The following is excerpted from Robert Prechter’s Independent Investor eBook. The 75-page eBook is a compilation of some of the New York Times bestselling author’s writings that challenge conventional financial market assumptions. Visit Elliott Wave International to download the eBook, free.
By Robert Prechter, CMT
…The natural tendency of people to apply physics to finance explains why successful traders are so rare and why they are so immensely rewarded for their skills. There is no such thing as a “born trader” because people are born — or learn very early — to respect the laws of physics. This respect is so strong that they apply these laws even in inappropriate situations. Most people who follow the market closely act as if the market is a physical force aimed at their heads. Buying during rallies and selling during declines is akin to ducking when a rock is hurtling toward you.
Successful traders learn to do something that almost no one else can do. They sell near the emotional extreme of a rally and buy near the emotional extreme of a decline. The mental discipline that a successful trader shows in buying low and selling high is akin to that of a person who sees a rock thrown at his head and refuses to duck. He thinks, I’m betting that the rock will veer away at the last moment, of its own accord. In this endeavor, he must ignore the laws of physics to which his mind naturally defaults. In the physical world, this would be insane behavior; in finance, it makes him rich.
Unfortunately, sometimes the rock does not veer. It hits the trader in the head. All he has to rely upon is percentages. He knows from long study that most of the time, the rock coming at him will veer away, but he also must take the consequences when it doesn’t. The emotional fortitude required to stand in the way of a hurtling stone when you might get hurt is immense, and few people possess it. It is, of course, a great paradox that people who can’t perform this feat get hurt over and over in financial markets and endure a serious stoning, sometimes to death. Many great truths about life are paradoxical, and so is this one.
For more information, download Robert Prechter’s free Independent Investor eBook. The 75-page resource teaches investors to think independently by challenging conventional financial market assumptions.
Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
Wednesday, March 25, 2009
Friday, March 20, 2009
Are We Near a Low in the Stock Decline? Two Unique Charts Reveal the Answer
Robert Prechter, New York Times best-selling author and renowned market analyst, was recently asked to present his thoughts on the real estate market and the financial crisis to the Georgia Legislature. The following article has been adapted from the transcript. Elliott Wave International has made the full presentation available free, including the full transcript and 30-minute online video.
By Robert Prechter, CMT
I'd like to try to answer a question: “Are we near a low in the stock decline?” Because in these times when stocks and real estate are declining together, they tend to bottom roughly together as well. So I want to take a minute and look at a valuation chart for the stock market.
What we have here on the “X” axis is the bond yield/stock yield ratio for the S&P 400 companies. Sounds fancy, but all it means is that the further you go out to the right, the less companies are paying in dividends compared to what they are paying on their IOUs—on their bonds. On the “Y” axis we have stock prices relative to book value. Book value is roughly equivalent to liquidation value, in other words, if you went and sold all the assets on the open market. When stocks get expensive, prices tend to rise relative to book value, and dividends tend to fall relative to the cost of borrowing. Why does that happen? At such times, people don't really care about dividends because they think they are going to get rich on capital gains. So dividend payout falls, and stocks get more expensive.
The small square boxes indicate year-end figures. The large box is a general area that has contained values for the stock market for most of the years of the 20th century. We had a few outliers: 1928 and August 1987, which preceded crashes in the stock market. And of course stocks were really cheap in the early '30s and again in 1941. If you are really astute, you have noticed something about this chart, which is that I've left off some of the data. It ends in 1990. What happened in the past two decades? Now I'm going to show you same chart but with the data from the last two decades on it. The March 2000 reading we call Pluto. Real estate wasn't so bad; I think it only got to about Neptune. But the stock market reached Pluto in March of 2000 in terms of the bond yield/stock yield ratio and the price multiple of the underlying values of companies. That's going to take quite awhile to retrace.
