Big day

Margin trading

I had a thought overnight. Dr Keen's margin trading versus stock market movement chart may not be all that it seems at first sight. It presents a chicken and egg problem. Does the margin trading drive the market or does the market encourage margin trading. I would guess it's a bit of both. Nevertheless the availability and take up of credit is linked to QE. And the relationship between stock brokers and banks provides a mechanism for all that money to find its way into the market.

And what comes next?

I have been bleating incessantly: What do I do next? What should I do now?  The market continues onward and upward and I don't want to miss that train. But is it too high? Should I take my profits? Moan, moan moan.

Monday will not be like that. I know exactly what to do. Have a look at the chart. You all know hat I think about volume spikes..

When the market opens I shall sell everything. I have already dumped a quarter of my holdings as nerves  frayed. I shall try to be as quick as possible in case there is a sharp fall. With luck the market will hold up and there may be a bit of a rally. Maybe my decision will be wrong and the market will continue upwards. But I don't care. I believe that the odds have shifted and I don't want to be the wrong side of those odds. I can always buy back. But if I am right, my profits will evaporate.

And now for something completely different

A few days ago I made a cake with a difference. When I first tasted it I thought it was a mistake. It was OK but with its slightly earthy quality it was nothing to write home about. But the next day it had started to mature and over the next couple of days it turned into one of the best chocolate cakes I've ever tasted. It was very different. The chopped up chocolate gave it the texture and mouth feel of chocolate and this combined delightfully with the lightness of cake.

I mixed 175 gms of self raising flour, 50 gms of cocoa, 200 gms caster sugar, a couple of tsp of baking powder. Then I chopped up 250 gms of cooked beetroot in a food processor. Next I mixed three eggs and 200 ml of olive oil with my Baymix. This I added this to the flour mixture. I then blended all together with the Baymix. Into this mixture went the chopped beetroot, together with  a 100 gms of high quality  dark chocolate (70% cocoa) cut up into approx. half cm. squares. (My guess is that these little squares melted and re-solidified without fully blending with the rest of the mixture so giving the cake a chocolate mouth feel.)

I have bought some silicone cake tin liners from Lakeland. They are fabulous. Instead of fiddling around greasing your tins you just put one of these liners into your tin and pour or spoon in your mix. The cake comes out perfectly. I baked at 170 degrees for an hour. (But test a bit sooner with a skewer which should come out clean when the cake is done). I cooled it on a rack and kept it in an air tight tin. 

I recommend leaving the cake to mature for a day before trying it. You might like it with some cream but I like it just as it comes..

A really simple explanation of how Quantitative Easing is fueling the rise in the stock markets.

Printing money

I have mentioned many times in this blog that I think the reason why stock markets are rising relentlessly while economies continue to languish is the result of Quantitative Easing. QE is the most up-to-date euphemism for printing money. 

The printing of money inevitably results in inflation: more cash chasing the same volume of goods leads to a rise in prices so there must be inflation somewhere. This is one of the first things a student of economics learns.

Consumer, commodity and property prices have remained relatively stable or falling until recently. And this while governments have been printing money continuously. Somehow the cash must be finding its way into the only arena where asset prices have been rising: stock markets. What I did not know was how the mechanism worked. That is until I came across an interview by Steve Keen.

Dr Keen showed the link between margin debt and the level of the US markets. This means that investors are buying shares on margin (another word for borrowed money) supplied by their brokers. 

The way QE works is this: governments buy bonds (which are long term assets) from banks and pay for it with newly-created money. The banks are now sitting on a pile of cash.

What the governments want, and their motive for printing money in the first place, is that it should be lent to companies to invest in their businesses and to consumers to buy goods from companies. In short, they hope it will be a shot in the arm for the real economy.

Partly because the banks are fearful of lending to customers who will subsequently default; and partly because people and businesses are uncertain that they will be unable to repay what they borrow, banks can't easily find borrowers. So they lend it to stock brokers who offer margin to their customers who buy stocks. They are willing to pay interest on money which they invest to make capital gains as their stocks appreciate. And the banks rub their hands as they earn good returns on the cheap money provided by the governments' QE.

