Key Challenges Plaguing Today's US Stock Market

Dear Friends,

Most people have a good way of handling bad news; ignore them, or better still, don't even want to know about them. However, in management, it has been said that "It is not a matter of how fast you get the good news, but the bad news that reflects the quality of the management."

Ignorance is bliss, but only for the short term. What we don't know may hurt us badly. Thus, I always adopt the attitude that I don't have a problem sleeping at night, if I know what is the worst thing that can happen. On the other hand, I DO have a problem sleeping at night, if I DON'T KNOW what is the worst thing that can happen.

I also adopt the attitude that good news / events are easy to manage, and thus, do not need much thought in advance. There is a lot more time to respond to good news because the decisions tend to be made easily.

Thus, this blog is skewed (biased) towards analyzing bad news, potential and real. Most bad news and potential problems will never turn into the worst case scenario, but sometimes, it is not a question of quantity, but of the significance in impact should merely a single less probable event hit us with full force. Not to be prepared is pure laziness, which I cannot accept as a philosophy of life.

In my mind, the biggest challenges plaguing the US Stock Market today (Short Term of less than 6 months) is the fear that

• Commercial Mortgage Backed Securities (CMBS) may be in the process of doubling on their defaults in year 2009. Click on the website link to check out MarketWatch Article by Laura Mandaro dated 19 November 2008 , AND
• The Consequences of further Corporate Debt Default from the Auto Industry if it were allowed to FAIL.
  

If General Motors is bleeding losses / burning cash at the rate of US$1 billion to US$2 billion a month, what is the total amount owed by the Auto Industry, i.e. not only GM, Ford and Chrysler, but also the businesses of dealerships, spare parts manufacturing, etc.?

Also, can you imagine 2 to 3 million people out of work and further aggravating the already badly hit housing market with new houses for sale?

There is also an argument by Paul B. Farrell, also of Market Watch, of a coming Great Depression 2, in his article dated 19 November 2008, entitled We'll be in Great Depression 2 by 2011. Farrell provides 30 reasons why he is of such a gloomy opinion. Please click on the website link to read the article.

Farrell mentions US$2 trillion of loans which he claims the Federal Reserve has refused to disclose (how did he know then?), which he calls the Shadow Banking System.

I don't know how far this claim is true, but if it is true that the Fed can loan out US$2 trillion without disclosure, I think this will be the ultimate breach of confidence in the US Banking System.

It would raise important issues like, "How can the Fed loan out such a material amount without Congress approval?" and "If such a big, material issue is covered up, what other cover ups are there?"

However, I would like to emphasize that I don't know and I can't verify Farrell's claim. It is important for us to take note of issues that may arise, but sometimes we have to make our own decisions, rightfully or wrongfully, whether to accept the explanations, claims and assumptions of others.

One of my biggest concern in the medium term (6 months to a year) is the financial health of Freddy Mac and Fanny Mae. Already the two US Government owned mortgage firms have asked for US$200 billion in bailouts. If this is enough, and the bailout money requirement stops here, that's fine. BUT, I fear (without any real evidence, and thus, just an intuitive fear), that US$200 billion is not enough to cover losses arising from around US$5 trillion of mortgage loans.

If we take a default rate of 10%, the total bailout money required may eventually hit US$500 billion.

Of course, one of my biggest concern over the longer term (1 to 2 years) is the effect of various defaults, from housing to commerical properties, to corporate loan defaults, to banking collapses, on the Credit Default Swaps Market and its players, of which the top banks of America are very much exposed to.

And as you would have guessed from my numerous blogs on Hyper Inflation and the consequences of Excessive Printing of Money, that I am extremely concerned with a potential US$ Devaluation Crisis.

In year 2006, I conducted a detailed Scenario Planning Study of the Future of the US for the timeframe of 10 years, i.e. up to 2015. I concluded then that at best, the US Economy would chug along in a lethargic manner, but the possibility of a Depression exist.

However, I also concluded then that only four Key Driving Forces would be strong enough to push the US Economy into such a devastated state.

First, there must be a bursting of an asset bubble. This has happened in the form of the Sub-Prime, Near Prime, and now, Prime Housing Mortgage Default Crisis.

