Sunday, April 1, 2012

Financial Contemplation

Market has been rising for the past few months, in spite of European issues and global economic slowdown. Some people have termed it as the US effect i.e. since the global economy is slowing down, people are bringing money into the US markets. Another widely shared understanding is that the US markets are levitating because of Federal Reserves monetary intervention. Although this might be true to a certain extent, market rise can be attributed to the lack of participation of individual investors.

As people are storing loads of money in money market funds and bonds, there is no significant participation of individual investors in the equity markets. For example, a lot of people on this blog are primarily out of the market. Although this is golden discipline, one thing that I have noticed over the past several years is that the market loves to induce maximum pain. Please note that the goal is to stay safe and buy with lowest risk. So if you are safe then you are doing well.

In today's market, max pain scenarios could be:

1- A complete collapse of the bond market. This would force people to seek refuge in the equities, raising the stock prices. This embracing of equities could give way to an equity market collapse.

However, based on the amount of free money being printed and the demand of US bonds in the global bond market (b/c of problems in Europe), this possibility remains low. There are so many international investors willing to support the US bond prices, along with the Federal Reserves. Therefore, it will be foolish to assume that the 30 year bond bull has come to an end. However, if the bond prices can decline below 2010 level then it would give an indication that the bond bull has ended. Absent this scenario, we should consider the 2nd alternative.

2- Equity markets rise into a speculative top, attracting many investors like they did in 1999 and 2006-2007. This leads to a market top in stocks. People leave the equities and jump onto the bond rally. This bond rally, would be sharp and could be the ultimate top of the 30 year bond bully. 

This second scenario would be another max pain alternative, as people pile up into equities at a time when they are about to top because of lack of bond yields, free money, and lack of other investment alternatives.  Once equity market tops, people jump ships to bonds only to witness another top.

If the 2nd scenario plays out, after 2-3 years (2015-2016) we will have the best time to buy property (at lowest possible mortgage rate) and the best time to buy stocks (after a market collapse). Please note that that will be a very tough time to buy anything because every one will be so pessimistic. You would have to be brave to do such an investment.

On the contrary, right now it is tough to stay away from the markets. US stock market has risen 20+% since October. Although almost no one can pick the exact bottom, the UST Algorithm's 8/4 test generated a buy signal in late November. But since it takes courage to buy at a point when the world is coming to an end, we were busy trying to pick short-term market gyrations that we missed the long-term change in trend. I surely have learnt my lesson, and have reduced listening to mainstream media.

In the mean time, it is wise to know that stock market is not the only source of income or for generating wealth. Wealth is generated when service is provided and God wills. Stock market creates wealth by providing liquidity to companies and ensuring that they perform to their maximum potential (fundamental analysis). As Mike mentioned in comments, there are so many other ways of making money and investing. For example:

1- Investing in start-ups
2- Diversifying: Buying Gold, Silver, Bonds
3- Buying property at a discounted price. Rent the property out. Hire a management service firm to manage the rental property. Use the rent to pay mortgage, tax, maintenance and other expenses. Deduct tax on the mortgage. All in all reap 5-10% dividends with a potential of price increase over a period of 5-10 years.
4- Personally optimize your budget e.g. cut waste and use the extra money to pay-off house/credit cards. For example, if one has $50000 in credit card debt and is paying 20% interest, investing $50000 in repayment of debt is equivalent of investing at 20% dividend, with no danger of stock price reduction.

In future, I will be talking about some of these ideas for educational purposes along with potential stock market investment opportunities.

For those who are long: Stop = 1387

Note: Sometimes we spend so much time making or trying to make money that we forget the great bounties we have been bestowed upon by God, like health, family and life. Enjoy these and be thankful. Wealth w/o health or family or life, is meaningless!!! 


  1. Thanks Naqvi, I agree that most on this blog are in safer investments or cash to either keep what they have (being safe) or prepare to dip a toe in if the market pulls back or melts down. I do a lot of reading on markets and I, just like most of the other retail investors in the US, missed the run-up since October (THATS what pisses me off!). The mainstream media really did a job on us. Now it appears that we are already at or near the top for the SP500 according to the majority of market "pros" (their previous yearly predictions) and not too many seem to be readjusting their view. Also, the highs in the last two years occured in in April.

    The US effect may continue but I have no idea how long that will last. Some "pros" are saying that earnings will not be too great for this first quarter but will continue to improve through the 3rd and 4th quarters. Well that very well and could be because the US consumer has disappeared for the last 2-3 years and making do with whaat they already have. They have to buy washing machines and cars at some point in time.

    You are also right to keep things in persepctive that wealth without family and health is really quite futile. My family and I are fortunate in that we do have other investments besides what is in the market - but my wife and I do all this work and attempt to gain wealth in an effort to provide our fmaily with the things we didn't have - but we do try to keep a balance (for the most part). Take good care and be careful out there! Brad

  2. Nice job Naqvi. Some excellent regard to the correlations out there - that is an interesting one to keep an eye on. As the money rotates, it may be the best indicator we have for the time being.

    Your comments about other investment strategies is sound as well...much of my money is in real estate and rental property. As has been reported, rents have maintained as it's much more difficult for people to obtain loans, and offering cash with a quick close can get you into some properties you never thought possible (in the San Francisco area anyway). My last two purchases were rented out with great tenants within a few days. It's just the same with everything else - research and patience is key. What I enjoy is that there is less "maximum pain" associated with the real estate market (at the moment) whereas in equities "maximum pain" is akin to air to breathe.

    Thanks again and I look forward to future analysis. -Mike


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