The parallel between margin debt and the DJI shown in Dr Keen's chart is scary. The video is here.

I have noticed that there has been a flurry of adverts by lenders who specialize in lending to high risk borrowers. I wonder if QE money is finding its way into this market too: lending at extortionate interest rates to people who don't care whether they can pay their debts or not. It used to be called sub-prime; now it's called payday loans.

My portfolio gets a pounding

Part of the reason I have done so well in the last couple of months is the relentless fall in the pound. Since the beginning of the year it has slid from almost 1.64 dollars to the pound to 1.48 on Tuesday 12th March. And because more or less the whole of my portfolio is now in dollars I have benefited.

To give you an example, one of my best performing picks was BBY. I bought some of these for $11.9 per share, so each 100 shares cost $1190. In sterling that was £725.50 at an exchange rate of 1.64. The price had rocketed to $20.3 on Tuesday, increasing my dollar investment by 71% to $2030 per 100 shares.  The exchange rate was 1.48 so in pounds my shares were worth £2743, an increase of 89%.

As you can see on the chart,  the Pound's value enjoyed an abrupt reversal of fortune. This followed a comment yesterday by Mervyn King, Governor of the Bank of England, that the Bank was not trying to push down the currency's value. Those of you who like chart patterns will notice that the market anticipated the announcement by creating a doji formation two days before.

For me the change in direction has cost me money. BBY continued its rise since Tuesday and is now at $21.50 a 6% rise. Sterling has risen to 1.516 so my 100 shares  worth $2150 in dollars are worth only £1418 in pounds, a rise of just 3%.

End of the road?

The health of the market

When a market has had a good run it regularly pauses for breath. The question that has to be on the mind of anyone committed to the market is: Have we come to the end and should I grab my profits while I can?

Is this such a juncture? It is evidence of my nervousness that I should ask myself this question at this moment, half way through the American trading day. I immediately wonder whether I should dump some of the poorer performers in my portfolio. In the US this is not such a big decision as when trading in the UK. Spreads are tighter and there is no stamp duty to pay. The part of my portfolio that is in my ISA requires a bit more thought because of the exchanging of currency which costs a bit more than 2% for a round trip. Still I believe that not doing a trade because of cost is always a mistake when the market dictates that the trade should be done.

Here is what I am looking at in the DOW and in the S&P.

Since there is no volume data till after the market closes I have a quick look at some large cap companies in the DJI and find that the volume of trade is not particularly high. This gives me the confidence to wait till tomorrow, perhaps.

The S&P has fallen a bit more than the DOW but is currently recovering. More support for my decision to leave things as they are for the moment.

One of my kind readers, You know who you are, alerted me to a stock pick that was rather weaker than the rest, MNST. I had a look and saw he was right and ditched it. Withe the market undecided as to direction I have yet to replace it. Thanks for the heads up.

My health

I have hinted in the past that my health is not the best. I take loads of medication to keep me going. There was an interesting edition of Thinking Allowed on Radio 4  called Drugs for l
Life. Its thrust was that we are moving from medicine to cure disease: you get ill doctors provide treatment and you get better; to medicine designed to preempt health problems in the future: your blood gets tested, you are shown to be at risk of something or other and you are put on drugs for the rest of your life. The author of the book that gave rise to the item wanted to show that drug companies favour this second approach this to boost their profits.

I don't fully agree so I responded to Laurie Taylor by telling my health story.

Your item on drugs for life interested me strangely. I have yet to read the book that gave rise to the item but, from what I heard, it seemed to me that an important point was startlingly absent: the effect of the age of the population. I will give the example of my life story to illustrate.

When I was young I would expect to get ill, be treated and get better. As I grew older chronic diseases started to rear their heads.

The first sign that I was one of the 100% of people destined to die came in my early 30s when a medical for an insurance policy showed slightly elevated blood pressure. At the time I was lithe and energetic and was told to go away and not to worry.

