I’m a bull. I like to think the Dow will see 20,000 in a few years and 40,000 before I’m dead.
Sadly things don’t go just one way. For every bull run there is a bear market at the end.
In investing, apart from picking beaten down stock I like to back strong 50/50 cases where affairs are on a tipping point and it could go either way.
A little push one way and heaven, a little nudge the other: hell. If you can find such situations you can take a position and catch big profits if you are right while cutting little losses if you get the call wrong.
Taking this tack you let the market decide and then you jump on board for the ride. This is how booms and crashes work.
Right now the market is in such a state.
Here is the chart:
You really don’t have to be a charting wizard to worry about a correction at this point in the chart. With so much confusion in the markets and after such a long rally a correction would be practically natural.
However it doesn’t have to go that way.
What if the market breaks out and shoots up into open waters of resistance free rallying? Traditionally a market breakout is only a 20% chance. But what if it did?
It would mean a significant rally, a really very big move upwards indeed.
So here we are at one of those market cross roads.
Taper plus runaway US government suggests a correction is imminent and so does the chart. How can it go otherwise? The chart screams correction coming up!
Yet for now we can let the market tell us in advance what is coming up because if the market goes under 14500 its going to get ugly and if we clear previous highs by much, a rampant bull markets await.
Its going to be a nail biting time.
What do I think is going to happen?
Well I’m a bull, but even so I’m prepared to stampede for the exit. I want to see a weak Euro and Yen too because for a really big correction to kick off, those in the know will pile out of the dollar and that will be an early warning of bad news to come. Likewise a Nikkei 225 rally will be a good omen.
To top it all, October is a favourite month for crashes, so the bull in me is about to get a pretty good test of nerve.
Shutdown, shut-up
Shutdown to wilful default.
What a giant mess.
The amazing thing about the shutdown and threatened default is that it doesn’t have to happen to such an extent that if the US actually did default it would be wilful.
I write in my Amazon finance No1 Best Selling 101 ways to pick stock market winners that you should avoid political footballs, period. So it is ironic that the politicians have conspired to make the whole global economy one giant plaything. (I suppose though that’s not surprising.)
I don’t really want to get into the political rights and wrongs of this nonesense except to say this.
The core processes of Western democracies are based around the necessity of travel on horseback. The system it works under was founded and developed over two hundred years ago.
The system is like it is because it took weeks for representatives of remote communities to get to the seat of power where they would argue issues with little contact with their constituents.
That’s not the case today.
It is perhaps why democracies are starting to grind to a halt. Technology has moved on and the basic structure of democracy, its processes and meta-structures have been come tired and over run by new faster, nimble and increasingly more powerful parallel structures.
Looking at the gridlock and low esteem that the political process is held in the US and Europe it certainly looks time for reform to the process.
That aside:
The Federal reserve has bought $1.5 trillion dollars of debt during QE. Amougst other debt it has brought it has purchased a huge pile of treasury securities.
That is to say, in the government’s bottom draw there is $1.5 trillion dollars of its own debt.
This is part of the picture of how the Fed got to send $19 billion in interest to the Treasury in August for just a quarter.
As such the government could cancel some or all of the Feds treasury holdings and bingo, there would be no debt ceiling issues.
The key is cash in not part of the debt ceiling, so government cancellation or monetisation of bonds lowers the national debt within those terms.
That could be good, that might be bad, but it could and any number of other manoeuvres be done.
For better of for worse such manoeuvres would avoid “default.”
So the shutdown fight is just another run of “Tom and Jerry” and any default would be unnecessary and effectively staged.
It would be a terrible tragicomedy for America worthy of 5th century Rome.
When you take accounting and add politics, all things become possible, including default of a country with the global reserve currency and $1.5 trillion dollars in its back pocket.
TOM (week 3)
Tesla
If it looks like a bubble and acts like a bubble, it’s a bubble.
Tesla is a the new bubble stock.
There is a lot of money to be made and lost in a bubble stock, but the trouble is bubble stocks are for trading not investing.
