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Stock Market: Bull and Bear Markets

When we talk about bull and bear stock markets reminds me that it’s a zoo out there. And, like any zoo, there are quite a few wild species to be found!

The first two are the bulls and the bears. We do know that a bull market is when stock prices are climbing strongly and a bear market is when they’re languishing.

One common myth is that the terms “bull market” and “bear market” are derived from the way those animals attack a foe, because bears attack by swiping their paws downward and bulls toss their horns upward.

This is a useful mnemonic, but is not the true origin of the terms.

Long ago, “bear skin jobbers” were known for selling bear skins that they did not own; i.e., the bears had not yet been caught. This was the original source of the term “bear.”

This term eventually was used to describe short sellers, speculators who sold shares that they did not own, bought after a price drop, and then delivered the shares.

Because bull and bear baiting were once popular sports, “bulls” was understood as the opposite of “bears.” I.e., the bulls were those people who bought in the expectation that a stock price would rise, not fall.

Both bull and bear markets are inevitable!

Smart investors try to anticipate both events to profit from their eventuality.

Bear markets are generally shorter in duration than bull markets. To avoid being hurt by bear markets you must recognize the signs early and move part of your assets into cash equivalent investments.

We do recommend that you invest for the long term. Don’t let the bears get you down!

Abraham Lincoln (1809 – 1865) once said: “When you have got an elephant by the hind legs and he is trying to run away, it is best to let him run!”

The same thing is true of bears – don’t panic and sell low. Let the bear market run its course, which history tells us is likely to be short.

On the other hand, a bull market can leave many investors feeling pretty good about their ability to prosper.

Their confidence bolstered by the good times …

Some even find themselves swept up in “Bull Market Myopia” and forget the basic tenets of smart investing, like asset allocation and portfolio diversification.

Holding good stocks through bull and bear markets is a prudent strategy. However, many investors feel that they do not want to be in the market during a bear market. It is difficult to predict when to move in and out of the market.

When a bear market ends, a strong upward move can occur in a short time. If you are not in the market you will miss the move. The probability that your timing will be wrong is very high.

Unlike slow-starting bull markets, bear markets may start with a mini-crash – a major drop within a few days when investors least expect it.

Many investors are afraid to get out of a bull market for fear of missing “big profits” at the top of the market.

This is a recipe for disaster!

It is also known as greed!

As a bull market continues to increase, investors should start to decrease their stock holdings and move them into cash or money markets accounts.

Now, besides bulls and bears there are two other animals in our zoo to keep watch for!

Ostriches:

Are investors who stick to their old strategies, oblivious to changes in the world around them.

And then there are the Hogs:

Bulls can make money …

Bears can make money …

But hogs are investors who are too greedy and usually get slaughtered!

Jan

13

2010

Emerging-Market Stocks Fall to Lowest in Week; Currencies Drop

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Emerging-market stocks dropped to the lowest level in a week and currencies fell as oil prices slumped and the European Central Bank president said policy makers will withdraw emergency cash gradually.

OAO Rosneft and OAO Lukoil, Russia’s biggest oil companies, lost more than 1 percent as oil prices declined. Aluminum Corp. of China Ltd. and Industrial & Commercial Bank of China Ltd. led declines among Chinese stocks amid concern that recent gains outpaced prospects for earnings growth. In Latin America, Mexico’s Bolsa declined 0.5 percent.

The MSCI Emerging Markets Index fell 0.4 percent to 965.08 as of 5 p.m. in New York. The measure gained 0.3 percent over the past five days, the third straight weekly advance.

Russia’s Micex Index dropped 0.1 percent to 1,334.15. The Shanghai Composite Index declined 0.4 percent, sliding from its highest level since Aug. 6 and paring its weekly gain to 3.8 percent. India’s Bombay Stock Exchange’s Sensitive Index, or Sensex, rose 1.4 percent.

