Canadian Money

DJUA and Nasdaq Indexes..."Canaries in the coal mine"?

2010-02-23T10:18:00.001-08:00

Sometimes one market index will lead the others in or out of a longer term trend. At this point in time the Dow Jones Utility Average has broken below its lower channel line. The Nasdaq Index has also done the same thing.

The other main US Indexes and the Canadian TSX Composite are close to doing the same. This may or may not turn out to be an important market turn but it is a heads up and the evidence is accumulating to support this conclusion. These two breakouts are consistent with other market price action I am following.

Important Market Downturn today? Feb. 18, 2010

2010-02-18T22:46:00.000-08:00

Short Term Forecast

A number of signals are suggesting that the recent market rally from the lows on February 5, 2010 for the TSX Composite and SP500 Indexes may have ended and the downtrend that began at the peak of the 10 month rally off the March 2009 lows will continue.

Dow Jones Ind Aver...February 12, 2010

2010-02-14T20:13:00.000-08:00

The DJIA appears to be doing the same thing as the TSX Composite Index north of the US/Can boarder. A well defined narrowing triangle pattern followed by a break out to the downside.

If I'm reading this correctly...the buy and holders on both sides of the US/Canada border are in for a very unwelcome surprise over the next number of months.

I won't speculate on the ultimate bear low or how long it might take to get there. Just that I'm expecting an ultimate bear low somewhere below the March lows.

TSX Composite Index Short-Term Expectation...February 11, 2010

2010-02-11T10:33:00.000-08:00

Every once in a while I stick my neck out and make a short-term market forecast. The TSX Composite Index has a short-term wave pattern that has the earmarks of an index that will be making new short-term lows. The rising, so far, triangle shaped pattern with overlapping waves... suggests that the buyers are losing ground to the sellers. The probabilities favour the index dropping below Friday's low near 11,000.

TSX Composite Index February 1, 2010

2010-02-01T20:41:00.000-08:00

An update on my last post.

The TSX index continues to look like the 10 month rally ended on January 11 at 12,070. The US SP500 is similar. The details of the waves since the possible end of the rally are consistent with what one expects following an important downturn. Now...the market can always do something different but so far it continues to look like the longer term trend has changed from up to down.

World Stock Markets Looking Weak January 28, 2010

2010-01-28T08:24:00.000-08:00

I continue to study the market charts looking for more clues as to what is going on. My main tool is the Elliott Wave Principle (EWP). I also use other forms of Technical Analysis. I do not ignore the fundamentals.

The results of my review continue to indicated that the bear market will most likely continue below the March 2009 lows. The index charts for Canada, the US and Japan are all very similar and tell me the same story.

I can't say how much lower the stock markets are likely to go but the situation continues to have the potential to develop into another 1929-32 bear market degree of severity. The loss during the 1929 bear market was about 89 percent. For comparison, the current bear market was closer to a 60 percent loss at the March 2009 lows.

I only refer to the 1929 bear market to give people something for easy comparison. My analysis is based on a great deal more data than one particular bear market. I successfully recognized the approach of the bull market peak using the EWP and this was not the first important market turn that the EWP allowed me to recognize.

If we do see a 1929 type scenario, investors who currently subscribe to the 'buy and hold for the long term' are risking holding shares or mutual funds that may take 25 years or more to recover back up to the bull market peak (2008 for Canada and 2007 for the US).

A few comments on the economic situation and human psychology

The news from official reports (economists/government etc.) are anything but rosy at this time. Governments continue to be worried. And, many investors recently burnt by the unexpected bear market slide down to the March 2009 market lows remain nervous at this time. Many continue to be sitting in a relative loss position.

I speculate that any relatively fast downward market moves at this time may lead to a panic that will be comparable to, or worse than, what we saw leading down to the March 2009 lows. This is what occurred in the 1929 bear market. Believe it or not, this is normal market behavior under the EWP. Bear markets frequently exhibit three distinct legs, one down, one up and one final down move. This was the case in 1929. After a very strong rally of about 50 percent on the way down, the floor fell out of the market for the second time taking it to the ultimate 89 % loss bottom.

With us humans we tend to think and act with a herd psychology, especially when we are afraid of something. If a lion grabs a Gazzel at a water hole the rest of the herd panics and runs for safety. People act in a similar fashion in the stock market.

I wish I had better news.

TSX Composite Index, January 21, 2010

2010-01-21T22:08:00.000-08:00

The stock markets may be near an important junction. The one year chart for the TSX Composite Index shows the rally since the March 2009 low. An impressive increase over a relatively short period of time. Without getting into a lot of detail....the circled breakout below the trendline has the potential to turn out to be an important market downturn. Other indexes in the US are at a similar juncture. We could see just a large temporary downturn in a continued uptrend or the bear market may continue to some point below the March 2009 low.

S&P 500 Index, Elliott Wave Count

2009-03-19T22:55:00.000-07:00

I am posting one possible Elliott Wave Count for the SP500. To keep things simple I have labelled two cycles with black being the higher one and red being the lower one. If this wave count is correct, the index will continue to make new lows after the current rally has ended. The green line would be the extreme upper limit of the current rally. The irregular wave two would explain the apparent seven waves in the leg down from early February to early March. The EWP only allows one to see "possibilities" and as always this is only one of the possibilites at this time.

S&P 500 Index...a 580 % rate of return

2009-03-16T20:03:00.001-07:00

During a good year in a strong bull market one might see a 20 percent net gain. As one lengthens the period of time, the percentage gain per year drops. For a good 5 year period the average year may be closer to 15 percent per year, compounded annually.

Taking an even longer historic view, if one goes back to the 1930s time period for the Dow Jones Industrial Average, the annual equivalent rate of return over about 80 years is in-the-order-of 3 percent to 6 percent per year. The 3-6 % spread comes from using peaks or lows at both ends. These numbers suggest that the longer one is invested, the more likely they are to see lower returns of rate.

At the other end of the rate spectrum, consider the market rally over the last 10 calendar days. The media has been focusing on how the markets have risen for the last 5 trading days. This rally has produced a very impressive short-term rate of return.

The SP500 Index rose from a low of 667 on March 6 to a high today of 774. This was a point gain of 107 points over the starting level of 667. A total gain of 16 percent over 10 calendar days. This is equivalent to an annual gain of 584 percent per day. The two ends of this spectrum are 3 percent and 580 percent. Interesting numbers here.

Based on nothing more than the 500 % + unsustainable rate of return recently we should not be surprised to see the markets drop significantly over the next few days.

March 6th SP500 Rally Update

2009-03-16T09:33:00.000-07:00

Following up on my post of March 6th , I am posting today's chart for the S&P 500 Index. The rally that began at that time continues to climb.
For anyone familar with statistical probability, ask yourself what are the odds that someone could have predicted this rally, on the day it began, if the stock market is really just a random walk. I know it is not an impossibility with a random walk but keep in mind here that I do not make a lot of these forecasts. I am not a roulette wheel being spun 7 days per week for years on end. Its quite a different situation. Very few trials here.

As I monitor this rally and ponder my trading decisions I am now trying to see where this rally might end, in terms of it's upper extreme limit. Strong rallies like this one are always temporary, at least in the short-term.

The end of a bear rally, if I am correct in this longer-term expectation, is always harder to call than the start of the rally. My crystal ball is not that clear. A degree of uncertainty is something one must always live with when forecasting the market. The degree of uncertainty varies over time.

There are several possible upper limits, the closest one being near 810. As always, the market will decide if this limit is the most appropriate or not. It all depends upon how much bullishness remains out there in stock market land.

Financial Advisors are Learning

2009-03-15T13:19:00.000-07:00

I am starting to see signs of the rosy picture painted by those who give financial advice change. A few years ago the typical story was ‘invest money in the stock market if you don’t need it for 5-7 years’. Sound familiar? Now, more and more, I hear them saying things like ‘if you have a time horizon of a few decades’ etc.

The undeniable market history, coupled with the severity of the current bear market, is forcing the financial advisors closer and closer to seeing how the market really works. I expect a lot of them are reviewing and rethinking what they were taught in financial advisor seminars etc. I also expect that the majority of them are also taking a big hit on their personal finances.

It will be interesting to see what their literature says a few years from now.

Predicting the Random Walk?

2009-03-11T08:18:00.000-07:00

In my post on Friday, March 6th I discussed the possibility of the start of a rally for the SP500 Index. The upward turn at level 667 did develop into a relatively significant rally. I have circled the rally on the updated chart. It will be interesting to monitor to see where the market goes from here.

The success of this prediction may be viewed as possible evidence that the stock market is not just a random walk. That does not mean that there is no randomness in the stock market.

A Random Walk and Black Swans

2009-03-09T09:42:00.000-07:00

Statistical experts say that stock price fluctuation over time is a random walk. If that is true , then why does the market increase in value over time?

I calculated the annual equivalent compound return for the Dow Jones Industrial Average from the low of 41 in 1932 (after the 1929 crash) to the most recent low of 6440 in 2009. It comes to about 6.75 percent compounded over 77 years. In other words, $1 would have appeared to have increased to $157 dollars.

The starting point and ending point of these types of calculations will make a relatively large difference. For example, if I use the 1992 peak of 381 and compare it to the 6,440 low in 2009 I get a an apparent annual compound return of only 3.75 percent. Yikes...put my money in saving bonds!

However, we should view this apparent increase as "an illusion" due to the effects of inflation over the last 80 years. We know that $1 in 1929 or 1932 bought a lot more "things" than $1 buys today in 2009.

If we subtract inflation from the stock market long term increase then prices may not have really gone up at all.

Another thing that occurs with a stock index is that stocks that drop in price below a certain minimum threshold value are periodically culled from the index and replaced with the lastest hot stocks. That's a little like dead people in a study group being placed with new live ones. This factor may also contribute to the apparent increase in the index over time. The real market increase may be lower than what the indexes suggest. The index was never designed to model the growth in the stock market.

With a random walk, we can say that if one waits long enough the true value of the DJIA can be expected to return to the starting point from time to time.

The current bear market may be just that...a "run" of values that happens by chance to be moving the markets back closer to the starting point.

And, Black Swans may just be the market randomly heading back to the starting point as should be expected with a random walk.

