Why the top 10 bear-market myths are wrong

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Guest Post

Michael Brush is a Manhattan-based financial writer who publishes the stock newsletterBrush Up on Stocks. Brush has covered business for the New York Times and The Economist group. He attended Columbia Business School in the Knight-Bagehot program.

Stocks might be off their peak for the year, but there are no fundamental problems.

SPY Oct14-2014

It always takes scary stories to make investors part with their stocks at lower profits than they had a week ago, or to sell at a loss.

You no doubt hear some frightening tales now. This is typical of October, when the ghosts and goblins come out to haunt the equity market. October very often harbors the low point for the year.

Call me Pollyannaish, and I might turn out to be, but I’m not convinced the scare stories are right.

True, this could turn into a 10% correction, which would be normal, since we have not had one for three years. But this is not the start of a bear market, and now is more of a time to buy stocks than to sell them.

To see why, let’s look at the top 10 bear myths and why they are wrong. I’ve shared most of these points with subscribers of my stock newsletter, Brush Up on Stocks.

Bear myth 1: Central banks are out of bullets

Even the central bank “wizards” are admitting that their powers are limited, quipped one strategist on Monday. Yes, this was a reference to the Wizard of Oz and the man behind the curtain with fake powers.

This one is wrong, but I can see how the nervous Nellies got there.

European Central Bank (ECB) President Mario Draghi just offered a lot of public commentary on why labor-market reforms are key to Europe’s economic success. This is the supposed admission that central banks are out of bullets.

But to me, those comments were made in Draghi’s role as a highly respected expert on the Italian economy, which he is, and less in his role as ECB leader, though that was part of it, too.

Basically, he was telling Italian and French politicians who are struggling to get through much-need domestic labor-market reforms: “Wake up! Be like Spain!”

Spain has taken steps to reform labor rules and other regulations that hinder businesses, and the moves are linked to an uptick in business confidence and economic trends there. Draghi knows Europe needs more of the same.

The problem here is that the nervous Nellies took this commentary on local Italian and French policy debates as a concession that the ECB is out of bullets. Not true.

After all, the ECB can resort to sovereign bond buying (quantitative easing), among other things. Germany, with its historical concerns about inflation, is opposed. However, the recent economic weakness in Germany may soften German opposition to European QE.

While making his labor-market-reform comment, Draghi also reiterated that the ECB is ready “to do everything that falls within its mandate.” But when people are in the mood to be negative, when the goblins are out, they develop blind spots. They missed this part of Draghi’s commentary.

I believe Europe may well expand its asset-purchase program to include government bonds in the coming months.

As for the U.S., the Federal Reserve is obviously not “out of bullets.” It could turn back to QE. That would be awkward and it might initially spark fear. (”What do they know that we don’t?”) And the economy does not warrant this. But nothing in Fed comments say it will never do QE again. Plus, the Fed could push out the timeline for interest-rate hikes, something the bond markets are already projecting. It has bullets.

China’s central bank also has room to develop more stimulative monetary policy. The apparent replacement of its central bank chairman may well signal a move in that direction.

Meanwhile, U.S. government bond yields have fallen sharply in 2014, which gives companies better access to low-cost financing. While the Fed has been signaling it will raise rates, the bond markets have been providing a stimulative rate cut.

Bear myth 2: The sharp decline in oil prices is a sign of global economic weakness

This isn’t 100% correct. A lot of demand has come off the market because China has trimmed strategic-reserve buying so a build-out in storage capacity can catch up.

And oil prices are down simply because supply just shot up. Last Friday, the Organization of the Petroleum Exporting Countries (OPEC) revealed it had lifted output by 402,000 barrels a day in September to 30.5 million barrels per day, the biggest monthly increase in almost three years, points out Ed Yardeni of Yardeni Research. Key OPEC members apparently want to weaken oil prices to push U.S. shale supply offline by making it less profitable or to punish Russia, or both.

Remember the decline in oil prices means lower prices at the pump. This helps the U.S. consumer, who is more of a key driver of the global economy now. The national average gasoline price last week fell to $3.25, the lowest for the year, and prices could fall another 15 cents by the end of the year, says the American Automobile Association.

Bear myth 3: The U.S. can’t decouple from the global economy

In other words, global weakness will inevitably infect the U.S.

I don’t buy this one. The U.S. economy is led by the consumer, and there are plenty of reasons to be more bullish on the consumer. Job growth has been fairly solid. Consumer confidence is OK.

And no one is talking about this, but government receipts are growing, which means government hiring will too. Whether you hate the government or love the government, this will help the economy.