I've also plotted the reading for November 2008. The market has made quite a trek back toward normal valuations, but if you look at these multiples in terms of book value, we are at 4 times. It has to go down to 2 times to get back into the box, and we are getting there on the bond yield/stock yield ratio which means that the dividend payout is rising somewhat to catch up with borrowing costs. And because the S&P is down 45%, of course, the dividend payout as a percentage has gone up. But there is a problem there. If you're reading the newspapers, you know that companies have been cutting dividends. In fact, they've been cutting them at the fastest rate in half a century. So it is going to be difficult for values to get back to a normal valuation range. So the stock market has quite a bit lower to go in order to catch up with normal values, and this suggests that real estate may have the same sort of trend going on.
For more information, access Robert Prechter's full presentation to the Georgia Legislature, free from Elliott Wave International. It expands on the excerpt above with the full transcript, a 30- minute online video, and 12 additional charts and figures.
Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
By Robert Prechter, CMT
I'd like to try to answer a question: “Are we near a low in the stock decline?” Because in these times when stocks and real estate are declining together, they tend to bottom roughly together as well. So I want to take a minute and look at a valuation chart for the stock market.
What we have here on the “X” axis is the bond yield/stock yield ratio for the S&P 400 companies. Sounds fancy, but all it means is that the further you go out to the right, the less companies are paying in dividends compared to what they are paying on their IOUs—on their bonds. On the “Y” axis we have stock prices relative to book value. Book value is roughly equivalent to liquidation value, in other words, if you went and sold all the assets on the open market. When stocks get expensive, prices tend to rise relative to book value, and dividends tend to fall relative to the cost of borrowing. Why does that happen? At such times, people don't really care about dividends because they think they are going to get rich on capital gains. So dividend payout falls, and stocks get more expensive.
The small square boxes indicate year-end figures. The large box is a general area that has contained values for the stock market for most of the years of the 20th century. We had a few outliers: 1928 and August 1987, which preceded crashes in the stock market. And of course stocks were really cheap in the early '30s and again in 1941. If you are really astute, you have noticed something about this chart, which is that I've left off some of the data. It ends in 1990. What happened in the past two decades? Now I'm going to show you same chart but with the data from the last two decades on it. The March 2000 reading we call Pluto. Real estate wasn't so bad; I think it only got to about Neptune. But the stock market reached Pluto in March of 2000 in terms of the bond yield/stock yield ratio and the price multiple of the underlying values of companies. That's going to take quite awhile to retrace.
I've also plotted the reading for November 2008. The market has made quite a trek back toward normal valuations, but if you look at these multiples in terms of book value, we are at 4 times. It has to go down to 2 times to get back into the box, and we are getting there on the bond yield/stock yield ratio which means that the dividend payout is rising somewhat to catch up with borrowing costs. And because the S&P is down 45%, of course, the dividend payout as a percentage has gone up. But there is a problem there. If you're reading the newspapers, you know that companies have been cutting dividends. In fact, they've been cutting them at the fastest rate in half a century. So it is going to be difficult for values to get back to a normal valuation range. So the stock market has quite a bit lower to go in order to catch up with normal values, and this suggests that real estate may have the same sort of trend going on.
For more information, access Robert Prechter's full presentation to the Georgia Legislature, free from Elliott Wave International. It expands on the excerpt above with the full transcript, a 30- minute online video, and 12 additional charts and figures.
Robert Prechter, Certified Market Technician, is the founder and CEO of Elliott Wave International author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
Thursday, March 5, 2009
CNBC = An Empty Wagon Is the Noisiest
How is it that Jim Cramer thinks he is on some White House enemies list? It is odd how these tools, Limbaugh's and the Cramer's, think so highly of themselves that they are on some enemies list. Narcissism describes the trait of excessive self love, based on self-image or ego. The term is derived from the Greek mythology of Narcissus. Narcissus was a handsome Greek youth who rejected the desperate advances of the nymph Echo. As punishment, he was doomed to fall in love with his own reflection in a pool of water. Well evidently some also fall in love with the sound of their own voice! I wish rush could pass us some of those painkillers from his housekeeper before our heads explode.All the talk that these type of people are out to do good for others is a tall tale. Jim Cramer will be the first to tell you how he is out there fighting for the average guy to help him make money in the market.
