Wednesday, February 28, 2007

Post Sell Off Comments

This will be my last post until next week. But, I wanted to make a few comments post yesterday's sell off. What do I find most ironic with yesterday's sell off? Two things. One, many are stating this is a one day event based on a system failure and two, the gold bugs, who kept telling everyone to buy gold as a safe haven saw the yellow metal crater.

Alot of people who have their head in the sand finally woke up to reality. I'm not going to sit here and gloat because I hate to see people lose money and I worry about society's well being if economies weaken. I gain no satisfaction from the misery be it mine or anyone else's. But, I must say there are too many people on Wall Street that are living in a false reality. Their anecdotal models are more concerned with what other people think, ie sentiment, than what matters. It's an extension of our society. We have sentiment pollsters forming public policy for our politicians. We have politicians deciding how to talk and walk based on polling data. We have marketing organizations turning newsrooms into paparazzi. We are bombarded daily by marketing messages created by pollsters. And, finally, we have sentiment pollsters giving Wall Street a sense of security based on what people think as opposed to what is important. In addition, too many self appointed wizards think they understand markets because they've learned how to read the stock market "new highs" list on Yahoo's web page or the 14 day stochastics. Therefore, they have a false sense of security based on very shallow knowledge levels. Markets demand tremendous respect and humility. This is not Wheel of Fortune or The Bellagio.

What amazes me is the response yesterday and today from the talking heads the pollsters have placed in front of the average investor to enlighten them. I have to generally disagree with many general conclusions. I will grudgingly have to say that Jim Cramer has generally helped educate the average investor. I have mixed perspectives in that he has a very wry sense of humor that I absolutely love. But, he's all over the map with buying and selling ideas and it is my opinion people should not be trading in and out of investments based on sound bites. Again, a reflection of our culture's desire for instant gratification. I figured I'd listen to Mad Money last night for some ideas on a post.

I only listened to the first five minutes of his show, but he said one thing I agreed with. In fact, one thing that only I seem to write about in the financial blogging or even financial media community. (Which truly amazes me because it isn't rocket science.) The controls instituted post 1929 to protect individual investors have been dismantled and professional money is now trading against their clients. Jim, if you are reading my blog, thanks. (I'm sure he isn't but I thought it's worth a shameless self promotion since everyone else does it. ) I have to say I totally disagree with his comments about the market. He blames this sell off on a system failure. That is totally erroneous. This volatility has been building for over two months. This had nothing to do with a system failure.

He said the controls in place haven't been tested since 1987 thus implying there was some dust on the logic and these systems needed to be re-evaluated. That is absolutely incorrect. Today, the Nasdaq declined 4%. If my quick calculations are correct, we saw about sixty or seventy 4% single day Nasdaq corrections from the prior day's close through the tech bubble bursting. It hasn't been since 1987 that we've had this type of day. We've had alot of these types of days. And not too many years ago either. We've even had some where the market resumed and went on to make new highs. Not too many but it has happened. Low volatility is an anomaly. It's like a spring being would tighter and tighter. New financial instruments and sophisticated trading tactics may reduce volatility for some time but it can never be a new permanent state of being.

If this was simply a result of a glitch, did the systems in China, Australia, Europe, Japan and elsewhere fail? This had nothing to do with a system failure. There was an order imbalance or some other technical issue that caused temporary problems late in the day but by then the damage was done. Did we see a minor late day swing based on a glitch? I'll leave that explanation to the IT team at the NYSE. But, who cares? The market had already had its worst losing day in years by the time it occured. I'll tell you what really concerns me. We have now seen order execution problems in the Nikkei last year and the NYSE this year. Likely the two of the three most sophisticated equity markets along with London. If there is not a guaranteed order flow, we are going to see the possibility for short term panics in developed markets should we see a serious melt down at some point. They may be remote possibilities but they exist. That, my friends, is something I do not want to be dealing with.

It is very, very naive to believe this is possibly a one time event as is being implied by some in the ill-informed financial press. With cyclical stocks the most extended in decades, we could see dozens of these types of days before the market starts another major bull market. Yet, one must keep in perspective that a continuous month of days like today would put the markets near zero. Two hundred years of the NYSE wiped out in a month? Don't let that last statement lull you into a sense of security. 1987 wiped out tremendous wealth in a few days. The investment distribution curve in not a normal one.

I've already said it but I'll say it again. Expect more risk and volatility this year.
posted by TimingLogic at 8:39 AM links to this post

Tuesday, February 27, 2007

I am BEAR. Hear me ROAR. If you read this blog and you were caught off guard, shame on YOU because you have learned nothing!

posted by TimingLogic at 2:54 PM links to this post

Chinese Stocks Crumble

I've written recently that the general market structure has changed this year. I've also written that Chinese and Russian equities are in a blow upwards similar to the enthusiasm in U.S. equities in 2000. As I've stated bubbles typically come in pairs and I expect global investors are very unprepared for another bout of serious declines in asset prices be it now or any time in the future.

More than half of the listed shares in China fell by their limit of 10% today. This is after last year's devastating declines in emerging markets, murderous declines in the Middle East oil driven markets and a prior blow off then mini crash in Russian equities that I've written about extensively. I already see people writing off the Chinese speculation stating it will not affect the Chinese economy. Well, losing $10,000,000,000,000 of market capitalization in the U.S. in 2000 surely didn't help the economy. So may I ask what these pundits are thinking?

Remember, China's regulatory control over financial markets is ungodly weak and many of these companies are government controlled institutions. I have written extensively of risk in emerging markets and risk where investor protections are very weak. Will the selling continue? Will the communist government in China be able to pre-empt a rout with intervention? Will they try to intervene? Will market manipulation even work? We don't know where this will end but it likely won't be a happy ending. This coincides with what may be the final stages of a second speculative top in the U.S. to marry the one in May of 2006. It's no coincidence I timed the chart of gold to be up yesterday.

Remember, what happens to the global resource play if China's equity market experiences a major decline? That includes gold, copper, oil, zinc, nickel, lead, etc. We have to see how events unfold but I expect the recent move in gold is a speculative coincidence with the speculative emerging market blow off we are witnessing.
posted by TimingLogic at 6:16 AM links to this post

Monday, February 26, 2007

Gold: The Anti-Fiat Hedge?

Click on the chart for a larger graphic. The gold ETF, GLD, in blue and gold demand in red.

Ok, so it seems every so often the "world is coming to an end" crowd hits the street running with Gold Is God rhetoric. Paper money is dead. The world's central bankers are destroying wealth. Only gold will save you in the coming crisis. Now is one of those times the gold bugs are feeling vindicated.

