The Significance of the 400 day (80 week) moving average

April 30, 2008
Once the 80 week fell late in 2000, it was quickly tested from below twice, but never overtaken until the bear was dead.
For the prior 20 years up to 2000, the 80 week was a great support level. It was only broken significantly in 1981, 1987 and 1990.
This level has also provided solid support since 2003 when it was overtaken, declaring the bear dead. Now we have another significant break with what so far looks like a test of resistance from below. Until this level is left behind, the smart trade is to buy fear only and fade greed, especially in the area of the 80 week moving average. It only helps that this is also the site of the 50% retrace from the recent high to the low.

Here we are again? 2001 vs. 2008

April 29, 2008


Is it really 2001 again? June 22, 2008

Are We Scared Yet? June 30, 2008

Danger Ahead: Fixing Wall Street Hazardous to Earnings Growth

April 29, 2008

By Christine Harper and Yalman Onaran

April 28 (Bloomberg) — Wall Street’s money-making machine is broken, and efforts to repair it after the biggest losses in history are likely to undermine profits for years to come.

Citigroup Inc., UBS AG and Merrill Lynch & Co. are among the banks and securities firms that have posted $310 billion of writedowns and credit losses from the collapse of the subprime mortgage market. They’ve cut 48,000 jobs and ousted four chief executive officers. The top five U.S. securities firms saw $110 billion of market value evaporate in the past 12 months.

No one is sure the model works anymore. While Wall Street executives and regulators study what went wrong, there is no consensus solution for restoring confidence. Under review are some of the motors that powered record earnings this decade — leverage, off-balance-sheet investments, the business of repackaging assets into bonds through securitization, and over- the-counter trading of credit derivatives. Without them, it will be difficult to generate growth.

“Brokerages will have a tough time for a while,” said Todd McCallister, a managing director at St. Petersburg, Florida-based Eagle Asset Management Inc., which oversees $14 billion. “The main engine of its recent growth, securitization, will be curtailed. Regulation will be cranked up. Everything is stacked against them.”

Last month’s collapse and emergency sale of Bear Stearns Cos., the fifth-largest of the New York-based securities firms, demonstrated the perils of Wall Street business practices developed after the 1999 repeal of the Glass-Steagall Act. The change allowed investment banks and depository institutions to compete with each other.

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Is Wall Street ‘Full of Bull’?

April 24, 2008

A well-respected analyst for 32 years, Stephen McClellan describes how analysts’ advice is biased and misleading for individual investors

by Ben Steverman

Stephen McClellan is biting the hand that fed him for 32 years.

A top-ranked analyst at Salomon Brothers and Merrill Lynch (MER), McClellan was one of the first to cover the booming computer industry. In addition to being well-respected, he was one of the longest-serving equity analysts on Wall Street, with a career stretching from 1971 to 2003.

Now, the retired 65-year-old number cruncher is saying what he really thinks about Wall Street. In his new book, Full of Bull: Do What Wall Street Does, Not What It Says, to Make Money in the Market (FT Press, 2007, $22.99), McClellan, admits that price targets are “fiction,” and buy/sell/hold ratings aren’t taken seriously by professional investors. Analysts spend perhaps only 20% of their time on research and the rest on marketing and other tasks, he says. They create sophisticated computer programs to track a company’s earnings, revenue, and cash flow in close detail. But the results are “not accurate at all,” he says. In fact, analysts often miss big trends and have a terrible record as stockpickers.

Stiff Penalties
Research isn’t written for retail investors, but for institutions. Those institutions, including mutual funds and hedge funds, have far too much influence over an analyst’s research, McClellan says. Companies and executives are also too good at manipulating analysts.

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The degradation of accounting

April 14, 2008

April 14, 2008

Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005) — details can be found on the Web site

Fair value accounting, by which debt and equity securities on a company’s balance sheet are “marked to market” — written up or down to their market price — has been hyped by accountants and regulators as the epitome of modern financial reporting, enabling investors to gain a completely true picture of their investment’s financial position. Indeed, Gerald White of the Chartered Financial Analyst Institute, speaking at an American Enterprise Institute conference Tuesday, believes it should be applied to all items on the balance sheet, not just financial instruments. There is just one problem: in the turbulence of the last nine months it has completely failed to work, and has indeed shown itself to be pro-cyclical, encouraging economically foolish behavior in both up and down cycles.

As someone who only thinks about accounting once a decade or so, I wasn’t really aware that much had changed from my business school days in the early 1970s. At that time, the values of assets on the balance sheet didn’t move much. Everything the company owned was dumped on the balance sheet at cost price and stayed there for decades while the world turned. The only exception was when the company held bonds or shares that had declined catastrophically in value (the occasional wobble was ignored) in which case they were declared “impaired” and their value written down. The fun for analysts was in finding companies whose downtown real estate was still held on the books at its value of 1926, when it had been bought, since there just could be a little teensy-weensy asset profit that might be unlocked from the company if one could figure out how.

This attitude to values was maintained through the inflation-accounting period of the late 1970s and early 1980s. Assets were assumed to be held for the long term, so buildings were written up by the movement in the consumer price index between the asset’s purchase date and the balance sheet date. US and British accounts differed in their approach to inflation accounting, which may have been one reason why it was abandoned fairly quickly once inflation returned to single digits, but neither system attempted to “mark to market.”

The “mark to market” approach had been used since 1940 by US investment banks, holders of large numbers of tradable securities, who needed to convince their regulators that their capital was adequate. It was not however used by British merchant banks, equally holders of substantial amounts of tradable securities. Only a small portion of merchant bank assets was held in a “trading account.” The remainder was held on a “back book” investment account and valued at cost. In this way, merchant banks were able to manage earnings very effectively; generally they built up large “hidden reserves” in good years which were amortized into earnings in years of unexpected dearth, so that the overall picture was smoothened. The result was to increase the confidence of the market in each merchant bank; people assumed that 200-year-old institutions had accumulated enough “hidden reserves” and undervalued real estate to smooth out any problems that might arise.

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