"I fight to help viewers and readers make and preserve capital. I fight for their 401(k)s, for their 529s and their IRAs. I fight for their annuities and for their life insurance policies. I fight for their profits, trading and investing. And in this horrible market, I fight to keep their losses to a minimum by having some good dividend-yielding stocks from different sectors, some bonds, some gold and some cash." Jim Cramer
Now Jim is not all bad, but he is still a carnival barker. He is there to get people into the tent, the tent of CNBC. The sheep who tune into his show and blindly buy buy buy get what they deserve. Many have taken enough shots of the cool-aid that they tell you all the great trades they have made. I hope that is the case. But, how hard is it to pick stocks in a raging bull sector and not make money? I have seen so many disingenuous arguments made on Mad Money. One that will always stick out is the great idea to buy an insurance company after Hurricane Katrina. To say they would benefit long term because of increased insurance rates was careless at best. To preach "do your homework" and then to recommend MRH-Montpelier Re is downright irresponsible. Homework aside, the bigger question was why of all the insurance stocks in the universe, did Jim Cramer recommend this turd. I am sure his recommendation helped someone get out of some stock, not sure who.
MRH - Montpelier Re
Someone who is championing themselves to help the average investor would not recommend buying a stock into earnings. One night I remember the great recommendation Jim made of buying Dick's Sporting Goods- DKS. The stock closed a little over $39 and was trading up over $41 in after-hours once it was mentioned on Mad Money. This stock was to have earnings released the next morning before the market opened and should have never been mentioned. The stock closed the next day at $33. If you are out to help the average investor, not recommending stocks the night before an earnings release in the morning would be a nice place to start. All the sellers at $41 that night were happy.The people who have some really good advice and insights for the average and even the above average investors are not people you will see screaming their heads off on TV. They are people that you would feel comfortable in recommending if your parents asked who to listen to or who to read up on. The thought of people my parents age and friends who have really worked hard for their money listening to Jim Cramer get off on hearing his own voice is scary and depressing.
Time is better spent reading books by David Swensen, John Bogle, and Benjamin Graham. Trust me you will be better off and won't need medication to deal with the headache you get from CNBC.
Monday, March 2, 2009
A Better Way To Handle a Shrinking Business
February 26, 2009
This article is part of a syndicated series about deflation from market analyst Robert Prechter, the world’s foremost expert on and proponent of the deflationary scenario. For more on deflation and how you can survive it, download Prechter’s FREE 60-page Deflation Survival eBook, part of Prechter’s NEW Deflation Survival Guide.
The following text was originally published in Robert Prechter’s February 2009 Elliott Wave Theorist
By Robert Prechter, CMT
During depressions, many businesses make a fatal mistake: They lay off employees. Some businesses have no choice; if the product or service is related more to quantity than quality, then perhaps there is no alternative. But many businesses are far better served by keeping their employees and reducing compensation. That way, they can continue to serve customers with full quality and stand ready to lead the competition when the next economic expansion arrives.
Surely most employees would rather endure an across-the-board salary cut than risk being laid off. In the 1930s, General Electric polled its workers on this very question, and the majority agreed that they would rather endure salary reductions. A few years later, when the economy recovered, GE had all of its employees in place and did not have to spend years recruiting new people. It shot out of the gate in full operating mode.
Moreover, the company had made progress improving designs and making plans during the lull. When business picked up, so did salaries. In the end, it was win-win for everyone.
Take, for example, a news service that needs to reduce costs. Instead of cutting staff by 50 percent, thereby forcing a radical reduction in the scope of the news coverage, it would make more sense to cut salaries by 50 percent and retain full service. If lowering the price of the service would keep the subscriber, viewer or listener base steady, or if reducing the cost of advertising would keep the support base steady, it would be better to make one of those moves rather than cutting staff. Either program would maintain quality and serve to keep the service in the forefront among news providers. Inflexible competitors would go out of business, thereby helping the survivors.
