Has Cash Been King for the Past 10 Years?

If you're like most investors, you've been nearly brainwashed with conventional market "wisdom" that stocks are the best way to grow your portfolio.

You would be crazy not to have your money in the markets, right?

But when markets drop, as we've seen in this credit crisis, it's amazing how quickly the story changes.

Steve Hochberg and Pete Kendall, editors of Elliott Wave International's Financial Forecast, challenged the notion of stocks' superiority years before this latest downturn.

Learn how cash has been king – and will remain so – far longer than the latest news headlines may have you believe in this free excerpt from Elliott Wave International's Credit Crisis Survival Kit.

Elliott Wave International has also made the full Credit Crisis Survival Kit available free for a limited time. In addition to this excerpt, it contains 14 other articles, reports, and videos that reveal how to survive and prosper during the credit crisis. Visit EWI to download the kit, free.

Cash's Invisible Reign Made Visible

[excerpted from Elliott Wave Financial Forecast, August 2008]

With respect to cash and its status as the preeminent financial asset, however, we are starting to wonder if investors will ever come around to our point of view, which, as we explained in the March special section, is that there are times when "the phrase 'focus on the long term' means "get out and wait.'" As we also pointed out, the last eight years are clearly one of these times, as cash has outperformed all three major stock averages over this period. A July 3 USA Today article shows how this outlook is actually becoming more farsighted as the bear market intensifies:

3-month Treasuries Beat

S&P 500 for past 10 Years

The article says, "Investors who bought stocks for the long run are finding out just how long the long run can be." But the farther back in time cash's dominance stretches and the rockier the stock market gets, the farther investors seem to move from ever taking anything off the table. After stating that "there can be times, long times, when stocks won't beat T-bills," a professor and popular buy-and-hold advocate is cited as "optimistic that the next 10 years will be better than the past decade." In March EWFF stated, "Cash will continue to outperform until stocks are no longer fashionable." There is no sign that such a condition is even close to happening.

It's somewhat amazing that cash is not capturing anyone's fancy because a tremendous society-wide thirst for cash is spreading fast. "In a deflation," the Elliott Wave Financial Forecast has stated, "Rule No. 1 is to unload everything that isn't nailed down. Rule No. 2 is to sell whatever
everything remaining is nailed to." The banking system is surely deflating, because, echoing Elliott Wave Financial Forecast's wording again, "Desperate American Banks Are Selling Everything That Isn't Nailed Down." SunTrust is selling its stock in Coca-Cola, an asset the bank held for 90 years. Merrill Lynch sold its founding stake in Bloomberg as well as various other subsidiaries.

Meanwhile, "Americans are selling prized possessions online and at flea markets at alarming rates." Pawnshops and auction sites are booming. At Craigslist.org, the number of for-sale listings soared 70% in eight months. This fits with our review of Craigslist's prospects when it was getting started in 2005: "This is just the set-up phase. Once the global garage sale really gets rolling, truly astounding volumes of dirt-cheap goods will be available on-line and
elsewhere." The global garage sale is on. The chart of the U.S. savings rate shows that the bull market in cash has come to life.

A 30-year downtrend in savings rates ended at minus 2.3% in August 2005. In May 2008, the savings rate skyrocketed to 5%. This jolt may be somewhat overstated due to the arrival of the government's stimulus checks, but the burst should be the start of a critical new mindset among consumers. When the government showered the economy with $600 checks, many did something they never would have thought of through most of the bull market: They put the money in the bank, which is exactly what the administration did not want. In fact, federal, state and local governments are desperate for the tax revenue that a little ripple-effect spending would have generated.

According to the National Conference of State Legislatures, states must close a $40 billion shortfall in the current fiscal year. "The problem today is that tax revenue is vanishing," says a story about the sudden appearance of the worst fiscal crisis in New York since 1975. Even cities like East Hampton, New York, where someone paid $103 million for an oceanfront house last year, are out of money. "Nobody understands how it happened," says one resident. The pages of this newsletter show otherwise. If we are right, a deflationary decline is depleting and destroying cash flows in novel new ways that no one alive has experienced before.

