Investing Trading Articles
November 19, 2013 - Prepare for More Financial Bubbles by Market Authority
The macro-world has been abuzz the past few days about comments made by Larry Summers on Nov 8th at the IMF Research Conference. Summers, once Treasury Secretary under Clinton, was in the running with eventual-winner Janet Yellen for Bernanke’s soon-to-be-vacant job as Fed Head. Although Summers wasn’t selected for the job, he still remains a thought-provoking policy expert.
The most talked about part of the speech is his suggestion that our economy cannot achieve full employment without the existence of some type of investment bubble. Take a look at this chart of US Unemployment rates going back to 1948. In the last 30 years, you can see each decline in unemployment was accompanied by a bubble of some magnitude.
1980s – Savings and Loan funded junk bond and mini-housing bubble, followed by the early 90s recession.
Fed response: Ease monetary policy.
1990s – Tech bubble
Fed response: Ease monetary policy
2000s – Housing bubble
Fed response: Ease monetary policy
2010s - Another housing bubble? Stock market bubble?
Fed response: Are you getting the picture?
The Fed applies the same remedy to every financial crisis. And the deeper the crisis, the stronger the prescription must be. And the stronger the prescription, the higher probability of inflating another bubble down the road.
Right now, Fed Funds at 0% isn’t even strong enough to get the economy moving and decrease unemployment. To add even more strength to the prescription, the Fed buys $85bln/ month in Treasuries and Mortgages to add more liquidity to the financial system.
Larry Summers is now arguing – even though Fed policy has been more than accommodating and partly responsible for one bubble after the next- Were there warning signs that the Fed missed? And if you thought the economy was overheating, where was the inflation during the housing rally? The point is, if the Fed wasn’t seeing inflation or a high degree of speculative buying, why take the foot off the gas if the employment situation is improving?
The Fed’s dual mandate is to maximize employment and stabilize prices, not to restrain speculative bubbles if it’s not associated with inflationary prices.
My view on bubbles isn’t as sanguine as common opinion for a couple reasons:
1. Yes, some people lost fortunes on the tech and housing bubble, but many also made fortunes. If you are flexible with your investments, you can make money on both sides of the bubble. I know plenty of traders that profited from both the rise of the tech bubble and the decline.
2. And, more importantly – macro bubbles are a function of capital inflows and are bound to happen somewhere. If the tech bubble didn’t happen in the US, it would’ve happened somewhere else.
So think about that the next time anyone criticizes the tech bubble that brought about companies like Amazon, Google, and eBay. Would you rather have them founded by the Chinese?
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November 05, 2013 - Using Fundamentals and Technicals to Build a Better Trading Strategy by Market Authority
There are two ways we value investments – fundamentally and technically. Both play an important role in executing profitable trading strategies. I’m going to give you a brief overview of each approach and then show you how the strategy uses a mixture of both to evaluate trading ideas.
Fundamental analysis is widely known as the cornerstone of investing, and the greatest fundamental investor of our time is Warren Buffett. From investopedia.com, fundamental analysis “is a technique that attempts to determine a security’s value by focusing on underlying factors that affect a company’s actual business and its future prospects… The term simply refers to the analysis of the economic well-being of a financial entity as opposed to only its price movements.” Fundamental analysts look at metrics such as revenues, profits, debt ratios, and the change over time in these metrics to determine whether to make an investment.
On the other hand, technical analysis looks at past prices and volume to predict future activity. The technical analyst, or chartist, doesn’t take into account the intrinsic value of the stock, but is more concerned with the locations of buyers and sellers in the past.
If you were at a grocery store, the fundamental analyst would be examining each food item before determining what to buy. The technical analyst would be sitting at check out monitoring what everyone was buying and then make an investment prediction.
Now both of these approaches are important in determining when to buy, sell, or hold. However, your time frame is what determines whether you rely more heavily on fundamentals or technicals.
Technicals are more valuable to investors with shorter time frames, while the fundamental investor can sometimes wait years before his investment pans out.
Since we have short time frames (5 day holding periods)- we first choose stocks with strong technicals. Stocks that have been in a consistent uptrend over various time frames. These stocks have the highest chance of trading higher in the next 5 days. A chart that looks like Delta Airlines (DAL)
Witness how DAL is consistently higher over various time frames (1 month, 3 month, 6 month). This is indicative of a shift in investor sentiment and a good predictor of higher prices in the short-term.
However, technicals aren’t all that matters. The system also looks for stocks with growing fundamentals to match the growing stock price.
Using DAL as an example, here are the fundamental trends in the stock that are pushing this price move…
1. Mergers have made the remaining airlines more efficient and profitable.
2. Capacity cuts.
3. Price wars are over.
4. Strong traffic.
Even after the big run-up this year, DAL is fundamentally cheap as it’s valued at just 8x next year’s earnings.
This is a lower valuation than competitors like United (10x forward earnings) and Spirit (15x forward earnings).
As you can see, a profitable approach utilizes both methods of looking at investments.
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