The problem I have with all of this is that I have called so many turns that even if the numbers, on their own, fit well into a statistical distribution, one having the appearance of a random walk, I have seen too much evidence to the contrary to believe it.

However, I can understand how others with less knowledge could come to that conclusion. That conclusion on their part would be perfectly logical. I guess, in a sense, good market predictions to those people would be just another Black Swan.

Immature Bald Eagle

2009-03-08T21:10:00.000-07:00

For a change of pace here is a photo I recently received from friends of ours. It is a photo of an immature Bald Eagle on the ocean shoreline on the east side of Vancouver Island. I presume it was taken with a telephoto lens. The younger birds don't have the characteristic white head until they are a few years old. The younger ones are also significantly larger than the older ones. This one already has "the stern look", the large curved beak and the large yellow feet.

SP500 Possible Temporary Bottom Today

2009-03-06T22:00:00.000-08:00

Every so often I recognize what appears to be a very likely turning point in an index. The SP500 may well have made one of those turns today (March 6) at the low of 666.79. This is based in part on my Elliott Wave Count. If the rally does occur I see it as only another pause in a continued downturn.

The interesting thing about this is that my analysis allows me to see "the possibility" of a relatively important market turn as it occurs. Only Elliott allows one to see this sort of thing.

Time will tell if the market has started a sideways or rally pattern. The market always has the option of going deeper still before it makes the next rally. In any event it appears to be due for a somewhat larger rally at this time.

Another Bull Trap Snaps Shut

2009-03-05T09:05:00.000-08:00

Over the last couple of days a rally of about 100 points occurred on the SP500 US stock index. This little rally naturally had people wondering if this was going to be a large rally or perhaps the end of the bear market. The rationale being...if the market is down 50 percent surely it can't go much lower. I'm sure that there people thinking/hoping the same thing when the 1929 stock market decline was at a 50 percent loss point. It eventually went to -89 %.

This morning that little 2 day bull trap closed and the SP500 made a new low.

It is also worth noting that another example of a bull trap closing occurred today on the Canadian side of the boarder. Canadian National Railways Company (CNR on TSX exchange) has finished a sideways move that began back on November 21. At that time the low was $38.9. The price has dropped to $38.5 so far today.

These "technical events" are measurable scientific evidence that the bear market is alive and well and that the best bet these days is for lower lows.

These breakouts to new lows do not tell us where and when the bear bottom will occur but they do warn us that the bottom will occur somewhere in the future at some lower level.

Bear Market Bottom

2009-03-03T09:25:00.000-08:00

No I'm not seeing any signs of a bottom yet. However, I thought I would discuss it a little to give readers a feel for where I am on this important question.

The stock markets in North America have recently started to fall below what can be described as a more or less sideways price move that began in the October to November 2008 time frame. Because the markets have now decided to go lower any hope of a bottom in that area has been lost.

The technical door has now been opened to "the possibility" of a much deeper bear market. By worse case I mean something as deep, and yes, perhaps even a little deeper than the 1929 crash (-89 %). At this time, for me at least this is an academic question. I will take it as it comes and try to profit from it. For now "I'm betting" on lower lows for the next while.

Believe it or not, another 1929 type event would be "within normal market technical boundaries".

Government officials and so called experts like Warren Buffet don't really understand how the stock markets work. If Warren really understood he would not be in such a loss position today. The problem is not subprime mortgages or foolish investments by banks or insurance companies. And even the crooks don't really count on a larger scale. These are only the "symptoms" of the underlying, broader problem.

The underlying fundamental problem is that "we" (in the broadest sense) have lived beyond our means for decades. Extremes include expensive winter holidays by working class people, mini-castle homes, two cars and replacing "things" because we just wanted something new. Paying ridiculous prices for stock issues. And, businesses that can only function with a bank loan. And I will throw in...believing in the flawed thesis of the buy and hold forever approach to investing.

In short....western society (and perhaps the world) have/had a spending problem. And, everyone has run out of money and credit. This is not a "confidence" problem. If a bum on the street has great confidence but no money or credit he still can't afford a taxi ride.

I'm not expecting the US and Canadian stimulus spending plans to turn things around. If someone is bankrupt giving them cash or a loan they can't afford only stalls off the inevitable a little longer.

With respect to the stock market, I see many stocks on both sides of the Canada/US border that still have "the potential" to continue much lower and take the indexes with them.

The chart shows how the TSX Composite Index has recently broken below its November 2008 low.

Three Main US Canaries Are All On The Bottom of the Bird Cage

2009-02-28T21:24:00.000-08:00

Its now official, the S&P 500, DJIA and DJTA Indexes have all broken below their November 21, 2008 lows. A clear Dow Theory confirmation of a continued US Bear Market, at least for awhile longer. The Nasdaq has yet to do so but I consider it a secondary index.

The Canadian TSX Composite Index is teetering on the edge of doing the same thing. On February 24th it went below its November low during mid-day trading. So there is little hope that Canada will avoid more downside as well.

We should expect the bear market to retrace something more than the ~50 percent loss to date. This bear market is now officially the second largest market loss since 1929-1932 (-89%).

Welcome Back to 1997

2009-02-26T10:24:00.000-08:00

The Juggling Dynamite blog brought this movie clip to my attention. It is interesting to watch at this time now that the stock markets are back to 1997 levels. If we don't learn from history we are...

Apple Computer Stock...The Reluctant Fruit

2009-02-25T09:18:00.000-08:00

I posted a chart for Apple back in October 2008. At that time the chart was telling me that Apple stock could easily see a price of $40 or lower. That would be about $50 lower than the current price. I have no reason to change that view. However, Apple stock is still hanging in there around $100.

All the major North American stock indexes have either broken below their November lows or they are within a hair's breadth of doing so. The Nasdaq is the index that has the farthest to drop before that happens. It makes me wonder why.

Apple Computer's reluctance to join the next stage of the bear market appears to be one of the reasons for the Nasdaq Index having the farthest to fall. Even Microsoft has had the decency to join the bear party and break it's Nov. low. And, Microsoft has recently warned that their business will suffer during the bear market. Make perfect business sense to me...new computers and the latest software are, in many cases, a luxury that individuals and businesses can postpone to save money. I would guess that Apple Computer will also see lower earnings with the drop in PC sales.

I still think the Apple will fall and we will see a large drop in the price. Based on what the rest of the market has done recently I don't expect we have long to wait before Apple breaks its November low. If that happens, as the Apple falls it will help bring the Nasdaq and other indexes to lower levels.

Dow Trend Confirmation Signals

2009-02-23T13:57:00.000-08:00

With respect to the severity of the current bear market, I agree with anyone who thinks that a much deeper bear market, like the one in 1929 (-89 %) is just one possibility.

However, there is another worse case scenario we should keep in mind. It is the possibility of a long duration, more or less sideways bear market, similar to the 1968 to 1983 time period. A lump sum held in the stock market through that entire 15 year period would have earned 0 percent in capital gains.

In fact, we may already be in one of those sideways market periods. It may have begun back in 2000. More so for the US than in Canada. Many stocks started their bear in 2000. Those stocks have already been in a bear market for the last 9 years.

In the short term, I continue to see a high probability of at least some additional downside below the November lows for all N.A. indexes. Likely world wide.

My expectation is based in part on the fact that the DJIA, the DJTA and the TSX Capped Financials and the TSX 60 (as of today) Indexes have all broken below their November lows. In short, we have an abundance of evidence to demonstrate the Dow Theory Trend Continuation signal has been given loud and clear.

Some people continue to hope for a large bear rally at this time. Unfortunately I see little opportunity for this to happen. In fact, a large bear rally may not even happen during this bear market if it goes much deeper. That pattern is only one possible bear scenario...one leg down one leg up then a final leg down.

If a bear rally does occur, I see it starting at some lower level, not starting from the Nov. lows, and not now.

Dow Confirmation Close at Hand

2009-02-19T22:21:00.000-08:00

I mentioned earlier that the Dow Transports had broken below its November low. I now see that the sister index, the DJ Industrial Average is very close to also breaking below its Nov. low. It could happen tomorrow. If this occurs...it will be a textbook case of Dow Theory confirming a continuation of the downtrend below the November lows.

The S&P 500 and the Nasdaq are still some distance above their Nov. lows but the number of canaries is growing. Since the Canadian TSX Capped Financials Index has already gone below its Nov. low the other Canadian Indexes will most likely follow as well.

A Dow Bear Trend Continuation Confirmation may be newsworthy enough to make the headlines.

This is additional technical evidence to support my expectation of the November lows being broken for all indexes.

Berkshire Hathaway is down by 43%

2009-02-17T23:24:00.000-08:00

Interesting. On a percentage basis, my portfolio is officially much better off than Warren's. I haven't lost a dime since the crash began. I'm a little ahead.

Berkshire Hathaway is down 43 % since the peak. I guess they subscribe to the buy and hold thesis and the fund tracks the market closely.

Unfortunately there may be more bad news for Warren. The chart suggests that Berkshire Hathaway Inc (NYSE) may just be starting the decline. It has broken below a 9 year trendline on high volume. That is not a good sign.

The real test will be to see how I do compared to Warren after the bear is over and the next bull is well under way.

Markets Going Down This Morning

2009-02-17T07:57:00.000-08:00

Further to my post about the possibility of General Motors going into bankruptcy and the markets waiting for "an excuse" to go lower.

It looks like it may have started this am. The charts indicated that the stage had been set for "this possibility". As always, this was just one possibility for the markets.

Buy and Hold Investing

2009-02-15T23:11:00.000-08:00

I have been reviewing the credibility of the case for the Buy and Hold for the Long Term approach to investing.

As I understand it, the thesis goes something like this. No one can consistently forecast the stock market so it can only be viewed as a series of random events. The exception is that the market history supports the view that the markets always recover from a bear market. Therefore, if one buys "good stocks" and holds for the long-term, then the investor will eventually receive a good return on the market investments. The trick is to ignore market flucuations no matter how deep or how prolonged they may be.

This investment philosophy can be combined with dollar-cost-averaging, which is also based on the belief that it is impossible to time the market. One buys market equities/funds, say every month with a fixed sum. In that way...as the prices fluctuate one buys more at lower prices and less at higher values.

There is no question, as long the country remains in business the index will come back eventually and surpass the pre-bear high. And, dollar-cost-averaging ensures that for prolonged bear markets one will be buying some shares at lower prices.

