"We cannot advance without new experiments in living, but no wise man tries every day what he has proved wrong the day before." - James Truslow Adams American Statesman
We are going to list several stories and then some stocks below to illustrate our point that in reality fundamentals matter very little at all. The only reason we are listing some of our past plays is to illustrate that we practice what we preach. We have also listed some other examples and illustrate roughly when one could have taken positions based on TA and mass psychology. It seems that markets mostly go up and down based on people's perceptions and usually tend to ignore fundamentals. We just need to look back at the Internet era for a clear-cut example and how fundamentals did not seem to matter at all. Yes in the end there was a massive correction but the smart players were able to work away with boatloads of money; the masses as usual were fleeced.
Venture Capital Investment Rises in 2004
SAN FRANCISCO - Venture capitalists accelerated their investment pace by 11 percent in 2004, marking the first year that the industry has poured more money into startups since the dot-com crash. A total of 2,876 investment deals attracted $20.9 billion in venture capital last year, up from $18.9 billion in 2003, according to data released late Sunday by the National Venture Capital Association, Thomson Venture Economics and PricewaterhouseCoopers. The quarterly survey tracks the financial mood swings in venture capital - a high-risk investment sector that has helped launch some of the nation's most prominent companies.
Last year's modest upturn ended three consecutive years of dramatic declines triggered by huge losses flowing from a dot-com debacle that venture capitalist helped create with an unprecedented flurry of investments. Before the downturn, venture capital investment peaked at $106 billion in 2000. Full Story
If you price the Dow in stronger currencies which we did last year and the year before you can see that the Dow has really done nothing much. If you take all the huge corporate profits and deduct 30% (amount dollar has depreciated roughly), you will find that most of the corporations are actually losing more money now. It appears that they are making more money because they are not taking inflation into account. So its interesting that venture capitalists would start putting more money into high risk enterprises; a clear example that fundamentals in the end matter very little.
Budget Office Sees Deficit at $368 Billion
WASHINGTON (Reuters) - The U.S. budget deficit will reach $368 billion this year before any war costs are added in, the Congressional Budget Office (news - web sites) said on Tuesday, according to a source familiar with the worse-than-expected numbers. The previous CBO forecast called for a $348 billion shortfall for the 2005 fiscal year that began on Oct. 1. Due to a technical quirk, the latest number does not include billions of dollars needed to fund military operations in Iraq (news - web sites) and Afghanistan (news - web sites), and analysts said these must be added in to get a true picture of the red ink. The previous forecast assumed $115 billion of war costs. "As a result of this technicality, we think it would be prudent to add roughly $100 billion to the CBO's fiscal year 2005 budget deficit estimate," Lehman Brothers said in a research note. The White House is shortly expected to ask for about $80 billion to pay for war costs. Full story
One would have expected the dollar to plunge on this news and for Gold to rally. However exactly the opposite occurred. The dollar rallied and continues to rally while the dollar plunged on the very day this news was released and has fallen considerably more since then. Hum what happened to fundamentals?
Nine of the 10 most-affordable markets in the organization's Housing Opportunity Index are in Ohio, Michigan or Illinois. All of the 10 least-affordable housing markets are in California. The median household income in Santa Barbara County in 2004 was $64,700. The NAHB says the median price of a home in metro Santa Barbara was $447,000 in the third quarter of 2004. To get a sense of the pace of price appreciation there, consider that the California Association of Realtors says the median price of a home in the county was $668,750 in November, just a couple months later.
Affordable Lima (pronounced like the bean, not the city in Peru) could scarcely be more different from Santa Barbara. Its skies are grey most of the winter, and it is surrounded by abundant, flat farmland that is pretty, but unspectacular. HUD says Lima's median family income in 2004 was $52,500. The median sale price of all homes sold in the third quarter of 2004 was $82,000, according to the NAHB. In other words, a typical home in Santa Barbara costs more than 10 times a typical family's income, while a home in Lima costs about 1.6 times a family's income. Full Story
How can the price of average price of a house in Santa Barbara in a few months rise more than the cost of an entire house in Lima? To make matters worse the average salary in both areas are approximately the same. Hum seems these people are not paying attention to fundamentals.
