Many people determine what is true, and then forget about it, rather than let it nourish their lives, Maritain said.

So it is with investing.

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The hardest challenge of investing isn’t learning all the probability-based rules discussed in “How to Make Money in Stocks.”

With time and effort, you can learn the rules. The big challenge comes after you learn the rules.

The challenge? You must follow the rules!

It’s human nature to look for loopholes, exceptions, excuses — any reason to ignore a rule. But that’s the road to investor hell — a portfolio filled with “exceptions” that turn out to be exceptionally efficient at losing your money.

One rule some investors have trouble following is the rule against buying extended stocks.

A fundamentally strong stock that breaks out of a base in big volume shouldn’t be bought after it rises 5% past the ideal buy point.

Eventually an investor will encounter a situation where this rule seems like a real party pooper.

You miss the breakout and then watch the stock rise day after day.

“Surely, IBD doesn’t believe I should follow this rule all the time,” you say. (We do, except for certain gap-ups that skip the 5% range.)

There’s a simple reality that makes violating this rule risky. Most winners will rise 20%-25% and then begin consolidating. That’s why investors should take most profits at 20%-25%.

If an investor buys a stock that is extended 10%, 15% or 20% past the buy point, the investor often will be buying just in time for a downturn.

And remember, not all breakouts make it to 20%. So you might be buying extended shares from the investor who bought properly and is now cashing in. Does that sound like a winning strategy?

Southwestern Energy (SWN) broke out of a double-bottom base on Feb. 1, 2005 with a 53.19 buy point 1 . Seven sessions later, the oil and gas developer closed at 57.71, up 8% and extended 2.

After a 19% gain, the stock began to form a base on base 3. Investors who bought at the peak faced the 8% sell rule two days later 4. Those who bought only 10% extended saw a fleeting 8% gain and faced the sell rule four weeks later.

source form: investors

As the managing director of Bethesda, Md.-based Absolute Investment Management, Robert Wiedemer oversees $200 million in assets under management. He explains what he sees in store for the market next year and which ETFs investors should buy now.

IBD: What is your outlook on the U.S. and global economy and stock market for 2012?

 

Wiedemer: The U.S. is in a “suspended recession.” The economy is still in the recession of 2008-09, but it has been suspended by massive government borrowing and massive government money printing. Hence, the outlook for 2012 will be heavily determined by how much more of this economic stimulus the government will create.

We expect that the government will continue to borrow at its current rate, but with little or no increase. Maintaining the massive spending increases of the past will keep the economy from falling dramatically, but it will not provide a major stimulus for growth. Only a big increase in borrowing will do that.

We do expect to see an increase in money printing. Another round of money printing, in some form of quantitative easing, or QE, will likely keep the stock market from falling too far and will indirectly keep the economy from declining substantially because a high stock market will encourage business investment and consumer spending.

Overall, this will result in slow or no growth, but likely not a big decline. Europe will likely go into a recession, and that will be a head wind to any economic growth in the U.S.

Furthermore, China’s growth may slow down dramatically and likely already has, but the Chinese government is not releasing a very accurate picture of its economic growth rate.

The combination of negative growth in Europe and slowing growth in China will help limit U.S. economic growth in 2012.

IBD: What leads you to believe another global financial meltdown is coming? How will it compare to the European debt crisis and the 2008 U.S. financial crisis?

Wiedemer: The fundamental economic problems, which will cause a global financial meltdown, have not improved at all. They have only gotten worse.

The four economic bubbles — housing, consumer spending, stock market and private credit — are being held up by massive increases in government debt and dollar bubbles.

source form: investors

You want to see light volume as this pattern takes shape. This signals an orderly exit by some investors, rather than a stampede out of the stock by many big investors.

You also want a handle that slants downward rather than upward.

 

Upward action in a handle is called “wedging.” William J. O’Neil, IBD’s founder and chairman, explained what’s wrong with it in his best-seller, “How to Make Money in Stocks.”