There is no doubt inflation has taken its toll on the dollar. Today's dollar is worth alot less than a dollar of the last decade or the decade before that as is the case with all currencies. But, one also benefits from inflation in the form of rising asset prices such as stocks and real estate. Mortgages taken out thirty years ago benefit from inflation as well. So does all long term government debt. If I can borrow for $1 today and pay you back with equivalently 10 cents or some fraction at a point in the distant future, is that entirely bad? People and countries benefit from a strategy of mild inflation. Sustained mild inflation typically means economic growth is taking place. In other words, paper money affords everyone an opportunity. If one understands the role of inflation and the benefits of paper money, they can develop a strategy to stay abreast of it or benefit from it rather than constantly trying to overturn the system or claim conspiracy theories. Don't we already have enough to worry about?

I have generally stayed clear of gold discussions on here. I don't think I've mentioned gold as an investment at all. It's not that I am oblivious to it. There are times to consider gold as an investment just like any other asset class. Gold has a strong appeal in times of heightened risk for economic or currency induced calamities. But gold is also appealing to those who are always bloviating that economic prosperity and the associated rise of economic assets are part of some conspiracy that is bound to end tomorrow. For all I know the world might end tomorrow. But, I doubt it will be caused by central bankers.

I'll repeat myself again by saying The Fed, the EU Central Bank, the Bank of England, The Bank of Japan, The Reserve Bank of Australia or any other central bank does not have a death wish for their respective currencies or economies. They have a fairly good idea of what actions would cause the death of their currencies and economies so paranoia is generally not well directed. I'm not saying events could not unfold which are beyond typical thinking because they do and will continue to do so. Central bankers are sometimes contributors or unable to stop said events. I've said on here time and again that central bankers cannot induce economic prosperity or always save economic expansions by easing monetary policy as so many believe. If you believe this, you are completely wrong. If it were so easy, making money would only require one to "show up".

Gold is oft considered a hedge against inflation. Seemingly unbeknownst to many, gold is also considered a hedge against deflation. It's basically a hedge against risk be it real or perceived. (Most of the time perceived.) But, as gold and gold miner stocks rise many believe its a sign central bankers are printing money. When the stock market rises, those same people are calling it manipulation. What's the difference other than personal bias? The Federal Reserve and other central banks definitely aren't in money printing mode right now.

The compelling nature of the gold investment thesis has been almost completely invalid from a historical perspective. If you are an agile trader, you might be able to take advantage of gold's volatility at certain times in history. But, during those moves of higher volatility, gold has also buried many investors with wild swings downward. A long term hedge or investment? Do you want to know how well gold has been as a long term investment? Gold is valued in the same dollar that it was thirty years ago and longer. The Nasdaq is up well over 1,000% in the last few decades even after the massive crash of 2000. Gold? Well, depending on where you measure from, it's either negative in its return over that period of time or has a return of about zero.

Many argue that inflation has killed the dollar over the decades. They tell you to buy gold instead. Gold can still be bought with that same measly dollar in the same general trading band that has existed for the last thirty years. Can you buy Intel with that same measly dollar for what it was worth thirty years ago? How about Exxon? Microsoft? Johnson & Johnson? Wal-mart? Target? Citigroup? Bank of America? Thank you very much but I'd prefer to invest in the industriousness of a free society over the long term rather than gold.

Would I buy a gold ETF or gold miners at the right time? Sure, as a trade. Maybe a trade lasting years. Yet, it would take a really terrible economic calamity for me to buy gold with the intent of holding long term. Not the prospect of a calamity as has been fabled time and again but actually having one. If we ever see a true economic mess, it doesn't matter whether I own gold, dollars, yen or anything else. The pain will be well beyond any individual's perceived control and we are all going down with the ship. Why invest long term in an asset which has had a terrible record as an investment vehicle?

Curiously, as gold stretches toward $700 an ounce again, demand for gold is no where near where it was the last time it reached this level. I could interpret that statement two ways. One, that means demand could continue to rise significantly with weak hands shaken out or two, this is a very weak attempt at making a substantial new high and the smart money isn't along for the ride. It might be of interest to know every Tom, Dick and Harry is crowded into the the "long" gold trade here. So I'd say we are more likely near a top in gold than a move to $1,000 or $2,000 as some have speculated. Will we get to those levels some day? That likely depends on macro events that have yet to unfold. Unless, one believes certain asset price movements are somewhat pre ordained. I'm open to such a perspective but don't know that to be a fact. The trend is your friend and gold's trend is up but there are many nonconfirmations surrounding this move.
posted by TimingLogic at 8:45 AM links to this post

Friday, February 23, 2007

A Little Nerd Humor

There's a little nerd in most of us. So, I thought this might be worth a few chuckles. A friend sent me a dozen pictures of "creative" exam answers. I don't want to clutter up my blog with all of them so I picked one that I thought deserved special attention. Very creative. (In case you cannot read the text in on the right hand side of the picture, it says "Bruce Wayne" aka Batman.

Back to more serious posts next week.

posted by TimingLogic at 9:09 AM links to this post

Wednesday, February 21, 2007

Albert Einstein's Stamp Of Approval For TimingLogic.Blogspot.Com

Most of you probably don't know Albert Einstein and I were the best of friends before he passed. Albert knew I would be blogging one day. So, in return for helping him on the General Theory of Relativity, he agreed to help me by endorsing my blog. I'd just like to take this moment to thank Al for his kind words. By the way Al, we know you rock!

posted by TimingLogic at 10:51 PM links to this post

Milton Friedman On Free Markets And Liberty

Well, my last effort at typing up a post was lost due to some glitch so I'm not in the mood to type alot right now. Therefore, I'm going to let someone else to most of the talking. As a quick note, I'm going to post one more commentary on the industrial economy within the next week or two.

I am very passionate about human rights, children's rights, civil liberties and the basic human dignity of freedom everyone on this earth should share. So much so that I find one of the most noble professions is that of human rights and civil liberties law. Thus, since President's Day was celebrated this week in the U.S., I'd like to post another topic as it pertains to freedoms, economics and civil liberties from one of the greatest thinkers of our time, Milton Friedman. Friedman was one of the first to blame central bankers for creating messes many decades ago. Because of his work, central bankers have now modified their policies to create more stable economies. Or so we will soon find out. If you enjoy original thought on the aforementioned topics, I guarantee this will be a very powerful read whether you agree with Friedman or not.

Many of the views expressed by Friedman in are quite radical. I like that. Not because his thoughts are radical for the sake of being radical but because his thoughts aren't the traditional group think of the herd. After reading this, you'll likely question many perspectives you held to be self evident. That's a good thing.

Here's the link to the compendium of interviews compiled by Reason. If you want to read more on Friedman, do a search on Reason for a wealth of Friedmanisms.

This is a great article!

Update: I'm assuming most people know Milton Friedman. He's a Nobel Prize winning economist.
posted by TimingLogic at 8:34 PM links to this post

Tuesday, February 20, 2007

Stop The Insanity Bus!