Twenty of the 26 emerging-market currencies tracked by Bloomberg declined. the Czech koruna was the worst performer, dropping 1.5 percent. The Polish zloty slumped 0.8 percent after the finance ministry said public debt rose 1.7 percent in September from the previous month.

“There were some ill-founded rumors about problems with the sovereign bonds in Ukraine that created nervousness around the markets,” said Benoit Anne, head of emerging market foreign-currency and debt strategy at Bank of America Corp.’s Merrill Lynch.

Ukraine

Ukraine’s creditworthiness may be deteriorating as the state rail company restructures its debt. Ukrzaliznytsya, the Ukrainian state rail company, has missed last week a principal payment on its $440 million three-year syndicated loan arranged by Barclays Capital in 2007, brokerage Dragon Capital said. Yet, debt owed by Ukrzaliznytsya, doesn’t contain so-called cross- default clauses that would force redemptions on loans guaranteed by the government, the brokerage said.

ECB President Jean-Claude Trichet said the bank will remove liquidity in order to ensure it doesn’t fuel inflation.

“Not all our liquidity measures will be needed to the same extent as in the past,” Trichet said at a conference in Frankfurt. “Any non-standard measure whose continuation would pose a threat to the achievement of price stability must be undone promptly and unequivocally.”

Crude oil declined 1 percent as the dollar strengthened against the euro, reducing the appeal of commodities as an investment.

The extra yield investors demand to own developing nations’ bonds instead of U.S. Treasuries narrowed three basis points to 3.09 percentage points, according to JPMorgan Chase & Co.’s EMBI+.

Currencies

Emerging-market government’s attempts to stem currency gains will slow the appreciation and spark volatility, Morgan Stanley said in a report.

Brazil said Nov. 18 it would impose a tax to close a “distortion” caused by last month’s levy on foreign purchases of stocks and bonds aimed at curbing the real’s 34 percent gain this year against the dollar. South Korea, India, Indonesia and Kazakhstan also signaled this week they are considering measures to halt the appreciation of their currencies, which have slowed exports and threaten to undermine their economies. Taiwan’s financial regulator banned foreign investors on Nov. 10 from placing funds in time deposits to curb currency speculation.

“Attempts to curtail domestic currency appreciation will only serve to slow the pace of what we expect will be further eventual appreciation and in the process simply induce more volatility,” Morgan Stanley analyst Rashique Rahman wrote in a report today.

Russian Stocks

In Russia, Lukoil, the country’s largest non-state oil company, fell 1.2 percent. Rosneft, Russia’s biggest oil producer, declined 1.7 percent.

Aluminum Corp., or Chalco as the Chinese company is known, slid 1.7 percent to 15.33 yuan, trimming its gain this quarter to 20 percent. Jiangxi Copper Co., the country’s biggest producer, lost 1.5 percent to 42.23 yuan.

Industrial & Commercial Bank of China Ltd., the biggest lender, fell 1.3 percent to 5.48 yuan, paring its advance this month to 8.3 percent.

The MSCI Latin America Index advanced 0.2 percent. Brazil, the region’s biggest market, was shut for a national holiday.

Nov

24

2009

How Stocks Trade

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Most stocks are traded on exchanges, which are places where buyers and sellers meet and decide on a price. Some exchanges are physical locations where transactions are carried out on a trading floor. You’ve probably seen pictures of a trading floor, in which traders are wildly throwing their arms up, waving, yelling, and signaling to each other. The other type of exchange is virtual, composed of a network of computers where trades are made electronically.

The purpose of a stock market is to facilitate the exchange of securities between buyers and sellers, reducing the risks of investing. Just imagine how difficult it would be to sell shares if you had to call around the neighborhood trying to find a buyer. Really, a stock market is nothing more than a super-sophisticated farmers’ market linking buyers and sellers.

