turned increasingly bearish. Forget about what news caused the Dow to fall. When market sentiment is bullish, bad news were merely shrugged aside. But when market sentiment is bearish, the slightest bad news causes reaction that is extremely exaggerated. That is how the market works.

Now the Dow stands at 10,002.18, i.e. on the brink of breaking down on the all important psychological barrier of 10,000. It has fallen 389 points from the time of my 22nd January 2010 email. If you have not got out by now, what should you do? This is the question I am trying to answer today.

This is an appropriate time to remind you that you are responsible for your own trading / investment decisions. I am merely sharing my own opinions, so that you may be able to make a more informed decision, having considered a more diverse perspective.

Like Columbus looking for the Indies, involvement in the financial markets is about navigating an unknown future. In doing so, we need a map and some navigational equipment to help us. So, I am going to share with you, a possible road map of the Dow. The secret to success is not only in knowing what is likely to happen, but in understanding that what is LIKELY need not necessarily happen. So what good is it to us if we cannot know for sure that it will happen?

A plan is better than no plan. Also, by having a possible road map, we know when things don't behave the way it is supposed to behave. We then have to decide what to do, when we are right, as well as when we are wrong. When things go as planned, we take action as planned. When things don't go as planned, we continue to watch, until a new feasible plan emerges, or until our earlier plan is back on track. Only in this way, are we in control of the situation, rather than letting the market control us.

So, what is the road map of the future?

We are now on track for the following price movements on the Dow: -

1. Dow will fall to 9,400 +/- 100. This is the first key milestone in charting the potential crash / significant (> 20%) downturn on the Dow.
   
2. Upon reaching this critical support level, it will rebound strongly up to 10,100 +/- 100. This 2nd Key Milestone will serve to be the final test of the strength between the bulls and the bears.
3. If the bulls win, the Dow will resume its previous uptrend. If the Bears win, the prophecy of a significant downturn / crash is likely to happen. This is the stage where we can take Short positions. Based on what I have seen of the price behavior thus far, the probability of a significant downturn / crash, i.e. a 5 wave downward impulse is the more likely scenario.
   

How low will it go if the Dow cannot hold at 10,100 +/- 100? The 3rd Down Wave will take the Dow to at least 8,400, possibly even lower.

Please do not take this road map for granted. There is no sure thing in the stock market. We need to monitor and observe price behavior at each critical milestone. We must also not adopt a dogged approach of being right, but to let the market tell us if we are right or wrong, and then, adjust our trading decisions accordingly. However, if we do not have a road map of what CAN happen, then, we do not have any idea if we are right or wrong.

This is THE Road Map of the future of the Dow that I have in my mind, and I am sharing it with you. I think the price movements today are very consistent with the very gloomy economic outlook I have, and this increases the probability that this downturn is a PRIMARY DOWNTREND, and not merely a correction. If anything, the uptrend from 6,500 to 10,700 was THE major correction, i.e. part of an upward correction in the Primary Downtrend that started in July 2007. The problems that plagued us in 2007 and 2008 are not over. They have not been resolved. Rather, they have been swept under the carpet, and now, in 2010, they are back to haunt us. The earlier upturn was merely a cash driven, market sentiment upward correction in a LONG TERM BEAR TREND. If I am correct, there is going to be a lot of economic pains coming in this second major long term wave. I was right the first time, when I shot out the alarm bells in August 2007. Let's see if I am right this time around .... again.

You will notice that I started out with the objective of answering the question, "What should you do, if you have not got out till now?" Yet, I have not answered the question, but instead, merely given you a possible road map of the future. Why?

Because of the words of wisdom of the highly successful traders. The secret to success is in getting out when the pain is bearable, i.e. when taking the loss is not going to hurt that much. Right now, if you have not got out at 10,389, you are probably hurting. I'm not trying to add salt to injury, but merely to highlight the need to implement risk management and to have a systematic strategy to exit a trade, be it a profitable or a losing trade. Of course, the secret to getting out with minimal pain is to get an excellent entry point on your trade.

Yeah right! Who doesn't know all this stuff? The challenge is in effective implementation. But, it starts with actively and constantly thinking in this manner. When you are caught in no man's land like today, then it is much harder to pinpoint an exact place to get out, or a good strategy of what to do next, which is why, at this stage, I can only share the possible road map, as the best help I can offer.