I'm getting off! Even this is too crazy for me. This daily speculation in the press about who is going to buy whom next is absolute stupidity. Yet, it is driving stocks up and down. The markets are now home to Gamblers Anonymous dropouts.

I've written on here about Daimler and Chrysler potentially de-merging and it now appears to be gaining traction. But, what is this of a GM-Chrysler merger? Are you kidding? Right on queue, Daniel Howes has chimed in with the only sane journalism I've seen regarding this story. If the GM board approved that deal, they should all be jailed for crimes against shareholders. Not really but this deal isn't going to happen if I still live in a world of reality. It doesn't stop the Wall Street spin machine from going into high gear. GM has limited ability to raise capital at anything other than junk levels and has spent the last year selling off assets to raise survival cash. Chrysler has no international operations, a dead product line, inferior products to GM, a bloated organization, a different culture and an ugly product pipeline. What would GM gain other than additional financial obligations, distractions from the focus they need and a glitch to slow down their own turnaround efforts? Why do I even see this type of gibberish in the press? More importantly, who are these dummies trading large amounts of stock on rumor? Look at the volume on the Daimler chart above. Gamblers are driving volume up 5, 10, 20 times normal volume on these rumors. It's now a form of short term investing which seems quite profitable. Or, should I say profitable until it is no longer profitable. People say there is a general bearishness in the markets? Bearishness is when there are BusinessWeek cover stories stating equity investing is dead not dummies pumping up stocks on every rumor reported by the paparazzi financial press.

The bottom line? There has been study after study performed and most mergers fail to deliver promised results. The failure rate is even greater amongst mergers of equals or near equals because of the extremely difficult job of integrating cultures as well as leadership roles. A problem that doesn't exist when Cisco, as an example, buys a small company to fill a strategy or technology gap. (John Chambers, the CEO of Cisco, gets mergers. They've done hundreds and they are usually quite small. He is on the record of stating that large mergers do not typically work.) If I were Toyota, Honda or Ford, I would be hoping for a merger. Energy focused inward on integrating cultures and reducing bureaucracy while I have an opportunity to beat GM like a drum by focusing my energy on product and customers.

The failure rate is almost assured amongst two weak companies such as Chrysler and GM. Two wrongs do not make a right yet the mergers and acquisitions crew on Wall Street doesn't care as long as they get their fees. We have evidence of this in the sellout that created DaimlerChrysler in the first place. A merger of equals with extremely different cultures. That deal was driven by greed and egos and never should have happened. It resulted in Daimler entering markets they knew nothing about and still don't. Daimler has never adjusted to the highly competitive, rapid paced business model at Chrysler. Daimler has the good fortune of an iconic brand in Mercedes yet they don't understand speed to market, rapid innovation and the flexible manufacturing principals required in a lower margin business. How do I know? Let the results speak for themselves. Frankly, it is my opinion they don't have a clue how to compete with Toyota or Honda. Ultimately, this will likely cause great turmoil in Daimler's core luxury business unless they adapt.

"Most mergers fail to add shareholder value-indeed, post-merger, two-thirds of the newly formed companies perform well below the industry average."
posted by TimingLogic at 9:10 AM links to this post

Monday, February 19, 2007

President's Day

In honor of America's greatest of Presidents, Thomas Jefferson, on this U.S. holiday, I thought it appropriate to post a link to the digital archives of Jefferson's writings at the University of Virginia which he founded.

I believe personal liberties of people around the world have always been and will always be under attack. It is the responsibility of each and every individual to remain diligent in protecting our inalienable rights, our civil liberties and our freedoms. Thomas Jefferson clearly understood the struggle to maintain these liberties would never end. Regardless of where you live, passionately embrace freedom; your freedom, the freedom of your fellow citizens and the freedom of all people around the world that one day we may all be free.

The quotes below and more are available at the link above.

"Single acts of tyranny may be ascribed to the accidental opinion of a day; but a series of oppressions, begun at a distinguished period and pursued unalterably through every change of ministers, too plainly prove a deliberate, systematic plan of reducing [a people] to slavery." --Thomas Jefferson: Rights of British America, 1774. (*) ME 1:193, Papers 1:125

"The greatest [calamity] which could befall [us would be] submission to a government of unlimited powers." --Thomas Jefferson: Declaration and Protest of Virginia, 1825. ME 17:445

"[It is] the people, to whom all authority belongs." --Thomas Jefferson to Spencer Roane, 1821. ME 15:328

"Whenever any form of government becomes destructive of these ends [i.e., securing inherent and inalienable rights, with powers derived from the consent of the governed], it is the right of the people to alter or abolish it, and to institute new government, laying its foundation on such principles, and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness." --Thomas Jefferson: Declaration of Independence, 1776. ME 1:29, Papers 1:315

"[We] disavow and declare to be most false and unfounded, the doctrine that the compact, in authorizing its federal branch to lay and collect taxes, duties, imposts and excises to pay the debts and provide for the common defence and general welfare of the United States, has given them thereby a power to do whatever they may think or pretend would promote the general welfare, which construction would make that, of itself, a complete government, without limitation of powers; but that the plain sense and obvious meaning were, that they might levy the taxes necessary to provide for the general welfare by the various acts of power therein specified and delegated to them, and by no others." --Thomas Jefferson: Declaration and Protest of Virginia, 1825. ME 17:444

"The oppressed should rebel, and they will continue to rebel and raise disturbance until their civil rights are fully restored to them and all partial distinctions, exclusions and incapacitations are removed." --Thomas Jefferson: Notes on Religion, 1776. Papers 1:548

posted by TimingLogic at 12:14 AM links to this post

Sunday, February 18, 2007

Turbo Hayabusa

Ok, now I know this is way off topic but I couldn't resist because I'm a motorcycle fanatic. I pulled this clip off of Autoblog.

This guy is casually wheelie-ing a Suzuki Hayabusa to 140mph, drops it and within ten seconds is up to 220mph. That's 140 to 220 mph in a throttle roll on in ten seconds! No, it's NOT kph as one commenter questions. It's mph.

There isn't a car less than $1 million that could even come close to this bike. Not that any of this has any redeeming value except to amuse me.

posted by TimingLogic at 12:00 AM links to this post

Friday, February 16, 2007

Ford Motor Company And The Detroit News

I wanted to put a quick post up this week on Ford after a very dour Ford article at

I believe some of the best automotive journalism anywhere is found at that site as I have mentioned before. Specifically, Daniel Howes, but the whole team is first rate. That's why I have it on my links section on the right side of my blog.