The whole think hinges, in part, on not picking stocks that never recover from the bear market and unfortunately that does happen. An index fund will eliminate that risk. But there is another little known risk. Unfortunately, the Buy and Hold approach only looks attractive if one "models it" using carefully selected portions of stock market history. In other words with good "market timing".

There have been periods of time when the market would have tested the patience of anyone subscribing to the buy and hold approach. The periods of market history I refer to are the 1929-1954 and the 1968 to 1982 time periods. The markets, as defined by the DIA Index, took 25 years to recover after the 1929 crash. And, the ~1968 to 1982 time period although a less severe bear in terms of depth (-45 % compared to the -89 % loss of 1929) but it was a time period where the market went sideways for about 15 years.

It is easy to show that for these two time periods, a lump sum, that was invested at the pre-bear peak, would have performed much better had it been in a nominal rate GIC. The green lines on the graph of the DJIA show a few recovery times, including the two mentioned above.

"GM considering Chapter 11 filing"

2009-02-14T10:40:00.000-08:00

This headline may be just the excuse the stock markets have been waiting for. Even the suggestion of this has the potential to create a run for the exit in any related stock.

The chart for GM shows that, at least for this stock, the bear market actually started at the burst of the dot.com bubble in 2000. Some other stocks also started their decline back in 2000.

This news also comes at a time when the markets are technically poised so that they have "the potential" to fall quite quickly, at least in the short term. If that were to happen then this could create sufficient downward momentum for all indexes to break below their Nov. lows. Some people view this low as a technical level of support. A drop below the Nov. lows would be viewed as the next important step in the bear market. Some who bought since Nov. thinking a big rally was at hand or the end of the bear had been seen may sell to cut their losses.

This is just speculation on my part but it is fun to guess which way "the crowd" will run.

TD Toronto-Dominion Bank (TSX)

2009-02-13T21:39:00.000-08:00

TD Bank continues in the bear trend. It recently broke below the November low, as did Royal Bank and The Bank of Nova Scotia. The Bank of Montreal has not done so yet but it may be a safe bet it will.

Too soon to buy Canadian Bank stocks. The P/Es are still in the 8-10 range.

SBUX Starbucks Corp

2009-02-12T21:40:00.000-08:00

I see that Starbucks will be selling an instant brand of their coffee. Not sure if that will make much of a difference for them.

The stock price looks like it will continue lower, below the Nov. low of $7. A nice example of how stocks move in trends. As long as the price stays to the left of the trendline, the bear trend is still in effect.

CNR Canadian National Railway Stock...lower lows expected Feb. 11, 2009

2009-02-11T07:57:00.000-08:00

I believe that earlier I mentioned that the US DJTA Index, the Transports, had already broken below its November low. This lead me to look on the Canadian side of the border to see if there was a Canadian Stock that one might expect to see doing the same thing.

Sure enough, CNR was following the same playbook. CNR had a nice 14 year bull market, running up from about $5 to a high near $60. The trend has now changed from an upward bull market trend to a downward bear market trend. A simple 4 year trend is shown. This action by CNR is totally consistent with everything else going on these days.

So far the bear trend for CNR has retraced about 35 percent of the bull. Don't be surprised to see it hit ~$26 or lower before this bear market is over. The P/E = 11, still too high for the bottom of a severe bear market.

TSX Capped Financials Index...the Canadian Canary in the Coal Mine?

2009-02-08T22:52:00.000-08:00

The TSX Capped Financials Index, the one that includes all the Canadian banks like Royal Bank etc. has recently broken below it's November low. It has only done so "by a hair" but that is significant from a technical point of view. It all goes back to Elliott and the limit of the second wave. In addition the wave pattern is consistent with just a pause in a continued downtrend.

I know a lot of people have their hopes up for an end to the bear at the November lows, or at least a large temporary bear rally at this time. However, if anything, I continue to see more and more data predicting a near term collapse of markets to lower levels.

By near term I mean it could happen this week or a few months from now. This sideways pattern could continue to stall out the markets for some time to come. The timing of these things is always the biggest part of the mystery.

Wish I had better news.

DJTA Index...Canary in the Coal Mine?

2009-02-02T09:44:00.000-08:00

The DJTA Index...broke below its November low this morning. This may turn out to be a significant early warning sign for the US - and perhaps other world wide stock markets. This event will likely make the daily news soon.

After some of the large cap components like UPS and FDX recently broke new lows, the Dow Transport Index broke below it's November low this morning. This appears to eliminate any possibility of an EWP wave two correction as part of a larger rally that many have hoped would occur at this time.

I also see similar wave and volume patterns in the other US and Canadian Indexes, suggesting that they will "most likely" follow on the heels of the DJTA Index. The volume patterns for the TSX Comp and Nasdaq are not as well defined as the others but it's there as well.

The DJTA Index may turn out to be this months canary in the coal mine. If the DJIA Index also breaks below it's November low then this we create the classic and time proven Dow confirmation of a continuation of the current trend. The current trend is a bear market downward trend. In other words, a technical analysis confirmation that the bear has not ended.

From a practical market monitoring point of view this event also suggests that the trendlines can now be adjusted as shown. I have shown them for UPS and the Dow Transport Index. The most exposed point of the recent sideways move now becomes the last anchor point for the most current trendline shown here. This new boundary becomes our trendline going forward.

US Stock Market...Possible Early Warning, December 22, 2008

2008-12-22T10:37:00.000-08:00

All three US Market Indexes are showing the beginning of a possible important downturn. The graph is just starting to break below the trendlines that have been in force for the last month. This is properly viewed...as an early warning. The Canadian Stock Market is not quite there yet but it could easily follow.

DJIA Index Elliott Wave Count December 15, 2008

2008-12-15T22:23:00.000-08:00

I am posting this chart for the benefit of those who follow the EWP. If this interpretation turns out to be correct, this US Index will soon see new lows. I see similar patterns in the SP500 and Canadian TSX Composite.

My Portfolio..up about 2% from the June 2008 Market Peak

2008-11-26T10:59:00.000-08:00

The other day I got into a lively discussion with someone about the stock market. I was unsuccessful in my arguments, however this person challenged me by saying what really counts is your portfolio performance not how you have done on one particular stock.

Since I had not looked at my portfolio as a whole for a few months I updated it to see where I stood.

I used the peak in the Canadian TSX Composite Index in early June 2008 (15,155 points) as a start date for my calculations. Its a date that everyone can relate to. Since that point in time my entire portfolio has increased by 2 percent.

In comparison, the stock market in Canada has dropped by 47 percent over that same time period, falling from 15,000 to 8,000.

Now to be honest, being retired I did not have a huge percentage in the market to begin with so my risk going into the Bear Market was not great compared to someone who was closer to having 100 % investment in the market.

Two percent is not a lot but considering what happened to the market during that time period my guess is that I might place relatively high on a portfolio performance comparison list for any age group.

Time will tell how I make out going forward.

Does anyone else have numbers for comparison?

Canadian Banks Getting Hammered in the Bear, Nov. 21, 2008

2008-11-21T13:17:00.000-08:00

The Canadian Financial sector is taking a big hit during this Bear Market and it doesn't look like it is over. So far the TSX Financial Index has corrected back about the last 5 years of increases. A dividend mutual fund, one that includes Canadian Banks has only lost about 4 years of gains. Perhaps the dividends are helping to keep the value higher than the index. Definitely on sale today but my analysis suggests prices will continue lower, at least in the short term. I'm not buying any yet.

Exchange Traded Bear Fund Update November 20, 2008

2008-11-20T08:25:00.000-08:00

I continue to hold my shares in the stock market Bear Funds and see a high probability that they could become more profitable with a further market decline. Here are the current charts for the Canadian TSX 60 Index Bear Fund and the US SP500 Index Bear Fund.

These funds are like holding short positions without the risk of losing more than you paid for them. Also, unlike buying "Puts" they have no time limit working against you.

Stock Market Comments for November 15, 2008

2008-11-15T08:08:00.000-08:00

Its been two weeks since my last post. The markets have continued to churn more or less sideways for the last two weeks. Corrective waves can take a long time to finish.

SP500 and Nasdaq have made new lows in November but not by a lot. DJIA and DJTA have yet to do this. The Canadian TSX has not made new lows yet but it may be close. RIM, one of the big index influences has already done so.

The index volumes continue to remain relatively low or are still decreasing. Continued evidence that this sideways period is only a pause in a continued decent. The fast paced upward and downward moves is continued evidence of a system that continues to be unstable.

Deep Bear Markets (say negative 40 %? or more) often take in the order of 2 - 3 years to bottom so this is all within normal historical experience.

I continue to see some evidence that this Bear Market actually started in 2000 and this is just a continuation. I have stumbled across a number of stocks have already gone below their 2002 lows and some that are approaching that price level. The 2002 to 2008 Bull may have been just a large upward move within a much longer duration Bear (correction). The mainstream media has yet to see this happening.

An interesting stock is Fedex. It has a well defined almost text book set of 5 waves. It now appears to be correcting the Bull market it experienced over the last 30 years or more. It is now into what Elliott called the next higher cycle, a second wave. And, second waves, in the extreme, have the potential to retrace almost all of the first wave. A third wave, one that will go above the 2008 peak, will only occur if Fedex survives the Bear. Some stocks/companies don't.

Stock Market Comments for October 30, 2008

2008-10-30T14:10:00.000-07:00

October has seen higher volumes but index values have trended more or less sideways. This includes the TSX Comp, SP500, DJIA and Nasdaq indexes. The Nasdaq sticks out a little because the volume has an obvious decreasing trend.

There are several possible scenarios for what is going on, but in my experience...all of them forecast lower lows for all indexes. As always, the timing of the lower lows is uncertain and temporary increases can happen before we see the lower lows.

SP500 Index Bear Fund

2008-10-24T22:26:00.000-07:00

Here's another Exchange Traded Bear Fund. This one is for the SP500 US Index. It ended today at $39 per share. The large degree of fluctuation is due in part to the times 2 leverage on the fund. If the index drops about 5 % the fund will rise about 10 %. This works both up and down. Its a very convenient way to short the market. It trades just like a stock.

