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Jerry
Good points that I hadn't thought of.
I have made no determination that 'the market is too high.' I'm strictly a
short term, contrarian trader, who spends from 1 day to a maximum of a
couple of weeks in a position. I gave up trying to determine where the
market was going a long time ago :). We trade strictly the S&P futures and
only play probabilities. We 'know' that we're going to be right about 75%
of the time, based upon probabilities. For the record, and to describe our
backgrounds, my dad has a Masters from the University of Michigan in
Statistical Economics. He's 89 this month and has been trading futures for
over 60 years. My brother has degrees in Engineering Math and Engineering
Physics plus a Masters in Business, also from the University of Michigan.
He's 54 and has been trading for approximately 35 years. I am the dumb one
:). I partied at the University of Michigan for 4 + years in Engineering
and finally graduated from Wayne State with a degree in Market Research with
multiple majors in math, statistics and economics. I am all but
(dissertation) on my MBA with a major in International Finance. I'm 60 and
have traded futures for over 40 years. With this type of background it's
easy to see why we're strictly technical traders. We feel that the
fundamentals are already in the market (by the time we discover it) and that
this is reflected in the market's price activity.
Having begun my career after college with IBM (1961), I have been through
these low inflation cycles, the booms, smaller busts, etc. In the early 60s
I remember giving people a 1.5% or 2% annual raise and they were happy,
especially with no inflation. Unfortunately, I do see some differences
here.
My dad has a methodology that he developed over the years to forecast market
moves (similar to Elliot waves). He called the 87 crash and after 4 days or
so, called me astonished, to tell me that the Bear market had ended, and
that we were back on our way up. Since then, all of his attempts to
estimate the market top have been for naught. I wouldn't bet a nickel on
when this move is going to end because I never would have anticipated a 15
year move up. BTW, he feels that we've reached the top and the bull market
is over. He hasn't been really accurate in calling the exact top for the
last few years, so take this forecast at face value. It's worth what you
paid for it :).
I, FWIW, sense that we have just gone through an important, fundamental
'change'. I don't know what happened or what it means, other than according
to our numbers, something has happened. I don't know if what I saw was the
cause or the effect. It's the first fundamental change we've seen in the
last 12 years. We seem to be seeing increased volatility in our market (S&P
futures). If we decouple the Bonds, our system shows 11 trades since May
1st, all of them profitable. Our actual trading system, during that same
time period, was right for 7 out of 8 trades. Don't get me wrong. These
numbers are unbelievable. Almost like Jim and his Amazon call. It's just
that I feel they are a little 'too good'. In the last 6 weeks, we made
profits that would normally have taken 26 weeks. Something's not right,
IMHO. Something fundamental has changed or is changing. The only thing I
can put my hands on is our increased trading volatility and the decoupling
of the Bonds. Again, maybe I'm wrong, but I'm starting to worry.
FWIW, we're short the S&P September futures at 1130.75.
-----Original Message-----
From: owner-metastock@xxxxxxxxxxxxx [mailto:owner-metastock@xxxxxxxxxxxxx]
On Behalf Of Greatelto@xxxxxxx
Sent: Thursday, June 18, 1998 10:15 PM
To: metastock@xxxxxxxxxxxxx
Subject: Re: Times are a changing? Bonds&Equities
Guy, here is some food for thought.....
Harlan Cadinha wrote in his recent newsletter..........
"The recent performance of stock and bond markets has made interesting
headlines. For every positive article, one can find a contrary one as to
why
the market is too high. Current worries are typically focused on historical
benchmarks of value.
A constant fear of FRB tightening seems to raise its ugly head often causing
extreme volatility.
To make a determination of fair value for markets, one must ignore many
props
and rules of the past in order to have a clear view of our current economic
landscape. As it took centuries to realize the earth was round, it is
taking
decades to realize that economic growth without inflation is indeed
possible.
Current value determinants must be adjusted to this emerging reality.
What is the value of a 5% return without inflation? To achieve that same
after inflation rate of return in 1981, one had to realize a nominal return
of
about 19%. Today, an investor can arrive at the same result with a mere 5%
plus return. Is it any wonder that many are rushing to stocks and bonds
that
produce returns higher than 5%? Under a "no inflation" scenario, what is
the
appropriate price to pay for a company that is growing predictably at 15%
per
year? Obviously, that kind of growth will fetch a lofty premium in our "no
inflation" world. So much for the benchmarks that helped determine value in
the inflationary enviornment of the 50's through the 80's.
The technological revolution has unleashed a productivity enhancing
prosperity
that can only compare with the industrial revolution. So long as
productivity
increases at a faster rate than wages, there will be no wage inflation.
Corporate earnings growth may slow because there is no pricing power in our
system. Companies that have had to rely on price increases have
underperformed those who are increasing earnings through productivity
enhancement. Lastly, our dollar has reasserted itself on the currency scene
after more than a decade of devaluation. A strong dollar is a buffer
against
inflation.
Now, all you have to do is ask, how high is high? While the answer is not
readily apparent, what is apparent is that past benchmarks are of little
determining value today. However, there is political risk both in the U. S.
and globally that must be monitored."
This is pretty much in keeping with questions you asked. Hope you do find
some value in it.
Jerry
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