He wrote: “This upward-wedging behavior along low points in the handle doesn’t let the stock undergo the needed shakeout or sharp price pullback after having advanced from the low of the base into the upper half of the pattern.”

Let’s take a look at a handle that had what you prefer to see: light trade and a downward slant.

Ford (F) etched such a handle pattern from early August 2010 through early October 2010.

This came as the storied U.S. automaker was executing a turnaround — bouncing back from the Great Recession.

The handle was added to a cup dating back to April 2010. It began to develop as Ford pulled back after climbing as high as 13.24 on Aug. 3. 1 That established a possible buy point at 13.34.

While the 17% decline within the handle was greater than you’d normally like, it was much less than the 33% drop in the base. Plus, the market was recovering from a steep correction.

Ford showed clear downward-sloping action throughout August. 2 This is exactly what you want to see as a handle starts to form.

Later on in the handle, the stock did start to creep up. 3 But in the most important part of the handle — its early days and weeks — the move was downward.

You can expect a little upward-sloping action as a handle wraps up, since the stock, after all, does need to climb above its recent peak in order to break out.

Ford’s handle also showed low volume, just like you want to see. Note how turnover dried up nicely near the handle’s lows in late August and early September. 4.

The stock broke out past 13.34 in early October in strong trade. 5

Ford ended up rising as much as 42% by mid-January. It then tripped a sell rule, slicing its 10-week line in heavy turnover. 6

source form: investors

For 18 consecutive quarters, from Q2,’02 through Q3,’06, S&P 500 operating earnings increased at least 10% each quarter. Initially the gains were a rebound from the earnings declines of the 2000-2002 Bear market and recession, and later on they were reflective of an accelerating market and recovering economy. Then came the housing bust, liquidity, unemployment, and for a brief period, true fear. However, with Q1,’11 earnings mostly behind us (97% reported), the S&P 500 has now posted five consecutive quarters of double-digit earnings gains. Based on current estimates through Q4,’12, the index is expected to post another seven consecutive quarters of double-digit gains, bringing the run to at least 12. In addition, Q3,’11 is expected to post an all-time high for earnings, at US$ 25.09 per S&P 500 share (or US$ 228.7 billion in aggregate), outpacing the current record of US$ 24.06 (US$ 213.7 billion in aggregate) set in Q2,’07. Therefore, at least according to the estimates, another five consecutive quarters of earnings records after Q3,’11 can be expected; nice if it happens. Now before you target your party-pooping Bear gun at me, just because I question that all quarters may not be record-setting quarters does not make me a Bear. Earnings, in my opinion, are doing quite fine. Q1,’11 posted near-record earnings (and if I ‘play’ with the Financials they did make a record), cash flow has set an all-time record (and the last time I checked, mark-to-anything doesn’t change cash flow); cash itself appears ready to set another record level for Q1,’11, and in my S&P Indices 2010 Annual Pension and OPEB report, I’m characterizing the US$ 455 billion in underfunding as “an acceptable and manageable expense, well within income and assets levels.” In addition, companies have accomplished all this in a high unemployment environment, with consumers displaying a bit less than their typical spend-thrift ways. However, double-digit record-setting earnings for (at least) another record six consecutive quarters in this environment, maybe, but. One but that I’ve come to watch and use in my analysis is the top-down estimates, compared to the bottom-up which is used much more than top-down. While bottom-up quantifies all the issues and permits issue comparisons, analysts do have a history of being a bit optimistic – the sun, as well as earnings and stock prices, will come out (and up), tomorrow, or at the very least the statement after that. However, top-down estimates, typically from economists and strategists (many of whom are economists by training), have a history of seeing problems in the economy (which impact earnings and prices) before individual analysts see it. To be fair (and unbiased, of course), top-down estimates are also typically slow to reflect the resolution of a problem. Given that top-down estimates now indicate that things may be a bit more volatile and less optimistic than bottom-up estimates predict, a second look at the market seems advisable, especially when so many agree that earnings will only go up (not everyone loves a crowd).

