Stock Market Predictions, Revisisted

Yep, it's confirmed. They're flipping coins! =)

In my last post, I saw a prediction that the stock market was poised to extend a rally. So I took the opposite view and predicted that they'd be wrong and that stocks were poised to go down. I'll readily admit, I have no idea what the stock market will do from week to week--I just don't believe that the "experts" do either. But even if they flip coins, they're likely to be correct half the time.

So how did my predictions do? The S&P 500 was at 1224.58 when I posted, and today, one week later, has closed at 1238.25. Alas, the "experts" seemed to have been right this week--with an increase of 13.67. But seriously, a 1% wiggle in price isn't really something to get excited about. *shrug*

But... consider this! NASDAQ closed a week ago at 2667.85 and today is at 2637.46, which is down 30.39 points! Considering that in the article, they hung their hats on companies like Apple (the largest influence on NASDAQ), IBM (not part of NASDAQ, but was down for the week anyhow), and Microsoft (one of the largest influences on NASDAQ)--in fact, every one of those tech companies that they picked out by name--were down, I think my belief of doing the opposite of what experts and "everyone" recommend still has merit. ;o)

They might have hit a forest (S&P 500), but they missed another forest (NASDAQ), and they missed all of the trees I checked in the forest that they did hit!

Stock Market Predictions

I happened to notice this article about S&P 500 index poised to extend streak. Despite the fact that I was taught to capitalize all but the most trivial words in the title of a piece, the part that really bothers me is the confidence this person has to call next week's stock market gyrations. It begins:

With one-third of the Dow components and crowd favorite, Apple, reporting results next week, U.S. stocks are setting the stage for another week of gains.

 I'll readily admit, I have no idea which direction the S&P 500 will go next week, but I can tell you that there are 30 Dow "components" (really just a fancy name for "companies") and 500 S&P "components," which means there are precisely 470 stocks in the S&P 500 not even being considered.

But really, what are the chances that stocks will be up next week if everyone already thinks that stocks will go up? All of the "smart" money will have already bought stocks at the end of this week in anticipation of stocks going up next week--but then who does that leave to buy stocks next week? It all but guarantees that stocks will go down next week. And the more people who believe it will go up next week, the more likely the stocks will go down instead.

Apple might be a crowd favorite, but they can also disappoint. Even if earnings come in above expectations, they could still give guidance that things might be disappointing--or at least not as good as everyone hopes and expects.

Why do they stuff so much media with this crap? I'm going to go out on a limb and dare to be different. I'm calling for the stock market to be down next week--and my theory is no more than because "everyone" seems to expect it to go up next week. =) I won't sell any of the stock I have--and I'm 100% invested in stocks--because I don't think one week will make any difference at all. Even if it's down next week, it might still go up the week after that, or the week after that. And anyhow, I could be wrong. =)

But I am calling a down market next week anyhow!

In Defense of Debit Card Fees

Seems that Bank of America stirred up a hornet's nest by charging folks $5/month for using their debit cards. I don't see anything wrong with this. But, before you string me up in effigy, it's only because I don't see Bank of America as the cause of this fee. No, the anger is misplaced. The blame really should lay on the shoulders of Congress.

Congress passed some laws limiting how much banks can charge in interchange fees. Which, frankly, seems un-American to me. Why should Congress be getting involved in how much a business can charge for their services? What next? Create a law that pizza places can't charge more than $5 per pizza?

Imagine what would happen if such a law were passed. Some pizza places might just go out of business. Or.... they might jack up the prices of other products to make up the difference and make enough to still stay in business. But... then what if people just start buying the pizza and avoiding all of those other expensive products? Well, instead of jacking up the prices of other products, perhaps adding new fees for a pizza can make up the difference instead. You know, like a "pizza preparation fee." They'll sell you the ingredients for $5, but if you want them to put all of those ingredients together into a pizza, well, that'll be another $5.

You might think comparing pizzas to debit cards is silly, but basically, this is exactly what happened. Banks paid for stuff like "free" checking and debit cards with money from those interchange fees, and because of an act of Congress, they can't anymore. They have to make money in other ways--by charging for other fees or increasing already-existing fees. Banks warned this would happen if Congress went through with their meddling, and by golly, that's exactly what's happening.

People have always been paying those debit card fees--they were just more hidden from view. You paid for them in higher prices on the goods you bought with them. It was built into the price of the goods and services you bought. Now they're separated, itemized, as it were.