State and local government employment accounts for around 14% of nonfarm payrolls, and the federal government accounts for slightly less than 2%, according to Deutsche Bank analysts.

Then there’s that decline in gasoline prices. It’s like a tax cut, and consumers will spend it. Which brings me to the next fear.

Bear myth 4: Worries about Ebola and the economy, and excessively cold weather will have consumers hibernating this holiday season

I doubt this. In part because of the reasonably strong jobs growth and falling gasoline prices, this negative view on the consumer is not confirmed by retail-sector experts and recent survey research.

The International Council of Shopping Centers just forecast a 4% increase in holiday spending. The National Retail Federation projects 4.1% growth, which would make this holiday the biggest one for retailers in three years. Both estimates are above last year’s 3.1%.

A recent poll conducted by Accenture found that 25% of consumers plan to spend more this holiday season than last, up from 20% last year, and 12% to 14% in the prior two years.

Speaking of jobs, the expectations of a strong holiday season produces a lot more of them. The International Council of Shopping Centers expects holiday hiring to rise 7.3% this year.

Bear myth 5: Ebola will become a widespread problem

Bouts of market weakness often correlate to some big potential health threat. It’s human nature to panic when confronted with deadly diseases that seem to spread. Excessive fear about epidemics makes people feel more cautious, and sell stocks to get defensive. But let’s take a deep breath and remember a few things.

First, Ebola can actually be contained fairly easily since it’s not an airborne disease. Catching it requires contact with bodily fluids. Widespread outbreaks in the U.S. or Europe are unlikely.

Remember that fears about epidemics, whipped up by the media, tend to fade once it becomes apparent a widespread outbreak is not in the cards. Who worries these days about SARS, swine flu or bird flu? Remember those? If you have profits in Ebola stocks, I’d be cashing them out right about now.

Bear myth 6: The International Monetary Fund (IMF) just downgraded its projections for global economic growth

Yes, but it raised its forecast for U.S. growth. Guess which change the nervous Nellies latched on to?

Bear myth 7: China’s economy is in the tank

Really? Then why did we just learn that China’s September trade data posted huge upside surprises.

Exports rose 15.3% year over year, up from the 9.4% increase in August. Imports rose 7%, the highest since February.

We’ll get more news on China’s economy later this month, in the form of GDP, industrial production and retail sales.

Bear myth 8: Germany’s economy is falling off a cliff, so Europe is doomed

Yes, the numbers for Germany have been bad. But it may be an aberration. Germany’s August decline in industrial production was related in part to a shutdown of auto plants for retooling and some calendar adjustments.

Germany is also weak because of Russia-Ukraine-related trade sanctions. That could last for a while, but trade-sanction-related weakness is not a sign of structural problems with Europe’s economy.

Germany has slowed, but it is probably not in recession.

Bear myth 9: The strong dollar will kill U.S. exports, and thus the economy

The trade-weighted dollar index is still well below its long-term average. The dollar has appreciated mainly against the euro and yen. It has advanced much less against the currencies of the two largest export markets of the U.S., Mexico and Canada.

And remember that the boost to our economy from low energy prices kicks in a lot faster than any negative impact of a strong dollar on exports.

Bear myth 10: Weak chip demand reported by Microchip Technology shows the global economy is crumbling

Here’s the problem with this theory. For much of the first half of the year, the supply chain in a lot of the chip world was tight. So in the third quarter, chip distributors were double-booking orders to chip makers to compete for chips. Chip makers came through as supply bottlenecks eased. Many distributors got what they asked for (twice as much as they needed) and now, not surprisingly, they have too much inventory.

Failed attempts by distributors to game the system (double booking) that result in excess inventory does not necessarily reflect global economic weakness. No doubt, weaker demand was part of the problem for Microchip Technology MCHP, but double booking by distributors was part of the problem too.

All these problems supposedly mean a bear market is in the cards. I don’t think so, since bear markets (20%-plus declines) are rare without recessions, and the U.S. economy is not going into recession.

Am I right about this? I don’t know for sure, but we may find out very soon.

Intel INTC, seemed to confirm my take Tuesday when it reported a 12% gain in net income on an 8% increase in sales, and said third-quarter inventories only went up “modestly” compared with the previous quarter.

From Wednesday through Friday, we will get a slew of important economic data, including numbers on retail sales, industrial production, housing starts, consumer sentiment, manufacturing in New York and the October Philadelphia Fed survey.