But, I must say the article today I reference above is what I consider noise. As I said in the last post, "focus on the turnaround, not the noise". Is there anyone who would expect morale at Ford or any turnaround to be cheery with 40,000+ layoffs and 16 plant closings? Is there anyone who expected Ford to meet their sales objectives in North America with an acknowledged weak product mix? This story is nothing new. Turnarounds are nothing but bad news. One thing to watch for is when bad news no longer sends the stock to new lows. That might give an indication the shares have moved from weak hands to strong hands.

Below is a chart for Ford's stock price going back nearly decade. Overlaid on the chart in red and green bar charts is Toyota. Obviously, Ford investors have been punished and Toyota investors look brilliant. Also overlaid on the chart my buying pressure algorithm. It seldom changes direction. Four times in a decade. Well, this obviously isn't a trading mechanism or a buy signal by itself but it appears some very big buyers have recently bought Ford. Too early? Maybe. Are they making their investment decisions based on Detroit News articles? Or have they met with the Ford management team? Have they reviewed the financials and turnaround plan with Ford? Are they making educated decisions or gambling? Time will tell.

posted by TimingLogic at 11:00 AM links to this post

Wednesday, February 14, 2007

The Industrial Economy Part Three: Transformational Efforts And Ford Motor Company

This is the third in my posts on the industrial economy. There may be one more. I haven't decided. I want to talk a little bit about corporate turnarounds. I'm not going to spend any time looking at a financial analysis because I generally think it's futile. But, concepts such as cash burn rate, free cash flow, debt loads, etc are surely determinant factors in any company's return to profitability. For me, it's a little too much of stabbing in the dark to make the assumptions used by most financial analysts. It's basically trend following. In turnarounds, trend following is almost by definition an oxymoron. Should any company in need of a transformational turnaround continue at trend, they will perish. As long as a company is reasonably capitalized and other things being equal, one has to really focus on a company's ability to execute as a primary driver in business transformation. All things being equal includes a compelling business model. It's different for Kodak than it is for Ford as an example. Ford has a very viable business model. Kodak is in the throws of trying to migrate from an annuity based razor-razor blade model (cameras-film) to the digital world. Does Kodak have a viable business model? That's much harder to determine because they are turning their old business model upside down in an attempt to survive.

In this post, I am talking about publicly traded companies. I must remind the readers I am not an investment advisor nor is any of this post to be construed as investment advice. I am simply sharing my experiences and perspectives. Re-read my disclaimer located in the left margin of my blog and make sure you clearly understand this. If not, you should cease reading this post, leave this blog never to return and find a new pastime because I take no responsibility for the reader's actions. It's sad I need to say this but some people have odd hobbies of blaming others for their mistakes.

Let's get going because this is a long post. What company was I talking about in the first post on the industrial economy? The company that has been decimated by competition, has an arrogant culture, inbred organizational structure, tired products and being slaughtered by Japan Inc? The company was Caterpillar a few decades ago when they were given up for dead. They were much worse off than Ford or GM. Since being given up for dead, a $10,000 investment in Caterpillar is now worth over $2.4 million. Would you be surprised to hear Caterpillar is now the most admired industrial company on earth? And, what if I told you it was also one of the most admired knowledge companies on earth? Uttered In the same breath as Google, Hewlett Packard, Microsoft and Apple? What did you say they make? Bulldozers? Pshaw, you say!

Today, everywhere I look people are talking about Toyota. Toyota to pass GM. Toyota passes Ford. Toyota to build plant in India. Toyota to introduce new pickup. Toyota introduces hybrid. Toyota, Toyota, Toyota. Now, don't get me wrong. Toyota is the god of auto manufacturers and an awesome industrial company. They are far from the insular, self defeating cultures of Ford or GM. They have a tremendous paranoia about failure and as Andy Grove stated, "Only the paranoid survive.". Or maybe more appropriately, Andy should be credited with realizing only the paranoid thrive. Forty years ago who would have predicted GM and Ford would be on the trash heap and Toyota would be the largest industrial company on earth? Who is willing to bet Ford might be a dominant, nimble industrial leader worthy of fear by the great Toyota forty years from now? "I'll never buy a Ford." "Ford will never get my money." Really? Do you think clients said the same thing about Caterpillar a few decades ago? They surely did.

While many are advocating a buy of Toyota or Honda stock here and now, I couldn't disagree more. There is no doubt they are the top two car companies on the planet but that is also factored into a premium equity valuation for both companies. In addition, it doesn't get any better than this for both companies. Two of the top three auto makers on the planet are going through the worst crisis in their history. Beating Ford and GM today requires little effort. All Toyota and Honda need to do is show up to win. Tomorrow, next year, five years from now, the competition from Ford and GM will be significantly more intense. Maybe brutally intense. No, the time to buy Toyota and Honda was four years ago at the start of this bull market. Now, buying Toyota and Honda is obvious to the main stream investor. That means reasonable odds are smart money will be distributing shares to uninformed investors at some point. Nobody likes Ford. Nobody believes. Nobody. And, that's why I love Ford Motor Company as a deep turnaround play. Because you never, ever, say never. Not with the incredible global franchise, global brand, tremendous technology, incredible talent and now a leader I believe has the right stuff, Alan Mulally.

Ford is a potentially powerhouse organization as is GM. I hear so many emotional responses when I mention Ford or GM as transformational stories. Did you know Ford is the only automobile company with a global brand and a strong history? Ford has been in international markets longer than many car companies have been in existence. Many people have never heard of GM because of its fragmented global branding efforts. Honda still doesn't have the global reach. Toyota is arguably the only equal of Ford's global brand. Is the Ford brand destroyed by recent troubles? Hardly. 95% of the world's population has not had a negative experience with a Ford product. Even today, in every continent sans the U.S., Ford is still building strong product and a dominant player. The hot European Mondeo has drawn rave reviews. Ford's S-MAX won the 2007 car of the year in Europe. Even in the U.S. where Ford is terribly weak on product right now, the company has a dominant position in the pickup truck market and a reasonably strong brand in the auto segment. If Ford can hold down the number two position in the U.S. with such a weak product line, what could it do were it firing on all cylinders?

Now, Ford was just downgraded to sell by a Wall Street firm. Yet another just upgraded them. Focus on the turnaround not the noise. How many Wall Street firms had a buy on Caterpillar when it was given up for dead? Zacks did a study a while back and found that companies with the fewest buy ratings are often the best investments. In other words, Wall Street is not the place to look for guidance on business transformation.