Second, the US Dollar has to devalue significantly. This scenario has happened for a while until the last few months when it unexpectedly strengthened significantly, erasing a large portion of its devaluation.

However, as the saying goes, the story does not end till the fat lady sings. Will the US Dollar experience a devaluation crisis in the future? Some people like Peter Schiff and Jim Rogers think so. Their opinions have been recorded on my blogs.

If there is a US Dollar Devaluation Crisis, due to the excessive printing of money, then, this will eventually trigger an International "Lack of Confidence" Crisis, and there will be no foreign investors' money to fund the irreversible Balance of Payments Deficits, and thus, the economic situation will worsen considerably for America.

This will lead to further Asset Deflation, which is a nice way of saying even more crashes in asset prices like properties and stocks, and even business ownerships, due to foreign investors pulling out their investments in US.

This should do it, i.e. push America into a Depression. BUT, if it doesn't, then the Trade Protectionist Policies that will be pushed for adoption by some Congressmen, to win popular votes, in an effort to protect jobs, will push THE WORLD, into a Depression.

This was THE WORST CASE SCENARIO that I foresaw in year 2006, before all the crisis happened. There is no reason to change any of my earlier analysis / scenarios.

This is why I have been monitoring the situation very closely, and emphasizing what seems like the words of "Doomsday" sayers, on my blog. Our job is to take all kinds of data into account, and then, only then, sift through each one of them with a fine toothcomb, to separate the fairy tales that cannot arise from the plausible situations that can arise, however, improbable.

With that, we will be in a much better position (better prepared) to take advantage of any opportunities that may arise that conforms to our strategic foresight and scenario planning.

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 2008 of Praesciens.Blogspot.Com.

Intuition Speaks Today -The Loonie as the Potential Winning Market Strategy?

Dear Friends,

Usually I pride myself in doing a lot of research for scientific evidence before forming conclusions. However, as the saying goes, "Rationality has an older sister; her name is Intuition."

I must admit that I haven't been trading this month, and it is because of my intuition. I don't take a trade based on intuition, but I do stop myself from taking trades if my intuition tells me otherwise.

Which is Better? Rational Analysis or Intuition?

The scientists overemphasizes the importance of Rationality and Scientific Evidence, while most people tend to go with Intuition, without looking for scientific evidence. Neither is correct.

The correct thing to do is to conduct scientific research, and rationally analyze the issues. Then, Intuition will synthesize the various factors into a holistic picture, and voila, foresight happens.

There are times when waiting for scientific evidence will be too late. What is the point of realizing today that this is a Bear Market? We want to be able to foresee such an event long before it happened, i.e. say, 1.5 years ago.

But at that time, when I was screaming bloody murder, some people thought I was an alarmist, a pessimist, or worse, a neurotic. Today, there is blood on the streets, and it is a very sad thing.

It's the same as the Poseidon adventure where most people stayed in the Ballroom and drowned, while a few decided to climb up.

BUT, the few adventurers could easily have made a wrong turn and drowned as well. That is the reality of life.

I remember the time when I first wrote the email that said, "This is the last train to London, get out of the stock market now." That was in July or August 2007.

But back then, there were no scientific evidence to back up the argument. Even the consumer spending statistics were still holding up, and the talk then was that the Sub-Prime issue would be resolved, and the crisis will be contained.

So, with hindsight, we know that Rational Analysis is useless for events that are about to happen, because Rational Analysis is based on scientific evidence of events that have happened.

So then, if if Intuition is not based on scientific evidence, what is it based on?

The correct answer is that Intuition must always be supported by Rational Analysis. Intuition that is not supported by Rational Analysis is a wild guess; a wild gamble, no more.

Systems Thinking (Cause & Effect) Modeling as the Mother of Intuition

But, the Scientific Evidence and Rational Analysis is not a direct evidence, for no direct evidence will exist as things have not happened, or is not reported to have happened yet.

In this case, we can only use a Systems Thinking Model of the World, which is actually, a Cause & Effect Model based on identifying the Key Driving Forces, and understanding their relationships and potential range of outcomes, and how they impact each other.

Why is this Important?

