Dan’s Blog

Fixing the Market: Reinstate the Uptick Rule

Dan Calandro - Wednesday, September 28, 2011

Extreme stock market volatility often pushes the average investor into making bad investment decisions. "Panic selling" is a common term used to describe stock market selloffs. Rarely, however, is the term "panic buying" used to portray strong, triple-digit stock market rallies, as indicated by the DJIA. 

Panic goes both ways – in buys and sells – which explains why several days of bruising stock market losses are routinely followed by a couple of triple-digit market rallies.  Short selling is at the core of this extreme volatility. 

Successful investing is traditionally defined as Buying Low and then Selling High.  Short selling works in reverse order: Sell High and then Buy Low. Short selling is the act of selling first, and then buying low at some later point in time.   

In order to "sell short," an investor must borrow shares of stock they wish to immediately sell. An investment bank – such as Goldman Sachs, Merrill Lynch, and Morgan Stanley – "broker" the transaction between investors, both borrowers and lenders of stock. 

For example, the short seller borrows stock X from an investment bank and immediately sells stock X for $50. Three days later the stock market sells off and the price of A stock drops to $30. The short seller then buys stock X and uses it to repay the investment bank – keeping the $20 difference as profit (less the fees owed to the investment bank, of course.) 

Even today most people know of the vast Kennedy fortune. Joe Kennedy, father of John F. Kennedy, was famous for his stock market prowess. This is the reason President Roosevelt appointed him to be the Commissioner of the Securities and Exchange Commission (SEC). In 1938, as SEC Commissioner, Kennedy instituted what is known as the "Uptick Rule." 

The Uptick Rule limited short selling to stocks that have moved up in price – even if by just a tick. In other words, an investor couldn’t short sell a stock that was dropping in price. Only owners of stock could sell during market meltdowns. 

That’s the way it should be. 

Joe Kennedy knew the abuse that unbridled short selling could inflict upon the stock market. He made a king’s ransom doing it. But the roaring ‘20’s were over, and now he was working for FDR. Kennedy’s aim with the Uptick Rule was to minimize stock market volatility. The Uptick Rule does just that. 

The Uptick Rule reduces the number of speculators looking to exploit hostile conditions and/or fragile investors. By so doing, stock prices are under less downward pressure and volatility is reduced.  For some irrational reason, the Uptick Rule was repealed in 2007 under the Bush administration. 

This kind of crazy volatility that the stock market is currently experiencing is only good for Wall Street’s business and hedge fund traders. Wild swings in price create panic and increase transactions (to buy and sell). Panic can cause average or fragile investors to Sell Low during market meltdowns because they’re scared. It can also prompt these same investors into Buying High after the stock market "recovered" because they don’t want to miss a chance for big gains. 

Short sellers are once again at the epicenter of volatility – this time upward volatility. Since short sellers lose money if stock prices go up, they place cat-like focus on "the market" and wait for it to stop falling. Once it does, they all start buying to cover their short positions (to thus repay the stock that they borrowed.) This forces stock prices to move higher – like we’ve seen the past two days. 

Each time this happens, when investors panic and Buy High and Sell Low, they lose a piece of their wealth and Wall Street gets richer. Extreme volatility facilitates this.

Fix "the market": Reinstate the Uptick Rule!  

Until then, Volatility -- Get used to it!

Calm before the Storm

Dan Calandro - Friday, September 23, 2011

Stock market trading was insignificant today. What can we learn from it?

We can debate when the rocky road began for the stock market this year, but to me it began in late July. The Dow dropped 200 points on July 27, 2011. Let’s call that a flare. Why not? America was on a disastrous course for a long time, long before late July, but that’s when the stock market started to freak out.

Traditionally, the stock market is always more euphoric during the first half of calendar years. Reason: there is more to speculate about – 2, 3, or even 4 quarters are yet to be lived. There is plenty of room to speculate. The year has just begun.

But late in the third quarter (where we are now) and into the fourth quarter, there are fewer things to speculate about. Just a few months remain. The year’s almost over. And by now, everybody on Wall Street pretty much knows the score.

That’s why most severe stock market corrections occur in September and October. Fair valuation is most easily ascertained. Overzealous speculation can be swiftly corrected with just one quarter remaining. And so it happens. Consider the midpoint of the action zone to be "fair valuation" as shown in the picture below.