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The previous analysis was excerpted from Elliott Wave International's
Credit Crisis Survival Kit. The kit, featuring 15 free resources
to help you survive and prosper during the credit crisis,
is available free. Visit
EWI to download the kit, free.

Trading is a Journey of Self Discovery

I'm doing my second round reading of The Disciplined Trader by Mark Douglas. Fantastic book, and I'm picking up some additional stuff out of it.

I'm less than half-way through the book, but one of the key things I've gotten out of it this time round is this - How well you are able to control your emotions when trading depends on the meaning you attribute to your wins and losses.

Do I hear some of you going "huh?". Well, basically, its not the event of winning or lossing that is critical, its our interpretation of what those events mean to us that's important. A person who attaches the meaning that "I'm a loser" to a losing trade, reacts very differently from a person who attaches the meaning that "I've interpreted the markets wrongly this time." The former is a global and permanent statement at the identity level, the latter is a specific and temporal statement at the behaviour level. Who do you think would be in more control in his trades?

One side issue that this brings up, is also that of self-acceptance. The more self-accepting one is, the more one is able to accept the mistakes. In Mark's book he says

"Taking responsibility is a function of self-acceptance. You can measure this degree of self-acceptance by how positively or negatively you think of yourself when you make what you perceive as a mistake. The more negatively you think of yourself, the greater you tendency to avoid taking responsibility, so you can avoid the pain of your harsh thoughts, thus generating a fear of making mistakes."

Well, I always say that trading is a journey of self-discovery. The better you know yourself, and are able to control your emotions, the better trader you are. And that's one reason why I believe, good traders who have undergone the necessary "training", generally tend to be of better character. Self-control is an important character to develop when you are a good trader... it shows in your trades, and your interactions with people.

Poll: What do you want to see more of on this blog.

Firstly, many thanks to all readers out there, and for the many encouragements. I'd love to know more of what you wish to see on this blog and I'll do my best to provide it. I've placed a poll on the right side, please take a minute to let me know what you would like to see more of.

If the option you want that isn't there, just leave me your suggestions as a comment here.

Thanks again!

AUDUSD Trade

My AUDUSD position has been stopped out, possibly proving my wavecount wrong. But we recall that flat corrections can make new price extremes.

The non-farm payroll data was 'unexpectedly' low. -159k actual vs -100k expected.
I say unexpected in quotes because I was expecting USD to weaken further. And besides that, many companies especially banks have been laying off staff.

In anycase, technicals are of key importance to me. So I'm taking my losses and waiting for the next opportunity. Its always painful to take losses, but necessary sometimes.

Take care and becareful out there.

Money as Debt

Here's an interesting video on how money is created. Very interesting to know, especially in these debt-filled times.

Trading Thoughts : A Gambling Account

Here's a 2-part series/article by BKTrader which I thought is pretty interesting. I've provided the two articles below, and I'll comment on it in another entry. :) Meanwhile, read, enjoy, reflect and see what thoughs come about.

—————–Trading Thoughts-A Gambling Account—————
Part 1
Admit it. Despite the volatility or rather because of it last week was a great time to trade. Not a great time to make money - unless you had the reflexes of jungle cat - but definitely a fun time be in the currency market. 20 rounds per day? 30? By Friday I was doing 40 and did even realize it. Of course when the dust settled I was up only modestly because wide spreads, sudden spikes and massive turns in sentiment created as many stop outs as winners. Never mind, it was rush to play and I enjoyed every moment of it because I never truly put myself at risk.

Like many FX traders I have more than one account. Almost everyone who trades FX seriously, be they retail or institutional has several dealing relationships. In a deregulated, decentralized, dispersed market that’s a smart thing to do. You never want to rely on only one point of exit in order to control your risk. But as retail traders we are fortunate not only to have many choices, but to trade smaller relative size. Since everyone in the currency market offers mini lots, its easy to open a small account and experiment to your hearts content. In fact I believe its not only easy, but also quite advantageous for retail traders to create a “gambling” account where you can go to town with your speculative capital.