Currently, 2011 full year estimates for both bottom-up ($98.06) and top-down ($94.89) estimates predict that 2011 will be a record year (not sure if that’s a buy or sell signal), beating the record set in 2006 ($87.72), with both also expecting Q3,’11 to set a quarterly record (bottom-up $25.09, top-down $24.07, with the current record of $24.06 being set in Q2,’07). However, top-down is pointing to a much slower growth rate after that, with next year’s earnings growth rate estimated at 6.7%, compared to the bottom-up estimate of 14.0%. Both annual estimates set new records for 2011 ($111.79 for bottom-up and $101.21 for top-down) and show growth, but bottom-up is over 10% higher. The concern I have is that we appear to be focusing on bottom-up only, dismissing the group that has a decent (but nowhere near perfect) record of sending up an early warning signal. The fact that top-down estimates show growth is a positive sign, but the reduced rate of growth suggests that we should reexamine what we are paying for forward growth, least we get ahead of ourselves. If you are a committed long-term holder who will hold the stock regardless, then the difference is a blip on the scope. But for the rest the investing public (a not so silent majority), accepting any forward estimate, which mostly everyone says is going straight up, deserves a watchful eye, and maybe even some set limit orders.

Source : businessweek

Can’t the Fed see what’s happening to the prices of commodities, such as gasoline, grains, metals and other raw materials? Is the Fed blind to the inflation that’s raging all around?

Yet, the Fed still clings to its easy-money policy, insisting that the fragile nature of the economic recovery demands its continued support. It’s expected that the Fed will keep buying Treasury bonds for three more months as part of its Quantitative Easing 2.0 campaign, and will keep short-term interest rates near zero “for an extended period” in an effort to keep the economy growing.

In other words, the Fed will keep pumping cheap money into the economy until the patient can stand on its own.

Some Fed officials, such as Charles Plosser, the president of the Philadelphia Fed, are getting nervous. “I worry about us getting behind the curve” on inflation, he said recently. What he means is that he fears the Fed will be slow to change course, and will let inflationary pressures build up before acting decisively to raise the cost of money. Read our coverage of Plosser’s views on ending QE2.

Plosser is in the minority on the Federal Open Market Committee. Most members of the committee agree with Chairman Ben Bernanke that the recent rise in commodity prices has been caused mostly by supply shortages in the face of rising global demand, not by excessive money growth. They think the recent increases will be temporary and won’t lead to higher prices for other goods and services.

The members of the Fed — even such inflation hawks as Plosser — predict that inflation will remain modest over the next few years. According to the latest economic outlook from the Fed, consumer prices are expected to rise less than 2% a year this year, next year and the year after. Read the Fed’s economic projections.

Consumers don’t see the world in the same way at all. According to the latest survey from the Conference Board, Americans expect prices to rise 6.7% in the next 12 months.Read more about the big drop in consumer confidence in March.

Why is there such a large discrepancy between the Fed’s view of inflation and ours? In part it’s because of the way our brains work. We all have biases in the way we view the world. Our memories emphasize recent events and big changes, but we hardly recall the things that don’t change much.

In terms of inflation, we remember that gasoline and food prices have risen sharply over the past two or three months, but we forget that gas and food prices plunged in 2008. What’s more, we don’t think at all about the fact that lots of prices — for instance, the cost of washing a load at the laundromat, or the amount of our mortgage payment, or the co-payment at the doctor’s — haven’t changed in years. Of all the things we buy, nearly three-fourths have so-called “sticky prices” that don’t change often.

Our minds are fooling us: We notice the prices that fluctuate all the time, but we ignore the much larger share of our spending that’s on sticky-priced goods and services. Over the past year, sticky prices are up about 1.2%, while flexible prices are up more than 4.5%. According to Fed economists Michael Bryan and Brent Meyer, sticky prices predict future inflation much better than flexible prices do. Read Bryan and Meyer’s research on predicting inflation.