I like Ford over GM for many reasons. Let's look at a few. First, I don't believe GM has suffered the pain Ford has. Hence, I'm not convinced GM's leadership team has the passion and sense of urgency needed to really drive the company to new heights as it pertains to transformational change. Yet, I could be wrong. GM may have hit bottom but I am dubious. On the positive front, there is no doubt GM has stolen the thunder of nearly every mainstream competitor with their new product introductions and alternative energy concept vehicles. Ford is structurally alot more dysfunctional than GM and it is priced accordingly. GM has already progressed significantly down the path of global procurement, global manufacturing, global engineering and life cycle management. Ford is just coming to grips with these initiatives. Yet, Ford is extremely serious. They are levering the company in a bet that the current turnaround will be successful. Ford has hired a proven turnaround expert who understands lean manufacturing and worships Toyota's culture of excellence. He understands innovation, he's very focused in the customer and he realizes great product are key to their efforts. The new boss has quickly moved to align corporate strategy and organizational models to win globally instead of the local turf skirmishes of the old Ford. In other words, bring the global resources of Ford Motor Company to bear in winning your business. Finally, he has quickly instituted a culture of personal responsibility, empowerment and accountability that was lacking in Ford.

Looking at the pricing action of Ford's stock, there is a reasonable chance that all investors who want out of Ford are out. Ford recently had a powerfully capitulative month where nearly two billion shares changed hands. Drastically more than any time in its history. And, in doing so, the stock actually made a higher low. A very bullish sign of a possible washout. A prior bottom was reached four years ago at this level and the long term chart below shows strong support at the $7-8 range going back decades. Is this a double bottom in the making? While most lay investors look to weeks or months for bottoming patterns, turnaround stories of battered companies sometimes take many years to form. Let's look at some historical precedence in the form of Caterpillar. Caterpillar's double bottom in its stock price took eleven years. That's right. Eleven years of muddling through mismanagement, lack of focus and poor execution. Now, Ford's success is partly tied to a reasonably healthy economy and battered companies always face more uncertainty in late economic cycles. Therefore, reasonable risk exists if the global economy see a hard landing at some point. Ford may move lower or even enter bankruptcy if any down turn is very protracted. But, that isn't going to happen any time soon. The ingredients are in place for a Harvard business school case study.

Let's look at the similarities between Ford and Caterpillar. The comparisons are frighteningly similar.

1) UAW rank and file
2) Old line industrial company
3) Strong global franchise and brand
4) Lack of strong leadership
5) Inward looking and insular organizational constructs
6) Inept execution starting with inept leadership
7) Poor customer service
8) Lack of focus on customer needs
9) Innovation and engineering choked off by bureaucratic control of the company
10) Thrown on the garbage pile as being unable to compete with the Japanese
11) A culture rife with no accountability or personal responsibility

Being part of many transformational successes, I think I have a nose for the success or failure of turnarounds. There is a certain je ne sais quoi they have in common. Some key initiatives I believe are key to successful turnarounds include:

1) Align organizational resources to fit strategy and objectives: global design, global branding, global procurement, global engineering.
2) The entire team must be reading from the same playbook. Common goals and plans must resonate with the alignment in both personal success and financial reward
3) Listen to the complainers and encourage positive dissension within the framework of constructive feedback. Vocal critics must be listened to and their suggestions taken seriously. Many are loyal leaders who are passionate about the success of their company.
4) The entire company needs to understand there is no room efforts of half attempts by anyone. We are all in this together and we all must pull our weight and more.
5) Recreate an entrepreneurial zeal and pride of ownership. Unlock the creative juices of the tremendous talent inside Ford.
6) Encourage an environment of risk. No risk, no reward. Innovation and success requires prudent risk taking with bold moves.
7) Encourage failure. This goes hand in hand with risk. Too often insular cultures breed "just enough" thought processes rather than putting it out there.
8) Create an environment of accountability and processize it. This goes hand in hand with alignment of key resources and organizational structure. Leaders want the challenge and will rise to the effort regardless of their title or role in the organization.
9) People need to understand it is a team effort and you are either on the team or you aren't. Healthy debate and alternative ideas are positive but in the end, it's all about the team. When decisions are made, the culture needs to embrace those decisions and move forward with strong conviction and execution.

Most senior executives fail to realize turnarounds are social movements. That is likely why so few are good at it. Team work, empowerment and leading leaders are not commonly had skills. A great leader is oft transparent because it's really not about them. Do you have any idea who runs Toyota or Honda? Likely not. Is that a coincidence? Likely not. Alan Mulally has many tough tasks ahead. But, in the end, he will strive to unlock the industriousness, creativity and pride of his employees onto the market place. In other words, it is less about Alan Mulally and more about his ability to unlock Ford's tremendous talent onto free markets. While it may sound simple, every bureaucracy resists change. Ford has resisted it for forty years. Yet I am quite confident he clearly understands how to do it. And, how to put the right people in a position to make it happen. In effect, successful organizations mimic democratic and capitalistic ideals within the organization. Debate, brainstorming, focus on the client, excellence, industriousness, execution, empowerment, responsibility, innovation, pride, risk, teamwork and financial rewards for doing so. As I have written before, Ford Motor Company and GM will rise from the ashes to become great industrial powers again.

There is not a single doubt that Ford is one of the greatest sources of talent, intellectual capital and knowledge on this planet. The goal is simply to unlock those resources and get them pointed in the right direction. Make no mistake, the talent and capability inside Ford and GM is every bit as good or better than inside Toyota or Honda. Once the tremendous talent inside Ford is organized constructively and freedom is given to that talent, the cream will rise to the top. While it would be fantastic if Ford had a great pipeline of new products hitting U.S. show rooms this year, they don't. Yet, by 2010, the entire Ford portfolio of products is set to be re-released. The biggest issue I see is inability to break the bureaucracy and legacy health care costs. But, with Goodyear's creative solution of putting health care into a trust, precedence may be set to lift that burden from Ford and GM.

posted by TimingLogic at 9:44 PM links to this post

Monday, February 12, 2007

The Industrial Economy Part Two

"We are justly proud of the high wage rates which prevail throughout our country and jealous of any interference with them by the products of the cheaper labor of other countries. To maintain this condition, to strengthen our control of home markets and, above all, to broaden our opportunities in foreign markets where we must compete with the products of other industrial nations, we should welcome and encourage every influence tending to increase the efficiency of our productive processes"
---Henry Towne, President of the American Society of Mechanical Engineers, 1911

Do I live in the same country as Henry Towne did in 1911? I think so. But, I also think many of the business and government leaders have forgotten the basics of business. Or, frankly, of life. Commitment, innovation, execution, perseverence and really difficult answers requiring really hard work. It seems many business leaders are simply a mirror of western culture as a whole. We want gratification and we want it now. And, we want something for nothing rather than having to work very hard to achieve it. But, why would that be a surprise? Aren't business leaders simply a reflection of society? I firmly believe success in life requires alot of hard work, calculated risks and a whole lot of being in the right place at the right time. Hard work has a tendency to put the odds of being in the right place at the right time in one's favor.

