Rebel Traders – Analysis Without The Hype

It has been said numerous times that RebelTraders is only a bear site, in that only bearish news is presented. Is that being objective, or is it merely an echo of reality?

Perhaps if you knew a bit more about me you might adopt a slightly different view of what is presented on my site and why it is I am so adamant about certain viewpoints. You may have a perception that I am a greedy, selfish, or even a stubborn individual who cares only about himself.

While I am bearish on the economy and the markets I am nothing of the above. Outside of the markets and this website I am told I am a very generous person. I give to others without asking anything in return. I volunteer a substantial amount of my time to help others through our fire department, being the coordinator for a local Community Emergency Response Team (CERT), and a member of our towns Office of Emergency Management team. Mrs. Rebel and I live in a very small community and we are both heavily involved in organizations that are all centered on helping those in need. And we never ask anything in return. What we do get in return is the satisfaction of knowing we made a difference in someone’s life in a time of trouble. But this is just how my Wife and I are, it is what we enjoy doing.

The birth of RebelTraders on May 16, 2007 was out of that very same mindset of helping others.  I am told by my family that I sometimes care too much and that I give of myself more than I should. Even this very website is free and provided to all without asking anything in return. When the site readership grew I had to move to my own dedicated server because it outgrew the free blogger service ‘blogger.com’ which is where RebelTraders was born. The costs to maintain and operate this site come out of my own pocket each and every day. While there is some advertising on the site it does not make any profit for me. It just goes towards the upkeep of the site and even then I still must put out my own money. Some have suggested I put up a ‘tip jar’ on the site, but I have even resisted doing that for it would make me feel I’m taking money for something I enjoy doing which is helping others.

Some say I have a chip on my shoulders, that I hold extreme anger against those who speak bullish on the markets. The only chip that I have on my shoulder is angst against those who attempt to take money from others for their own financial benefit. Be it through deceptive marketing, misguided information, or outright lies. I know it is a chip that will always be there for a world that has an open and honest Government and honest business practices will never become a reality in my lifetime. But that does not mean I just lay back and just take it. As long as I have my voice and fingers to type with I will speak my mind and say what I see to be the truth, no matter how many people don’t care for it. I’m not here to please everyone all the time. For if that was my only goal then RebelTraders would have never been born.

I have attended many trading seminars over my lifetime. Some were here in my own neck of the woods around Philadelphia and New York, and occasionally by travel. My reason for attending these seminars once in a while is to meet people. I have met some of the best technical analysts and traders in those travels. One aspect of your web host here is that I am a ‘people’ person. I enjoy listening to all view points and believe it or not I am rarely one to tell others they are completely wrong. Instead I will just present an alternative view. I can’t force anyone, nor should I even expect anyone to adopt my alternate view if I have one. It is always up to the individual to decide for themselves what view point is right for them, whether it be right or wrong. I can only offer a viewpoint that may provide some balance to their views.

In early 2007 I became extremely frustrated with the quality and/or skewed information that was being presented to investors and traders.  The reason I was frustrated was that through my own observations, research, and analysis of the technical aspects of the markets led me to believe that a significant bear market was about to befall upon the world. This is why RebelTraders was born.

During those early days trades were discussed, macro and micro economic conditions were presented, and counter analysis was offered in the face of ever increasing bullish talk from CNBC and the Government. In the eyes of some readers, I was being unpatriotic to go against my own Government by disagreeing and even refuting their claims that all was well with the economy.  As time went on the economy continued to show all of the warning signs of significant and long lasting change was coming. And in spite of all the complaints from readers who kept trying to persuade me to think otherwise I kept my view.

As I stated earlier I am keen to other viewpoints, but they must be based on rational thought and data. As an engineer I have spent a good part of my life always debugging and designing systems that were based on facts. An engineer bases his or her work on empirical evidence and that is how I always have approached the markets my entire trading career.

The stock markets are full of individuals and corporations who only have one interest in mind, and it is theirs. Even large investment firms who specialize in managing other people’s money may say they have your best interest at heart but the naked truth is that for the majority of them they don’t care about you. Every company always operates under a ‘what is in it for me’ business model. The primary reason investment banks and other investment specialists are in business is to make money, not to make ‘you’ money. Yes, there are some that base their profits on the growth of your portfolio but that is not where the real money is being made. The real money comes from simply having your account in their files to show a bigger account base which in turn allows them to do more and grow bigger. They can’t grow and make more money if the deposit base is thin.

Your $250,000 portfolio with Acme Investment Advisers Incorporated (made up name) is worth more to them as an account, irrespective of how much money you make or lose under their guidance. Case in point, how many people do you know received a phone call from their investment advisor in late 2007 or even 2008 and were told to sell everything? How many were told that the markets are facing big problems ahead and it might be safer to get out? See what I mean. The only thing that matters to an investment firm is the fact that you have money in their ‘system’ and so why would they want to tell their clients to sell and get out when your account is part of their life blood.