The bottom line: The selling might not be over. Nevertheless, I think it is more of a time to buy than to sell. On average, after a weak October, the October-May gains average 5.3%, well above the average 1.7% gain from May-October since October 1928, says Ed Yardeni of Yardeni Research.

But all the negatives will surely overwhelm some investors. As John Buckingham of the Prudent Speculator quips: “Wall Street is about the only place where they hold a sale, and folks are hesitant to show up.”

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The Basics of Binary options

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The binary options market has joined other recognized financial markets, such as stock markets, Forex markets and commodities markets as a popular financial instrument for investors. In fact, binary options trading has become the most popular venture for investors looking to make a quick buck.

Unlike other monetary vehicles, the binary options market offers traders opportunities to gain more than they lose. Binary options brokers offer many features that appeal to the novice as well as experienced trader and it is a simple system, easily understood and put into play. Binary options are also referred to as All or Nothing Options, Digital Options, as well Fixed Return Options or FROs.

Binary options became acceptable for trading in 2007 and were approved at a legitimate investment instrument in 2008 by the Securities and Exchange Commission. By May 2008, the American Stock Exchange incorporated them in the form of European cash or nothing binary options.

Binary Option Features

There are many characteristics that differentiate binary options from other investments, but like its colleagues, it is important to fully understand the trading process before putting down any money.

What exactly are binary options? Binary options provide a unique option for the retail trader with many advantages over other financial markets such as Forex or stocks. Like the meaning of the word, binary (meaning two) options leave the traders with only two possible outcomes. You can either win or lose your investment.

The way it works is as follows: A trader chooses a stock, commodity or currency pair, and makes a prediction about the direction that instrument will move. The expiry date of the binary option can be as soon as one hour and if that instrument has indeed moved in the direction of the trader’s prediction, the trader is “In the money”. That means this specific trade was profitable.

What is unique about this style of trading, among many other things, is that the trader cannot lose more than the original investment. Either the trader predicted correctly, in which case, he can make up to 72% of the original investment, or he predicted inaccurately, in which case, he loses their original investment. There is the possibility of keeping a minimal percentage of the trade depending on the broker’s policy. Interestingly enough, binary options and Forex share a common characteristic in that no physical instrument is actually being traded. No goods are ever cross hands and all the trading is conducted virtually.

Binary Option Brokers

Choosing a binary options broker should be based on word of mouth and referrals. One should look for ease of setting up an account and regulatory approval by reputable authorities. Most brokerage sites list user-friendly, highly marketable platforms, unique trading features, professional risk management and first-class service among their many qualities. Some sites run smartphone and android applications allowing the trader to be on target every minute of the day. The newest trend in trading platforms is their ability to be utilized without downloading the program.

Free demo trading accounts are an essential part of any online brokerage and are very beneficial for introducing new traders to the binary options markets. Some brokers offer bonuses; most do not.

Binary options have a lot to offer when it comes to making quick and easy profits. But like with any investment, understanding the way binary options work within the framework of global financial markets will bring considerable more success than blindly trading with no prior training or knowledge.

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How You Can Take Your Trading To an Olympic Level

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The average trader always has money on the mind. Money, money, money. A couple more points. A sexy balance sheet.

That’s also why they’re average. The best of the best aren’t thinking about money at all. Let’s use an analogy to prove this point.

What happens to an Olympian who’s always looking up at the scoreboard or clock? They lose the puck, fall behind another skier, or miss their landing. What happens to the Olympian who is focused on improving their game, making the right pass, hitting the right turn, and nailing their landing? They win.

This is no different than trading. Money is the byproduct. We all know that. But focusing on the byproduct doesn’t get you any closer to it. To take your trading to an Olympian level, you must remove yourself from the bottom line and focus on what makes you better. If you can’t do that, go liquidate your brokerage account. You shouldn’t be trading.

This Saturday, you can take that first step towards the gold. At 10:00am EST, the Olympic Trading Summit will bring you a full day of free trading education via live webcast.

You’ll have the opportunity to focus on improving your strategies and learning new ones. The educators will be some of the brightest and most experience traders in their respective areas. Options, Equities, and ETFs will be the focus and everything from swing trading to options spreads will be covered.

The good guys over at Marketfy are putting the event on and they’re providing invites to all our readers. The event, which is being sponsored by MBTrading and Benzigna Pro, will have a bunch of freebies, promotions, and offers for those in attendance.

Pro Tip: Enter the room by 9:45am EST if you want to get in. The room caps at 1300 attendees and it only took 45 minutes to get there the last time they did this.

Register here to gain access to the Olympic Trading Summit >>

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