I'm expecting the SP500 index to go lower, perhaps a lot lower, and if true the shares of this fund will rise above the last peak of $45.

Agrium Inc. (TSX): Expected to Go Lower

2008-10-22T16:37:00.000-07:00

Once in a while I come across an interesting short term chart pattern that turns out to be a good forecast of things to come. Agrium, a Canadian stock, has been falling in price like most everything else. It now has one of those patterns. Agrium recently hit a low of $36 after peaking near $116 back in June 2008. At $36 it was down $80 from the high for a loss of 67 percent so far.

The chart is now saying to me that there is a very high probability that it will go below $36. The obvious pattern here is the decreasing volume pattern as the price moves more or less sideways near $40. One way to conceptualize what is happening here is that the number of buyers who are willing to pay this price, at this point in time, are running out. Once these "bottom guessing buyers" have their fill the price can easily resume it's downward travel.

If I was really gutsy I would short it now but I'm staying with shorting the TSX 60 Index. Its more of a sure thing.

US and Canadian Stock Market Milestones

2008-10-20T09:39:00.000-07:00

Many of us are wondering....How deep will the Bear Market go? How bad might it get?

So far we have only seen about a 40 % loss in the major market indexes. The extreme I have seen so far is the Canadian Venture (penny stocks) Index. It was cut by about 70 percent at the low in October.

My review of a handful of Canadian Mutual Funds, mostly TD funds, indicted that fund values have been reduced by 30 % or greater more depending upon the fund. Dividend stock funds have suffered the least so far. Small Cap Funds and Energy Stock Funds reached lows near a 50 % loss in October. All funds have rebounded a little since the October lows.

I have no way to estimate the ultimate Bear Market low at this time but I can see a few scenarios. As the Bear goes deeper and deeper some of the possible "least severe" scenarios are off the possible list.

The Stock Market is governed by rules, but the rules allow it a great deal of flexibility, and at any point in time it has more than one possible future. This makes perfect sense since the people who will buy or sell next week, next month or next year have not yet made those decisions.

I follow both the US and Canadian Stock Markets. They are quite similar. I have used the Elliott Wave Principle to evaluate the markets for many years. This knowledge allows me to periodically "take the pulse" of the market to determine where it might go in the future. It has allowed me to call many important market turns, frequently on the same day they happened. Most recently, it allowed me to see "the possibility" of a big downturn in the market back in late 2007 and I sold all of my stock market related long positions well before the recent large drop in the markets.

So now, like everyone else, I look for signs of a bottom. The best I can offer at this time is a few milestone market levels. From a technical standpoint, the US Markets are ahead of Canada in their decent. They have already passed one important milestone and are approaching the next. If the DJIA breaks below the late 2002 low near 7,100 then a much deeper Bear could occur. In one scenario, it may then be in the process of correcting the entire history of that Index, back down to much lower levels.

The Canadian TSX (Toronto Stock Exchange) still has one more "less severe" option. Here, there are two milestones close to 6,000. If the TSX Comp breaks below 5,700 then it could be a much deeper Bear Market.

We can look for "bottoms" occurring above these milestones, and on occassion, just above them. Its limited information but its better than just guessing, or listening to the news media pundents who attempt to relate current events as the only factor in market moves. The truth is that the current Bear Market is a normal retracement of portions of Bull Markets that have lead up to it. The real question is... where did the Bull Market start, the one being corrected by this Bear Market?

As time goes on, if the market creates patterns I can recognize, and I'm paying close attention rather than out enjoying the outdoors somewhere, I may be able to see a possible bottom forming. Stay tuned for updates.

TSX Composite Index Forecast October 15, 2008: I Expect the Bear Market to Go Lower

2008-10-15T10:43:00.000-07:00

I just finished my most recent analysis of the TSX Comp Index, as well as the charts for POT (Potash Corp) and RIM (Research in Motion). All three are telling me the same thing. The Bear Market has not ended and the next leg down could be a relatively strong one.

Forecast Details
TSX Comp Index, at 9,625 points, going below 8,851.
POT at $98, going below $85.
RIM at $69, going below $58.

These forecasts are about $10 moves for the stocks and about an 8 % downward move for the index.

As always, the market will do whatever it needs to do and nothing is guaranteed. The timing is uncertain for these events but I'm expecting sooner rather than later. It may have already started downward.

SP500 Index

2008-10-11T21:00:00.000-07:00

The US stock market is currently down by about 43 percent. It is approaching the lowest level of Bear Market that began in 2000. If the index breaks below that level this will be a large red flag. In comparison, the TSX Composite Index in Canada is down by about 40 percent. However, it is not yet close to breaking below low of the 2000 Bear.

TSX Bear Fund

2008-10-09T20:39:00.000-07:00

Not all mutual funds are dropping like stones these days. This Bear Market fund is bought and sold like a stock without any minimum holding period. It is a convenient way to short the market. It has a leverage factor of times 2 so it moves up nicely when the TSX 60 Index drops. The TSX Composite and TSX 60 are very similar charts.

This is the only investment I hold today for the stock market. I just sold the last of my long position mutual funds (TD Energy) yesterday. I took a $500 loss on this last small long position but expect to make it back later when the market is closer to the bottom of this Bear Market. Until then the rest of my investment money is safely put aside in things like money market funds and bond funds. I'm betting on a significantly deeper Bear Market. Time will tell if this is correct.

Apple Computer Forecast Oct. 3, 2008

2008-10-03T21:55:00.000-07:00

Apple Computer is currently at $97 per share. There may well be a double top pattern completed here. This particular top pattern is a pretty good one with lower volume under the second top and strong volume on the break below the neckline located near $120. These types of patterns are often very reliable forecasting patterns. This one indicates a target price of $40. It could go lower. I know it's hard to believe being able to forecast a $50 price change. If your skeptical, try putting a note on your calendar to check on the price say 6 months or a year from now.

Stock Market Comments October 1, 2008

2008-10-01T17:59:00.000-07:00

I'm expecting the TSX Index (at 11715 today) to continue lower before this Bear Market has ended. POT (at $136.5) and RIM (at $71) are two of the key stocks on the index. They both appear to be set up to go at least somewhat lower before the ultimate lows are reached. As usual the timing of the lower lows is uncertain. Wait for it.

The US bailout plan, if approved, will not prevent this. At best it can only delay the inevitable for a short period of time and perhaps not even that.

I was visiting False Creek in Vancouver by boat not long ago and took this photo of the Science Center building.

Is Blogging Writing?

2008-07-25T09:53:00.000-07:00

This question appeared on the Retirement: A Full Time Job blog.

She had a writing course teacher question whether blogging was actually "writing".

Putting marks on paper in any fashion including a blog page, a page that one can print out on paper, qualifies as being a form of "art". Writing and drawing are also forms of art.

Perhaps the question should be... Is a blogger an artist, like a conventional writer of articles or books? I think so. The PC and Internet are just new tools for putting marks on paper. More than that they allow instant publishing in a form that is available around the world.

Perhaps blogging goes one step further than conventional writing. The reader can immediately comment on their reaction to the post, or as I just did, go to his/her own blog and continue the discussion.

Deer Fawn Photo

2008-06-03T10:02:00.000-07:00

The other day I was driving home along a gravel road after a few hours of paddling a small lake in my kayak. I came across a couple of very young fawns on the road. They were so small that at first I first thought they were small dogs or something. They were the youngest I have ever seen in the wild.

Talk To Your Enemies

2008-05-15T10:09:00.000-07:00

The current news reports about the US Presidential Election has got me thinking about an important concept…what motivates people.

One side, the Obama group, thinks it is better to talk to your enemies. The other side, Bush supporters, believe it is better never to talk to your enemies except to try and scare them with threats. They believe that enemies can be scared into going away, or just eliminated with bombs and bullets. Perhaps there is some truth in both positions. The correct answer may be "it depends".

If you are dealing with someone who can be scared and bombed into submission, or… at least scared into leaving you alone - then the "make them afraid or dead" approach works fine. On the other hand, if you are dealing with someone who would rather die than give up…the "make them afraid or dead" approach will not work.

Suicide bombers (SB) are an extreme example. Japan tried this during the Second World War but made the mistake of organizing their SBs into a formal military. The US defeated Japan with more resources and more killing power and a strong resolve.

The more recent SBs, the ones who blend into the general population, and surprise you many times - over and over again - are quite a different problem. It requires I think…a different approach. The WW II Japan solution may not work here.

One should take this same approach in everyday one-on-one life.

Pension Income Splitting...Sweet!

2008-04-14T09:59:00.000-07:00

Every year I force myself to do my own income tax and I spend the $50 or so to buy QuickTax to try and ease the pain of it all.

This year, without pension splitting our total refund would have been ~$5,000. I know I could reduce this refund but I have my emotional/fussy logic reasons for keeping it that high. But...back to the point-- with the new Canadian 2007 pension income splitting allowance our total refund comes to about $6,000. An increase of just over $1,000.

The second point I want to make is that 2007 QuickTax doesn't optimise the transfer amount, it just inserts the maximum 50% transfer. The summary graph (a nice feature) looked lob sided to me so I used the old trial and error, bracket approach method to search for an optimum transfer amount.

I tried changing the T1032 transfer amount in increments of several thousand dollars from a low of $2,000 to the max of ~$18,000 and found that I increased our total refund from ~$800 up to just over $1,000. Our optimum transfer amount was in the vicinity of $16,000.

When I saw that there was indeed an optimum amount somewhere...that is, the total refund went up as the transfer amount increased, then it started to go down as the amount increased beyond a certain transfer amount, I went back and used smaller increments of several hundred dollars to bracket and zero in on the optimum amount. It turns out there was a range of about $1,000 that provided the same total maximum refund.

Stock Market Status April 12, 2008

2008-04-12T22:38:00.000-07:00

The Canadian and US stock markets have been moving sideways since January. This week may have seen an important downturn point but there is no way to know for certain. The minimum requirements appear to be in place for an important turn but as always this is only one possible future.

The US government, with the best of intentions, continues to throw "easy credit" at various firms trying to shore things up. Those actions may in part be helping to keep the markets in a sideways holding pattern for a time. Eventually even the US government may run out of cash/credit to do this type of thing.