1551vDJIA-11top 

As you can see, the Average can’t hold the mid point – fair value, as defined by current and historic economic valuations. That’s the stock market predicting recession.

Now, recession is not new news if you’ve been following my blogs. Instead, this picture is another piece to the puzzle – another market fundamental pointing towards recession – another indicator of lower stock prices.

The weekend is a great time to take a breather and plan your next move. Prepare your assets for a rough road. If you need help, feel free to contact me.

Enjoy the weekend!

dan-

BloodBath

Dan Calandro - Thursday, September 22, 2011

All major market indicators fell today – the DJIA lost 3.5%, gold was down 4%, oil declined 6.5%, and the 15-51 Indicator lost 2.8%. This is what happens when amateur fiscal and monetary policies meet championship caliber threats. 

This is what happens when central governance treats symptoms instead of ailments

Is the world economy in recession? Of course.

The world’s largest customer is the United States of America. Free market spending is the driving force behind her dominance. That free market, as mentioned in many of my previous blogs, is in recession. And when the largest consuming market in the world (America) is in recession, then the largest manufacturing market (China) also contract. This causes trade activity to also decline. 

With less trade one needs less currency, less currency protection, and less fuel to transport goods to markets. That’s why gold and oil followed stocks into the basement today.  

Add to this another poor piece of information from the US Bureau of Economic Analysis, who announced today that personal income growth declined by 50% from the first quarter to the second. Consumers continue to fall behind all around the world. A sustained economic recovery cannot be had in such a condition.

Of course, none of this is new news (see my previous blogs.) The picture is simply becoming clearer to the Wall Street establishment – who remember, never saw the 2008 crash coming. If they are the first to know, they are always the last to say. Keep that in mind when making your investment decisions. (As an FYI, in disastrous market conditions some 70% of all stocks still have “buy” ratings on them.)

Today was no surprise to me. Stay tuned…

xRef:

Asset Allocation
Correction or Bear Market?

Twisting in the Wind

Dan Calandro - Wednesday, September 21, 2011

Once again the Dow failed to hold onto the action zone’s midpoint, dropping 284 points or 2.5%. The 15-51 Indicator lost 1.3%, with construction, industrial, financials, and energy leading the decline. 

One reason the stock market sold off today was the Federal Reserve’s announcement to employ “Operation Twist” – the act of selling short term duration bonds and purchasing an equal amount of long term duration bonds. The maneuver is intended to reduce long-term interest rates; this in hopes of reviving the housing market and spurring on long term investment. 

It won’t work. 

Interest rates are not the problem with the housing market (see yesterday’s blog.) They’re already historically low and dropping them another point or two won’t make the least bit of difference. This makes central governance look like a subprime mortgage borrower during the run-up to the housing crash. Refinance, spend more money – refinance, spend more money – refinance, spend more money; and then go bankrupt. 

Smoke and mirror monetary and fiscal policies are causing investor uncertainty and stock market volatility. This is what happens when governance addresses symptoms instead of problems. 

Also making news today was Moody’s rating service, who downgraded Wells Fargo, Bank of America, and Citigroup. This confirms that the currency crisis remains a global threat to investors – and that America is not immune. 

How strong is your portfolio? 

Review these blogs for more helpful information:

Contradiction

Truth

Need help?  Invite Dan to host an investor forum for your friends and family. 

Fixing the Market: Where to Start?

Dan Calandro - Tuesday, September 20, 2011

There is an old saying: a problem identified is mostly resolved.  It’s simply impossible to fix an unknown problem. That’s where we start. 

The problems with the American market are simple. It’s:

  • over-regulated
  • over-taxed, and
  • over-leveraged

This can be seen by:

  • lackluster economic growth
  • high unemployment
  • weak currency

In a nutshell, the free market has little room to operate, and as such, is in recession. What to do? 

Begin at the source of weakness; housing prices remain at rock bottom valuations and banks aren’t lending money. How can we fix that?

First, the Federal Reserve can stop paying banks not to lend. Yes. The Federal Reserve is paying banks 25 basis points on their cash reserves – in other words, paying them not to lend money (that’s their business, by the way.) And where does the Fed get this cash? They print it. 

