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To quote an old Chinese proverb (or maybe a curse): May you live in interesting times.
We indeed invest in an interesting time.
My favored overall stock market indicator is the Value Line Index, because it contains 1,700 stocks and covers about 95% of all the volume of the market. In the past six months, the 50-day moving average for that index has gone from 2,130 to 2,078, barely a 2.5% change. To me, that is sideways and not very interesting.
On Tuesday night (July 29) as I write this journal, 60% of the issues are trading above their 20-day moving average, but 70% of the issues are trading below their 50-day moving average. The upside movement is just too short to start predicting a trend, given a flat market for the past six months. (By the way, I wrote and submitted these trades early because of some personal travel; let's hope the market hasn't tripped me up in the meantime.)
Of course, in those six months we've seen the whole housing and building industry collapse, dragging down the financial services industry with it. We've seen a flight to oil, other energy commodities and hard assets. The dollar continued to sink against other major currencies. That's a lot of interesting panic for a flat market!
Value investors may have run out of money and committed too soon as many core industries continue to get cheaper and cheaper. There are just too many bargains and not enough money to buy them all.
Growth investors have seen the equity and credit markets dry up, so how will the businesses they like to invest in get the capital needed to expand?
Embarrassed for the accountants
Plus, with all the write-offs that the financial services industries keep reporting, I'm having a hard time believing any of the financial statements. Where were risk managers and both the internal and external auditors when all these loans and financial assets were being booked? I am a former auditor, and one of my duties was to analyze the value of financial assets and test to see that loan-loss reserves were adequate. I took that charge seriously!Everyone is yelling that the banking executives and banking regulators have let us down, but I think we've had one of the biggest failures of the accounting industry since Enron and WorldCom. These failures of the accounting industry to protect stockholders from misstated financial statements are isolated not just to a few companies but to whole industries.
How could so many independent accountants at so many different firms fail to do their jobs and protect the stockholders from bad information? Not one accounting firm found these overvalued assets in hundreds of financial institutions.
Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standard (GAAS) failed us all – big time!!!
I'd like to be optimistic and look forward to improving financial statements, but how will I be able to have faith in the 10-Qs and 10-Ks if they are not worth the paper they are written on?
But I just need a few stocks
My goal over the next six months will be to find just a few stocks, around 20 on both sides of the market. I won't follow the press releases, because I have no faith in them. I'll look for price movement and increases in volume. My views will be short term, and I'll just try to fish where I think there are fish.We need to be where the action is now and not try to predict where it will be six months to a year from now.
Lastly, a personal disclaimer: The stocks I select should not be taken as buy/sell recommendations for you. They were selected by my stock-screening process, then analyzed before being added to or subtracted from my portfolio. Do not concentrate on the stock names; learn the selection process and refine your own.
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