This bear market may only be in the early stages. It takes time for all that bullish enthusiasm to get worn away. In addition, those trying to "guess the bottom" and make a quick buck also need to be taught a lesson. They will stop guessing after losing enough money.

TSX Composite Index Forecast April 1, 2008

2008-04-01T09:35:00.000-07:00

Here's a short-term forecast for the TSX Comp Index. I called the last couple of turns correctly and thought I would stick my neck out a little this am to see if I can do it again. I see a possibility of the next downturn occurring at a point no higher than ~13,450. I can often call the turns correctly but the extend of the move that follows and the duration of the move are much less certain.

Canadian Banks

2008-03-17T22:49:00.000-07:00

I took another look at a few of the Canadian Banks stocks today and it is now clear that at least some of them now have the potential to go a great deal lower. A bear low of $10 to $15 is possible for stocks like the Bank of Montreal (BMO.TO)and the Canadian Bank of Commerce (CM.TO).

Were probably only now getting to the point where many stock holders are starting to pay attention and getting worried about what other unknown things have been going on. The US government is already in the panic mode...reducing interest rates on the weekend.

Dow Index Breaks Below 25 Year Trendline

2008-03-15T00:57:00.000-07:00

Not a good sign.

This is why its called a Bear Market

2008-03-14T15:10:00.000-07:00

"Triggering a sell-off throughout the financial sector, Bear shares slumped 47% to $30, their biggest one-day drop in at least two decades. "

Just another milestone on the way down.

Canadian Banks are being effected as well.

Margin Calls

2008-03-10T20:46:00.000-07:00

First it was the subprime mortgages in the US. Now the latest news is margin calls in the US. Margin calls occur when people borrow money and put up stock as security for the loan. I could do this through my broker account but I never have to date. It sounds like the Bank of Montreal is being hit by the margin call problem. I wonder about the other Canadian Banks.

The thing is-when a margin call is made people have to come up with more cash or sell some of their holdings. This can translate into a wide stock market sell off taking the good companies down with the bad. And, I guess...if it is large enough - the sales reduce the values of the equities even more, the ones being used for collateral and this in turn can lead to additional more margin calls...and the cycle feeds on it self.

I wonder...could the reduction in equity values lead to margin calls or something equivalent for those doing the Smith Manoeuvre?

I see the sell off today has brought some Canadian Banks to the brink of making new lows...TD, RY and BNS.

Canadian Bank Stocks...continued weakness?

2008-03-08T12:33:00.000-08:00

Bank of Montreal stock continues to be in free fall with a decline of about $30 per share to date. This is 40% price reduction from the peak of $73 down to $43. The TD Bank, Royal Bank and Bank of Nova Scotia are all very close to breaking below previous January lows.

Canada and US Stock Market Comparison

2008-03-07T17:02:00.000-08:00

In case you were wondering...the Canadian stock market continues to keep pretty much in step with the US stock market.

Today the Nasdaq broke below the low made in January. This is an important technical move.

The other two US indexes, S&P 500 and the DJIA look like they will do the same in the near future. The TSX Composite index has farther to fall before this happens but it is not much of a stretch to envision it will also eventually fall below its January low.

Extreme Bear Market Warning?

2008-03-02T21:53:00.000-08:00

I have noticed something important in a few US Stocks.

The million dollar questions with respect to any large Bear Market is where will it end? How low will it go? Is it over yet?

Three US stocks are coming close to dropping below their lowest lows during the Bear Market that began in 2000 and ended about 5 years ago. There may be others.

Home Depot (HD) and Dell Inc. (DELL) and Citigroup (C) have all experienced large price decreases. The interesting thing at this time is that these stocks are all getting very close to breaking below their lows of 5 years ago. Citigroup is almost there....perhaps Citigroup is the canary in the coal mine.

From a technical standpoint this would be very important. If they do drop below their lows of 5 years ago (2002) this may be an early signal that the indexes will do the same.

In short...it could be an early warning that this Bear Market has the potential to retrace all of the US index gains of the last 5 years.

Click on the links above to see the charts.

Potash Corp...$188 million dollar mistake?

2008-02-25T22:23:00.000-08:00

I have been studying the chart for POT.TO (Potash Corp) lately looking for confirmation about what may lie ahead for the TSX Composite Index. Potash Corp is definitely one of the stocks contributing to the January rally on the TSX. The wedge shaped rally is more pronounced with POT than it is for the Comp Index.

Today was not one of the larger volume trading days, but about $188 million changed hands today for shares of this one stock. $500 million per day is closer to the longer term average daily trading.

I see a high probability that this stock is ready for a good price tumble. If true, all those buyers today will soon be surprised and disappointed.

A few facts.

$160 per share and a P/E ratio of 48. This P/E level is way too high and not sustainable.
Price has accelerated from $75 to $160 over the last 8 months (0.67 years).
A doubling of the price in 8 months. This is in excess of a 100 % increase per year.
The larger and larger price oscillations in recent months are an indication of a nervous and uncertain market. It is a sign of financial instability.
The chart looks more like a chart for a 5o cent penny gold mining stock than a blue chip stock.

It looks like a text-book example of classic irrational exuberance.

It will be interesting to follow this one.

TSX Fooled Me Again

2008-02-21T18:48:00.000-08:00

The rally that I suspected was over is still in play and it rose above the 13,570 mark. This has eliminated one of the possible options to solve the current puzzle.

I still see 2 or 3 scenarios for a continued bear market. One is a triangle shaped rally. So far it looks like this is a possibility. If so, this rally still has some more headroom with a couple of more small legs to go. If it turns out to be a triangle... then once the triangle is complete the drop following it will be downward and relatively fast.

TSX Composite Index Forecast Feb. 19, 2008

2008-02-19T10:01:00.000-08:00

I was wrong about the TSX Composite Index rally having ended. This made me ask...What am I missing here? I took another look and noticed a detail in the chart that I had overlooked earlier. It always makes sense in hindsight and the market never breaks its own rules.

I now see another possible outcome. The ultimate limit to the current rally could be the low of 13,570 made near January 7th. As always there are other possibilities but this one appears the most likely maximum value before the index makes the next important turn and continutes its zig zag decent toward lower levels. I'm still expecting a final bear market low somewhere below 12,000.

The rally is still rising today....so far it has hit an intraday high of 13,452. With this short-term scenario it can only rise a maximum of another 118 points (13,570-13,452).

Apple Computer still on a downhill run

2008-02-18T20:46:00.000-08:00

I took a look at Apple Computer today. It is currently at ~$125 per share with a P/E ratio of 27. The price run up from about $10 to $212 over the last three years was an excellent example of "building castles in the air". I guess there was still some life left in the dot.com mania.

The evidence points to a high probability it will be going down to $100 or lower. It could go significantly lower than $100 before this bear has run its course.

Still waiting to see if that TSX Comp rally has finished or not. I'm guessing it has but time will tell.

TSX Index January 31, 2008

2008-01-31T10:43:00.000-08:00

The S&P/TSX Composite Index is still moving more or less sideways just below the peak of 13, 171 (13,158 error corrected). The Bears and Bulls are evenly matched so far and it still could go either way in the short term. Similar patterns exist for RIM and POT as well as for the US S&P 500 Index.

TSX Going Lower now?

2008-01-25T13:56:00.000-08:00

I'm seeing a number of signs that the market rally that started on Tuesday near 12,000 may have run its course. This is a very short-term prediction.

The TSX Comp index hit a high this am of 13,171. Now its always possible that a lot of new money may enter the market and keep this rally going for a while yet. The market always has incredible flexibility.

If this was the complete end of the relatively small bear rally and not just the first leg of a longer term rally...then the market is free to resume its fall below the low of 12,000. So far - this rally has taken on the shape of an upward pointing wedge. This shape is a common pattern that forms during bear markets. This pattern is more pronounced in RIM where the required decreasing volume pattern matches very well.

To put all of this in perspective...I firmly believe that the TSX Index will eventually bottom and then recover all of the lost ground, eventually making new all time highs.

Early Warning Signs

2008-01-24T09:34:00.000-08:00

Anyone who follows the stock markets is currently wondering... What will the stock market do over the next few months or years? Fortunately, there is a relatively simple way to get a feel for what is likely to come next. This method does not require one to guess anything about profits, dividends, interest rates, government intervention and so on.

Here's how it works.

Over long periods of time stock markets move in trends. After a number of years the long-term trend changes. A simple way to detect if the trend may be changing is to use a simple trend line. For a Bull Market the trend line moves upward. It is a line connecting all of the major low points. For a Bear Market the trend line moves downward. For the Bear Market it is a line connecting all the highs. The trend line works for market indexes and for many stocks.

We can think of the trend line and the market action relative to the line as a "trip wire" or early warning system. The market cannot change from one long-term trend to the opposite long-term trend without breaking through the trend line that has been "in force" for a number of years. This is a simple undeniable fact. This analysis is scientific because it can be repeated and verified by others. For longer time periods there is always only one long-term trend line. Any market history chart will show this to be true.

At this point in time we wonder.. Are the stock markets just in a relatively short-lived and shallow correction, or have the stock markets begun a much deeper longer-term Bear Market? Before the next large Bear Market can begin, the Bull Market trend must be penetrated on the downside. The long-term trend must start to change.

These two graphs show that the US and Canadian Stock Markets have both broken below the long-term Bull Market trend lines. These trend lines have not been violated for the last 5 years. In general, longer time period trend lines are more important that shorter time period trend lines.

At the very least, the recent breaks through the 5 year Bull Market trend lines should be viewed as an early warning of a larger (deeper) Bear Market starting. If so, it is only in the early stages.

Chasing The Bear

2008-01-23T14:02:00.000-08:00

I've decided to put a little more money behind my forecasts for a deeper Bear.

I have sold out the balance of my mutual funds that are stock market based. I'm completely out of the TSX Comp Index Fund and the Royal Bank Dividend Fund. I can't recall for sure why I kept the remaining units of these funds this long. It was probably part oversight and part concern for selling mutual funds within the 3 month minimum holding period. I took a loss of a few thousand but if I'm right I will easily make this back later when I buy back in at significantly lower levels. A good trader has to be cold-blooded about these things.

I am also going one step further. I have also placed an order for some Horizons BetaPro Bear Fund (HXD) that shorts the TSX 60 Index. I'm currently trying to guess the extent of the current short-term bear rally so I can get it at a little better price. Its at $23.50 and I'm offering $22.85. I know I'm unlikely to call the exact bottom but its fun to try. Its a little confusing with the index going up and HXD going down.