We need to stop printing so much money (it makes for a weak currency.) Besides, giving banks free cash isn’t a great incentive to take risk and lend. Stop paying banks to hoard cash and they might start lending it. It makes common sense.

Second, minimize Fannie Mae and Freddie Mac’s role in the housing market. For example, right now the Dow is around 11,400 – down some 20% from its all-time high in October 2007. Home values, as defined by the federal government via Fannie Mae and Freddie Mac, are down 40% – twice the rate of decline for the Dow. 

Fannie Mae and Freddie Mac guarantee loans made by banks. Banks don’t loan money to consumers unless they have this guarantee. Many times Fannie Mae and Freddie Mac’s valuations are in complete contradiction to local governments assessments.  In my area, for instance, local government assesses my property value 25% more than Fannie and Freddie – which coincides with "the market's" rate of decline.  My local government clearly has it right. 

But it is not they who control money supply and the availability of credit. 

By establishing these guarantee values, Fannie and Freddie determine how much debt can be obtained for a certain piece of property.  By so doing, Fannie and Freddie essentially control the price of housing.  It’s like government price fixing. They did the same thing during the housing boom, when money (debt) was too easy to get and housing prices skyrocketed. 

Now it’s the polar opposite.  Money is impossible to get. This forces home prices down because credit cannot be obtained to purchase housing at higher prices – regardless of what a person is willing or able to pay.  

This goes against free market principals and has caused a huge contraction in other kinds of consumer debt – like home equity loans, credit card loans, and small business lines of credit. All of this is bad for consumers, housing, and the Market in general. 

My second recommendation to fix housing and banks -- disband Fannie Mae and Freddie Mac.

Third, fix unemployment! 

Stay tuned for that…

Strong

Dan Calandro - Friday, September 16, 2011

“The market” is up about 9% in the past twelve months.  But it doesn’t feel like it. Recent volatility makes it seem like a terrible year. Of course, most mutual funds don’t produce returns close to the DJIA. Mutual funds aren’t built for performance. They’re built to make Wall Street a lot of money. 

In LOSE YOUR BROKER NOT YOUR MONEY, I demonstrate successful investment by building a portfolio called the 15-51 Indicator (see its long term performance trend here), or 15-51i for short. 

The 15-51 Indicator is an above-average portfolio. Built on the strong foundation of my patent-pending 15-51 stock allocation method™, the portfolio consistently outperforms the Dow Jones Industrial Average. Stock selections were made using the method outlined in my book.   The 15-51i is an above-average portfolio -- not a great portfolio. The purpose of that portfolio is to indicate how stock market strength is performing and to produce above-average returns.  It's not intended to be a standard for greatness. 

The Dow is an average portfolio, and therefore produces average returns -- which over the past 12 months is 9%.   This, by definition, is "average returns." 

The 15-51 Indicator is above-average. It produced a 33% return – that’s 349% better than the Dow Jones Industrial Average this year. Here’s the picture. 

15-51i-1yr

That’s what strength looks like.  It's above-average. 

And that should be your goal.  Aim high.  Beat the 15-51 Indicator. 

Read my book and then use my portfolio builder to assemble a stronger portfolio than what your broker threw together.  Instant charting will show you how your portfolio performed over the past 1, 5, 10, and 15+ years.  See the amazing results! 

It’s time to Lose Your Broker.

PS: And contrary to what Wall Street would lead you to believe, past performance is indicative of future results. Above-average consistently outperforms average construction -- in the past, present, and future. 

Enjoy your weekend! 

What the Market Needs...

Dan Calandro - Thursday, September 15, 2011

Well, we know one thing for certain: When you raise the debt ceiling you are guaranteed to end up with more debt.   Whether or not President Obama’s most recent spending bill is a good idea is not worth debate. 

Since 2008 the US government has spent an unprecedented amount of money to revive the economy – increasing national debt by some $6 trillion. All we have to show for it is a 9% unemployment rate and these recent Wall Street Journal headlines: 

            Household Income Falls, Poverty Rate Rises

            Economists Raise Recession Odds, Doubt Fed Can Help

           

Too much debt can drive a country into ruin just as easily as it can destroy a subprime mortgage borrower – ask Greece, Spain, Portugal, or Italy. There’s no reason to argue what is already plainly clear: escalating national debt threatens security and investment returns. Besides, it doesn’t work. If massive government spending could solve economic woes it would have started to work by now (we’re talking trillions of dollars spent to date.) 