Before we go on, we should distinguish between the primary market and the secondary market. The primary market is where securities are created (by means of an IPO) while, in the secondary market, investors trade previously-issued securities without the involvement of the issuing-companies. The secondary market is what people are referring to when they talk about the stock market. It is important to understand that the trading of a company’s stock does not directly involve that company.

The New York Stock Exchange
The most prestigious exchange in the world is the New York Stock Exchange (NYSE). The “Big Board” was founded over 200 years ago in 1792 with the signing of the Buttonwood Agreement by 24 New York City stockbrokers and merchants. Currently the NYSE, with stocks like General Electric, McDonald’s, Citigroup, Coca-Cola, Gillette and Wal-mart, is the market of choice for the largest companies in America.

The NYSE is the first type of exchange (as we referred to above), where much of the trading is done face-to-face on a trading floor. This is also referred to as a listed exchange. Orders come in through brokerage firms that are members of the exchange and flow down to floor brokers who go to a specific spot on the floor where the stock trades. At this location, known as the trading post, there is a specific person known as the specialist whose job is to match buyers and sellers. Prices are determined using an auction method: the current price is the highest amount any buyer is willing to pay and the lowest price at which someone is willing to sell. Once a trade has been made, the details are sent back to the brokerage firm, who then notifies the investor who placed the order. Although there is human contact in this process, don’t think that the NYSE is still in the stone age: computers play a huge role in the process.

The Nasdaq
The second type of exchange is the virtual sort called an over-the-counter (OTC) market, of which the Nasdaq is the most popular. These markets have no central location or floor brokers whatsoever. Trading is done through a computer and telecommunications network of dealers. It used to be that the largest companies were listed only on the NYSE while all other second tier stocks traded on the other exchanges. The tech boom of the late ’90s changed all this; now the Nasdaq is home to several big technology companies such as Microsoft, Cisco, Intel, Dell and Oracle. This has resulted in the Nasdaq becoming a serious competitor to the NYSE.

On the Nasdaq brokerages act as market makers for various stocks. A market maker provides continuous bid and ask prices within a prescribed percentage spread for shares for which they are designated to make a market. They may match up buyers and sellers directly but usually they will maintain an inventory of shares to meet demands of investors.

Other Exchanges
The third largest exchange in the U.S. is the American Stock Exchange (AMEX). The AMEX used to be an alternative to the NYSE, but that role has since been filled by the Nasdaq. In fact, the National Association of Securities Dealers (NASD), which is the parent of Nasdaq, bought the AMEX in 1998. Almost all trading now on the AMEX is in small-cap stocks and derivatives.

There are many stock exchanges located in just about every country around the world. American markets are undoubtedly the largest, but they still represent only a fraction of total investment around the globe. The two other main financial hubs are London, home of the London Stock Exchange, and Hong Kong, home of the Hong Kong Stock Exchange. The last place worth mentioning is the over-the-counter bulletin board (OTCBB). The Nasdaq is an over-the-counter market, but the term commonly refers to small public companies that don’t meet the listing requirements of any of the regulated markets, including the Nasdaq. The OTCBB is home to penny stocks because there is little to no regulation. This makes investing in an OTCBB stock very risky.

Oct

28

2009

Toxic Assets Explained

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“Toxic asset” is a non-technical term for certain financial assets whose value has fallen significantly and for which there is no longer a functioning market, so that they cannot be reasonably sold. The term became common during the financial crisis of 2007–2009, in which they played a major role.

When the market for such assets ceases to function, it is described as “frozen”. Markets for some toxic assets froze in 2007, and the problem grew significantly worse in the second half of 2008. Several factors contributed to the freezing of toxic asset markets. The value of the assets were very sensitive to economic conditions, and increased uncertainty in these conditions made it difficult to estimate the value of the assets. Banks and other major financial-institutions were unwilling to sell the assets at significantly reduced prices, since lower prices would force them to reduce significantly their stated assets, making them appear insolvent.

Oct

23

2009

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