Saturday, February 13, 2010

Steps to Success

Charting is a great way to spend a cold, snowy winter day, or night especially if your stuck with two feet of snow. If you can learn to read charts you might develop a great feel for the direction of the general market and individual stocks. So, you are asking yourself. why do I need to know this? Isn't  it more important for Dan to know it rather than me? Yes. Charts can show us what is going on today, what has happened in the past and they can also be a great indicator of the future direction of the market or a stock or literally anything that can be charted. If you can better understand that investments have patterns and you can understand what these patterns mean then the more you will be in tune with what I'm thinking. As I have said to you in the past a big part of my job is educating you my clients.

Let’s take a look at the chart below. It is the past 90-days price action on the SP 500 Index.

The blue dotted line is the 50-day moving average of the S&P 500 index. You can have moving average for any number of days. I like to use the 50 and the 200-day moving averages because they give me both a near term and a longer-term view of what is happening in the markets. On January 21 the S&P 500 Index broke down through the 50-day moving average. From a charting standpoint this was a very important change in the market direction you see the index had been above its 50-day moving average since last November 5th.

If we look at what has happened since January 21 we see that we have experienced a series of lower highs and lower lows. The market seems to be churning, up big one day down even bigger on another day. Breaking the moving average line indicates that the market is loosing directional momentum and may be in for a correction. If you are still with me and not a sleep, breaking the 50-day moving average doesn’t tell us how far the market might decline or when, just that the market has lost some momentum.

We can see this loss of momentum in that the S&P 500 in another section of this chart. Three times the market stalled at the 1148 to 1150. The index failed to push though the level on January 11, 14, and 19 and could go no higher. It attempted 3 times to break through the 1150 level and failed. Once it could not breakout the market began to turn and it broke down. If we were to draw a line along the most recent bottoms we might be able to project out were the index might fall too --we see the next indicated low is 1044 down from 1075, which was last Fridays close. There is no guarantee that we will get there, but unless we see some significant good news this coming week I would expect to test the 1044 level soon.

Keep in mind that markets do not go straight up or straight down. What we are trying to understand by looking at charts is to try and to the momentum of the market. I use this moving average and momentum indicators for entry and exit points to buy or sell investments. for you and me. Common stocks trade in a ranges between highs and lows. Look at the stock quote section of you local newspaper or on line and it will give you the current price and the high and the low for the last 12 months. If you are looking to buy a stock you want to be somewhere closer to the low and if you want to sell you would like to be closer to the high for the year.

When I make the decision to buy a stock I do not commit all of the money I have allocated to that particular stock at one time. Let’s say for a client, I want to commit $40,000 in one position. My initial investment might be between 25% to 50% of what I want to invest. No one can pick tops and bottoms in stocks. We only know the top or bottom for a period of time after the fact. The use of moving averages and highs and lows are all tools that can help us achieve better returns with lower volatility. I know this is not one of my most exciting posts, but for some of you it may be helpful. Sometimes going to school can be fun other times its just work.

Dan Perkins

Sunday, February 7, 2010

The Story of the Three, no Four Little PIGS

As children we heard the story of the three little pigs and the big bad wolf. The wolf came after the pigs who knew they needed protection from him. The first pig built his house out of straw and the second built his home out of sticks. The wolf came and huffed and puffed and blew both of their houses down. The third pig built his house out of bricks and no matter how hard the wolf huffed and puffed he couldn’t blow the house down.

Recently Wall Street, who likes acronyms almost as much as Washington, came up with a new one; PIGS. The letters in the acronym stand for the countries of Portugal, Ireland, Greece and Spain. Some of you may have heard of the BRIC countries; Brazil, Russia, India and China referred to as major economic and investment opportunity countries while the PIGS are places to avoid financially. I find a great irony that during a time when the world is concerned about H1N1, the Swine Flu, we are also worried about the PIGS countries.