What is the single biggest sin in trading aside from not using stops? No doubt its over trading. Yet telling an FX trader not to over trade is akin to telling a guy not to stare at a woman in a skimpy dress. We know its impolite but few can resist the temptation. Discipline may be the key to success in trading but when it comes to human beings all of us are subject to our appetites. Eventually everyone loses control. Much better therefore to lose it in a controlled environment.

That’s why a gambling account is so vital to your trading health. The markets will always entice us to gamble. Better to do it with a small amount of money, rather than wreck your real account. Trading books are littered with examples of guys and gals who made small fortunes in the market only to give them all back in a wildl over trading binge that typically ended up in a margin call. If you are going to get blown out of the market, do it your gambling account.

Next week, I’ll tell you how you can turn vice into virtue by making the gambling account your own little trading lab.

Part 2
Last week I talked about the need for a separate gambling account to let off steam and allow our worst impulses run wild in a controlled and contained environment. This week I’d like to suggest that a gambling account is not merely a diversion for Vegas like entertainment but could in fact be a very useful tool in our arsenal as FX traders.

Perhaps the greatest problem facing many traders is the fear of losing. It is the primary reason so many trade without stops, postponing the day of reckoning in order to avoid the immediate pain of capital loss. In fact when trading a gambling account many traders do just that - they lay on a trade, leave no stop and hope for the best. But the “have a hunch bet a bunch” strategy inevitably ends in tears and a margin call.

On the other hand, if you actually practice safe trading by always using stops, a gambling account can be an incredibly liberating, educational experience. A gambling account when used with stops can be a source of experimentation and learning. You can experiment with a variety of strategies and money management approaches that you might never consider in your regular account.

Granted you could do all of these things on a demo, but your experience and sense of commitment would be completely different. Do you really think you would be checking quotes every 5 minutes on your Blackberry on your USDJPY position if it was done on e demo account? Hardly. Even if your are trading for just a $1 per point real money makes a difference and makes your trading much more meaningful.

For me one of the most useful lessons from trading a gambling account is the realization that just staying the course can often mean the difference between victory and defeat. Woody Allen one said that, “90% of life is just showing up.” In trading this can often be true. Trading in these wildly volatile markets this week, I often would find myself in a deep hole by the middle of the day, but by sticking to my plan and continuing to take trades that were part of my setup I was able to end up positive by the end of the day. Would I have had the courage to continue if this wasn’t my gambling account? I doubt it - that’s why the lessons I learned were worth far more than the pips that I earned.

News Laden Morning, and wild week ahread

There's a huge amount of financial news this morning, and I've shared them on the panel on the right. But I thought I'd just share my thoughts. :)

Bradford & Bingley to be nationalized: reports
Looks like shortly after Freddy and Fannie have been nationalised in US, Bradford and Bingley are being nationalised in UK. (What's with this same first letter alphabet thingie for these firms? Perhaps I should come up with a W&W or A&A... haha)

Either I hadn't been kept up to date on UK news, or there hadn't been as much interest in B&B as there was in F&F. I'm not sure of the impact of this new on the GBP, but it would certainly be good to take this into consideration. Perhaps with its nationalisation, banks in UK are more comfortable with lending and liquidity issues are lessened.

There are a few items on the bailout bill:
Text of economic rescue bill official summary
Rescue bill released

Basically, the bill will be passed, and Paulson will have the authority to manage $250 billion upfront instead of his intended $700 billion. It doesn't say what has to happen or when he can use the rest of the $700 billion. I suppose some checks and oversights out in place is a good thing, because I'd be worried if he did dump all $700 billion at one shot. So perhaps, $250 billion as a first tranche is good enough for now.

The most important question would be how the markets are reacting to this. Perhaps some short-lived joy on the improved liquidity, followed by the realisation that markets are still on its way down.

Why do I say that? Well, the Fed had been pumping in loads of cash, cutting rates like mad, all in efforts to stablise the markets. This $700 billion bill (enough to wage a full fledge war) is almost a final resort after seeing all else had failed. I do think it is necessary for the Fed to act, but I think it serves to cushion the impact of the market correction, or prevent it.

That's all for now. Good luck with your trading!