Incidentally, one of the stickiest prices of all is the price of labor — wages, which are rising at an extremely slow pace of 1.7%. And has anyone noticed that home prices — the ultimate sticky price — are falling again? Read about the sixth straight decline in the Case-Shiller home price index.

Who to believe?

When thinking about how to calibrate monetary policy in order to keep prices stable, it’s better to consider sticky prices rather than the flexible prices that pre-occupy our minds and our daily discussions about the dangers of inflation.

Here’s the key point for the Fed: Because sticky prices are changed infrequently, businesses tend to set them at a level that will cover their own expected higher costs over that interval. Sticky prices have a built-in inflation expectation component!

The concept of sticky versus flexible prices is closely related to the idea behind so-called core inflation, which looks at inflation trends by excluding food and energy prices, on the grounds that those prices are volatile. (Food and energy prices are among the most flexible prices we have, often changing daily in response to forces of supply and demand far beyond the Fed’s control.)

The point of paying attention to core inflation has always been to look beyond temporary price fluctuations so we can more accurately predict where overall inflation will be next year or the year after. It would be foolish for the Fed to change policy dramatically every time the price of eggs goes up or down.

The idea is sound, but the Fed’s reliance on core inflation has been a public relations disaster, leading people to wonder sarcastically if Fed officials are so out of touch that they think we don’t have to drive or eat. The emphasis on core inflation has destroyed the Fed’s credibility.

The Fed now has a problem best articulated by Chico Marx, who posed the timeless question: “Who you gonna believe, me or your own eyes?” Should we believe the Fed when it says consumer prices will probably rise about 1.5% to 2% a year, or should we believe our own eyes and our own brains, which we know aren’t the most reliable witnesses?

The Fed is probably right about inflation not being a problem now, but no one believes it. That creates a credibility problem, and something worse: If consumers and businesses begin to expect higher inflation, it could become a self-fulfilling prophecy.

source from: marketwatch

European Central Bank President Jean-Claude Trichet this month said the ECB may raise interest rates in April for the first time in almost three years to fight mounting inflation pressures. “Strong vigilance is warranted,” he told reporters March 3 after the bank set its benchmark rate at a record low of 1 percent for a 23rd month.

“Don’t listen to him,” Weinberg said of Trichet today during an interview on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “If he tells you there’s inflation, there’s not inflation. There is no inflation in Europe.”

European prices rose the most in more than two years in February, breaching the ECB’s 2 percent limit for a third month and putting more pressure on the ECB to raise rates. Inflation in the 17-nation euro region quickened to 2.4 percent from 2.3 percent in January, the European Union’s statistics office in Luxembourg said March 16.

“High unemployment is keeping wages down low, and that means there’s not inflation no matter what the ECB tells you,” Weinberg said. “The ECB may raise interest rates, but what we’re seeing in Europe is the same thing we’re seeing here: a relative rise in the price of energy and food compared to other goods and services.”

Weinberg said he thinks the euro area’s unemployment rate will rise to above 10 percent in February from 9.9 percent the prior month when the European Union’s statistics office releases the data April 1. That compares with a median estimate of 9.9 percent in a Bloomberg News survey of 28 economists.

source from: bloomberg

“It’s a nightmare for everybody,” Stern said during a March 24 interview in Basel. “We have to adapt. Something will come. I don’t know when, but one day it will happen.”

Swiss exports are lagging behind German goods sold abroad as companies from watchmaker Swatch Group AG (UHR) to chemicals supplier Lonza Group AG (LONN) struggle with the franc’s ascent against the euro and dollar. While both nations benefit from global demand for their products, the euro’s weakness has helped bolster sales and economic growth in Germany.

The franc gained 10 percent over the past year against the euro as investors sought a haven from the European debt crisis. Thecurrency markets help explain why analysts are estimating that the Swiss economy will expand 1.95 percent this year, trailing the predicted 2.6 percent growth rate for Germany.

Swiss central bank President Philipp Hildebrand said as recently as March 18 that the franc’s advance is among the “considerable risks” to the economy. Exports, which account for about half of the nation’s gross domestic product, rose 7.1 percent in the fourth quarter from a year earlier. In Germany, sales abroad jumped 15 percent in the same period.