In our little story of the Four Little PIGS, who plays the part of the Big Bad Wolf? Perhaps the Big Bad Wolf is the enormous amount of debt the world has taken on to prevent another global depression. A very short time ago, early December 09 in fact, everybody was talking about the weakness of the dollar and the strength of the euro. At the time the exchange rate of dollars to euros was 1.512. The world was in recovery and the talk was to replace the US Dollar as the global reserve currency. During that time I wrote a Blog opining that when the world gets in trouble there is only one place that people want to have their money and that is the US Dollar.

One of the PIGS, Greece, had a problem paying its bills and the S&P threatened to downgrade the credit quality rating of its debt. The result was a huge reversal in the dollar against the euro. S&P started to look at the rest of he PIGS as well as the UK and the US and said that unless these countries got their debt under control S&P might have to downgrade all of these countries.

Now we find the euro at 1.3651 and only seven tenths of a cent to break a major support level for the euro. The stock markets around the world have seen a significant sell off including all the BRIC countries. We are at a critical juncture of deciding to stop the expansion of debt and we must ask ourselves do we want to take the wind out of the Big Bad Wolf? Then all the BRICs in the world can’t stop the most significant economic downturn since the Great Depression. My guess is that the world will turn only if the United States starts taking the wind out of the Wolf by becoming more responsible about managing its debt.

Dan Perkins

Tuesday, February 2, 2010

Is the American dream over for at least a generation?

Growing up I always heard, “ buy a house it will go up in value; you can’t loose money in real estate”. We have seen ups and downs in the real estate market, but prices always snapped back fairly quickly, but not this time. Young people just entering the housing market will have the great American opportunity to buy a house cheap perhaps a lot cheaper than their brothers or sisters who bought just a couple of years ago. They may make money on their real estate purchase or they may at best just stay even. The number of people who have lost significant wealth with the decline in the value of their homes is


The wealth of American families plunged nearly18% in 2008, erasing years of sharp gains on housing and stocks and marking the biggest loss since the Federal Reserve began keeping track after World War II.

The Fed said that U.S. households' net worth tumbled by $11 trillion -- a decline in a single year that equals the combined annual output of Germany, Japan and the U.K. The data signal the end of an epoch defined by first and second homes, rising retirement funds and ever-fatter portfolios.

The list below shows the 10 worst performing residential real estate market in the United States according to a recent report presented by AOL expressed in term of discount that is being taken to sell a house.

City Discount % of sales Reg Price Foreclosure Price
Pittsburg 59% 10% $123,000 $35,000
Cincinnati 39% 15% $141,000 $65,000
Columbus OH 38% 19% $158,000 $71,000
Minn St Paul 34% 26% $210,000 $114,300
Phoenix 29% 58% $168,000 $100,000
Denver Co 27% 25% $225,000 $135,000
Los Angles 27% 39% $435,000 $232,000
Riverside CA 25% 66% $205,000 $140,000
Kansas City 25% 29% $142,048 $97,152
San Francisco 24% 25% $530,000 $230,000

I have to tell you I was shocked at some of the cities listed above. No cities were listed from Florida or Texas and that Pittsburg would have the largest foreclosure discount at 59%. Who would of thought that the average foreclosure price in San Francisco would be $230,000?

I like you have seen the ads on the Internet for foreclosed property but the idea that you could buy a house in Pittsburg in foreclosure for $35,000 is just mind blowing. I have a friend and client who lives in Scottsdale and he tells me that he has seen discounts close to 50% on some houses.

I bring up the issue of net worth lost in housing as part of the two edged sword of jobs and housing that we have to deal with if we are going to truly turn this economy around. In just about 2 months from now the Fed will stop buying mortgage loans in the open market. Most experts do not know for sure what will happen to the mortgage market when the Fed pulls out as the buyer of last resort. Some experts feel that interest rates will have to rise in order to attract new buyers to replace the Fed. If interest rates for mortgages rise then what will be the impact on both new home sales, resells and refi’s? The cost of money could go up which could put pressure on many sections of the real estate markets and new cities may replace those on the list perhaps at greater discounts.

We are in uncharted waters with what is happening in the credit markets only time will tell if the next generation of Americans will actually make money in the real estate markets.

Dan Perkins