Before I answer the question to the last post, I'm going to tie a few posts together starting with the last one. I'm going to talk a little bit about labor costs in this post. I'm not an industrial engineer nor am I am manufacturing guru. I have worked in manufacturing environments and with manufacturing clients so I'm conversant enough on the topic to write an intelligible post on a blog. And, to raise awareness of a myth that the only way to compete in any manufacturing business is to pay the production team members a very low wage. This is not a treatise on lean manufacturing methods but rather a generalization of a topic which is very relevant to my next post and to the future.

It seems most people in the U.S. and Europe, countries with traditionally high manufacturing wages, have been brainwashed into believing their labor costs are too high to compete globally. So, they see an inevitable shift of all things manufactured to developing country sweat shops where employees making 50 cents a month. I just heard the the chief investment officer for the largest investment institution on earth, an American firm, state that he is bearish long term on the American auto industry because of high labor costs. Now, as I've pointed out before, the question you need to ask yourself is if the person making the comment is qualified in any way to be an expert on the topic. If you are Shigeo Shingo, then I want to absorb everything you utter on this topic. If you are a successful Wall Street CIO, then I want to hear what you have to say about asset allocation models in a highly correlated asset world not what you think about the manufacturing labor rates. Frankly, because you likely are just repeating what you read. And, the premise for what you read was probably inaccurate as well. To put it bluntly, it's hilarious to envision Shingo debating a Wall Street CIO about manufacturing methods, processes, technology or labor rates. That's like Albert Einstein debating me about the theory of general relativity.

What surprises me is that it doesn't matter whether a person has a production job or is a business executive, everyone believes the U.S. manufacturers are paying salaries that are too high. The mantra is that if developed countries are going to compete, they must lower wages. That's generally preposterous. Who really believes a race to the bottom of the barrel as it pertains to wages for the masses will create a healthy economy or a healthy consumer capable of maintaining an economy? Or who really believes that we can all sell real estate or be financial advisors and outsource all production employment to developing economies simply because they will work for lower wages?

It was recently reported on in 2006 Toyota paid its workers more than Ford or GM yet is the most profitable industrial company on earth. Ring a bell? If you study history, it sound like Henry Ford's company one hundred years ago. Even before Toyota was manufacturing in the U.S., does one really believe Toyota was paying poor wages in Japan? A country whose GDP is second only to the U.S.. A country with incredibly high land costs, high labor costs, a quasi-union work force, national health care, very high energy costs and a need to import all of its raw materials? Please don't tell me it is because of an unfavorable dollar/yen exchange rate either because Toyota makes cars all over the world and regardless of where they make cars, they do so profitably. That includes the Europe where worker's rights are the most stringent of any continent.

The reality is manufacturing efficiency and the ultimate end product cost contains many variables beyond labor rates. Cost is more about a maniacal focus on continuously optimizing efficiency, quality and lowering labor's input into the final output. Labor's input into final output is not wage rate but continuous improvement of doing more with less via technology and business process improvement. And, a great industrial company never rests as it pertains to continuous improvement. Always questioning how to do more with less, even questioning if I need a skilled worker to do unskilled labor. Or whether my skilled labor would serve my client better by focusing on higher value work. So, where does this notion that people must make piddly salaries come from? Is this a reflection of too many finance minded executives infiltrating all sectors of our economy? Because I can assure you, most of what is taught at Toyota would require you to throw what was taught at Wharton Business School. Manufacturing and operations related segments of the economy are not about spreadsheets, they are about real commitment to rolling up your sleeves and understanding how you make something and continuously make it better.

Toyota's Production System as well as those of other successful manufacturers is based on the idea of reducing waste through optimization. Waste is generally classified into the following areas:

  • Overproduction (making more than what is needed, or making it earlier than needed)
  • Transportation (moving products farther than is minimally required)
  • Waiting (products waiting on the next production step, or people waiting for work to do)
  • Inventory (having more inventory than is minimally required-Excess Inventory or Deadliest type of waste)
  • Motion (people moving or walking more than minimally required)
  • Processing itself (relates to standalone processes that are not linked to upstream or downstream processes)
  • Defects (the effort involved in inspecting for and fixing defects)
  • Safety (unsafe work areas creates lost work hours and expenses)
  • Information (age of electronic information and enterprise resource planning systems (ERP) requires current / correct master data details) (Courtesy of Wikipedia)
Do you see wage rates in the above list of lean manufacturing focus areas? If I pay someone $25 an hour or $10 an hour, how does that fact improve the processes above? To the contrary, doesn't the fact that I pay higher wages mean that I should be able to attract a more qualified worker and a more committed work force? That I should theoretically find employees more capable of adding more intellectual value to my organization and thus finding continuous answers to the never ending innovative improvements required in a competitive world? And, in the end, wouldn't that allow me to reduce the labor cost per unit of output? Part of excellence in any organization is to encourage all teammates to provide continuous feedback on how to improve operations regardless of what their role is in the organization. When was the last time your organization asked you to participate in such an exercise? At Toyota it is a condition of employment. It is processized. It is demanded and expected that you use your brain regardless of what your job title is, be it janitorial services or CEO.

So, if I paid a worker $25 an hour or $10 an hour, if the best practices for final assembly of an automobile is between 15 and 18 hours, is the labor rate going to be the determining factor of whether I have a successful business model? A final product which may cost $30,000 or $50,000 and the variability of wages at $25 or $10 an hour is a few hundred dollars? That is absolutely ridiculous. I'd say the bigger variable is how to reduce the number of high paid management executives which bloat the full time equivalent salaries and benefits of production workers so often quoted in the press.

Isn't it more important to build a quality product and get it right the first time? To reduce recalls, warranty work and poor customer satisfaction? To make sure the assembly processes result in zero defects, highly efficient manufacturing processes and unnecessary waste be it human idle time or excess inventory? If you don't get these issues right the first time, how much does it cost if you are paying 50,000 people a wage of $30 an hour and $20 in benefits? That doesn't even take into account the other costs involved in rework or poor quality, or what impact design, branding, marketing, engineering or innovation play in a corporation's success. What's the difference of whether I pay an electrician working in a factory $35 an hour or pay a capital equipment salesperson $500,000 a year or the Home Depot CEO $250 million dollars? Are low wages for factory workers really the answer to a competitive world? Is it really about how little I can pay someone that determines my success because manufacturing requires a mindless body? Or is the issue one of a disconnected management culture which is more interested in their own financial gain as opposed to creating an industrious society or a successful organization? In other words, if Toyota and Honda can do it, why can't GM and Ford? What is the only variable between those four companies? Senior management's commitment to their company, the success of their products and their employees? May I ask what the difference is between a country who has a poor record of human rights and a company which only values the bottom line at the expense of associate welfare? Is there a difference? One where thugs rape a country of its wealth while the general population live in squalor. Yes, this is a very critical analogy but I believe every so often a society needs to have an open dialog about what we want to achieve as a whole. This has nothing to do with being a capitalist or pro-business. I am extremely pro-business and very passionate about capitalism. But, I also believe companys have a social responsibility and it is incumbent upon the markets to enforce what conscience we want of our businesses. Companys which treat their associates as expendable costs rather than cherished assets have a tendency to treat their customers with a similar blase attitude. In the end, as a shareholder or customer or consumer, is that an environment you endorse? There is no perfect answer to the questions I am asking. But, they should be asked. And now is a time to be asking the questions of what society wants from its leaders.