I have invested time to explain the relationship between Rationality & Intuition because most people tend to act on their own intuition, but hardly ever trusts another person's Intuition. Human Behavior is such that trusting a person's Rational Analysis with all the supporting scientific evidence is already hard enough, what more, for another to trust a person's intuition.

Also, very few people know how to train and develop good intuition, and thus, can't differentiate or evaluate good intuition from bad intuition.

These are the types of things which I feel should be taught in schools and universities, because the knowledge here is the key to uncommon wisdom, but alas, this will not be the case, for a long, long time. Try convincing any professor to accept Intuition as an Equal Subject to Rational Analysis, and you have a big challenge on your hands.

Anyway, my experience is such that Intuition is very important, especially Good Intuition developed from Systems Modeling as informed by Scientific Evidence and Rational Analysis.

Ok, now that I've got the issue of Rationality & Intuition out of the way, let's get down to serious business of making money.

Market Anomalies I Don't Understand

Supported by Rational Analysis, my Intuition identifies the following Market Anomalies (Inconsistencies): -

• US Dollar should be weak, not at its strongest for the last few years, as it is now. Why? Because the US Government is printing money, even much more than ever.
• Oil Price should not be so low; not so fast, anyway. Crude Oil went below US$50 per barrel today.
• Gold should not be so high at US$750 per ounce, which does not seem to match with the price falls in other commodities, especially Oil.
  

Yet, the Price Movements continue to suggest Gold in a sideways movement, with increasing potential to go higher. From Rational Analysis, Oil is expected to rebound, and yet, it keeps dropping in price.

The US Dollar strengthening momentum seems to have abated somewhat, i.e. it is now see-sawing in more or less a sideways motion, with a slight strengthening bias, when it should be weakening.

Why?

The Price movements as depicted on the Technical Charts is not telling me the same story as my Intuition. Why?

I don't know. But, from many years of good experience, I trust my intuition, which is why I stay away from the markets. I haven't lost a single cent, but neither have I made any. But considering the world lost a few trillion US dollars in this month alone, I think I can live with my not making any money, and having lost none.

But defensive play does not buy the milk powder. So, what are we to do?

The Potential Winning Market Strategy - The Loonie?

My Intuition has been right more often than wrong in pointing me to the winning market strategy. If my Intuition is correct, Oil must strengthen once more, and the US$ should weaken at the same time.

From a forex perspective, one of the purest Oil play is the Canadian Dollar / Yen (CADJPY) Forex trade. For years, when the Oil Price was climbing rapidly, the Loonie (Canadian Dollar) strengthened against the Yen. However, when Oil Price fell, so did the Loonie against the Yen.

If the strengthening of the Oil Price may precipitate the weakening of the US$, then we need to also watch the USDCAD (US Canadian Dollar) Forex Rate.

Thus, my intuition points me toward the strengthening of the Canadian Dollar against both the US$ and the Yen.

Again, I reiterate that this is based on Intuition, not Technical Analysis nor Rational Analysis, so we need to wait for the Technicals to provide the right confirmational signals before trades are taken.

US$ Relationship with the Yen

But how will the US$ behave with regard to the Yen? CNBC has not been focusing its attention on the consistent and persistent weakening of the US$ against the Yen in recent weeks. The US$ weakened below 100 a few weeks ago, and is now at 94.5 Yen to the Dollar, which is a very strong Yen.

As a matter of reference, the USDJPY exchange rate was around 145 Yen to the US$ in 1997, during the Asian Currency crisis.

The key question is "What will happen if the Yen breaks below 90 to the US$? Sooner or later, US consumers are going to feel the inflationary effect of a strong Yen, especially once the deflationary effect of a weakened but stable Oil price wears off.

It should be noted that the Yen is also sometimes seen as the proxy of the Chinese Renminbi, which is not freely traded on forex markets.

Righfully, the Yen should not be strengthening because the Japanese Economy is also in deep trouble. However, the answer for the strengthening of both the US$ and Yen have been noted in my previous blogs, i.e. the Unwinding of Carry Trade, where the interest rate differential between the Japanese BOJ (Bank of Japan) rate and the Federal Reserve FOMC rate is now less than 1%, when it used to be 4% to 5%.