Twenty years later I ended up in hospital with something called malignant hypertension, blood pressure so high that it would kill in the short term if left untreated. I left hospital after intensive treatment and a pile of pills to take for the rest of my life. I also had lost 25% of my kidney function and had a diagnosis of diabetes. I was told to go away, modify my diet and they would keep an eye on me.

Fast forward another 11 years  to my early 60s. My blood sugar control had deteriorated and I began my first course of blood glucose drugs. These increased gradually over the next couple of years and a statin was added.

Then a new disease struck. It was probably Lyme disease but was never diagnosed as such. This time I was in hospital for over two weeks and lost the use of my legs and hands due to neurological damage. When I left hospital my legs had recovered but not my hands and it took a neurological drug to restore my ability to use them. Another lifetime pharmaceutical to add to my list.

However, this episode was definitely a case of getting ill, being treated, and getting better (even if the doctors did not claim credit for my recovery). But I had a new diagnosis as a result of the mass of inconclusive tests that were done.

This time it was Lupus. It seems to be asymptomatic so they are keeping an eye on me but offering no treatment.

Finally my pancreas has now given up trying to produce enough insulin and I have to inject. The number of pills I take has decreased but I have to count carbohydrates.

As I move relentlessly to the point when I join the majority of all those who have ever lived, I am happy and active. I can do what I like. And I have doctors and their friends in the pharmaceutical industry to thank. Without them I would be long gone as a result of one or more of my chronic diseases, or something which I did not catch because I was inoculated.

I am very grateful for the work that their researchers have carried out on my behalf. Go for it guys. Crack the malaria parasite problem next.

Portfolio

A couple of posts ago I listed the shares I had shed, and then later, new ones I had bought when my confidence in the market recovered. Here is my current portfolio. It is still doing as well as before. An average rise of 2.2% per week would translate to over 100% per year.

The market will never let me make all of that because it will pull back at some point. But my reaction will be to look for early warning signs and take my profits and cut my losses so I keep as much of the profits in hand as possible. As I have said in an earlier post "it's all money" and needs to be garnered.

This year has been a dismal year for me. I lost my nerve in the spring as my profits faded and sat on a small loss all the year, I had to kick myself hard to get going again, I restarted in December buying both UK and US shares. By the beginning of January I was making good money, especially in the US. I switched all my investing to the US despite the fact that trading in the US from inside an ISA is costly. You are obliged to sell pounds each time you sell shares and repurchase dollars when you buy new shares. But the temptation to switch was too great. I was making about four times as much profit in the US as in the UK.

Bottom line is that since December i.e. in about three and a half months I have made my profit target for the year (my years run April to April). I am keeping my fingers crossed and hope that the remaining couple of weeks will let me keep what I have made and perhaps earn a little extra. I must remember never to be complacent.

Here is a list of my holdings with percent profits earned after purchasing costs. All of these have been picked using Vector Vest Unisearches chosen by means of rigorous back testing. (See earlier posts for more details.)

Remember that nothing I write should be construed as  is not an offer or invitation to buy or sell securities. It is a record of my own trading written as a diary of my own activities which I am prepared to share with others in case they find it entertaining..

Uncharted territory

Go back a couple of posts and you will find this chart:

I noted that the high volume of trades was significant. I worried that it could signal the end of the line for the market movement. I was right. The flat period had come to an end. But I was wrong about the direction it would take. Part of my natural anxiety. I described it like this "my outlook on the market would appear to be hopeful but cautious." 

What happened next was this:

One day's increase in volume should never be ignored. As the market picked up my confidence picked up too and, as you know, I refilled my portfolio.

Long may this rally continue. We are now clear of the previous all time high and are in uncharted territory. There is no guide to where the next stopping point will be, based on the DOW. The S&P has some 35 points to go before it reaches its all time high so that's where we should be looking next.

New high for the DOW

Up, up and away???

I write this as the US market is about to close on Tuesday night. It’s a nail-biting moment. The DOW JONES 30 index has broken its all-time high and is currently pulling back. 

