Economic Negativity is Blinding Investors

By: Larry Cyna | Wed, Aug 15, 2012
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Investors today feel that they have been burnt as their stock portfolios have performed poorly. Each day they are bombarded with negative news from Syria where fighting continues, from Europe where the ever increasing debt crisis never seems to reach resolution, from Japan where debt levels continue to rise as the population continues to age, from the USA where unemployment remains stubbornly high and where there is fear of the future, from China where there seems to be an increasing slowdown, and the negativity emanates from every news source.

The Daily Swings in the Stock Market

The stock market seems range bound without a clear direction. One day, reports of disappointing house sales in the US sends the markets down. The next day an interpretation of the latest remark by a Fed Member leads some commentator or another to surmise that a new round of Quantitative Easing will be forthcoming, which sends the markets higher. It seems that almost each day, there is an anticipation of some news or event that will signal either a dramatic fall and a worldwide depression, or the end of the downturn and the start of a massive upturn. Yet the markets seems to fall back to the mean after the latest rise or fall.

Taking a Broader View

What is needed is for investors to take a broader view of the world.

The Major Stock Market Indexes

In October 2008 and again in March 2009, there were dramatic falls in the stock markets, and investors fled the markets fearing that all value was dissipating. In order to have a proper overview, let's start with the indexes and see what has happening over the last 4 years.

The Dow Jones Industrial Average

The Dow Jones Industrial Average hit a low of about 7,000 in 2009. Since then, it has relentlessly risen, albeit with significant dips along the way. If you plotted the DJIA on a chart, it is in a upward channel that is continuing. Today it stands over 13,000, which is almost double its low of 4 years ago. It is above the 10 day MA (Moving Average on a yearly basis), above the 50 day MA and above the 200 day MA. Ignoring the daily news headlines and only looking at the long range trend, the Dow Jones averages have been on a positive path for 4 years now.

The Dow Jones Composite Index (DJCI) shows a similar movement through a clear upward channel. The 2009 low was around 2,400. The current is above 4,400, again almost double that low.

The Current Stability

It is often repeated that the stock market foretells the future. As China and other economies rose to prominence, the price of precious metals rose dramatically, as did the price of base metals, and other commodities. After such a rapid rise, one would expect the downward slide would be similar. But this has not happened.

Gold peaked in the $1,900 range in 2011, and then fell to $1,600 where it has stabilized. It has been range bound around $1,600 for some time. It has not fallen back to $300, where it started its rise, nor to $1,200 where many pundits prophesied.

Silver had a similar stellar rise to almost $45, but has weaken to the high $20s and stabilized. Copper had a similar fall and then rise, but has stabilized above $3.00. Similar results can be seen for energy prices. The stability of commodity, metal and energy prices at levels far higher then historical norms bodes very well for the future.

Recent Volatility in the Stock Market

As the market reacted to strong negative or positive news over the last year, stocks either rose or fell dramatically, but then bounced back to the current levels. But as the summer progresses, and the news never changes, investors are calming and not reacting quite so dramatically. Volumes of stock trading have continued to moderate and more and more money is being parking in the Money Market at near zero interest rates.

The Stability of the World

The clear interpretation of this is that there is worry in the investment world, but that demand for commodities, metals, and goods and services remains constant. There has been no great crash, and the market is telling us that there will not be a great crash.

What to Expect

The debts in Europe are impossible to deal with. Germany does not have sufficient resources and strength to bail out everyone without being hurt badly itself. Either a common Eurobond is created that mandates closer economic controls over all countries, or the weaker countries will sink further into the mire. Either way, there is no escape from economic reality. The advantages of this great economic experiment have been overshadowed by the excesses of benefits given by governments to its citizens. Europe is too big an economic block to fail, so it will muddle along. In due course, reality will force a moderation in spending and slow economic growth and inflation (hopefully mild) will gradually diminish the debt and the abuses. But the point is that Europe will not disappear and goods and services will remain in demand.

China will also face its weakening as its great economic boom which was fueled by world demand for cheap goods and services abates, due to higher costs and weakening demand.

Japan will continue its path towards economic uncertainty because of the aging population and increasing debt.

The USA will not have a government that destroys economic activity through a dramatic recreation of the scenario that caused the great depression - dramatic and abrupt debt reduction. Political rhetoric will give way to economic reality as it always does.

The Bottom Line

We are in the bottom of the current cycle, and the next economic cycle is starting. The stock market is telling us so. The enormously increased numbers of middle class consuming people around the world are demanding more goods and services. The old abuses are slowly being wrung out the system, and patience is warranted while the world changes yet again - as it always does.

The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds. Larry Cyna and/or the CymorFund have positions in the shares of companies mentioned.

China, DJIA, economic cycles, European debt crisis, Gold, Investing, Japan, Silver, stock market, Stock market cycles, Wall of Worry



Larry Cyna

Author: Larry Cyna

Lawrence J. Cyna, CA

Larry Cyna

Larry Cyna, CA, is CEO and Portfolio Advisor to Cymorfund, a boutique hedge fund. He expresses his insights several times a week on his blog and offers a free newsletter which can be subscribed to here.

Mr. Cyna is an accomplished investor in the Canadian public markets for over 20 years, and has managed significant portfolios. He is a financing specialist for private and public companies, and has expertise in real estate and debt obligations. He has assisted private companies accessing the public markets, has been a founding director of public companies and is a strategic consultant to selected clientele.

He is and has been a director, a senior officer and on the Advisory Board of a number of TSX and TSXV public companies in the mining, resource, technology and telecommunications sectors, and the Founding Director of two CPC's with qualifying transactions in mining and minerals. He was an honorary director of the Rotman School of Management MBA IMC program, has completed the Canadian Securities Institute Canadian Securities Course & Institute Conduct and Practices Handbook Course, was a former Manager under contract to an Investment Manager at BMO Nesbitt Burns, a roster mediator under the Ontario Mandatory Mediation Program, Toronto, a member of the Institute of Corporate Directors of Ontario, a member of the Upper Canada Dispute Resolution Group, and the Ontario Bar Association, Alternate Dispute Resolution section.

He obtained his designation as a Chartered Accountant in Ontario in 1971 and was the recipient of the Founder's Prize for academic achievement together with a cash reward. He became a CPA in the State of Illinois, USA in 1999 under IQEX with a grade of 92%. He is a Member of the Institute of Chartered Accountants of Ontario and the Canadian Institute of Chartered Accountants.

He holds certificates in Advanced ADR & in Civil Justice in Ontario, Faculty of Law, University of Windsor, certificate in Dispute Resolution from the Ontario Institute of Chartered Accountants. Previous accomplishments are Manager of Cymor Risk Consultants LP specializing in Risk Management Assessment; CEO of Cyna & Associates specializing in mediation and ADR; Founder & Senior Partner of Cyna & Co, Chartered Accountants, a fully licensed and accredited public accountancy firm with international affiliations; and was a partner in a large public accountancy firm.

Mr. Cyna is well known in the Canadian Investing community. He attends presentations given by public companies to the industry on a daily basis.. These presentations are intended by the various hosting companies to present their inside story for the purpose of attracting funding, or of making parties more interested in acquiring shares of those companies. Being in constant communication in this manner keeps Mr. Cyna deeply involved in the current market and leads to numerous investment opportunities.

Mr. Cyna is currently a Director of Argentum Silver Corporation and Telehop Communications Inc.

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