When the financial crisis began to grow even larger some investment firms went as far as to tell their clients to ‘ride it out’, or that these problems were common and you should not worry. Even in my own family we were exposed to that very tactic. In a post I published back on December 2, 2007 I discussed how an investment service attempted to tell  its clients that they should essentially turn off the television and go take a walk. It was not about how much money any client stood to lose, it was about the company losing the account, that’s all that mattered. Your personal gains or losses means squat to them.

The following is the actual letter a family member received in December 2007, again this was in 2007 and was already one month after I called a new bear market (more commentary follows the embed article below).

Rather shocking isn’t it. Telling clients to, in not so many words, just go stick your head in the dirt and ignore everything.

We all know the stock market is speculative and involves risk. But when it comes to the stock market it is also the breeding ground for the largest corruption, lies, scams, false statements, and outright deception. The larger the company is so too is the potential for even larger scandals, lies, and even illegal activity all in the name of making even more money. Just look at the major banks that have become so large that they can’t be killed. Instead their pilferage of the innocent grows to the pilferage of everyone in the form of the largest tax payer bailouts in history.

An individual investor is seldom told the truth of what is going on. They receive nice and glossy year end reports from companies they are invested with. They show beautiful photographs of people hard at work, speak of corporate ethics being at the top of their priority list, and speak about how great the future will be. Remember Enron? How about WorldCom? Take the many other thousands of companies that throughout history have been reduced to rubble, or left impotent by their own lies and fraudulent activity. The only entity that is worse than the stock market with respect to lies and deceptive statements is the Government itself.

So just how does a person who wants to invest money in the markets find any real information. Many turn to the financial news shows and get guidance from the likes of Jim Cramer, the team at the Fast Money desk, or listen to any number of large financial institution spokespersons speak about how this stock or that stock is a great investment. The financial media is just as guilty of always presenting a bullish sentiment regardless of the facts in front of them. Unfortunately no one in the big financial media outlets ever gets held to account for their actions. I read an article just today about Jim Cramer and how many death threats he has had against him. Gee, could it be that his ever bullish mantra has cost people to lose money and they are mad at him? He is on TV so he must be smart and must know what he is doing, right? Unfortunately so many innocent people watch him and think that very thing. If Cramer says it then it must be true is what these innocent people think. So sad a world it is that a screaming manic on television who has even admitted in the past to breaking Securities and Exchange Commission (SEC) rules is being taken seriously.

My mission here at RebelTraders is to do my best at presenting a view of the markets based on technical analysis, macro and micro economic events, and real world observations. My statements sometimes rub people the wrong way, they may disagree completely. Some may even think I have no capability at all for seeing anything good when it comes to the markets and economy. On the contrary, I am not that at all. I so desperately want to report good things going on, I desire the day I can say to everyone that I see green pastures ahead, and to report that the economic problems are all behind us. But wanting to report good things is different than reporting the truth. One thing I will never be is persuaded to do is report what I know to be incorrect. The word ‘Rebel’ may mean to go against a popular view but it does not indicate that I am a permabear, or even stuck in my ways. In the case of RebelTraders it simply means speaking what I see through my own research, which may often go against the mainstream media. In this regard I am a rebel.

My view of where we stand now remains the same. We are in the midst of a secular bear market (not cyclical), the rally from March will fade, and a return to a downward path in the markets will resume yet again. I await the signs of organic growth to return which to date has not. It remains my view that any market advance should be an opportunity to sell (or go short if you are an astute trader).

I foresee home prices declining much further still, credit contraction in the consumer sector will continue well into the year ahead, if not much longer. Foreclosure activity will continue to increase, personal and corporate bankruptcies will rise much faster in the coming year, and the growth witnessed to date in the form of corporate earnings will deteriorate once again after the artificially created growth fades away.

There is still much danger facing our markets and the economy as a whole. Agree or disagree that is my view and I will continue to report what I see, not what I’m told to say.

I often receive emails and/or comments within individual articles asking why it is I hold a bearish opinion in spite of the U.S. equity markets haven risen dramatically since the March 6th intermediate low. Some individuals will go as far as to chastise my opinions. Let me attempt to shed some additional light on this subject, perhaps in this way you will have a better understanding of how (and why) I trade in the manner I do.

Secular Bear Markets

The very first reason I maintain a bearish outlook is that it is my view, as well as some other respected analysts, that we are in what is called a ’secular bear market’. What separates a secular bear market from an ordinary bear market?

A secular market trend is a long-term trend that usually lasts 5 to 25 years (but whose distribution is more or less bell shaped around 17 years, in the stock market), and consists of sequential primary trends.

Even within a secular market (bull or bear) there will be secondary bullish or bearish counter trends. These counter trends typically are short in duration when measured against the primary trend before the primary secular trend is resumed.

In 1929 a secular bear market had begun and it did not end until 1944 when World War II lifted the economy out of the black hole. In between 1929 and 1944 there were a series of counter trend rallies (meaning that prices moved up against the primary secular bear trend).

Investing In Secular Bear Markets

For example, an investor like myself who recognized that we were entering into a new secular bear market in early 2008 and positioned his or her investments accordingly (short) would on this day have a gain in their portfolio of 34% today on August 7, 2009 by simply shorting the Dow Jones Industrial Average.