Once a bubble is underway, in the short term almost anything can happen, but in the long term the outcome of a return to market normality is extremely likely.
That doesn’t mean you can’t make a lot of money out of the madness. Its just a very dangerous game.
Risk equals reward and bubble’s are immensely risky which is why there is reward to be had.
As such bubble stocks draw investors to them like the cliché moths to a flame.
Bubbles are lovely to behold.
Look at this delightful chart.
Lets go closer.
Fascinating.
What’s that burning smell, wow it’s me!
Of course the best thing to do is ignore these kinds of stocks but that sadly is not going to happen. The reason the stock has gone to the moon is everyone wants in.
Saying “avoid” is futile.
Saying Tesla’s stock price is too high is not the same as saying Tesla is not a brilliant company.
Tesla has done a great job.
The stock isn’t through the roof for nothing. You just have to see one of their cars on the road to want to own it.
It is so “lick-able” it looks like an iphone with wheels.
What did they do to the paint job to give it that opalescence? Or is that the new owners just polishing it 24/7. Who knows, we shouldn’t care. Perception can only be reality for so long.
We should stick to the land of comparative valuations and likely outcomes.
So Tesla is a great company with a great product, but is it a good value investment?
Lets keep that for later, but you can guess right off my opinion is no it isn’t. Is its stock going to rise?
Why not? Once “super star” status is achieved normal laws of the market no longer apply.
If Tesla wasn’t a super-star stock, it would be the easiest call in the world to short Tesla, but with the US markets bi-polar tendencies, this is the first thing to avoid doing at this stage. There is always plenty of time to short Tesla and it will be long time after it made perfect sense to do so. Super-star stocks can stay in orbit a lot longer then you’d ever guess.
So go long? Going long Tesla is purely a trading position, there is no long term reason to cling on to this company at these heady valuations. Not unless TSLA invents anti-gravity paint.
I know no one wants to hear this but Tesla is worth twice Fiat, the owners of Ferrari.
Tesla and Porsche are worth about the same. You could buy Peugeot five times over.
Should Tesla be worth half of GM?
The market thinks so and the market is always right. Right?
So how to play the stock?
Well first off, if you aren’t in, leave this one alone unless you want to play a high risk gambling game with your money.
Tesla is now pure speculation.
But if you are in and sat on a fat profit, this is what you should do.
Created a upward trend line you are happy with. One that if broken you would consider worry some.
When it breaks that line, or does anything that starts you sweating put a volatility box around the action. This box should be as wide as your confidence in the future of the stock. If it breaks down through the bottom level of your box then you should consider closing your position very closely.
It is that simple.
Why? As I explain in my, 101 ways to pick stock market winners, this gives you a clear forward looking triggers to tell you things have changed technically while reminding you where your concerns lay before things start to go off the purple path.
However what if you are on the side-lines drooling about missing all those Tesla stock profits?
For me its easy, I wouldn’t hold this stock because I simply won’t touch manically priced companies. However that’s no good for many, their finger is twitching to click the buy button.
So if you want to play here is my observation.
If you study the life of glory stocks you will see there is a lot more action to come for Tesla. That’s not to say its going up much more. However it could. I’m saying that the story of this company’s wild stock ride has only just started.
As such Tesla’s stock will be trader heaven for perhaps years.
So the thing to do is to study the past and note how these mad stocks pan out.
Here is Apple and Netflix to give you a flavour.
As a contemporary of the real Tesla, Mark Twain said, History doesn’t repeat itself but it does rhyme.
Sadly the future is likely to rhyme with, “gloom, trouble and dust,” but that cycle will most likely take a few years.
TOM (week 3)
Apple
So Ive been writing about Apple now for a few years.
You can read my prognostications over the years and they’ve been goods enough for me to remind my readers of them.
So what now?
Well this what the last this I wrote, saying Apple was going to follow the path of Microsoft in its post bubble life.
This is where we were then:
This is where we are now.
So we are still in line with this prediction.