If an airline is in trouble, it should not cut routes and service while holding prices and salaries up. It should cut salaries and prices and continue serving the highest possible number of customers. That way, it will be the carrier of choice for many fliers when the economy returns to expansion mode. Again, everyone wins, including the employees.
This idea would work well for any business that does not have long-term contracts – such as with labor unions or high-level employees – guaranteeing salaries. Even in such a case, negotiating reductions would be smarter than going bankrupt.
This approach could work for many kinds of businesses: airlines, manufacturers, newspapers, shippers and sports teams, to name a few. If you work for a business for which this plan would serve, mention it to those in management. Even they would probably prefer a reduction in income to none at all.
Reducing salaries has another benefit, which is that fewer people would go to the state for “unemployment benefits,” reducing the strain on state budgets and taxpayers. If your business would operate better with all its employees, consider a company-wide salary reduction as opposed to layoffs.
……….
For more on deflation, download Prechter’s FREE 60-page Deflation Survival eBook or browse various deflation topics like those below at www.elliottwave.com/deflation.
* What happens during deflation?
* Deflation survival
* Why is deflation bad?
* Deflation personal debt
* And much more in Prechter’s FREE Deflation Survival Guide.
Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
This article is part of a syndicated series about deflation from market analyst Robert Prechter, the world’s foremost expert on and proponent of the deflationary scenario. For more on deflation and how you can survive it, download Prechter’s FREE 60-page Deflation Survival eBook, part of Prechter’s NEW Deflation Survival Guide.
The following text was originally published in Robert Prechter’s February 2009 Elliott Wave Theorist
By Robert Prechter, CMT
During depressions, many businesses make a fatal mistake: They lay off employees. Some businesses have no choice; if the product or service is related more to quantity than quality, then perhaps there is no alternative. But many businesses are far better served by keeping their employees and reducing compensation. That way, they can continue to serve customers with full quality and stand ready to lead the competition when the next economic expansion arrives.
Surely most employees would rather endure an across-the-board salary cut than risk being laid off. In the 1930s, General Electric polled its workers on this very question, and the majority agreed that they would rather endure salary reductions. A few years later, when the economy recovered, GE had all of its employees in place and did not have to spend years recruiting new people. It shot out of the gate in full operating mode.
Moreover, the company had made progress improving designs and making plans during the lull. When business picked up, so did salaries. In the end, it was win-win for everyone.
Take, for example, a news service that needs to reduce costs. Instead of cutting staff by 50 percent, thereby forcing a radical reduction in the scope of the news coverage, it would make more sense to cut salaries by 50 percent and retain full service. If lowering the price of the service would keep the subscriber, viewer or listener base steady, or if reducing the cost of advertising would keep the support base steady, it would be better to make one of those moves rather than cutting staff. Either program would maintain quality and serve to keep the service in the forefront among news providers. Inflexible competitors would go out of business, thereby helping the survivors.
If an airline is in trouble, it should not cut routes and service while holding prices and salaries up. It should cut salaries and prices and continue serving the highest possible number of customers. That way, it will be the carrier of choice for many fliers when the economy returns to expansion mode. Again, everyone wins, including the employees.
This idea would work well for any business that does not have long-term contracts – such as with labor unions or high-level employees – guaranteeing salaries. Even in such a case, negotiating reductions would be smarter than going bankrupt.
This approach could work for many kinds of businesses: airlines, manufacturers, newspapers, shippers and sports teams, to name a few. If you work for a business for which this plan would serve, mention it to those in management. Even they would probably prefer a reduction in income to none at all.
Reducing salaries has another benefit, which is that fewer people would go to the state for “unemployment benefits,” reducing the strain on state budgets and taxpayers. If your business would operate better with all its employees, consider a company-wide salary reduction as opposed to layoffs.
……….
For more on deflation, download Prechter’s FREE 60-page Deflation Survival eBook or browse various deflation topics like those below at www.elliottwave.com/deflation.
* What happens during deflation?
* Deflation survival
* Why is deflation bad?
* Deflation personal debt
* And much more in Prechter’s FREE Deflation Survival Guide.
Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.
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