Rates on 30-Year Mortgages Fall
WASHINGTON - Rates on 30-year mortgages fell for a fifth straight week, but other shorter-term rates edged up a bit, influenced by the Federal Reserve's (news - web sites) decision to raise a key rate it controls for the sixth time since last June. Freddie Mac's weekly survey of mortgage rates released Thursday showed that rates on 30-year, fixed rate mortgages averaged 5.63 percent for the week ending Feb. 3, down from 5.66 percent last week. Low mortgage rates powered sales of both new and existing homes to all-time highs in 2004, the fourth straight year that sales in both categories have set records. Analysts are forecasting housing will enjoy another good year in 2005 with sales dipping by around 3 percent, a decline that would still give the country the second-highest levels for sales of new and existing homes.
"We continue to expect rates will not rise very much this year and that the economy will grow at a sustainable pace," said Frank Nothaft, chief economist for Freddie Mac. "This should translate into a continued good atmosphere for housing." Rates on 15-year, fixed-rate mortgages, a popular option for refinancing, remained unchanged at 5.14 percent. Rates on one-year adjustable-rate mortgages were 4.23 percent, up slightly from 4.18 percent last week. Full Story
The Fed is aggressively pumping short-term rates, this is the sixth increase to date and long-term rates continue to fall. One would assume that long-term rates would increase in sync, but that does not seem to be the case. Also given the fact that we had loose money policies in place now for several years on would expect rates to rise due to the rising default and bankruptcy rates across the nation.
Now lets take a look at some stocks
For the nine months ended 9/30/04, revenue fell 49% to $4.9 million. Net loss fell 46% to $3.7 million. Results reflect a decline in the number of subscribers, offset by decreased general and administrative expenses, and a Settlement gain of $1.6 million.
In at 2.56 out at 9.60
For the nine months ended 9/30/04, net sales fell 52% to $14.3M. Net loss applicable to Common totaled $12.1 million, up from $1.5 million. Results reflect decreased sale at Audio Book Club due to reductions of new members, lower operating margins and increased interest expense.
In at 33 cents out at 1.35
For the nine months ended 9/30/04, revenues rose 62% to $20.8 million. Net loss totaled $11.2 million, up from $4.9 million. Revenues reflect higher sales in both U.S. and foreign countries. Higher loss was offset by an increase in sales and marketing expenses
In at 3.60 out at 5.25
For the nine months ended 9/30/04, revenues rose 17% to $18.3M. Net loss from continuing operations rose 5% to $10.4 million. Results reflect the new contract with Pioneer Hi-Bred, offset by increased R&D expenses.
For the six months ended 6/04, revenues fell 12% to $9 million. Net loss totaled $1.9 million, up from $599 thousand. Results reflect increased competitive pressure for Cyto Vision product sales and increased general and administrative expenses for the period.
In at 55 cents out at 1.10
For the fiscal year ended 3/31/04, revenues decreased 25% to HK$4.1 million. Net loss fell 66% to HK$34.8 million. Revenues reflect a decrease in the sales of manufactured hygienic paper and products. Lower loss reflects the absence of a HK$97.8 million impairment charge.
In at 15 out at 30 cents
For the nine months ended 9/30/04, revenues increased 24% to $9.9 million. Net loss rose 15% to $7.8 million. Revenues reflect higher volume shipments of OPMS products. Higher loss suffered from higher cost of revenue and higher research and development expenses.
In at 80 cents out at 1.60
All the above are examples of stocks we actually played late last year and this year. We are only listing them in order to show that we practice what we preach for it would make no sense to write about something and practice something entirely different. Now lets look at some random stocks one could have taken positions in even though the fundamentals were far from good. All the examples listed were entered using mainly trend analysis; explaining trend analysis is beyond the scope of this article. The same trend analysis principle used in the above examples will be applied to the below example.
Some other examples
For the nine months ended 9/30/04, total revenues rose 12% to $3.9 million. Net loss from continuing operations rose 44% to $6.9 million. Revenues reflect increased royalties revenues from Retin-A Micro(R). Higher loss reflects increased research and development
Could have easily got in around 1.10 as it traded in this range for a long period of time and out anywhere from 1.90-2.30
For the fiscal year ended 9/30/04, revenues increased 68% to $136.8 million. Net loss increased 17% to $1.6 million. Revenues reflect increased sales to newer OEM customers. Higher loss reflects increased selling and marketing expenses and the presence of $4 million for impairment of intangible assets.
