The Rude Awakening
Laguna Beach, California
Thursday, June 21, 2007 ------------------------- - When education beats innovation,
- Leading indicators and the unhappy ending,
- Preparing for war, painting the car and much more…
------------------------- Eric Fry, reporting from a suburban battleground in California… "Daddy, I can't wait for the next two days of school," your editor's son Ethan exclaimed today. "We will have no education whatsoever." "That's great," his father laughed. "Yeah," Ethan continued excitedly, "we handed in all of our educational books today. So there's nothing we can use to learn anything. This is gonna be awesome." Ignorance may or may not be bliss, but there is no mistaking the bliss of no education. However, a bit of education can come in handy when one has placed hard-earned dollars at risk in the stock market…particularly an education about the sorts of market patterns that tend to repeat themselves. We'll return to this theme in a moment. But first, a morality tale: Last weekend, my daughter and my youngest son and a couple of their friends prepared for battle…suburban style. They begged their indulgent father to take then to the grocery store to buy eggs and water balloons and various other suburban armaments. As we were strolled the supermarket aisles looking for anything that could serve as a non-lethal weapon, the kids explained that a group of 12-year old girls would be "T.P.-ing" our house sometime after 11:00 PM. "How do you know this?" I asked. "Because I overheard one of the girl's brothers talking about it," my daughter replied. "And you're sure they'll be coming tonight?" I continued. "I'm positive," she insisted. "So why are they going to be tossing toilet paper all over my yard? Is this a joke or retaliation?" I inquired. "Well," she paused. "It MIGHT be retaliation. My friends and I T.P.ed one of their houses last weekend." "Wonderful," I replied sarcastically. "So what happens next…after they TP my house tonight?" "We'll get them back…hopefully tonight," she explained.
"That's why we're buying eggs and water balloons."
"But aren't they just 'getting you back?'" I asked. "If you keep getting each other back, I'll need to hire a full-time security guard. The way I see it, I'm the only loser in this whole thing…and it's not even my war." "But you're supplying the troops, Daddy," she laughed, as she ran down the aisle after her friends. After we had finished procuring an array of armaments, we returned to the house. All the kids scurried around the place, amassing eggs on the upper balcony, filling water balloons and chattering about places to hide out and wait. My youngest son, Ethan, was particularly excited by the preparations. He could not wait to hurl eggs and water balloons - with permission - from the balcony. In fact, he had dedicated several minutes earlier in the day to preparing a list of innovative munitions. His list featured the following weapons of minimal destruction: 1) Tomatoes
2) Plain eggs
3) Plain water-balloons
4) Chocolate milk in water balloons
5) Vanilla yogurt in a water balloon
6) "Blended-up" bananas in a water balloon
7) Gross experiment in a water balloon. To Ethan's chagrin, he did not have enough time to prepare any of the innovative water balloon weapons. He merely filled them with water and placed them in a bucket on the balcony overlooking the street. He also stockpiled raw eggs alongside the water balloons. "Daddy, you should move your car," he suggested. "It might get hit by eggs." "Good idea," I replied, as I strolled downstairs to move my car about 50 feet up the street. Then I strolled back up to my bedroom and flipped on the TV while the kids continued scurrying about with their preparations for suburban warfare. While running from the faucet with plump water balloons toward the deck, they strategized about where to hide and how to attack. On one occasion, Ethan peered over the railing of the balcony and yelled, "I see them! They're down the street!" His older sister rushed out to look, but saw nothing. "Stop yelling when you don't see anything!" she demanded. A few moments later, he yelled again, "I see them! Quick come look!" "Shut up! They'll hear you!" his sister yelled, while his father strolled out onto the balcony. Again, no attackers were visible. "Ethan, you gotta keep quiet," I instructed him. "They might hear you and run away." "But I saw them," he insisted. "They were right there on the sidewalk near your car." "Well they're not there now," his skeptical father replied. "And besides, they're coming here to TP the house. So you don't need to keep looking down the street. Just wait until they show up on our lawn." "Okay," he grudgingly replied, after which he proceeded to stand guard near the window and survey the front yard. 15 minutes passed…then 30…then 45. Finally, my daughter received a text message from one of the attackers that read: "Go check out your car! It's messed up." Ethan and the girls ran downstairs to look. I walked. Sure enough, my car was a complete mess - covered bumper to bumper with "washable" paint that would not wash off very well. Ethan was devastated. "I told you I saw them! I told you! But no one would believe me!" "Yeah, you were right, Ethan," I admitted. "I just wasn't expecting them to dump paint on my car. I thought they'd just T.P. the house." Ethan hung his head and skulked upstairs. All his preparations were for naught…and my advice was misguided. We had all prepared to "fight the last war." My kids and their friends had prepared to toss water balloons and eggs at the girls who would be TP-ing their house. No one prepared for the actual war that arrived. Worse still, in preparing for the last war, I had moved my car out of our
line of sight, thereby insuring the success of the "enemy's" novel attack…and our defeat. That's what happens to generals who fight the last war. They lose. On the other hand, investors who fight the last war usually win. That's because market trends - unlike military tactics - tend repeat themselves, like wave after wave of charging doughboys. Education, therefore, succeeds much better than innovation. Understanding the stock market's historic tendencies - and preparing for them - tends to succeed much better than embracing the innovations that Wall Street's pin-striped hucksters continuously foist onto a gullible public. --- Diversify With Metals --- High-Ho, SILVER! Those who heeded his call banked 400% in just 34 days on this "sterling" options play - one of the 10 Triple Digit winners he picked in 2006… Join the Maniac's rampage and YOU could rake in even more than this - and faster - as the global commodities crunch escalates. Read on here - Resource Trader Alert ------------------------------ Bad Generals Make Good
By Eric J. Fry Sometimes it's good to be a bad general. On the battlefield, bad generals tend to "fight the last war." They utilize military tactics from prior campaigns, rather than devising new tactics for the campaign they are in. But on Wall Street, a bad general would be a good investor, because a good investor tends to fight the last war. In other words, successful investing demands repeated campaigns against familiar enemies: like rising interest rates.