I'll leave you with one final quote.
"I determined absolutely that never would I join a company in which finance came before the work or in which bankers or financiers had a part. And further that, if there were no way to get started in the kind of business that I thought could be managed in the interest of the public, then I simply would not get started at all."
---Henry Ford 1922
posted by TimingLogic at 8:16 AM links to this post

Friday, February 09, 2007

The Industrial Economy: A Quiz

It's time for a quiz. You remember those? Professor or teacher would walk in and say that they were going to give a pop quiz today. How fun is that? Well, you don't get a zero regardless of the answer on this one. There is no wrong answer. But, I'm testing your ability to think in the future and not in the past. Don't make any assumptions. That's all of the hints you get. Ok, one more. Everyone who reads this blog likely knows of the company but the answer is not obvious. Here goes.

What company has tired products?
What company is part in an industry that has been told it cannot compete globally because of labor costs?
What product has a bloated corporate structure of bean counters and do-nothing management?
What company has forgotten how to innovate?
What company has so much inbred arrogance that customers are dictated to?
What company has been losing market share consistently for years?
What company has had a stock languish for years because of poor leadership?
What company is being given up for dead at the hands of the Japanese manufacturing juggernaut?
What company has inbred silos which are more concerned about competing with each other for glory rather than focus on the competition and the market place?
What company has dysfunctional leadership facilitating this behavior?

I could go on and on but that's enough. If you get this right, I might share a small amount of any winning lottery ticket proceeds I may ever win.
posted by TimingLogic at 11:17 AM links to this post

Thursday, February 08, 2007

Blow Offs And Bull Market Tops

Jan 3, 1973. "It is very rare that you can be unqualifiedly bullish as you can be now."
---Alan Greenspan

I've put this chart up before but thought now would be a timely opportunity to repost it. The chart is of the S&P 500 in the early 1970s. Marked on the chart with the blue arrow is the week in which Alan Greenspan made the comment above. Are friendly central bankers good investment advisors?

In addition to reminding people that economists aren't typically investment gurus, here's the real reason I am posting this. The general commentary from many is that we must have a blow off top before any bull market ends. Therefore this bull market has further to go. Another recent statement is that sentiment is too bearish for a bull market top. I even read one commentary where the author said sentiment is so bearish that after a quick correction he wouldn't be surprised to see a rally that doubled the current market averages. Really? So the valuation on the small cap averages would then be the highest in history? Double it's current valuation? Double its current valuation which is the same valuation as the S&P 500 in 2000? The S&P 500 would trade at asset values similar to 2000 again?

There have been many bull markets ending with a whimper. A market which is similar in many regards to this cycle is the 1973 market. (Note: I said many not all.) A market where the world saw tremendous global growth. A market where industrial commodities went ballistic. A market with high oil prices. Where's the blow off top in the chart of the S&P500? Where's the overly exuberant investment behavior exhibited in the pricing action? The S&P didn't really do anything for a year and a half then ended with a whimper by pushing upward for a few months. There doesn't need to be a blow off for a bull market to end. Many seemingly think every bull market ends like the technology bubble in 2000. To the contrary, except for bubbles, we don't typically see a blow off. By the way, in reference to bubbles, we are in the midst of a bubble and we had our blow off. It was May 2006 in which metals and commodity related stocks went parabolic in a period of a few months. I highlighted this repeatedly in posts last year.

Beware the bear. He is cunning and a deceiver. Beware the journalist or blogger who is not armed with facts as he is working for the great deceiver. (For those who are politically correct and scoff at my use of "he" as my pronoun of choice, you may insert "she" or "it". I am politically correct but find the use of "he" more appropriate here. Mostly because I've met many more men who are bears, ie, hairy and bad breath, and the market bear is really human in form. Capeesh? Capisci? Kabish? Coppish?)
posted by TimingLogic at 9:23 AM links to this post

Tuesday, February 06, 2007

Stock Pools And SEC Investigations Into Leaked Trading Data

I must have had a bout of clairvoyance with the announcement yesterday that the SEC is investigating some very big firms on Wall Street. It was just last week when I talked about the possibility we were experiencing the modern day equivalent of stock pools on Wall Street. Nothing has been proven yet but if this is taking place, it would explain alot about pricing behavior this cycle and the parabolic moves in certain stocks and commodities. It might even have some role in broad market moves across commodities and stocks.

So, let's speculate a little. Let's say you are BigCompanyA on Wall Street. You cater to hedge funds and large trading organizations as clients. You see an order come in from HedgeFundA to buy twenty million shares of CompanyX. If known by other hedge funds, this order could tip the direction of CompanyX. Now BigCompanyA shares this information with other large hedge funds. Not only that but they do so before they actually execute the order. In other words, with these tip offs, maybe ten or twenty other hedge funds or trading firms line up to buy the same investment. What would have originally been twenty million shares purchased might be two hundred million shares or four hundred million shares. The benefit? Drive CompanyX via cumulative buying just like stock pools did in the 1920s. In other words, manipulate the stock or commodity or whatever and create a piling on effect. Is this legal today? Well, stock pools are illegal after being banned post 1929. I'm not an attorney but a former SEC chair said if this is happening, it is definitely insider information and definitely illegal. It gives professional investment firms an enormous advantage and an ability to create significant volatility and much higher profits while the market indices are struggling with very low returns. If you, as an individual, had this information, would it be beneficial? Significantly beneficial. It might even guarantee that my trades would be profitable. And, how does an individual investor compete against that? They can't. And how does this help individual investors? It doesn't. And how does this provide a level field based on fair buying and selling in an open market environment? It doesn't.

I've written time and again that Wall Street is doing the same thing today that they did in the 1920s. They are trading in the markets using their own proprietary trading desks and they are trading against individual investors. Individual investor profits at major Wall Street firms now pale in comparison to the money firms make trading their own accounts. If this SEC inquiry leads to proof this is what is going on, and I am not saying it is, who cares about the individual investor? Just a wild thought?
posted by TimingLogic at 12:40 PM links to this post

Monday, February 05, 2007

Dow Theory Buy Signal On Dow Transports New High?