Will it close above that high or will profit takers pull it down again? Will tomorrow be the day that profit takers move in and grab what they can, while they can? Or has this been the moment when markets push into the stratosphere and get ready to plummet into a new bear market? My money, cautiously (as ever) is on the last possibility. We should note that the S&P 500 still has a way to go before it hits its own all-time high.

Well the market has closed now and the DOW is some 40 points above that all time high number. The futures market tentatively suggests another rise tomorrow. The volume of trades was low and the move up has not been dramatic so there is little to suggest that this is the end of the line. 

The main cause for worry is that it has made the news headlines. News headlines are important because they signal the moment that everyone knows what has been happening. The reason why the volume of trades is important is that when volume is low it suggests that money is still waiting on the side-lines. There has been no panic by uncommitted investors who jump onto the fast moving train before it’s too late. Big rises on high volume are the kiss of death for a market. Soon there'll be no more money.

My new shares

What have I been doing? Over the last few days I've been refilling my portfolio. (Recently it dropped below 70% because I was fearful of the slowdown in the market and shed my weaker shares, but I’m now 96% invested).

On Sunday I made a thorough examination of the selection criteria that Vector Vest offers and picked out three that seem to work very well: two that I have been using for some time and one new one. They are:

• ·         Stocks that have improved in their fundamentals over the past three weeks, are in industries that have been doing well, and stocks that have relatively low prices
• ·         Stocks  which have shown a sharp rise in earnings in the past quarter with decent fundamentals and price movement
• ·         Stocks that have hit a new one year high, have rising earnings, have good fundamental qualities and have relatively low market capitalization.

The shares I have picked to fill my portfolio are: (all US stocks):

GAIA, VMED, PRE, TEAR, CUTR, MDH, HPOL, PPC, ART, UNXL, ABR, FVE

You see that my approach is to spread my risk. The trick to tracking all these shares is to have a very robust and flexible system for keeping an eye on them. I know immediately when any are falling behind. I am ruthless in weeding out dead wood and taking profits on shares that have done well but are beginning to fade.

I keep the information easily accessible on an Excel sheet that is linked to a live feed. It is neither hard work, nor time consuming to check what is happening. At present I hold 35 shares.

The wait goes on

Within 50 points of the all time high

The DOW climbed to withing 50 points of its all time high before throwing in the towel and ending the day down. Worryingly this was on moderately high volume so it could be a sign that this is the end of the line. 

Over the past couple of days, I have been shedding shares that have not done so well without replacing them (LRAD, GVA, MSO, SOMX). This, together with earlier sales, has brought my cash holding up to 32%. So, deeds being more significant than words,  my outlook on the market would appear to be hopeful but cautious. I can't say more than that.

I have been making cakes over the past couple of weeks. Yesterday I made one to my own recipe that worked out rather well. It was based on a Jamaican fruit cake recipe that I found but was impractical because it had huge quantities of ingredients. I had also seen a recipe with wholemeal flour which I wanted to try so I linked the two together.

Jamaican fruit cake recipe

 

I mixed up 140gms of wholemeal self raising flour, 140 gms of sugar, 140gms of butter, two eggs and a generous teaspoon of baking powder. I used my Baymix (a sort of stick mixer) to blend these ingredients.

When all this was thoroughly mixed together I added about 150ml of wine, about 200ml of rum and a couple of desert spoonfuls of treacle. (My wife, it turns out, does not like the flavour of treacle so next time I will give it a miss.) The added liquid made the mixture a bit runny so I added some wholemeal flour to thicken it a little but not too much (say 50 gms). 

I added about 50 gms of cut up dried exotic fruit from Sainsbury's and similar amounts of cut up dates and walnuts and a peeled cored, and chopped apple. I mixed in the fruit and nuts with a fork and spooned the mixture into loaf tin with a silicon lining. I baked this in a preheated oven at 180 degrees C for an hour. I checked with a skewer to make sure it was cooked through and then turned it out on a wire tray to cool. 

It is moist and delicious.