Whether cause or effect or sheer coincidence, rising interest rates tend to coincide with bull market mortality. Thus, as bull markets approach their final days, the earliest signs of failing health tend to appear in the financial sector. In other words, bank, brokerage and utility stocks tend to top out weeks or months prior to major stock market declines. "I've kept a close on the share price of Merrill Lynch (MER) for over ten years," our colleague, Jeff Clark remarked in the January 12, 2007, edition of the Rude Awakening ("Time to Sell Short?"), "and don't ask me why, but the stock is one of the best leading stock market indicators I've ever seen. If the price action of MER is bearish, you can almost always bet the overall market is due for a fall. I even had a saying around my brokerage office, 'As Merrill goes, so goes the stock market.' "Right now, the chart of Merrill Lynch (NYSE: MER) looks bearish… and if it breaks to the downside, it will be an ominous sign for the broad stock market." As it turns out, Jeff called the exact top…of Merrill Lynch stock (NYSE: MER), that is. MER has slumped 10% since mid-January. Meanwhile, however, the stock market has continued to charge ahead - up more than 8% since the day Merrill topped out. This curious divergence is not as curious as it may appear. MER is simply one of the many interest-rate sensitive stocks that tends to peak before the overall market peaks. The Dow Jones Utility Average also tends to provide a leading indicator of overall market weakness…and it, too, has been drifting lower. Since interest rates have been rising for the last three or fours years - and rising sharply for the last three or four months - interest-rate sensitive stocks of all sorts have been faltering. Over the last two years, the yield on 10-year Treasuries has advanced from 3.89% to a recent 5-year high of 5.29%. Interest rates at the short end of the yield curve have also been climbing. No surprise then that the Utility Average topped out one month ago, and has tumbled 8% since then. But the broader market averages remain buoyant nonetheless. 
We've seen this battlefield before. Back in mid-June of 1987, interest rates were rising along the entire yield curve. Merrill Lynch shares topped out in January of that year. The Utility Average topped out in March. But the Dow continued charging ahead - up 28% through mid-June of 1987. 
The Dow continued soaring until mid-August, when it topped out with an astounding year-to-date gain of more than 40%. Two months after that, the "Black Monday" crash of October 19, 1987, converted the Dow's sizeable gains into sizeable losses. 
The fact that stock market trends of 2007 bear an eerie resemblance to stock market trends of 1987 is not automatically cause for fear, but it is absolutely cause for concern. Adding to this cause for concern is the fact that investor sentiment has become extremely complacent and optimistic, which, as a contrary indicator, suggests the market is approaching an important peak. "The giant stock market rally has brought the broad market put/call ratio to the levels that prevailed at prior market tops," observes the seasoned options pro, Jay Shartsis. "One such ratio is the 21-day 'dollar-weighted' put/call ratio for the S&P 500 futures. Now standing at about 44 cents of puts traded for every $1.00 in calls, this ratio is way down from levels near $3.25 in puts per $1.00 of calls at last summer's market lows and $2.40-to-$1.00 at the market low in early March, 3 months ago. The current level, therefore, represents the lowest level of put-buying - hence highest level of option trader optimism - in several years and is of course contrarily bearish. One of these fine days all these 'Fearless Fosdicks' are going to get smacked real hard on their snoots and sent home crying to their mommas." Furthermore, Shartsis concludes, the "Titanic Indicator" triggered last week. This powerful sell signal occurs whenever "within 7 days of a new Dow high, there are more new lows than new highs on the NYSE. This indicator has quite accurately identified past market tops." Hmmm…time to prepare the defenses. --- Free Market Investor --- Income + Growth + Safety = "An Immense Success" Get double-digits returns and income checks…from a secret and super-reliable "pension-payout plan" that's otherwise off-limits to everyday Americans… Click Here to learn more about the Free Market Investor | 