I hope that this email has started you thinking about your own trading system. A good trading system is one where you can adopt a process of continuous improvement, possibly even incorporating quality management programs like Six Sigma into your decision making processes. If you do not have a systematic trading system to make decisions, how can you measure your own performance whether what you did was right or wrong? And how do you improve what you can't measure? In fact, how can you even know if you have improved, if you have not measured your performance?

Best wishes,

Ooi

SMA50 Breach on the Dow

Dear Friends,

This was the email article that I wrote on 22nd January 2010, that I forgot to publish on my blog, but am now doing so, for record keeping purposes.

Pursuant to my Global Macro Economic Outlook via email dated 4th January 2010, entitled "Singapore's Economy shrinks 6.8%", where I was of the opinion that we should get out of the stock market at between 10,500 to 11,000, yesterday night, is the first US market day, where the Dow has broken below its SMA50, and more importantly, CLOSED below it. This is my Alarm system from a Technical Perspective that shouts, "GET OUT NOW!", if you are still not out.

Please note that it is not time yet to Short. There is a difference between getting out of a Long Exposure because it is too high a risk, and too low a reward to continue taking on the exposure, and it is another to take on a fresh exposure on the other side of the fence. Why? Because dying bulls always have last gasps of strength that tends to weed out the weakholders.

For once, the Technical Outlook is in sync with my Global Macro Outllook. Remember, we are playing a probability game based on statistics, and thus, the market may go up once more, breaching above the SMA50, should there suddenly be positive news announced tonight or tomorrow. But, what is clear is that more and more people are getting out for sure, based on technical chart.

Whether this is merely a short term correction, or the start of a new long term downtrend is unclear, which is why this is not the time to take a Short Position yet. What you are doing here, is to buy insurance, just in case the price collapses all the way to the SMA200. If the market moves up above the SMA50 once more and stays up, you may re-enter your Long Position at slightly higher price, and at the some losses on transaction costs. This is your insurance cost for doing the trading business.

I can't share my entire trading system with you because it took me two years of scientific research to develop it. But I want to protect my friends where possible. For me, I will NEVER keep a Long Position open when price is below SMA50. This is how I protect myself from ever being hurt in any stock market crash, based on studying Dow price movements over a period of 80 years. I hope it will serve you equally well.

Please note that as any quantitative systematic trading system based on historical backtesting is founded on statistical probability, there is no such thing as a sure thing. The question is not whether I am right or wrong, but whether over thousands of trades, over many years, we will make money, or lose money. And for me, I put my money where I know for sure, that had I done it in the past, I would have made money. Mathematical Probability is in my favor, just as the rules of the casino is always mathematically in the favor of the casino.

This, my friends, is how the technical traders and technical trading strategy hedge funds make money. Of course, despite the best of intentions from me to protect you from losses and help you make money, I am not God, the all knowing. I can be wrong, and I have been wrong, and I will be wrong, some times. Thus, technical trading being a probability game, you have to make your own decisions as to what is best for your own trading / investments and bear the consequences of your own decision.

Best wishes,

Ooi

Singapore's economy shrinks 6.8 percent in Q4

Dear Friends,

I wrote two email articles (edited for better accuracy) that I forgot to post on my blog, so for record keeping purposes, I will do so now.

As usual, please reminded that you are responsible for your own investment decisions. I am here to share my opinions and information, but you enjoy the gains, and suffer the losses. So, make your own decisions, for better or for worse.

http://sg.news.yahoo.com/ap/20100104/tbs-as-singapore-economy-3c8dc0d.html

Singapore's economy shrinks 6.8 percent in Q4

THIS is what I am talking about, when I said that the Long Term Outlook of the Dow should be below 6,500. This news is fresh from the oven. Singapore is the first country to report its GDP data for 4th Quarter 2009, i.e. within 5 days AFTER 31st December. US GDP data will only come out on 29th January 2010.

The significance of this news is not that there is a relapse into economic recession, but rather the fact that it is 6.8% negative, which is comparable in pain to some really bad recessions. In short, there was a lot of economic and financial pain experienced in Singapore between October to December 2009. So much for a happy Christmas.

You cannot use the rubbish media definition of an economic recession of 2 negative quarters because it is biased. It takes one quarter to get out of recession, and when the GDP was 0.1% positive, the media announced to the world that a country is OUT of recession, and then, it takes two quarters to announce another recession. Just stick to positive and negative GDP growth to get a feel for the economic pain. Also, pay attention to the numbers to understand how much pain is being experienced.