I guess I should respond to recent events as it pertains to Dow Theory. Don't expect the same cheers you are reading on the front page of market publications or shared by TV personalities. I really haven't spent alot of time writing about Dow Theory confirmations or nonconfirmations over the last few years because as far as I would define Dow Theory, we haven't received any Dow Theory sell signals since this bull market began. Yes, there were times when the Transports moved higher and the Industrials didn't or vice versa, but those were short lived movements of minor moves. The drop in the Transports in 2006 was the first meaningful decline in the Transports since this cycle began. Because of the size of the drop in the trucking and railroad sectors, it was and remains a concern. Yet, I'm not sure a Dow Theorist (I am not one myself) would have ever made the call that they received a sell signal in this cycle.

Let's back up for a minute. For those of you who don't know, Dow Theory is basically a set of writings hypothesizing market movements by Charles Dow, the father of all things Dow and the founder of the venerable Wall Street Journal. Part of Dow's writings hypothesized rail stocks must confirm the move in industrial stocks to validate a healthy equity market and underlying economy. It's common sense that if Industrials are moving higher that the companies shipping their product are also making moves higher. If one isn't following the other, and it usually is that Transports aren't rising with the Industrials, the economy may be weakening and the market move could be a false one. Now, I've given you one cliff note and there are alot of people who have taken those writings and developed them much further than anything I am writing about. But, when most people write of Dow Theory, they are talking about Industrials and Transports confirming one another in pricing action. The foremost authority on Dow Theory today is Richard Russell. Russell is a man I admire greatly for his deep thought, honesty, understanding of markets, Wall Street's workings and because he's been around the block a few times. Nearly 80 to be exact.

Most of the general talk this past week re the Transports and Dow Theory has been made by the bulls. This is after the bears were pointing out the Transports didn't confirm the Dow's new highs this past rally. Well, from my perspective there's really not alot to write about on either side. Neither the Transports nor the Industrials have really done alot other than bide time and neither has made a lower low on the charts thus confirming bearishness. Yet. What I do find worthy of writing about is the generally false comments.

I'm not going to single out any particular blogger, journalist or market prognosticator. But, I will say that in the world of free speech in which we live, if you are going to put it out there, you had better be prepared for criticism. In the world of business, you learn to press your advantage. Here's one situation where I see that advantage. Or, frankly, an opportunity to discredit the oft fact-less hype machine we sometimes call "news". My criticism is with the statement that whenever the Transports and Industrials are making new highs, it means a Dow Theory buy signal must be generated. That it is purely mechanical and if one doesn't follow it, they aren't following Dow Theory. Or, that the Industrials and Transports making new highs bodes well for future stock market gains. There are many out there making these very statements right now.

I am quite confident if Charles Dow or any of the people who developed his writings into Dow Theory were alive today, they would not be calling a new bull market or allocating significant new dollars to the world equity markets just because the Transports hit a new high. First of all, I don't believe Charles Dow ever hypothesized anything about Transports. He hypothesized about rail stocks confirming industrial stocks because rails shipped the goods of the industrial economy. That doesn't include airlines making new highs because of a drop in oil as has happened with the Transports recently. Additionally, if Dow Theory stated that every time the Transports and Dow hit a new high, one should go long the stock market, it would be an absolutely awful market timing mechanism. I really don't think any Dow Theorist would make such statements as is being made by so many news sources today.

Dow Theory is a little like religion. One can find any message in religion to support biases. So too with Dow Theory. The next time someone tells you the Transports are confirming the Industrials implying a strong market is dead ahead, you can tell them they need to do a little more homework. Dow Theory is a framework of anecdotal evidence to be used prudently. If one is using the action of the Transports as a sign of future market action, one could just as easily hypothesize a top is near from a historical perspective. In other words, don't expect to give a monkey a calculator and have him solve the world's problems.

Let's look at two examples to validate this point. Up until this past week, the last time we actually had both the Transports and Dow making all time highs was mid year 1999. The bull market was basically over by June of 1999. The market had deteriorated significantly and the only stocks driving higher were some internet and large cap tech stocks blowing off into early 2000. So, to issue a buy at that time would have been followed by a drop of nearly 85% in the Nasdaq and large drops in other sectors as well. That includes a big drop in the Transports. Similarly, in 1929 the Dow Transports and Dow Industrials confirmed new bull market highs the exact month we had a top in the stock market before the Great Depression. If one would have issued a buy at that time or would have said the future of equity investments was likely to be bullish, they were again incredibly wrong. They would have again bought at the very peak of a bubble market only to see their investments drop 90%.

Dow Theory buy signal? If it was that easy, we'd all be rich. Once again, the media's reporting is inaccurate. Be forewarned. The Transports are within a handful of percentage points of reaching an overbought condition only seen two other times in the last eighty years. When were those times? Well, I'll let you figure that one out. But, both dates were mentioned in this post.
posted by TimingLogic at 7:55 AM links to this post

Friday, February 02, 2007

The Chinese Stock Markets And Manias

Last July in a post titled "Is There Another Gasp" , I speculated that the world of of hot money would continue to have an appetite for large caps in Europe and the US, oil and China. There is no doubt the appetite for all three is very strong. Large caps are leading the U.S. and European markets while Goldman and Deutsche Bank recently issued a communique to double down on commodities in 2007. Chinese stocks were making new highs last summer when I wrote that post and in late December it appears they made an amazing parabolic blow off. If you follow international markets, it's hard not to see the insane stories coming out of China on investor behavior.

The premise for much of my argument that China will surely have a catastrophic outcome to their current economic environment is based on two things. One is directed overinvestment not driven by markets but by corrupt communist political agendas and the other is a parallel to the U.S. development leading up to 1929. Moving from an agrarian society to industrialization. A creditor nation extending credit to other countries to feed disproportionate export growth. The rapid growth of cities as people move from rural areas following the allure of new wealth. Massive over investment due to unholy money supply growth. The coincident linear feelings of invincibility fueling a culture of greed. And on and on and on. It surprises many to learn every American under the sun owned equities in the 1920s. I believe we generally view our forefathers and mothers as somewhat unsophisticated and we believe one must be sophisticated to own stocks. Many people in that time didn't even have running water or electricity yet they were pretty doggone sophisticated and every bit as smart as people today. In fact, much of modern theory in science and human behavior came from that generation. A fact many of us often forget.

Globe and Mail has an excellent story on the stock market mania building in China. I know I've been saying this for quite some time but if the mania is in equity markets, it's surely in the economy as well. While comments have been veiled, the Chinese government has made statements I interpret as fearful of their inability to temper the economy and over investment in recent months. These situations never end on a positive note. There is no reason to believe this one will either. All of this is the reason I have said an overthrow of the communist government at some point isn't so out of bounds. If the Chinese economy sees a protracted hard landing, we could see another repeat of Russia's communist failure. That would be good for the long term global economy, good the Asia, good for the U.S., good for Europe and, most of all, wonderful for Chinese citizens.
posted by TimingLogic at 11:50 AM links to this post