Will the Yen continue to strengthen? I don't know. Based on observations of more than a decade, the BOJ has always worked very closely with the Federal Reserve, and any strengthening or weakening of the USDJPY has always been based on what both authorities agree upon more than anything else.

So, what do the Fed and BOJ want in the future, assuming they will still be in control of the USDJPY forex market?

I think the Fed is testing the market whereby, it is encouraging US exports while deterring imports with a weaker US$ to the Yen. When it reaches a point where it starts to hurt the US consumers, or the BOJ feels that it is too painful for Japanese exporters, the Yen strength trend will reverse, again, in a managed, well behaved manner.

CONCLUSION

In conclusion, it is not possible to form a reliable opinion of the future direction of the USDJPY, which is why we will need to let the Price Charts tell us which trade to take, i.e. USDCAD or CADJPY, or both, in the future.

If my intuition is correct, and this current weakening of the Canadian Dollar is reversed, it will be the start of a new Uptrend for the Loonie. To catch the start of a new Uptrend and ride it all the way to the top is every trader's dream.

So, I would watch the Loonie very carefully. Hopefully, the LOONIE will make us a lot of MONEY. Haha.

I would reiterate that this market strategy is only based on my intuition, not Technicals. Wait for confirmational technical signals before taking the trade.

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 2008 of Praesciens.Blogspot.Com.

Tranquility is what the Financial Markets Are Experiencing Today

Dear Friends,

What the Financial Markets are experiencing right now, is Tranquility, with relatively small volatility, ahead of the Christmas Holiday. This is not a bad thing, for this Christmas.

God knows, with so much drama and trauma in October and November 2008, it is no wonder that the newspapers have not reported a drastic increase in suicide cases. In fact, in one email I received from a friend, there was a contrast of the two eras, between the 1929 Great Crash, and the recent October 2008 Stock Market Crash.

In the 1929 Crash, a number of well known Wall Street personalities jumped from their office windows. However, in this recent crash, the email depicted a number of protestors at Wall Street, possibly people who oppose the use of taxpayers' money to bailout financial institutions, or those who are upset with the mortgages crisis, carrying pickets with the message, "Jump, you idiots, jump!"

However, with bailout money forthcoming so easily, it is possibly the consumers and the taxpayers who have to jump in time to come.

But I digress. I was talking about the Tranquility of the Financial Markets today. The slow price movements of the Financial Markets can be depicted by this beautiful, serene song, "Opposition to an Arranged Marriage" from "The Butterfly Lovers (Erhu Concerto), performed by The Philharmonic of China.

The Erhu Instrument soloist is Xu Ke, while the Conductor is Mak Ka Lok.

I don't pretend to know Chinese Orchestra, but I do enjoy Chinese Classical Music, especially the instruments, Erhu and Guzheng.

I listened to a Soloist Guzheng played in a Chinese Garden in Suzhou and it was so fantastic, especially in the aesthetically pleasing surroundings of Suzhou Art of Gardening, which, in my opinion, is one of the best gardening art in the world. Of course, I have yet to visit the Chinese Gardens in Beijing, which I was told, also had its roots from Suzhou Gardening Art.

Best wishes,

Ooi

Amazing! Guitarist Playing With His Feet!!!

Dear Friends,

This year's Christmas is one of the toughest ever for some people. So, let me write an Inspirational blog to revive your spirits, especially if you are feeling a little down.

If you think "Life is Tough", watch this amazing video clip I found in YouTube. No one seems to know who the guitarist is, but did you notice he is playing the instrument with his feet?

What's more, he's enjoying himself thoroughly even though no one seems to be appreciating nor donating to his cause.

If you think you are handicapped because life has not been fair to you, think again. You can do it, if you keep working on it.

WE CAN DO IT! Yeah!!! Enjoy!

Best wishes,

Ooi

Tina Turner is here to provide us Inspirational Energy

Dear Friends,

I have been writing so many bad news into my blog that I think we need a "Lift Me Up!" Inspiration. I can think of nothing better than to listen and WATCH Tina Turner as she does Proud Mary.

There are two versions here. The first is a much younger Tina Turner with Ike Turner. It's very, very cool, and sure to bring up your energy level.