HXD trades just like a stock and its great being able to short the TSX market with such convenience. I think the last time I went short was when the airlines were in a nosedive after 9/11 and I made a little money on Air Canada's tailspin.

I can never predict whether the TSX's next move will be due to energy, mining or financials or some other stocks. By focusing on the entire market I don't have to try and guess the details. The truth is I don't care. I view the market as just a possible way of making a profit.

Changing the topic a little...I took this picture of a Buffalo/Bison bull yesterday. It was a nice change of pace. I have to say that I refrained from touching him. He must have weighed 2000 pounds.

Bear Market Protection

2008-01-21T23:40:00.000-08:00

I have been searching for a Bear Market Mutual Fund. One of interest is the S&P/TSX 60 market inverse fund sold by Horizons BetaPro Funds. It appears to ba available as a normal mutual fund with a $5,000 minimum purchase and also as an Exchange Traded Fund with no minimum limit. The graph is for the ETF version.

It is a relatively new fund that appears to be equivalent to shorting the entire index. It moves opposite to the index. It is a means of offsetting the Bear Market. It has two times leverage so a little goes a long way. $5,000 in this fund will offset $10,000 of long positions in stocks or mutual funds exposed to a down-trending market.

Caution...the leverage works both ways. Call the direction wrong and you lose twice as much.

Bear Market Fear

2008-01-21T10:27:00.000-08:00

The TSX Composite Index broke below the 12, 500 level today to a low near 12,120. I was expecting this break below the 12,500 level. It is just more data to support my forecast. Down about 17 % from the last high near 14,647.

A quote from this am..."Tebbutt said the recent market reaction is composed of "irrational" behaviour motivated by fear and uncertainty."

Is it really irrational to sell at this time? I disagree. Even a person with the foggiest notion of how the markets work will likely realize that many people will rush to the exits under the current conditions. Even the US government is "afraid" and "uncertain".

I sold out in November and I’m perfectly comfortable but I have the advantage of being able to see these things coming. When I sold it was a rational decision. I was not afraid. I plan to buy back in closer to the bottom.

I continue to think this Bear Market has a long way to go before it ends.

I see that TD Bank has broken below the $64 level. That was a significant technical sign of continued weakness.

A couple of other high flyers to watch... RIM and POT These two Canadian stocks look like they have entered a downhill snowboard race event. RIM is leading now but that can change overnight.

US Stock Market Looking Very Weak

2008-01-14T10:18:00.000-08:00

If you have been following this blog you are already aware that I follow the market and periodically make forecasts.

Well...the US stock market in general is looking very weak from a technical perspective. I won't bore you with the details but the entire US Stock Market looks like it could drop, at least another 20 % or more. The Dow Jones Transportation Average is leading the pack downward at this time. I expect to see a further decline in the DJIA, DJTA, SP500 and Nasdaq.

I'm not sure how much of the US drop will spill over into Canada but the risk is very high that it could. My best guess is that the TSX Composite will also go significantly lower. After the TSX Composite run up from about 6,000 to 14,000 since 2002, a retracement in the order of 50 %, back to ~10,000 would not be unusual. It would be well within normal market action.

2007 Cash Flow

2008-01-09T20:12:00.000-08:00

Well the numbers are in for 2007. We have a lot of sub categories so I will only note the larger ones.

Our total spending for the year was about $31,000. This includes all expenses except those that were scheduled to be paid from earmarked pre-retirement savings. Savings paid about $18,000 for a newer used car and $3,000 on boating.

Income Tax ~$2,600
Municipal Property Tax ~$1,800
Groceries ~$7,000
Restaurants ~ $2,900
Entertainment ~ $2,300 including car trip expenses
Home Maintenance ~$2,000
Auto Gas ~$1,500
BC Medical $1,152
Auto Insurance $1,300
Clothing/Hair $1,200
Savings for our next car replacement $2,000 (pay cash every 5-10 years)
BC Hydro ~$900

We own our home and we don't have a lot of vacation expenses other than boating. The total for the year is well within my pre-retirement estimates.

TD Bank follow-up January 8, 2008

2008-01-08T10:34:00.000-08:00

TD bank stock is close to an interesting milestone. If it breaks below the $64 dollar level this makes a much lower price drop more likely (not guaranteed).

I have been following Canadian Banks for some time. Bank of Commerce and Bank of Montreal have both seen a large price drop so far. My best guess is that we will see similar drops in all Canadian Banks. They have all had an excellent Bull Market run for many years and a large price drop (Bear) would still qualify as normal market action.

Today's news includes a "rumour" that TD may be exposed to the US Subprime Real Estate problem. This would not surprise me as TD has been working on getting a foothold in the US Banking industry. This rumour could lead to a break below the $64 level which in turn could lead to much lower prices to come.

Net Worth Debate....include the house?

2008-01-04T10:20:00.000-08:00

I noticed some blog posts lately about net worth and retirement. Its also that time of year when we receive our property assessment notices. It can lead to questioning if a home went up $30,000 this year should that increase be included in a net worth statement?

The short answer is yes.

If push comes to shove "you can always eat your house". By that I mean you can always sell your house and rent a place to live. This will provide excess cash to live on if you need it.

On the other hand...if you stay in your house when retired and don't take out a mortgage on it to get access to some cash flow...it won't provide any income. But home ownership means you won't have to pay rent each month and this will reduce the need for retirement income.

I know some people who have sold more expensive homes in Vancouver, bought less expensive newer ones on Vancouber Island. They use the extra cash for other things in retirement like boating.

Owning a home gives one more options when retirement comes around.

Canada and US...Twin Stock Markets

2007-12-18T15:00:00.000-08:00

The Canadian and US Stock Markets are for the most part, joined at the hip. Historically the degree of change varies a little but they run pretty much parallel.

Starbuck Follow-Up/News

2007-12-06T09:23:00.000-08:00

The stock price continues to decline for Starbucks. Now at $22.50 and the P/E still at 26. Still a long way to go before the price makes business sense.

Today news came out about a problem with their thermos coffee cups burning people when the handle fails. Reminds me of a Seinfeld show.

This won't help the stock price.

Water Bill Caution

2007-12-05T09:52:00.000-08:00

If you have a water meter, and if your home plumbing develops a slow water leak, one you don’t notice, your bill will climb. Keep tabs on the consumption on the bill, comparing it to normal. Otherwise you risk getting a big surprise on your water bill payment one day. A bill could easily be a couple of hundred dollars higher just for the leak, especially if your paying for both water and sewer when both costs are based on the water meter reading. Toilet leaks that run 24/7 are a most common cause of this sort of thing. Fortunately, you can hear toilet leaks during the night when the house is quiet if you listen while …well you know.

TD Bank...penny stock or blue chip?

2007-12-03T00:02:00.000-08:00

This is such an interesting move by the price for TD Bank stock that I had to post it. It took the best part of the last 2 months to come down from $75 to a low of $64. Then, acting more like a penny stock driven by the power of a stock market bubble it regained $75, an increase of about 17 percent over the last four trading days. Now that is volatility!

Chart Game

2007-11-27T11:01:00.000-08:00

While surfing the net I came across a site called "Chart Game". As I understand it, the purpose of the site is to allow people...to test their ability to predict stock price direction using just the information contained in the price chart. The charts are good quality and include both price and volume. The game allows one to play with "play money".

A significant limitation to the charts is that they only go back 24 months. For my type of analysis I need to see the entire available history for the chart because what may happened in the future is governed in large measure by what has occurred for the last 10 years or more. Limiting the data to only 2 years of history... in my opinion is not a valid test.

One needs to recognize that not all stock charts are useful for "good predictions". Indexes are always good but many stock charts are terrible candidates. In addition, there are periods of time when no one can make good long-term prediction.

I like the basic premise of the game and hope the site developer will take the idea further. I firmly believe that any one who thinks they can forecast anything be able to demonstrate that ability.

Sayward Photos

2007-11-22T22:21:00.000-08:00

A couple of photos I took near Sayward on Vancouver Island.

Dow Theory Sell Signal...almost there

2007-11-21T22:39:00.000-08:00

If you follow market news you will be seeing articles discussing if the Dow Theory has signaled a change from a long term uptrend (bull market) to a long term downtrend (bear market).

So far only the DJTransportation Average Index has developed a sell signal by declining below the August low near 4,450. The DJIndustrial Average has not yet done so and this confirmation is required before the Dow Theory sell signal is confirmed.

The DJIA must break below the August low near 12,500 points. It is not far away from doing so with a low of 12,725 today. Another ~3 % drop will take it below the 12,500 level and confirm the sell signal.

In comparison, the S&P/TSX must decline to below about 12,500 before it has developed the Dow Theory change of long term trend signal.

The S&P 500 and Nasdaq Indexes also have a way to go down before they would give a sell signal.

The fact that the DJTransportation Average Index has developed a sell signal...an early warning that a bear market trend may be underway, as opposed to just another small correction, is significant. This is consistent with the overall Dow Theory that expects the industrial slow down to show up first in the transportation industry. For example, before an industry can produce items made of raw products such as steel, these products must first be transported. If a slow down is under way it will then show up first in the transport of raw materials.

The fact that the Dow Theory sell signal seems to be within reach may have influence on some investors and lead to more selling...as people try to beat the gun to avoid getting caught in a fast moving down-draft of price decline.

The next few trading days will be interesting to follow.

Starbucks... The Stock Not The Coffee

2007-11-15T17:52:00.000-08:00

I see that it is time for Starbucks to take a healthy correction. Down to $24 from a recent high of $40. Even at this price the P/E is still at 29 times. Definitely some Castle Building in the Sky has been going on here. It reminds me a little of the dot.com craze.

I would not be surprised to see $15 before this correction is over.

ps...I don't like their coffee but that's just me..too strong. But--most people do.

Bank of Montreal Going Lower?

2007-11-15T11:11:00.000-08:00

In general... I see a high probability that markets will continue downward for some time to come.

For instance, BMO is looking very weak in the short-term. After sliding down from near $73 since late May 2007 it recently made a low of $56.44. I'm expecting BMO to go below $56, perhaps within a day or so. Chart link.

