TSX Crash

[Peculiar_Investor]

Are you sure that US budget deficits are bad for the stock market? I'm currently reading "The Only Three Questions That Count, Investing by Knowing What Other's Don't", Ken Fisher. He is a known investment manager and Forbes columnist.

His Question 1 is: What do you believe that is actually false?

In the chapter on this topic, he states one of the biggest myths is "the Federal Budget Deficit Myth". By reframing the question and looking at the Federal Budget Deficit as a % of GDP, he shows that Budget Deficits are good for stocks.

He offers a good presentation of this argument, and I'm tempted to agree with his reasoning.

Just to complete the list of questions.

Question 2 is: What can you fathom that others find unfathomable?

Question 3 is: What the heck is my brain doing to blindside me?

I'm not fully convinced on all his logic, but it is a good read and challenges the reader to examine their own thinking and investment processes.

[sweedy]

Subsequent to Sep 7, 2001 the TSE reached a minimum on Sep 24, 2001.
That's a period of 17 days.
Conclusion? The TSE will reach its bottom in 17 days.

Let's lick our wounds ... and relax.

Now I am scared. Didn't TSE reach a new low (more than 10% lower than in Sep 2001) one year later in Sep 2002?

[agape]

In the chapter on this topic, he states one of the biggest myths is "the Federal Budget Deficit Myth". By reframing the question and looking at the Federal Budget Deficit as a % of GDP, he shows that Budget Deficits are good for stocks.

Short term, yes. Long term, no. Sooner or later it's time to pay the bill.
Without consideration to fiscal policy, which amounts to a "reshuffling of the deck" , deficits are inflationary and put great pressure on the currency.
When that debt is foreign owned, that can lead to lower bond prices based on perceived higher risk and the demands for higher rates. The eventuality is that it is not good for stocks.

The author may be right, but only on the basis of a short to medium horizon. He may also miss the essential point that modern currencies are debt instruments (IOU's) , in spite of the fact that they are used (and thought of) as assets.

The market is at a point right now that it must follow the banker's creed of "inflate or die". I expect that we are going to see some potent inflation which stocks may react to positively until the market sees through the paper charade. Maybe it sees the charade already.

[gummy]

sweedy:

Now I am scared. Didn't TSE reach a new low (more than 10% lower than in Sep 2001) one year later in Sep 2002?

Uh ... yeah.
Since history repeats itself (don't it?), that means we're in fer a bumpy ride, eh?

Check out:
http://www.gummy-stuff.org/historical-compare.htm

[parvus]

I posted this in soapbox, but thought it might be useful here (but of limited use, since it's only the DJIA). It's from yesterday's NYT.

[gummy]

Neat charts!
We done worser in the Great White North (this century):


Mebbe we should be happy with the recent downturn, eh?

[Ronatola]

I would like some advice on how I should re-invest my RRSP $ assuming that a stock market crash will occur. Currently most of it is in equities.
I would like to split my $ up into 4 portions.

I currently have my rEsp setup in a couch potato portfolio as follows...

ISHARES CDN DEX UNIVERSE BOND INDEX FUND-CAD 36.721%

ISHARES CDN MSCI EAFE 100% HEDGED TO C$ INDEX FUND UNIT-CAD 18.072%

ISHARES CDN S&P 500 HEDGED TO CDN DOLLARS INDEX FUND-CAD 18.138%

ISHARES CDN S&P/TSX CAPPED COMPOSITE INDEX FUND-CAD 19.934%

Is this a good setup? I don't assume so, since in a crash the indexes will fall right?

Should I convert it all to cash/bonds/gold?

[arnyk]

Ok straight up, let me say that nobody knows for sure that anything's going to happen.

Now, if you assume stock markets will crash, the optimal strategy is to short those markets.

[Ronatola]

Ok straight up, let me say that nobody knows for sure that anything's going to happen.

Now, if you assume stock markets will crash, the optimal strategy is to short those markets.

Arny - What does 'short those markets' mean?

[scomac]

Arny - What does 'short those markets' mean?

A short sale is to sell securities on the open market that you don't own. As you might imagine, selling something that you don't own is a high risk strategy because you must buy these securities back at a later date. What you are doing in essence is betting that the security you sold will go down in price. Now all of this is irrelevant because you can't margin a registered account so you couldn't do it even if you wanted to.