Don't forget that if you were once earning $10,000, and your earnings drop significantly to $7,000 in the recession, it is little consolation, nor any news to celebrate when your boss announces a salary increment of $100 for you. The $100 increment amounts to a raise of 1.4% on the low base of $7,000, and does nothing much to bring your salary back to normal of $10,000. This is the TRUTH of the economic pains in the world right now.

Worst, the world is about to experience further income cuts, even from the low base of $7,000, and what you just saw from the news is like your salary being cut another $483, from $7,100 to $6,617. Can you feel the pain? So much for the $100 increment a few months ago.

Most businesses are suffering from significant drop in sales turnover and profitability, and there is nothing to suggest that this trend will not persist for the foreseeable future, without any significant changes for the better. If anything, the future looks even bleaker with time, and there is an increasing possibility of even further drops in turnover and profitability in the next one to two years.

The funny thing was, I kept analyzing the economic data, trying to remain unbiased as I searched for signs of positive or negative Economic Growth in the future, and my Economic Growth Forecasting model could not give me any positive results, even though EVERYONE in the world kept talking about an economic recovery. Now, I know that my Economic Model didn't lie to me, and it was the commentators who were biased in their assumptions. Some actually used the wrong model to make their forecast, and this was evident from the way they talked.

For your information, what is Foreseeable Future is defined by me as "AS FAR AS I CAN SEE, until new information changes the outlook".

This is THE MAIN WAVE of the ECONOMIC TSUNAMI, and it is almost upon us. I expect the economy of US and Singapore to also experience bad results for 1st Quarter 2010.

The first economic recession of 2008 was like a fall from a 3 storey building. You end up half dead in hospital's Intensive Care Unit (ICU). You slowly recover, and the champagne bottles start to open in the view that you will be back on your feet in a few months' time. NOW, the doctor suddenly finds you have some symptoms of a relapse. Complications have arisen. You are not out of danger yet. You are still recovering from your bone breaking fall, but because of your low immune system, you have caught other diseases. You are in danger of becoming very ill.

How ill? What is this illness? What medicine to prescribe?

All these questions cannot be answered at this stage because at present, only the negative symptoms are appearing, while the cause is less certain. COMPLICATIONS, not an accident, is the cause of this Main Wave of the Economic Tsunami.

The facts we know are clear. There is a hell of a lot of economic and financial pains being experienced, and the world economy is extremely fragile. It only takes a snap of a single match, to light up the bonfire.

From our perspective, this is about businesses and consumers having to suffer too long from low income compared to the hey days, while prices of everything remain higher than the income fall. Without a relative fall in prices, People and businesses are still tightening their belts on the overall, and despite whatever any Government or media has to say, the people know the pain is there, with nothing in sight to change that view, for the foreseeable future.

There are some pretty bad economic storms out there, and it is brewing into another major Financial Tsunami. It is coming, my friends. You might want to consider getting out of your stock positions if you have any, and wait for a more opportune time to reinvest.

I quote from an email I wrote on 29th December 2009 in response to a very interesting article per website link below, of the growing income gap between the rich and the poor, i.e. before the Singapore GDP announcement: -

http://silverbearcafe.com/private/11.09/unraveling.html

In the last few months, I came to the conclusion that there is no point lamenting about the gap between the rich and the poor because that is exactly what capitalism is about. The only thing we have to worry about, is

"Which side of the fence are you on?"

I think there is no solution to this economic problem. The prophecies of George Orwell's "Animal Farm" will keep repeating itself, whoever is in power, and the world will cycle through great eras, down to bad economic eras, and we are seeing the movement towards worser and worser economic conditions, in the economic super cycle.

Economic Depressions cause a change in wealth on a massive scale. It provides the necessary earthquake to break the existing economic structure and its foundations to the core, leaving behind vast devastation for all. And from the ashes of disaster, a new economic era is born. This was how economic history has been, and this is how it will be.

America had it great for a long time, not because of capitalism, but because they had plenty of land, and was the industrial might of the world. Next, the US$ became the world reserve currency, and this allowed Americans to spend 750 times more than they should have, if the US$ were not the reserve currency. There is no way America can repay the debt it owes the world.

The mound of sand is looking like it is about to topple. We do not know exactly when the last grain of sand will do the whole mound in, i.e. cause it all to fall down, but it's a question of WHEN, not IF. Debts have to be repaid. Full stop.

The grain of sand is actually the US Treasury issues, whether short, medium or long term notes. The over subscription for such notes are falling, and is down to 2.1 times now, from a high of 3.6 times. It was only a couple of months ago, that it was 2.9 times.