Euro Membership

“Swiss exporters would be much better off now if the franc hadn’t appreciated that much over the past two years,” saidAlexander Koch, an economist at UniCredit Group in Munich. “They would be as successful as their German counterparts as both countries’ export sectors are similarly positioned.”

The Swiss remain opposed to adopting the single currency, and just one of five government-coalition parties supports opening membership talks with the EU. The government was forced to negotiate a set of bilateral treaties with the EU after voters rejected a proposal in 1992 for membership in the European Economic Area. That has allowed the nation of 7.8 million to enjoy some of the advantages of membership without giving up any sovereignty.

Joining the euro region is “out of question for the foreseeable future,” said Georg Lutz, a political scientist at the University of Lausanne. “No party would suggest that as they know that voters want to stick to the franc.”

‘Catastrophic’ Gains

Swatch Chief Executive Officer Nick Hayek, whose Biel, Switzerland-based company generates 25 percent of its total sales in European countries excluding its home market, has called the strength of the franc “catastrophic.” Lonza, a supplier of chemicals to drug companies, said March 21 that the franc’s ascent reduced full-year earnings by 28 million francs ($30 million) before interest and taxes.

While the Swiss National Bank tried to stem the franc’s gains in the 15 months through June 2010 by purchasing foreign currencies, it has since ended those intervention attempts. SNB Governing Board member Jean-Pierre Danthine said March 24 that influencing exchange rates is only “temporarily” feasible.

Forty-seven percent of Swiss companies said the currency is weighing on orders, according to an SNB survey conducted in January and February. Swiss freight company Kuehne + Nagel International AG has considered changing the currency in which it reports financial results to euros from francs, Chief Financial Officer Gerard van Kesteren said in a March 24 telephone interview.

Lost Revenue

“Last year, the translation from foreign currencies cost us around 6 percent of our revenue,” he said. “We have to compensate for that with more business and accelerated growth.”

Only the U.S. dollar performed worse than the euro in the past 12 months, according to Bloomberg Correlation-Weighted Indexes, which measure the performance of the world’s 10 most- widely traded currencies against each other. The euro dropped 3.3 percent as Greece and Ireland required financial rescues from the EU and International Monetary Fund.

The franc traded at 1.3000 against the euro at 9:12 a.m. in Zurich, down from 1.2986 yesterday. Versus the dollar, it was little changed at 92 centimes. The median of at least 30 analyst estimates in Bloomberg surveys is for the currency to weaken to 1.35 per euro by year-end, and to 97 centimes per dollar.

Swiss stocks are trailing their counterparts in Western Europe. The benchmark Swiss Market Index (SMI) has fallen 0.6 percent this year, compared with a 1.4 percent gain of Germany’s DAX Index and the 5.7 percent increase of France’s CAC 40 Index.

Health Program

Norbert Walter, former chief economist of Deutsche Bank AG, told Aarau, Switzerland-based Aargauer Zeitung newspaper in January that there’s no quick solution for Swiss exporters.

“Only the all-encompassing fix might help, namely joining the euro,” he said.

“Swiss exporters had to constantly adapt to the franc’s appreciation by becoming more efficient,” said Alexis Bill Koerber, an economist at BAK Basel Economics research institute. “In that sense, the franc has been a health program. We are a victim of our own success.”

Switzerland’s economy expanded at an average annual rate of about 1.6 percent in the decade through 2010, compared with 0.9 percent for Germany. The SNB raised its 2011 estimate for Swiss gross domestic product growth on March 17 to 2 percent from a previous forecast of 1.5 percent.

“Generally, you enter a monetary union if you have a credibility problem,” said Rudolf Minsch, chief economist at Zurich-based business group Economiesuisse, which represents about 30,000 Swiss companies. “But with the euro area, it’s the other way round. Compared to that, the franc’s strength is a minor issue.”

source from: bloomberg

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