Stick with the "Couch Potatoe" portfolio that you have set up. This is the best way to ride through the volatility that the markets are currently experiencing. Don't make any big bets on what you believe the market will do in the short term because no one can predict the future with accuracy on a consistent basis. If the markets go down, then you might need to rebalance your portfolio at some point. You could also add some additional funds if they are available so that you can take advantage of the lower prices. Either way, you need to stick to a disciplined investing approach where you add funds when available, rebalance when necessary and ignore the noise in the marketplace.

[arnyk]

Short selling is a way to make money when things go down in value. Say a stock is trading at $100 today. Simply put, you borrow shares of this stock from your broker, and then immediately sell them at $100. Later when the stock crashes down to say $50, you cover your short or repurchase the shares at $50. You then return the shares to the broker.

Your profit is $50, since you initially sold the borrowed shares for proceeds of $100, and then repurchased at a lower price of $50, leaving you with $50.

Anyways, I wouldn't recommend doing anything you're not comfortable with. A couch potato setup is a solid, low cost long term strategy.

[arnyk]

Yeah what Scott said, listen to him he taught me everything I know.

[mw]

Short selling is not for those who are not nimble. Generally if you have to ask you aren't ready for it. Your losses can, theoretically at least, be unlimited. A margin clerk will see that they are not, but you won't enjoy the phone call.

Another marginally safer alternative is to add short exposure via a short ETF, one that inversely mirrors an index or sector. Personally I believe these are fabulous capabilities that Canadian RRSP investors have needed for many years. I am a heavy user of such products, I am a market timer with many years of experience. I know my limitations and have a good sense of market direction. The former is more important than the latter.

scomac's advise is good; to that I would add if you are interested in market direction or hedging or any topics along these lines that you do some research / get educated well before the eve of the crash. When the crash is upon market participants (now, next year, decades hence - they occur all the time) its too late to be making such decisions or stepping into the fray with a new untested (for you) strategy.

After all, depending on the nature of the decline I might be there buying whatever you are selling.

That said, my own opinion on medium term market direction is not favorable for the long side. However I watch the markets virtually all day long and actively manage a number of portfolios. Its a full time activity for me - my job. If I need to change that outlook I can react virtually instantly. Most folks aren't able to perform in that manner... they have lives and other jobs.

Whatever you do, gain an education first... and I realize that a fuse you are lighting by asking the question.

[blonde]

The 'RULES' are 'different' in the Global Economy.

Do not be surprised to learn that there ain't NO free lunch. However, the opportunities are better and bigger than ever before...It's ALL about MONEY...MEGA-Money.

My guiding principles for 'Success' draw the road-map for Real-Success...in this particular case, focus on principle #1 and #3...100% committment to 'ems is total disaster...I wonder why!!!

'ems the breaks...suck is life in the fast-lane...eh!!

[arthur]

Analyst with a pretty good track record predicts major stock market crash around October, over 20% decline.

Inflation will force Fed and ECB to raise rates, causing a major sell off, plus more details that emerge in the sub prime fiasco.

Sold my HXU and HEU, will hold my golds, may sit out for awhile???

Yeah, Market timing, I would rather crystallise gains.

[mw]

RBS is late to the party. An "analyst" here started a thread 3 weeks ago, verbalizing out loud what has been discussed for longer.

The Upcoming (circa) Summer 2008 Market Crash (May 24)

Short financials week of May 2

First warning on Transports May 20.

Dow Test of Top warning, May 20

May 20, warn about rising wedge and lay out target (spring lows)

May 23 I reiterate in a forum here that GE is headed lower.

I've always seen potential in GE... to go lower. It would not surprise me to see it at 27.50 in the next little while.

Am told "no way".


28.20 at this writing and still pointed down.

May 22 - I present quarterly charts with deep targets (aka the RBS call today). Speculation; but not impossible.

June 10 - KO rockets up and I go short.

A couple minutes earlier wish had looked at it. Perfect. Selling here break 56.46... not a fun place to do it 13:33:02;

KO is now 53.34 at this writing. Note the price quoted above is a typo; was a break of 58.46 that triggered my trade. Still short.

My point in posting this diary re-cap is that the signs for the broader market (not Canada's distorted TSX) have been there for weeks. Since early May noted financials were headed lower again and I nailed the Dow swing peak. So far I've been unwilling to consider a lasting bottom is in.

I do not believe that Canada will be spared from this; in other threads I've detailed the weakness under the covers of the TSX.