Positions could have been taken at 1.50-1.60 and closed out between 2.50-3.00
For the three months ended 10/31/04, revenues totaled $257.1 million, up from $94.9 million. Net loss from continuing operations totaled $553 thousand vs. income of $30.4 million. Revenues reflect increased sales from the eBusiness and Fulfillment segment. Loss reflects increased selling and amortization expenses.
In at 1.20 to 1.40 and closed them out between 2.30-2.80
This story just came out on Yahoo today, Feb 10, 2005
U.S. Trade Deficit Hits All-Time High of $617.7 Billion in 2004; Jobless Claims Fall
WASHINGTON (AP) -- The U.S. trade deficit soared to a record of $617.7 billion last year as Americans' appetite for all things foreign, from crude oil to cars, hit all-time highs. The United States even rang up a deficit in farm goods as imports of wine, cheese and other food products hit a record. Full Story
Now you would have thought the markets would probably react in a negative way to this type of data, but instead they rally rather strongly on the news.
We have never really ever believed in fundamentals, we find it amusing and interesting to read this info. The reason why we don't place to much weight on fundamentals is that there is no inductive thinking involved. At the most only deductive thinking is involved. In order to deduce something you have to have certain data, so you are coming up with conclusions based on the way the data is presented. Since the data is presented in a standard format you and every Joe out there will come to the same conclusion. It is almost impossible to be inductive here, since the data is fixed. When you look at a chart and use certain TA tools with custom settings the picture is never the same for two given individuals. Even the same individual will see something different the more he or she looks at the chart. So here you are forced to use the inductive process. Inductive thinking is a 1000 times superior to deductive thinking. You need to use even more of the inductive processes when you start to apply mass psychology and paradox theory to your studies.
So to summarize in fundamental analysis you simply read the data that is presented in a standard format and you and 1 million other Joes then draw the same conclusion. However when you step into the world of TA, it gets complex as you are basically analyzing a picture. The saying that a picture is worth a 1000 words comes to mind. The one great thing here is that we won't have a mass consensus. What's even better is that the majority does not really know how to apply TA Properly (TA= Technical Analysis), so the edge you have over the masses is even greater.
Now throw in Mass psychology, which less than 9% of those who use TA are familiar with and those that are somewhat familiar with it still don't know how to fully use it. They think because they have mastered some elements of it they do not need to constantly study this phenomenon. So in reality the true advanced students in this area probably are fewer than 3%. And if you throw in the law of paradoxes into the equation you narrow the field even further down, to probably under 2%.
So as you can see in the end fundamentals are really just the tip of the iceberg. It may seem a daunting task to be able to understand the markets given all the areas one has to have some knowledge in.
However here are some very simple easy to understand rules or areas you can work on.
1) Learn trend analysis, it has a psychological and TA component built into it already.
2) Mass psychology is simply the ability to recognize that one should never do what the masses are blindly doing and also to measure the degree of euphoria in so-called contrarian groups. Most of these groups are nothing but so-called fashion contrarian that think its cool to try to be and act like a contrarian. So when readings in both these groups are high (masses and contrarians) the student of mass psychology usually looks for an exit or entry depending on whether they are bullish or bearish.
3) Paradox theory simply boils down to this rule. You never get what you desperately seek. Desperation creates a form of blindness be it visual or mental, you are no longer fully in possession of your senses and therefore you are bound to make some grievous error sooner or later. So the desperate only end becoming more desperate. Never chase something, seek it, understand and make it come to you. Those that chase only end up running themselves into the ground. We can use the analogy of a beautiful woman and the guy who wants to get her attention.
In it is generally assumed that beautiful women are hard to approach or talk to. Beautiful women are only hard to approach if you are going to use a line, that's because they have heard every single line out there and are basically sick of them. If you just simply talk to them as you would to a friend and oh yes try to look them in the eyes while you are doing this, you will be pleasantly surprised with the results. Apply this principle to investing, why try to use and study complex systems based on wave patterns or so-called black box systems etc. You can simply learn Trend analysis and then slowly but surely add to this system by applying mass psychology and possibly paradox theory. You could also try to master 2-3 so called simple TA tools, but make sure you master them well.
If you can master trend Analysis you have completed more than 65% of your journey and possibly even 70%.
"Man is an over-complicated organism. If he is doomed to extinction he will die out for want of simplicity." - Ezra Pound 1885-1972, American Poet, Critic