The second video clip is Tina Turner many years later (already a grandma), doing Proud Mary in a super charged energy level that makes us all shy of our own energy and enthusiasm level. I was amazed and inspired by her "Will to Live Life" so well.

In this video clip, Tina said, "People ask me when am I going to slow down, you know what I tell them? I'm just getting started!"

So, whenever you need a "Lift Me Up!" just watch or listen to Tina Turner's rendition of Proud Mary. Which version is your choice. Enjoy!

Best wishes,

Ooi

US Properties at US$250k to US$300k

Dear Friends,

Want to buy a nice property? What can US$250,000 to US$300,000 get you today? Check it out.

Best wishes,

Ooi

US$100 for a House with Land?

Dear Friends,

Some of you are probably thinking, "All of you Doomsayers, and Media are just sensationalizing the situation. Are you sure it's as bad as you say it is?"

Well, watch this video clip from MSNBC and make up your own mind. Can you really buy a House (4 Bedrooms) with Land for a mere US$100?

It's a beautiful house which for more than 2 years, it couldn't be sold, and thus, the owners are actually raffling (lottery) the house off, i.e. you buy a lottery ticket for US$100, and if you are lucky, you may just get the house for that price.

That's how creative people are becoming, to sell their house, even nice houses like the one in the video. Very sad. Heart breaking, but true.

Necessity is the Mother of Invention. As Hannibal said, "We'll either find a way, or make one."

Best wishes,

Ooi

Deflation Environment Confirmed - A Little Late Though

Dear Friends,

If you are still wondering what is happening in the economy and financial markets, watch this video report from CNBC Erin Burnett NBC Nightly News.



We are in a Deflation Environment, both Asset Deflation (House & Stock Prices Dropping) and now, Consumer Deflation, i.e. Consumer Goods Prices are dropping, although not as much as we would like it to be.

When in an Asset Deflation environment, adopt an Asset Deflation Strategy to manage your investments. I have written out a simple guide on my blog on Asset Deflation Strategy written on 12 October 2008.

Best wishes,

Ooi

Citigroup Lost 23% of its Value Yesterday - Why?

Dear Friends,

Citigroup lost 23% in one day! What's happening?

CNBC's Maria Bartiromo explains on NBC Nightly News that today's stock market is about "CONFIDENCE, or rather the LACK of it". She went on to say that "People do not have clarity about what banks have in their books"

In my opinion, the Short Term challenge is Confidence, but the bigger, more fundamentally structural challenges are

• banking losses aggravated by lack of transparency, and
  
• exponentially rising Unemployment

Can any Government solve these problems? The market wants the US Government to do so, but I think the reality is that it cannot be done. Time will heal all wounds, and Time for Healing will start AFTER reality sets in, and the world goes through the necessary pain. I'm not trying to be a doomsayer, or a sadist, but I really believe that's the reality of the situation, and trying to fight against it, adds new problems to an already complicated situation.

It is very sad when the reality of the future is a BLEAK Outlook.

Best wishes,

Ooi

US Stock Market Indices Outlook 081119 - Bearish All the Way

Dear Friends,

In my last outlook blog for the Dow Jones Industrial Average Index, Dow Outlook 081111 - Hopes of a Climb Back to Health Fading, I stated that: -

"The Medium Term Outlook for a "steady, well behaved, Climb Back to Health" Scenario is fast fading away, into a more sober, continued volatile, and difficult trading conditions of the 1948, 1969 Medium Term Correction Wave Scenario. This is the most consistent outlook with the Short Term Sideways Consolidation, and Long Term Bearish Outlooks, based on the price pattern movements today."

For the Other Stock Market Indices Outlook, S&P500, Nasdaq, Russell 2000 Outlook 081111 - Bearish Except for S&P500, I stated that: -

"The S&P 500 has the same outlook as the Dow, i.e. Short Term Sideways Consolidation, Long Term Bearish whilst Medium Term Hopes of a "Climb Back to Health" Scenario is fading.

We would trade the Nasdaq 100 and the Russell 2000 only on a Short Position Strategy, with a Stop Loss just above the latest Pivot High. If our Continued Downtrend Outlook for Nasdaq 100 and Russell 2000 is right, the Indices should not break above this Pivot High."