I'm kind of surprised that Bank of America hasn't been better explaining all this, though. Really, it's been a PR disaster for them, and it seems like they're response has been nothing more than, "Tough, live with it." They really need to do a better job explaining why this new fee has been created in the first place--Congress made them do it. =)

Bank of America seems to be the whipping boy for this issue, but all the major banks are moving in this direction, and I'm sure more will continue to do so. It's not a bank-specific problem--it's a banking-specific problem.

And since we're talking about banks, here are a couple of my own thoughts on the subject:

If you aren't using a credit union, WHY NOT?! For those Occupy Wall Street folks complaining about banks making too much money, HELLO, use a credit union! It's essentially a non-profit bank! You get better rates, fewer fees, and more bang for the buck. It's amazing to me that for-profit banks can even stay in business against credit unions. And for those people who choose to use a traditional for-profit bank, well, it's America, and by golly, you have every right to squander your money on poor service. I'm not going to go in the streets and protest it, though. =)

And, if for some reason you can't join any credit union, well, I do have one account with a for-profit bank I've been quite happy with you might also consider: ING Direct. They're an online-only bank which lets them save on costs like, you know, buildings and tellers, and other expensive stuff that brick-and-mortar banks still have to deal with. It feels more like a credit union than a for-profit bank, but of course, the catch is that you have to do all of your business online. =) For most people, though, I don't think that's a big hurdle to clear. There are plenty of free ATMs around to get money out of, you can direct-deposit your paychecks into the account, and really, what else do you need? I have a credit union back in San Luis Obispo that I like, but it's a little distant for me to use regularly nowadays. I started online banking when I moved to Oregon and continue to use to here in Washington and have been happy with it for years. =)

Why David Trainer is an Idiot

I was reading Don't Fall For the Market's Head Fakes by David Trainer on Forbes.com this morning. At least I was until I reached that graph. I have a major problem with this graph: the scale. If you look at the left-hand side of that graph, you'll see the levels for large-cap stocks in increments of 500, each of them evenly spaced, which I've reproduced in Figure 1.

Figure 1: Scary-looking, huh? Not really--it's blatantly misleading. 

The problem with that scale on the left is that an increase from 500 to 1000 means it doubled in value. The difference between those numbers is 100%. At the top of the scale, from 3000 to 3500, the value went up a mere 16%. A 500-point change in 1926 was a lot more than a 500-point change in 2010, and not at all comparable. The scale should have been logarithmic for apple-to-apple comparisons between 1926 and 2010.

If you look closely at the graph, you can even "sense" that this graph is bull$#!! The Great Depression started in 1929. The Dow fell from a high of 381.17 in 1929 to a low of 41.22 in 1932--a staggering 89% drop in value. But look at this graph during that time period. That black line representing the stock market looks absolutely flat. If the Dow fell the same number of points today--339.95, it amounts to a 3% drop in value. How useful can a graph possibly be when a 3% drop in value today is equivalent to an 89% drop in value in 1929-32?

And that "trendline"--how is it possible that a "trend" can overshoot the value it's supposed to be trending (and by such an enormous margin!) from 1926 through 1994? To show how ridiculous this trendline is, I took a segment of the graph above for use in Figure 2.

Figure 2: The trend--from 1926 through 1980, seems to be quit a bit off from the
 actual values it's supposed to be trending. Could it really be off by this much for over 50 years?!
 Is there anyone during these 54 years who ever showed such a graph to explain why stock
 prices were so incredibly undervalued for over 50 years? No--because that "trend" wasn't created until 2010!

But what would a properly drawn graph look like? This is the second problem I have with the graph: The small print. Sources:   New Con­structs, LLC and Ibbot­son Ibbot­son, 2010 Ibbot­son Stocks, Bonds, Bills and Infla­tion Val­u­a­tion Year­book, (Chicago: Morn­ing Star, 2008), 228–229. *Large Cap Stocks as defined by Ibbot­son are the best com­par­i­son for the S&P 500, which did not exist as it does today in 1926.

So basically, this scale is completely made up using a source I don't readily have access to. It's true, the S&P500 did not exist today as it did in 1926, but the Dow Jones Industrial Average did. Why not just use that? The Dow has always been made up of a large cap stocks, and it's an index I can look up values for and graph with ease on Yahoo Finance.

Figure 3: A properly scaled graph of the DJIA from 1926 to today.