The key, the next shoe to drop is the Interest Rate Derivatives. It is said that there are around US$140 trillion in Interest Rate Derivatives, and the horror story is .... what will happen if the US Interest Rates rise significantly? Some are expecting the IRD to cause major losses on those who have underwritten the assurance of continued low rates regime.

My point .... no, the world is not falling apart overnight. But, every day, it is getting closer to economic disaster. We don't know exactly when it will happen, but we have a clue in the form of Interest Rates. The Fed has to raise interest rates significantly, at a very fast pace, too fast, and this will catch everyone off guard, and cause massive losses. But the Fed is resisting this move, knowing the next crisis to come, for as long as they can. So, when the Fed does make a move, you know that it is not voluntary in nature.

This is the current situation. Of course, the danger may pass, if they reach a good agreement with PBOC (People's Bank of China), to continue to support the US Treasuries, so ... this is not an imminent disaster, but a real danger that needs to be accounted for. The key is in the future Fed Interest Rate .... not the normal moves, but the ones that seem very unlike a normal Fed policy. That's when we know something has gone terribly wrong.

As for the alarm bells on capitalism, the current situation in US is nowhere near as bad as the Great Depression, not to mention the times of Industrial Revolution. To understand the Great Depression, see the movie, "The Grapes of Wrath". For life in the Industrial Revolution era, see Les Miserables.

My outlook for the world economic and financial markets for 2010?

I am too busy to write blog articles nowadays, so I will just requote what I wrote to a friend earlier today in response to his recommendation of an Elliott Wave Theory blog, and before the Singapore GDP number was known to me.

Thank you for sharing. I went to the website and his chart on the Rising Wedge, with falling RSI seems to confirm my opinion that the US Stock Market liquidity driven run up is almost over. I actually sent an email to Victor, over the weekend, to get out of any positions if he can, but I am too busy to write any articles on the outlook.

If you look back into my April and August Outlooks, the only two times I wrote Dow Outlooks since April 2009, I set a target for 10,500 to 11,000 as the maximum peak potential. We are in that critical zone, and there is no reason nor price behavior evidence for me to change my outlook set then. Of course, I was wrong on the duration of the run up .... but hey, I'm no God. Hahahahahahaha. Forecasting is a probability game, and I won't get it right the next time, but sometimes, it does work.

The big strategic picture is usually quite reliable, compared to the short term forecast due to noise from news and short term fear and greed sentiment.

My long term forecast is still one of extreme pessimism, i.e. below 6,500 on the Dow, before the economic challenges are all over. BUT, we will have to reassess the situation at the 8,900 to 9,200 region, and depending on the news and price behavior, we will need to make a decision whether THIS new downturn is the 1st wave of a 5 wave Long Term Bear Market (my macro economic view), or merely a Downward Correction in a Long Term Uptrend (the general consensus macro economic view).

You will note that I do not believe in ALL of Elliott Wave methodology, i.e. too much wave counting. Instead, I believe in what I think is quite reliable, the wave structures that can arise, and try to assess the various scenarios, as they unfold, .... with a view to making money.

In other words, don't get lost in the details of EWT. Be flexible. Stick to the simple principles, and make money from it. Of course, the making money part is the tough part, but, it all starts with the thought right?

In short, this is going to be hell of a year, to find opportunities to make money, because the world economy and financial markets are going to experience one heck of a roller coaster ride this year. Meantime, go easy. Smell the roses, enjoy the fresh air, and just stay out of trouble. Life will be great if you can do just that.

Best wishes,

Ooi

Love for Coffee

Dear Friends,

Once in a while, we hear people say that we must always take time to smell the roses. For me, I always take time to smell and consume coffee, rather than flowers. Some of you may actually wonder why I am such a strong supporter of Starbucks Coffee.

My favorite coffee is still Starbucks Coffee Colombian beans. I even buy packets of this Colombia coffee to consume at home, not because it is one of the most expensive coffee in the world, but because I just love its aroma and taste. To me, there is no better coffee than Starbucks Colombia coffee. I have tried other Colombian coffee, but somehow, it is different. It seems a lot more bitter than what Starbucks offer. Colombian Coffee is so expensive that it is hardly ever sold in Malaysia, although, I just found out that there is a Coffee operation in Muar that imports it.