A week later, with the exception of the Dow (DJIA), ALL the key US Stock Market Indices, i.e. S&P500, Nasdaq 100, Russell 2000, have broken their Key Support Level set in last month's October Crash. The Dow is set to re-test its Key Support Level of 7882 as well, as it has closed at 7997.

With the high possibility of Margin Calls pressurizing the Dow, it doesn't look like this Key Support will hold, at least from an Intra-Day perspective.

Thus, our Dow Outlook for all durations, i.e. Short Term, Medium Term, and Long Term, is Bearish. It is possible that there will be persistent wild fluctuations up and down, but the odds of success is on a Short Strategy, for the foreseeable future, pending new price information.

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

Jim Rogers on the US Dollar

Dear Friends,

Here is a good video clip discussion between UK Financial Times' John Authers and Commodities King, Jim Rogers. He explains his view of why the Dollar is strong, and his outlook that eventually the Dollar will weaken.

Jim Rogers on the Dollar and Post Crisis Financial Order

One of the most important and amazing lesson we can learn is the humility of Jim Rogers to be able to say, "I don't know, and I probably will get it wrong" so easily, when the normal person has so much difficulty saying the same statement.

Best wishes,

Ooi

Earnings Expected to Be Weak for Tech Stocks until year 2010

Dear Friends,

Here is the Wall Street Journal video clip warning of the weak earnings of Tech Stocks. So, if you are thinking of buying Tech / Nasdaq, just note that earnings are expected to be bad till year 2010.

Best wishes,

Ooi

WSJ - Home Auctions Find Few Buyers

Dear Friends,

This is a very important situation to consider if you intend to invest in properties. There is a significant gap between what the banks want in auction prices and what buyers are willing to pay, resulting in only 3 properties sold, out of 23 properties auctioned in this video.

Usually, there will come a time when the sellers will decide that any amount is better than not getting the sale done, and this will result in severe "Distressed Selling", which will be the last phase in a Property Market Cycle. However, the last phase may last for some time, if and when it happens. So, do be careful, when you invest in properties today.

Best wishes,

Ooi

Dear Friends,

Here are three Wall Street Journal Video Clips that summarize the Real Estate situation in the US today.

The first video clip brings news of continued record plunges in Home Prices.

This 2nd Video Clip from Wall Street Journal explains what the US Government, mainly the FDIC is doing to help Slow Foreclosures, and whether it is working.

This 3rd and last video clip from Wall Street Journal attempts to explain "What the Housing Bottom Will Look Like?"

Best wishes,

Ooi

Why Paulson's Plan Won't Work

Dear Friends,

Here is a Wall Street Journal video clip of the Interview of David Ranson, (H.C. Wainwright & Co., Economics Inc.), by Simon Constable (Dow Jones Newswires Columnist) where Mr. Ranson explains why he is of the opinion that the Paulson Plan won't work.

In fact, he mentions the current Uncertainties plaguing the markets and the economy, and proposes the idea of Accelerated Bankruptcy, which is in conformance with the concept of Creative Destruction, a term first coined by Schumpeters.

Should the financial institutions that are about to fail be encouraged to fail? According to Mr. Ranson, this is the fastest way for the economy to recover. Does that make sense? Take the pain and move on, OR, fight and minimize the pain.

Be careful what you wish for ..... some wise man once said this. When financial institutions drop like flies hit by a nuclear bomb, will it be too late to regret?

To be, or Not to Be, that is the Question (Shakespeare).

In my opinion the US Authorities have to have a clear understanding of the situation before they can make a final decision. The authorities must be clear that despite the vast resources of the US Government, they cannot save everyone, be it a depositor, a mortgage borrower in trouble, or a financial institution.

Where the authorities draw the line, in terms of what is good for America, will depend on the ROI (Return on Investment), i.e. the cost benefits of a Rescue Plan. The key objective must surely be the most benefit for the least cost. Easier said than done, but unfortunately, this is the ONLY way to spend money wisely, what more in this case, hard earned taxpayers' money.

Best wishes,

Ooi