Looks a lot different like this, huh? You can quite clearly see the stock market crash from the Great Depression early in the graph. Now that must have been painful! A similar crash today would send the Dow plummeting nearly 10,000 points to about 1,000.


And what about the trend line? Unfortunately, Yahoo doesn't have a slick option to "insert trendline" into their graphs, but I figured I could eyeball one myself and add it in. Can't be any worse than the graph provided by David Trainer. So I added a trendline for Figure 4.

Figure 4: My custom-made trend line. Fits a lot better than David's trendline, doesn't it?

There are statistical methods available to get a statistically correct trendline, and while I don't claim my trendline is 100% accurate, just looking around, it feels intuitively correct. Before the Great Depression, at the end of the go-go '20s, the stock market is now widely considered overvalued and speculative. (At the time, it wasn't so obvious, but in hindsight, it always is!) And my trendline shows that. At the greatest depths of the Great Depression, stocks were considered cheap, and my trendline shows this.

For pretty much all of the 1980s, my trendline shows stocks to be undervalued, and had you loaded up then, you'd have done pretty well for yourselves. But by 2000, stocks were wildly overpriced at their worst values since the Great Depression, and again, my trendline shows this.

And during the market meltdown that hit bottom in 2009, my trendline shows that stocks fell well below normal values and only recently returned close to the trendline.

So while my trendline may not be scientifically precise, it does seem to be more-or-less correct. And really, when it comes to the stock market, it's better to be approximately correct than precisely wrong. =)

So what does this mean for the future? I won't make any claims about what will happen next week or next month or even next year. I have no idea what will happen. But I do know this: That trendline is going up. Through a Great Depression, two world wars, through 9/11--it keeps going up. If the trend continues, the Dow could hit 20,000 in the next 10 years. Maybe more, maybe less, depending on the state of mind of investors at the time. But whatever the actual value turns out to be, it's almost certainly going to be higher.

And that's why I think David Trainer is an idiot. He can't even look at a simple graph and say, "You know, this graph is misleading and deceiving." All those clues in the graph never made him sit up and think critically.

But that's okay--it's people like him that scare others out of the stock market, driving prices down, and allowing me to purchase stocks that I believe are significantly undervalued. Just because I think he's an idiot doesn't mean I don't like him or appreciate his efforts in allowing me to buy stocks on the cheap. Thanks, Dave! =)

Trademark This!

I just finished reading an article titled Apple Sues Amazon Over Term 'App Store'.

And I want to be the first to say BOOOO Apple! How Apple even managed to trademark such a generic term in the first place I can't figure out, but that's about the same as PayLess Shoes trying to trademark the term "Shoe Store" or Ben and Jerry's trying to trademark the term "Ice Cream Store." It's stupid and ridiculous, and a completely waste of everyone's money.

So BOOO Apple. If you want to trademark a term, come up with a creative name. That's your specialty, isn't it? Creativity? Surely you can do better than "App Store." That sounds like something Microsoft would have come up with.

Bing vs. Google

There was a news report where Google accuses Bing of copying their search results. The folks at Bing say that's just nonsense. Which is the truth?

Seems to me like it's pretty darned easy to test that theory. Run a few search results in both and see if they turn out the same. So I tried that. =)

When I search for "letterboxing" on Google, I get links to LbNA for the first four search results, then a link to Atlas Quest, then two links to wikipedia, then a link to Silent Doug's letterboxing.info.

A search for "letterboxing" on Bing, I first get a link to LbNA, then a link to wikipedia, then a link to Atlas Quest, then a link to Silent Doug's letterboxing.info.

Guess what that means? The results are different! Apparently, the results are only the same if you're searching for made-up words. =) And really, how often do you search for made up words?

If you want to talk about the quality of searches, when it comes to "letterboxing," I think I'd give the edge to Bing. The fact that Google clutters up their results so the first four results point to the same website makes it harder to find multiple sources of information. However, I will admit, I'm happy that the first non-LbNA website on Google is Atlas Quest, while AQ is #3 on Bing. But because of those multiple links to the same website, Atlas Quest actually shows up as the #5 link on Google. Which, I suppose, might make Google more popular with people who don't like Atlas Quest, but in terms of quality searches, that's just bad....

Seems more like a desperate ploy by Google than anything. Perhaps feeling a little threatened by Bing's growing influence? Which seems ridiculous to me--Google is still the 800 pound gorilla in search. They should act like it.