Compare this against investors who believed that the market would continue to go up and kept buying additional positions (long) in the Dow Industrial Average ETF (DIA) on each drop in the market (buying the dips). That individual would have a portfolio today that is at a loss of nearly 8.0% as of August 7th, 2009.

‘Buying the dips’ is what is referred to as ‘averaging down’. There are situations where averaging down can be beneficial but it is generally dangerous to do unless you are very experienced and understand the charts and know your risks and can manage them. For layman investors averaging down can be financial suicide.

Trading Within The Primary Trend

Because I hold the view that the U.S. equity markets are currently within a secular bear market then that is the primary trend. Given that this secular bear market began in late 2007 history tells me that the primary trend will last at least another 4 or 5 years at best. When an investor or trader is working within the confines of a primary secular bear market he or she has to recognize that the primary trend (down) can resume at any time. Investing or trading the counter trend rallies carry added risks because those positions are against the primary trend.

Experienced traders and/or investors can make good money trading these counter trend rallies by day trading or initiating short swing trades,  but they must never take their sights off the direction of the primary trend. Taking ones eye off the primary trend is what often leads many investors to lose even more money in the long run.

Counter Trend Rally Euphoria

Within any bear market (secular or cyclical) price movements back in the upward direction very often lead to a euphoric “all is well’ call from investors and the media. This euphoria can lead the inexperienced to make disastrous investment decisions as they solidly believe the worst is over and invest substantial sums of money in a market that has already taken away a significant amount of their money.

Euphoria in the markets has been around as long as the markets themselves. It is this constant battle between bears and bulls that gives us a market in the first place. Often is the case however with the financial media that euphoria has taken on a whole new dynamic. Case in point is CNBC, a financial media outlet that has transformed into nothing more than an entertainment outlet with cheerleaders and very biased reporting.

The advent of 24 hour financial media coverage and the Internet has create euphoric battles of the likes never witnessed in history. It is for this reason that it is even more important to remain focused on your own trading and investing strategy.

Added Complications To The Current Secular Bear Market

Secular markets come and go in cycles. A secular bear market will follow a secular bull market which was the case from 1984 to 2007. The secular bear market that now grips the markets has added issues that go beyond simple cycles. The massive amount of credit de-leveraging that is occurring at the corporate level and the consumer level is of historic proportions. The previous 10 to 15 years of the secular bull market was fueled even further by the advance of credit everywhere. Organic growth took a backseat while wild credit expansion took the wheel.

Now that all forms of credit are imploding it leaves no one to drive the car. The financial system is in shambles and the U.S. Government is desperately attempting to get credit back at the wheel, but it is damaged and won’t be able to drive much further. A return of a secular bull market will take place when organic growth is able to take hold and credit is brought back down to reasonable levels again. It is important for credit to return to acceptable levels if organic growth is to ever have a chance at taking hold.

Where Are We Now

The Government has attempted to rescue the economy by using tax payer money to rescue those corporations who became too over extended in the credit bubble. Instead of letting the system work itself out (by accepting the losses) the Government has simply given more money to institutions who became engorged in the credit bubble and not allowing that credit bubble to deflate.

Allowing the excess credit to dissolve by it’s own devices will be painful for many. More companies will go bankrupt and job losses will go even higher. But it is what is required if we are to ever return to any sustainable growth. The Federal Reserve has the essentially set the lending rate to zero, meaning that borrowing money from the Government is nearly free and allows them to in turn, via leveraging, create even more credit in a bubble full of holes. All we are doing at this time is plugging one leak after another while new ones keep forming.

Another issue with the Government bailouts is a phenomenon known as ‘pull forward’. In other words the stimulus and other programs designed to stimulate the economy are simply pulling forward any growth to the here and now in an attempt to stop the free fall of the economy. The cash for clunkers program is ‘pulling forward’ vehicle sales in an attempt to stimulate that industry. But all it accomplishes is a ‘rush of euphoria’ that all is well when companies involved in that industry talk about increased sales.

In reality all they are doing is having a massive sale (at tax payer expense) in order to pull in car buyers now. But once the sale is over it goes right back to where it was before, but next time it may be even worse because car buyers were exhausted during the ‘big sale’. And what is worse is that the Government program is actually an encouragement for more people to increase their debt loads again, when the de-leveraging process should be left to unwind without interference.

The United States has transformed into a nation of credit addicts. All the way from the Government down to the individual American. The Federal Reserve, by keeping the lending rates at near zero are simply being a drug pusher, enabling the addicts to keep getting their fix. What we have learned over the past 10 years is that whenever interest rates go up the growth of the nation is severely stifled. This is because the nation has lost its ability to sustain any form of organic growth and constantly needs that credit fix to keep going.

Until organic growth can return to the United States this secular bear market may actually last much longer than even historical norms.

Trade accordingly and be mindful of the big picture.

Long time readers of my site already know I have spoken extensively about this being a secular bear market. Mr. Rosenberg speaks further on this…