Despite pounding the table on this theme I am careful to remain detached from the idea emotionally; otherwise one can get too wrapped up in a trade to detect the bending of a trend when it ends.

Minor typo edits.

[eezee]

HEY GUMMY, what does your uija board, er spreadsheet say ?? You were dead on in Jan.

[gummy]

HEY GUMMY, what does your uija board, er spreadsheet say ?? You were dead on in Jan.

I reckon if I guess often enuff I'll be right once in a while, eh?

[mw]

Dow is off ~ 1130 points since spring high failed test of top, or almost 9%. So far the selling of last few weeks has been more or less orderly. Not a crash, but headed that way until proven otherwise.

Today US financials revisited the spring lows.

Look to NDX / Nasdaq as the tell (and RIM here) - it, and a liberal Energy weighting, are the primary sectors holding the SPX up from revisiting the spring lows.



There is almost certainly at least another month of lower prices. Is there another quarter? Dow and SPX are not far from setting a second down quarter (end of June). That is unusual. Last time a major sell off resulted in two down quarters (initiating down swings on the quarterly chart) was back in 2000.

Financials have been going down now for 4 quarters with little respite. Maybe that means they are due for a break. Perhaps that means broader markets recover or at least go sideways. I doubt it means a new stable uptrend, not from here.

[randomwalker]

Analyst with a pretty good track record predicts major stock market crash around October, over 20% decline.

Article in question


"The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks. A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist."

http://www.telegraph.co.uk/money/main.j ... rbs118.xml

[westinvest]

Dow is off ~ 1130 points since spring high failed test of top, or almost 9%. So far the selling of last few weeks has been more or less orderly. Not a crash, but headed that way until proven otherwise.

Today US financials revisited the spring lows.

Look to NDX / Nasdaq as the tell (and RIM here) - it, and a liberal Energy weighting, are the primary sectors holding the SPX up from revisiting the spring lows.

(many technical charts deleted)

Forgive me, but I was under the impression that your technical analysis would have one "home post" here on FWF. It seems I'm wading through your charts and trends and wisdom on more than a few topics....

[mw]

No, I did not state that I would limit my discussion of any topic to one forum nor do I recall ever stating that I would confine the posting of charts, images or any non-textual information to any one area.

I did say that I would avoid putting many short term trade ideas in What did you buy, What did you sell forums, and that I have most certainly done.

I've gone a step further and, mostly, moved most posting of market analysis charts and discussions to two threads which I've created. I can only assume from the readership of those threads that some folks are finding value in either the text or imagery or both, or are at least getting a chuckle tossed into their day.

Charts are used in every aspect of market analysis, from evaluating and presenting economic metrics such as CPI right on down to price. I bet you a nickel that the Royal Bank of Scotland used charts extensively in determining what call to make and when to make it.

If I have something useful (subjective I know) to say regarding a particular sector or equity, and wish to post in the relevant topic area per the forum guidelines, I should hope that there are no restrictions as to what I can contribute other than politeness and appropriateness of topic. I certainly do not see the value in creating a mirror topic called "KO (Symbol-KO) The Visual And Text Topic", or "GE In Pictures (Symbol-GE)", when there are already existing topics with on-going discussions I wish to contribute to.

[lilbit]

Thank you for your contributions, mw. They expand my understanding of what is happening here, and I am learning a great deal.

[desk4811]

What inflation? Canada's central bank just said inflation is at 2.2%, with core inflation at 1.5%, hardly numbers to exclaim 'the end is here', RBC would be quite happy to see nervous people sell their stocks and hand them their money. Their CEO wants a bigger bonus and a cash infusion is what's needed. Don't pay any attention to their 'predictions'.

[mw]

Desk: RBC did not make the call, it was RBS - Royal Bank of Scotland.

As for inflation... its there. Its growing. Its only a matter of time. Canada lags for a number of reason; real inflation measured properly elsewhere is quite clear... and I'm talking western countries, not emerging markets.

Furthermore the decision to ignore non-core is a political decision as much as it is one of trying to avoid noise.

It makes sense to avoid including, fully, food and energy inflation IF they are moving sideways - in other words, movement is noise.

It doesn't make sense to ignore food and energy price inflation *IF THEY ARE TRENDING*, which they most certainly are.

Spend some time looking deeper at the issue than the few words you might see on the news, and tell me you can honestly come to a different conclusion.