Here is a rather discerning Consumer Report at yahoo news that suggest Starbucks' House Blend and Green Mountain Signature Nantucket Blend Medium Roast as amongst the best coffee. I find Starbucks House Blend agreeable, although I am not very excited about it. I have not tried Green Mountain Coffee.

It is interesting to note that this consumer report actually advises people not to merely go for the high priced items thinking that price reflects quality. For me, quality is reflected not in price, but in the taste and aroma of the coffee, and in such a case, every one has different preferences, just like choosing the fragrance of a perfume. You know a cheap perfume when you smell one, but expensive perfumes does not necessarily mean that it will definitely be agreeable to your sense of smell.

http://news.yahoo.com/s/nm/20100202/lf_nm_life/us_coffee_consumerreport_blends

I tend to go for the medium strength coffees like Colombia or Starbucks' South of the Border. House Blend is fine with me too. Sumatra coffee is also quite quite bold (strong), and is the most alike to local coffee. For those of you who like the strength of local coffee and finds Nescafe to be "no kick", then, try Sumatra. For me, this is about the boldest that a coffee should be. It is tolerable, as a coffee, but definitely not my favorite, nor even a preferred choice. I prefer House Blend to Sumatra.

Casi Cielo seems too strong for me. It is the strongest coffee I have ever drank at Starbucks, although, somehow, it seemed to have toned down somewhat .... or is it that I have gotten used to its Bold strength? I don't know. But, the early Casi Cielo looked very oily and yellowish (in fact, I was quite concerned for my own health after drinking it), whilst today, it seems less so. Maybe the name is the same, but the blend has been changed?

Anyway, there is only one advice I would share on coffee, i.e. local Penang coffee is made of high caffeine, low quality beans. Whilst some of us may have grown up on Penang local coffee, and I still love to drink it whenever I am back, do be careful. Because of the high caffeine content, the coffee is very bitter, and has to be roasted with margarine. And as you know, anything fried / roasted with butter or margarine is supposed to produce very high cholesterol content. This is why we have to drink local coffee with sugar, whilst we can drink pure coffee without sugar or milk with coffee made from arabica beans, like those from Starbucks Coffee.

If I am not wrong, Nescafe is a blend of robusta beans (local coffee beans) and arabica beans. Thus, drinking Nescafe Classic is theoretically healthier than drinking local coffee, although I am not sure about the effects of the creamer, which, if I am not mistaken, is made from palm oil.

I would recommend Nescafe Gold or Black Gold, not because we want to be seen to be higher class, but because it is made of better quality beans, i.e. higher content of arabica beans over robusta bean ratio. If I am not wrong, I think Black Gold is 100% arabica beans, although I have difficulty getting it in supermarkets.

We coffee lovers have to watch out. On the one hand, a cup or two of coffee a day, may actually be good for health, but the more caffeine we take into our body, the less healthy we may be. Thus, the idea is to enjoy the coffee, yet, minimize caffeine and sugar intake to a minimum.

The next time you buy a cup of Starbucks' "coffee of the day" (COD), do check out their board on what is being served. The COD changes periodically, usually fortnightly. Even though you buy the same cup of COD, at different times, you are drinking different types of coffee with different aroma and taste, if you haven't realized it.

By the way, there is similar reasoning on quality in terms of tea. If you want to know more about tea, do take some time to visit the Boh Tea plantation at Cameron Highlands, and take their tour. I did that about 15 years ago, and learned more about how the quality of tea is differentiated, although, English tea is never my cup of tea. I am more of a chinese tea lover, and here, I love great Shui Hsien, Tieh Kuan Yin and Ma Lau Mit. My favorite is Ma Lau Mit, but do be careful. This tea is too strong to be drunk frequently.

So much about coffee, tea and me. Take some time to smell the aroma, and enjoy the taste, preferably without sugar, and definitely without milk. That's pure coffee drinking, of a coffee lover. Unfortunately for me, I have a sweet tooth, and I take a lot of sugar. Oh well, we have to sin in some ways right?

And oh yes, if you want the full experience, ask an experienced Starbucks staff to pick out the right cake to match your favorite coffee. Then, take a small sip of your favorite black hot coffee without sugar or milk, followed by a small bite of the recommended cake that perfectly matches the coffee you are drinking. Then, take another small sip of the coffee. I promise you, life will not be the same ever again, after that experience.

That's how the British aristocrats used to drink their tea or coffee. The right cake with the right coffee or tea, without sugar or milk. Nice .... out of this world ...... Heavenly ....... enjoy!

Best wishes,

Ooi