I keep drawing this chart, which is extremely bearish and not one born out by the way apple has been performing, at least as far as the press is concerned. It will take something dramatic for this to happen.
The bull want to see this chart.
Funnily enough it kind of did this in 2007-2008 so its not utterly outlandish. However I cant see it myself.
Apple, the king of the stock market might not be dead but the new bubble action is with Tesla.
In the bi-polar US stock market you can go from Hero to Zero as any shareholder in Blackberry will tell you. Nokia with its great Lumina product sold to Microsoft for third of sales.( Disclousure: I don’t own MSFT but I might get a Lumina soon.) These recents pieces of history coupled with nothing much new from apple should be enough to keep anyone holding apple on their tip toes.
I feel the Apple as Microsoft thesis is a 50/50, the resurrection prayer a 20% chance and a slump 30%.
As such Apple is going to delivery up a rough ride for holders.
(TOM Week 4)
Gold
I’ve been a fan of gold for a long time. I don’t invest in it but I have felt sure it would rise hugely. I was write up to recently but now Gold is in the dumps.
I am tempted to buy the physcials at this point because gold is a nice thing to have in a portfolio and it pays dividends in the form of being lovely to actually be able to admire. Holding a tube of Kruggerrands in your hand will give you the same feeling as any accelerating sportscar.
However Gold does not look great for the near term. On a long term chart you could be easily looking for $800 an ounce. A bull case sees recent lows as just a correction.
The fundamental case is equally schizophrenic. I like to think that a large proportion of new gold production is at these current levels of spot gold prices. As usch you would think gold couldn’t fall by much.
The bears simply say there is a huge amount of Gold above the ground, so who needs new Gold.
The fact is this argument was true in the past when prices were rising but you could also point out that the price of mining Gold has also risen spookily alongside the price of Gold itself.
Is this because Gold has risen at all in real terms but the cost of doing basic stuff like mining has been where inflation has shown itself?
My point of view is not what is gold going to do, even though I think it will be strong up to Xmas but where it will be in 5 to 10 years.
I believe it will be significantly higher.
This is because debt to GDP of the west has to get back to below 60% of GDP and the only way this is going to happen is via the depreciation of money over a 5 to 10 year horizon by half.
As such you wont make a real increase in your wealth by holding gold by you will stop your wealth being halved by stealthy inflation.
Passive investing won’t save you from this pillage by inflation, but active investing will and Gold is most certainly risky enough to counted as active.
Holding gold is a pain and paper Gold is asking for a different kind of trouble, so in the end the main draw back for putting a sizable chunk of your wealth into Gold is a question of custodianship.
Happily safe deposit boxes are cheap.
1st world v Developed world
TOM not for publication in reserve
What if I told you we were in for a huge equity rally?
It is much easier to predict the past than the future, so it isn’t such a great idea for a pundit to write like that.
However you want to hear big calls and the direction of the market is the key one.
We could be sat right on the very rim of a nasty correction as I write this because the market is high.
If it rally much on from here it will be in blue sea of no resistance. The market will have entered the magical phase where new market territory is broken.
As such it should pull back alongside the upcoming taper and the US shutdown and tilt into the abyss.
I have to be prepared for that, but I cant help thinking we are on our way over the next few years to 20,000.
The idea is simple, the developing world booms at the temporary cost of the developed world. The tables then turn. Long term this is a virtuous circle, one that will see equalisation. This is what globalisation is all about. However life isn’t smooth and economics is cyclical.
We’ve had the developing world boom and now we a firmly in the bust phase. The other side of the coin is that the developed nations are in an upswing having suffered over 5 years of economic misery.
The thing about booms is they happen from low points, so as soon as the bad news is out of the way good things start to happen. Yesterday might be recession, but today things start to go your way.
A rally starts the very next second the bottom of the fall is reached. The west has passed its bottom.
Meanwhile the developing nations have passed their peak. The Hubris is long gone. Of the BRIC countries only the Russians are not in a mess.
Since I wrote this things have not got better.