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Jack Schwager, the author av the trading bible Market Wizards, now has a lecture that can be watched on Youtube or here below.
Since most of his advice is very good, you can really understand that he is a smart man who interviewed and learned from some of the best traders of all times.
The whole lecture is divided in four pieces.
Quotes from Market Wizards
If you have not seen it yet, see the clip from BBC about the trader who spoke frankly about what he thought about the market. Some of the things he says is:
- The smart money, do not buy the European rescue plan. The stock market is finished. The Euro is finished.
- That he and most traders do not care about how the economy goes. He says that he goes to bed every night dreaming of a recession since they equal opportunities.
- A trader or any person can make money if he is prepared.
- This economic crises is like a cancer. It will just grow if not taken care of. Get prepared.
- Governments don’t rule the world, Goldman Sachs does, and Goldman Sachs does not care about the European rescue package.
- In less than 12 months the savings of million of people will vanish, and that is just the start.
I mostly agree with him, and think he has some good observations. But there are two main issues here that I want to point out. Firstly, from a contrarian view it is very bullish when mainstream television like BBC air such an ultra negative outlook like this.
Secondly, what is really interesting is that many newspapers today write about this interview. But instead of focusing on what the trader said, they focus on him as a person trying to discredit him. When people trying to hide their heads in the sand by discrediting sources instead of statements, then that should be seen as very negative from a contrarian view.
Market sentiment remains very negative at the moment, making it hard to bet on a downward market (S&P500 1163), more upside risk than downside risk at the moment. However, the long-term outlook is still very bearish as long as most people are denying the risk of a disaster.
The spread on interest rates between mortgage loans and central banks’ loans to other banks are increasing. While banks pay less for long-term loans, the private households who want a loan to buy a house need to pay a higher premium each day.
This implicitly means that house-buyers have to pay an increased risk premium to their bank and that real-estate investment are getting worse each day, not taking future depreciation of house value into account.
I do not see that this phenomenon is widely recognized and that more pressure on real estate is to come.
It seems that most countries want their currency weaker. At least in bad times such as the present. Both strong countries such as Switzerland, and countries with serious problems such as the USA.
In times of trouble debt is building up. In the US it seems that debt is building up no matter it is the best of times or the worst of times. When debt has reached a level in which it cannot be repaid, then there is one option left, to inflate the amount of that country’s currency and thus devalue the value of its debt.
The downside is that you lose confidence next time you need to borrow. Also note that this trick is worthless if all other countries do the same, which is what we will see happen in the future. Then the value of money just will evaporate all around the globe.
So stay tuned for a nice inflationary cycle to come within the next few years, in times when many countries will try to have the weakest currency. But then again, why not? The intrinsic value of today’s money is nil.
The Q-ratio is one of the methods to estimate the fair value of the stock market. It is defined as the total price of the stock market divided by the replacement cost of all its companies.
To put it more simply, the Q-ratio shows how much do we have to pay to buy the stock market compared to how much it would cost to build it up from scratch.
The Q-ratio is a fairly simple concept, but timely to calculate; fortunately, the US Federal Reserve provides the data on a quarterly basis.
To compare how much the companies cost with how much it would cost to rebuild them seems like a clever and objective way to measure the fair value the stock market. And looking back at “Q:s” history it has been of great value for investors using it.
The basic logic behind the Q-ratio is that if the “Q” is above 1.0, then the market is valuing the present stocks more than it costs to reproduce them; making them overvalued. If it is below 1.0, then it cost less to invest in stocks than it cost to reproduce them, thus making it more profitable to invest in the stock market than creating new companies.
On contrast to the P/E-ratio, the Q-ratio, is independent from the interest yield for comparison analysis. This makes the “Q” an easy and objective way to measure markets.
One of the drawbacks with the Q-ratio is that you have to trust the FED releasing the correct data, unless you wanna calculate the replacement cost of every stock by yourself.
Most people would intuitively think that the value of Q would be around 1 or a bit above in long-run. But its long-term value is close to 0,7. This is probably due to the fact that most firms assets are generally booked too high.
It is a shame that most amateurs in the market does not prefer to use the Q-ratio instead of P/E-ratios or dividend yields, both of which need to be compared to interest rates and other measures to be understood in their context.
Today the Q-ratio is a bit above 1 making the stock market overvalued by 40-50%.
I hope you enjoyed this article! Feel free to leave a comment.
Chart below shown for a historical view and is not recently updated
Chart from: http://mla.homeunix.com/q-ratio/
Two questions regarding mortgage (home) loans.
Why are most people having adjustable mortgage rates on their home loans?
Is it better to have adjustable or fixed rate?
There are mainly two reasons why people choose adjustable mortgage rate:
- Because, an adjustable rate is mainly lower, since you have to pay an insurance premium for knowing your rate beforehand and will not end up with negative (or positive) surprises. You have secured your price of living at a certain rate. Secondly;
- since rates have steadily gone down for the last fifteen year or so, the bet to secure at a higher rate have been a losing bet. And since most home buyers memory have only seen interests going down and house prices going up, this is what they will define as a normal state of things.
The typical home buyer do now have the knowledge or understanding that interest rates have been much higher historically and most were not thinking of rates when rates were 15%, just back in the 90’s.
Another misconception is that they will be able to change to a fixed rate later on if rates go up. No such luck. If rates are going up, they will not be able to fix their rate at todays low level. They must then fix it at a higher level or continue speculating that rates will remain low, thus ruining the whole idea about keeping the cost of living low and decrease risk. What all this basically means is that when choosing an adjustable rate you are speculating with your home as security that rates will go down or remain neutral.
When choosing a time-period, do not choose 2 or 3 years, since then you are only insured from spiking interest rates for that period. Choose a period for as long as you need to make payments for the house, thus knowing your cost of living for that period instead of running the risk of ugly surprises. The government will not bail you out. They only do that to the really big and stupid risk-takers that have million-dollar-bonuses every year.
When choosing a fixed mortgage rate today, you get the lowest fixed rates in the history of mankind, and pay the smallest premium ever compared to the adjustable rate. So instead of taking the risk to double the cost of your living, fixing your rate seems like a pretty good deal of you ask me.
Below a chart comparing the long 30-year-old rate (blue) and the short prime rate (orange).
Reproduced with the permission of Mortgage-X.com
I never understood all the fuss about so-called downward manipulation of a company’s stock price. I so often hear or read about people complaining about that their stock is manipulated to be artificially lower than it should be. Even if it was true, that would be a good thing!
As all other things in life, the lower you buy, the better you are off. The advantages of buying a stock lower means, you get more of the company for the same money, a bigger share of future earnings, a higher dividend each year, and a better risk-reward ratio in distance for an up versus down swing.
A low stock price is only bad in one of the two scenarios. If a company needs to issue new stocks. Then they will have to sell out more of the company diluting the current ownership base. And it is obviously bad if current shareholders need to sell stocks at the time of the manipulation.
So please tell me if you know any stocks that are manipulated to be cheaper so I can buy them. I suggest you do the same next time you hear about manipulated stocks.
Click here for a general paper on Stock Market Manipulation.