Investors should take note and approach investment defensively until these hostile market conditions change. 

But what needs to be changed? What will signal a major investment opportunity? 

Starting next week I will address this by beginning an intermittent blog series called, Fixing the Market, which will appear on slow news days, when nothing much changes in “the market.” Each blog will address an economic problem and offer solutions to correct course. These are the changes investors should be looking for.  They will signal a significant change in market condition and will create a robust environment for maximum investment returns. 

Because that’s what the market needs right now -- an attitude readjustment. 

Word of the Day: Jobs

Dan Calandro - Monday, September 12, 2011

The word "stimulus" has been completely dropped from today’s political vocabulary. "Jobs" is the word of the day.

But wasn’t that the point all along?

President Obama’s first stimulus package, known as the American Recovery and Reinvestment Act, had a specific purpose – to stop unemployment from reaching 8% by investing in "shovel ready" projects. But how long has unemployment been over 9%?  The "stimulus" clearly didn't stimulate.  

Under the guise of an American Jobs Act, today’s bill submitted by President Obama is nothing more than another crippling spending bill. Government spending of this ilk, dating back to the $700 billion forced through by President Bush just before he left office, cannot fix the problem of unemployment.—Can it temporarily plug a hole in a dike with dollar bills? Yes. But that’s it. It can't solve anything long-term.

How do we know for certain?

Since the 2008 Market crash, government has spent more than $4 trillion to correct the course of the economy – to "put America back to work" and to create jobs. That’s a long time and a lot of money, and still, unemployment hasn’t improved and the economy continues to be "fragile." If this kind of robust government spending program worked, it would’ve worked by now.  

Then why do it again?

What President Obama’s government is trying to do is spend its way out of the traditional definition of a recession (six consecutive months of negative GDP.) By spending $4 trillion dollars a year, the government has plugged a hole in the GDP dike that the free-market doesn’t have the capital to fill. This kind of recklessness (we’re talking trillions here) has stopped recession in the literal terms. But not in effect.

The free market is shrinking – it is in recession. That’s the real problem. More government spending will not fix that. It can’t. Nor is it meant to. This kind of government frivolity is intended to do one thing – increase GDP spending —to make things look like they’re better than they are.

President Obama is an intellectual. And he needs another $500 billion to continue the facade that there is no recession. That’s good for politics. But bad news for investors.

Stay tuned…

Always

Dan Calandro - Sunday, September 11, 2011

Remembering those who have loved and lost on this notorious day, 9.11.01.  And to the heros that ran to their aid. Godspeed! 

RaisingFlag

Confidence

Dan Calandro - Friday, September 09, 2011

Sep 09, 2011

I know, a Bernanke-Obama tag team is enough to shake anyone’s confidence. It certainly shook mine. The Dow lost more than 300 points today, which represents a drop of 2.7%. This is the negative mojo I mentioned in yesterday’s blog. Today was no shock to me. 

I saw both speeches yesterday. Bernanke gave little details about the “tools” he has at it his disposal to correct the economy’s course. He looked nervous, and sounded it, too. He even had the proverbial glisten of sweat across his forehead. Why? Because he, above all else, knows all too well that those tools he refers to are, at their very best, no better than a toothpick and a nail file in an effort to slaughter an oversized pig. Because that’s the case. And that’s why Bernanke looked so nervous. 

Ditto for President Obama, who with his speech last night, withdrew any life in “the market” that Bernanke left in. Obama reminded me of Lebron James during the NBA finals earlier this year. Do you remember that?  He fell flat and looked small.

And the stock market reacted to that with a 3% drop today. That’s what happens when leadership and talent come up small in big spots, like Obama did last night. 

What “the market” really needs right now is incentive, freedom, and encouragement. Not another lecture. Not more spending. Not more smoke and mirrors. Not more failed policies. Hey, if four trillion dollars of stimulus couldn’t fix things then another half-of-trillion won’t do it either.  Why bother? 

But that is what’s before us.

And until that changes you must have confidence in your asset allocations, in your investments, and your strategic plan. As I say in my book, it’s the only way to be comfortable and successful with investment.  If you need help, or have questions, email me

Enjoy your weekend!

Talk soon,

dan-


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