The Retirement Time Bomb

2007-11-07T08:31:00.000-08:00

While on our little vacation I was in Chapters and found Gordon Pape's book, "The Retirement Time Bomb". It was this book that alerted me to the impact that early retirement has on the Can Pension Plan with the zero years reducing one's pension, to a degree, if they wait beyond age 60 to take it. Something that the Fed Gov't has yet to do.

Overall I think that Gordon's book is a good one. His chapters on CPP and OAS and related clawback is well done. My copy is from the Vancouver Island library...the best price in town.

He includes a good section on how to estimate your money needs in retirement, starting with a review of your lifestyle choices. On page 61, he suggests that to just maintain one's standard of living, one will need about 80% of their pre-retirement income. He also states that 60 % will give one a very modest retirement. The text refers to after-tax income, then it says gross family income so I'm not sure what one he intended.

Like all of us he has some fears and some biases. Intended or not, his book might scare many people into continuing to work longer than they really need to. He fears that the Baby Boomer's will have to pay part of their own health care due to the demands outstripping the country's ability to cope. He thinks that early retirement is a pipe dream for most people, most having to work to age 60 or later. The reasons include health care costs and the effects of inflation.

At one point he supports reverse mortgages, as long as the money is invested, but at another point he warns against borrowing to invest in the stock market in case one does so just before the next big Bear Market. He includes some good information comparing the different options available for using the equity in one's home.

All in all...a good reference book on the subject of retirement.

Canada Pension Plan - Be Aware of $0 Contribution Years

2007-11-01T22:20:00.000-07:00

I just found out something new about CPP, something that is important for anyone considering retirement before age 60.

For each year one retires early, that is prior to age 60, one accumulates a $0 CPP contribution year. Your not working so you don't contribute to the CPP and you qualify for a smaller Canada Pension Plan.

Depending upon your work history this fact can have the effect of reducing the CPP that you will receive. In my case, dumb luck saved me once again, and although I retired a few years ago, at age 60 I will still qualify for just a hair under the maximum amount. However, if I delay taking it past age 60 - the $0 contribution years continue to accumulate and I start to get further away from the maximum I might otherwise have qualified for.

It occurred to me that anyone who plans on retiring really early such as at age 45 should be aware of this fact.

Mainland Trip Photos

2007-11-01T10:41:00.000-07:00

I am posting a couple of photos from our recent trip to Vancouver and the Okanogan Valley. One is from Stanley Park in Vancouver on a rainy day...a horse drawn wagon, and the other was taken in Kelowna - showing the fall colours. As I post these photos it occurs to me that the one with the horse drawn wagon might make a great puzzle photo.

Back In Town

2007-10-26T10:31:00.000-07:00

Just returned from a 5 day trip to Vancouver and Kelowna area. Spent some cash, did a little big city shopping and saw weather from pouring rain all day to sunshine with a little snow thrown in as we crossed the coast mountains. A nice change of pace. I will try to post a pic or two in the next little while.

I see the price of TD Bank stock is still dropping. Near $68 today. TD Bank still looks like it has more downside in the short-term. Will it go below the low of $64 in August?

Looks like my call for Royal Bank to hit $59 in the short term was ...wrong. It never went above $57. Fooled by randomness?

I'm more interested in the total market trend. Is the TSX in just a short term correction or in the early stages of a larger Bear Market?? It could go either way.

Black Monday Anniversary...20 Years Ago Today

2007-10-19T15:03:00.000-07:00

TD Bank broke below $70 today...you can decide if I was just a lucky coin flipper or not. I'm expecting it to go lower yet.

The media have mentioned that today is the 20 year anniversary of Black Monday and compared today's market drop to that day in 1987. In terms of the numbers, today's drop (Friday) was much less of a decline in the indexes. It is interesting how the media plays a significant role in spreading the market news. Now everyone will likely become aware of it over the weekend.

From a very broad market perspective, the 1987 Bear Market was only exceptional because the market dropped so fast, then recovered the loss relatively quickly. Otherwise - it was not anything out of the ordinary. From a portfolio viewpoint, does it matter much if one sees the drop over 3 days or 1 year? It shouldn't for the long term buy and holders. Most Bear Markets take several years for the total decline.

The stage may be set for a Bear Market at this time and today's small drop was just part of it. The Bull Market has done really well the last 5 years - moving almost in a straight line for that period of time. A 148% total gain on the S&P TSX Composite and somewhat less for the DJIA. We shouldn't be surprised if many great buying opportunities appear in the not too distant future. If so...keep in mind it is not a problem...it is an opportunity.

I leave tomorrow on a short vacation to the mainland and may not post for the next week. Being retired--our travel plan is open ended and it will depend on the weather and how we feel that day.

It will be interesting to watch the market next week.

TD Bank Update Oct. 18, 2007

2007-10-18T10:49:00.000-07:00

I continue to see weakness in the shares of TD Bank. It looks like a very high probability of a short-term (days?) price drop below the $70 level.

It appears to be declining in conjunction with US Bank stock weakness...all that pessimism about the mortgage stuff going on down there.

Lower price opportunities ahead?

Blog Action Day...Environment

2007-10-15T10:07:00.000-07:00

Blog Action Day...an excellent idea.

Here's my post for blog action day.

I recently changed over from a 6 cylinder car to a 4 cylinder car. I also bike to the grocery store once in a while. So on this topic I'm not doing as bad as I was a few years ago. Here's a few random thoughts.

I was watching a show about Greenpeace a few days ago and Greenpeace members succeeded, at great personal risk, in bringing an end to the hunting of whales, by simply filming and showing the public what was going on. They ran around the whaling ships in small inflatable craft taking pictures of the hunting as it happened. One of their first films shown on TV around the world was a harpoon being shot at a whale.

Public opinion and political opinion soon changed as a result of those efforts. A simple but powerful idea....just show the pubic what people were doing. Bring our attention to it. Get peopole thinking and talking about it. I expect that after that event, anyone associated with whale products, buyers or sellers, started to feel a little guilty.

It makes me wonder if that same tactic could work for other "big city" things? For example, if Greenpeace were to film people doing things such as filling up a large gas guzzling luxury car at the pump or filling up a large motor yacht at the dock, would that help change things? Would people feel guilty owning such things?

I guess today...anyone with a digital camera could start doing it and just put the footage up on U-Tube. If the footage is interesting enough, especially if it is a well-known person, it may make it to TV.

TD Bank Update Oct. 9, 2007

2007-10-09T12:30:00.000-07:00

TD continues to show short-term weakness, with an obvious decrease in volume over the last 4 days. In my experience - this is a classic sign of a further drop in price. The buyers at this price level, at this point in time, are running out and sellers will be forced to accept lower prices. It is a vicious cycle where each new lower level makes a new group of stock holders nervous.

In any event, this downturn is only temporary in nature.

Cheap Coffee for two at Tim Horton's

2007-10-05T11:22:00.000-07:00

Now to be honest...I haven't done this for awhile, and it was originally my ignorance that let me discover a cheaper way to buy coffee for two at Tim Horton's.

Order their largest coffee, whatever they call it, then when the new hire (and they are always new it seems), hands you the large cardboard cup - ask for two real cups as well. You can then sit down and split the large coffee with a friend. It's cheaper than ordering two regular sized coffees.

I stumbled upon this money saving trick, while driving alone across western Canada, where Tim Horton's are easy to find and open 24/7. I travelled with a thermos, had one cup of coffee in the restaurant and put the rest in a thermos... one for the road.

Royal Bank Stock Going Up?

2007-10-03T05:45:00.000-07:00

Every once in a while I stumble upon a stock chart that has some good forecasting patterns. I guess because I have some money in a Dividend Mutual Fund that includes Canadian Bank stocks such as Royal Bank - I follow the charts on a casual basis. This forecast will not change anything I do with money....it is just for academic amusement.

Contrary to what you might have heard, there are recurring patterns in stock price charts, and some times, they have predictive value. In this case, Royal Bank has been down for the last 4 months or so and the question is...will it go back up soon or what? I noticed that it appears to have just completed a bottom pattern that predicts a minimum increase to near $59. There's more... this apparent short-term bottom, and turn upwards, is consistent with the Elliott Wave Count. In addition, because the last high was $60, there's a good chance that a turn upwards, at this time, will carry on to new highs above $60.

The Bank of Montreal (BM), down from $73 for the last 5 months, may also be on the threshold of completing a short-term bottom and turning upwards pattern as well. This one needs a little more time to clarify.

I also see that the TD Bank recently completed a bottom pattern and rocketed to a new high. Yesterday's free-fall drop for TD is a normal reaction following a very fast advance...likely very temporary.

It will be interesting to follow what happens here.

S&P TSX Composite Index - 148 percent return

2007-09-30T20:24:00.000-07:00

Observation
Over the last 5 years, since the end of the bear market, this Canadian Stock Market Index has risen from about 5900 points up to the last new high close to 14,600 points. That's a total increase of about 148 percent over 5 years which is also equivalent to an annual compounding rate of 20 percent. Not bad!

I determined the annual rate by using a trial and error method in the following equation.

Future Value = Present Value (1 + i) to the power of n, where i is the annual interest rate and n is the number of years. One could also use a table of values if they are handy. In this case the future value is 14,600 and the present value is 5900. You can check it by multiplying 5900 by 1.2 and repeating (compounding) for a total of five times.

Some might think that this bull market is getting long in the tooth both in age and in total returns.

2007 Expenses Jan-Aug

2007-09-28T10:56:00.000-07:00

I updated my monthly cash flow spreadsheet the other day by adding in the last few months and thought I should share the information. Here are a few 8 month totals for two retired adults living on Vancouver Island.

Groceries $4,632
Restaurants $2,061
Entertainment $1,681

So far the actual totals generally agree with my estimated total for 2007. I estimated a total of about $38,000 for the year. This total includes a $2,000 - $3,000 savings toward the cash purchase of our next replacement car. Boating costs, a special retirement entertainment expense, is not included in this total. That has been running at about $3,000 per year. We own our home so there is only maintenance and property tax included in the $38,000 total.

A few times each year I compare our actual cash flow to my forecast. I find that having this cash flow information eliminates any money concerns both before and after retirment.

Trip Photos...100th Post!

2007-09-14T10:15:00.000-07:00

We were out on the boat over at Desolation Sound for a few nights. Desolation Sound is located between Vancouver Island and the mainland about half way up Vancouver Island. Here are a couple of photos I took. Star fish are not just pretty decorations...they clean up the leftovers. This one, at Squirrel Cove on Cortes Island looked like it was slowly heading for the dead crab just above it. The tide is low so they are both temporarily out of the water. The tide change can be 10 feet over night so when we anchor the sailboat this has to be taken into consideration. The other photo is taken from the Curme Islands looking toward the mainland...where the Grizzly bears still run free.

Other than the base cost of owning the boat, whether we use it or not, we don't spend a lot of money while we are out cruising. It is like having a small waterfront cottage with a fantastic view. We are mostly at anchor so we don't use a lot of gas and there is no charge to anchor the boat. We use our dinghy with a small outboard motor or just rowing to explore while the sailboat is at anchor. We like to anchor near hiking trails if possible so we can get some exercise on shore.

Reading Other Blogs - September 6, 2007

2007-09-06T09:20:00.000-07:00

I continue to be impressed with the quality of information available on the web. In the workplace, I always believed that if you encouraged people to think and communicate in a group environment, that everyone would learn together. The web is the ultimate communication tool for this type of thing. When I read the different blogs it is almost like being back at work and discussing investments over coffee break. In fact, it's much much better... since the quality of discussion is 1000 times better.

For Example
Canadian Dream posted his recent interview with Derrick Foster about his new book. Just yesterday I read on another blog that DF had written a new book. I expect to read both of DF books this winter. However, because of the information I found on the web about dividend stock investing and the tax breaks available, I have already invested some money in a dividend stock mutual fund.

Four Pillars posted an overview of his investment plan. One point I liked is that he has limited his leveraging to a level he is comfortable with, currently about 10% of his investments. I strongly encourage anyone with a mortgage to take a hard look at the SM opportunities in conjunction with a financial planner. It is normal to be wary of leverage, but rather than do nothing and let the years slip by, one can follow FPs lead and start with a percentage limit on the leveraged portion of one's portfolio. I recall having trouble sleeping when I took out larger mortgages years ago but I quickly forgot about it. After a short while the extra debt "was normal" and I never gave it much thought. In the final analysis we all leverage our investment in real estate when we take on a mortgage.

The Financial Blogger is posting his real time experience with the SM. I look forward to following his progress. It is a good blog to read if your afraid of the SM. It doesn't sound very scary because the numbers start out quite small. It gives one a chance to "grow into it" over time.

Million Dollar Journey's blog has a great guest post by Melanie McLister that summarizes the SM and provides a link to a table of comparison for Canadian sources of special mortgages needed for this strategy.

Buy Order...TSX Index Mutual Fund on Sale Today

2007-09-05T08:30:00.000-07:00

Anyone else buying into the downturn?

The market news this morning is on the negative side and my earlier expected drop below 12500 for the S&P TSX Comp Index is still a possibility. The volume continues to decline as the index climbs above the low made in August. However, a drop below 12500 in the near term is not guaranteed, so I bought a little more index-e fund at this time. A buy at this time builds in a 6.5 percent advantage compared to buying after the market recovers from this temporary setback. My plan is to buy more units if the index goes lower, averaging down.

I wouldn't do the same thing with a stock issue...that would hold too much risk for my liking but history teaches us that the index always comes back.

Canada Bank Rate History 1956-2006

2007-09-03T18:26:00.000-07:00

Since the prime bank rate is such a key factor in many financial decisions, I found a history on the web and graphed the January Rate. The average prime rate over the 50 years from 1956 to 2006 was 7.58 %. The extreme range was a low of 3.5 % in 1956 and a high of 20.0 % in 1981. The highest stretch of rates was the seven (7) year period from 1979 to 1985 when the rate never went below 10.5 %. Talk about 7 years of bad luck!

Keep in mind that these are prime rates and fixed rate mortgages are always higher.

Smith Manoeuvre Review...September 2, 2007

2007-09-02T08:14:00.000-07:00

I'm still reading the book and reviewing some comments on other blogs. It took me awhile to understand the basics. Not because I am older, and not because I am new to this kind of financial stuff, my resistance goes much deeper. It is contrary to my basic emotional programming. I guess I also thought that this sounds too good to be true.

I must admit that I am still trying to "get use to the idea". It makes a lot of sense logically and mathematically but like most everyone else I have been brain-washed with the working-class belief that debt is bad and that we should run away from it as fast as we can. Our beliefs come from our parents, friends, relatives, books and the media. Were all driven by fear. When I read other posts on the SM I know I am not alone on this issue.

Smith makes some excellent points beyond just using leveraging. That when it comes to investing in things that go up in value such as equities or real estate, "time is our friend". That is not a new concept, I have "know it" for many years. But Smith has found a way around the "big rock" in the stream, he shows us a way that we can overcome an imaginary obstacle, like the migrating salmon, we can jump over it. He gives us a solution that we never had before. It is positively brilliant.

It then follows that to wait "to invest", until the mortgage is paid off is not the best course of action. It is a "missed opportunity".

The reality of it all is that in order to become financially independent and retire at an early age, we need to own our own home and own other investments as well.

The SM is much more than just leveraging to buy investments. Smith also demonstrates the benefits of selling current investments like CSBs, Term Deposits or equities, using that money to pay down the mortgage, then borrow it back to re-invest. Many of us have a mortgage and money invested in other things at the same time. I was in that position for a couple of decades.

By simply re-arranging our financial house to take advantage of the tax benefit, we can keep our total debt the same, own all the same stuff, and get a big tax refund on top of it all. The tax refund can be used to pay off the mortgage sooner or to buy more investments. One's dollar level of debt never goes higher than the original size of the mortgage. And, with inflation, that debt actually reduces over time. A debt of $100,000 today is really less than a debt of $100,000 ten years ago. So one's debt level and amount of leverage actually reduces over time using the SM.

What about our fears...what if a bear market occurs? What if interest rates rise? These are excellent questions and I think one needs to go into the SM with eyes wide open and with "an emergency plan". Having an emergency plan reduces stress.

I don't know if my emergency plan ideas for the SM are the best ones, but here are a few initial thoughts.

Emergency Plan Ideas
If interest rates go crazy, like they did back in the early 1980s - and mortgages go above 20 percent, what can one do with leveraged investments? I can think of several options.

Owning equity investments, in addition to one's home, is not the same thing as owning a more expensive house. You can't sell half of your home quickly, easily or conveniently. In comparison, with the SM you have more control. Equity investments can be easily sold to reduce the amount of leverage.

Using the SM one owns the equity investments free and clear. They are not "bought on margin"(the old scary method) so you will never see a margin call that forces you to sell anything during a market crash. You won't be tempted to jump off a 10 storey building. You will therefore always have total control on the degree to which you are leveraged.

When and if it happens, you will have to weigh the pros and cons of selling equities and losing the tax refund. Higher interest rates will also bring higher tax refunds to your door to mitigate the situation. It may come down to whether or not one can meet higher monthly payments. Keep in mind that interest rates don't go from 6% to 20% overnight. You will have some time to consider your options.

During a long bear market one could sell some equities in the SM leveraged portfolio and replace them with interest paying things like Term Deposits, GICs or CSBs. During periods of high mortgage rates, these things would also be paying much higher interest rates. I can recall getting in-the-order of 18% on term deposits back when mortgage rates went above 20 %.

Another option may be to lock into a fixed interest rate loan for the investment account.

Smith also discusses the option of capitalizing interest. CI means borrowing more to pay the interest. Doing some of this would also be a way to control monthly payments.

The Smith Manoeuvre Review...September 1, 2007

2007-09-01T05:56:00.000-07:00

I'm currently reading "The Smith Manoeuvre" by Fraser Smith, 2002. ISBN 1-55369-641-7.

So far I'm finding the book quite good and easy to understand. It is a quick and easy read if you don't stop to check the math. Theoretically, in hindsight, had I discovered the SM back in the mid 1980s, when the author first invented it, and had I implemented it on my mortgage, and had I understood the market, as much as I do today... back then... then I would be a lot richer than I am now. Hindsight is 20/20 and there are a lot of "ifs" in this statement!

One of my initial concerns was that the SM required one to take on additional debt. This doesn't seem to be the case. As I understand it, for the Plain Jane version, one's total debt never exceeds the initial amount of the mortgage for the life of the mortgage. That is less scary than taking on a mortgage plus additional debt for investments.

I also like the fact, that for young people, the investments grow slowly over time, giving one time to adjust to the reality of market volatility. It forces one to "dollar cost average" into the market. Even if one understands very little about the market, dollar cost averaging builds in a safety factor against really dumb moves. But be very careful here....dollar cost averaging alone is not enough to save one from big stock market mistakes.

The SM depends upon using financial leverage to help one grow their net worth over time. However, financial leverage can also make a bad move much worse. In general, the SM alone does not guarantee success and it could make things much worse.

When applying the SM one should have a solid understanding of how the stock market works and the historical pitfalls. "The Four Pillars..." book is a good primer on this issue. In particular, learn about the historical mistakes that keep repeating themselves with each generation. Each and every time market participants think "this time is different".

A worse case scenario for the SM would be where one invests a very large "lump sum" into the market, in the wrong (high risk) investments, at the worst possible point in time. This could happen with a mature SM account, where the owner gets caught up in a buying mania, sells and buys a large sum of investments within the portfolio, or where one begins the SM with a large lump sum borrowed on a home that had been owned free and clear before the SM.

For example, if an investor (gambler) made a lump sum purchase of dot.com stocks such as Nortel (NT)or Cisco (CSCO) or even the entire Nasdaq Index near the peak of ~5000 in late 1999 or early 2000. This was a classic case of "irrational exuberance" when many people treated the market like a gambling casino. Then, during the subsequent severe bear market, the investor/gambler "lost heart", gave up on the "buy and hold" philosophy because the pain was too great, and sold it all at a large loss. That loss would then be in the form of debt, debt that the investor/gambler must pay interest on until it is paid off.

One redeeming fact is that the interest on that debt is all income tax deductible. Also, if the SM had been in place for a number of years with significant profits accumulated, prior to the dumb mistake, these profits would help offset the big error.