Rational Advisor

What a week, the excitement was spread over three days, with Monday’s plunge followed by a tussle on Tuesday before the eventual lift-off on Wednesday.

The S&P/TSX index Index off 1.4% for week is down more than 10 per cent from the high of 15,073 from just one month ago. That’s a 10% drop in a month! How about that index investors! Did you realize that an index could fall 10% in a month!

The Dow Jones Industrial Average ended the week 3.6%, at 11,497; its 4.9% rise after Tuesday was its biggest three-day gain since March 2003.

The Standard & Poor’s 500 index rose 1.7%, to 1261 and is 19.5% off its October peak. Again, since October this index is down about 20%. How now, index investor champions. What about all those lower MERs did they end up helping you cushion your investments.

This is the fallacy around index investing, in thinking that the downside is also better. I don’t see too many media heads commenting on the volatility of thes index funds.

What led the Toronto markets were those beaten up Financials, as investors felt more confident about bank stocks following good news from Citigroup.

Citigroup gained $1.38 to $19.35 after a 2Q loss of $2.5 billion beat analyst forecasts. This followed stronger-than-expected results earlier in the week from JPMorgan Chase and Wells Fargo, easing worries about American banks.

Elsewhere in the financial sector, Merrill Lynch lost $4.89 billion during the second quarter, hit by almost $10 billion of write downs and charges. Merrill’s shares edged up 18 cents to $30.91.

Again, it shows the stupidity of following these analysts expectations. Personally, i think they and the people that listen to them are to blame for the markets pyrotechnics.

The financial sector, which has absorbed the brunt of the fallout from the credit crunch, jumped more than 10% in the past three sessions, buoyed by results from banks south of the border that were not as bad as expected.

Wells Fargo managed to raise dividends, JPMorgan Chase managed to top estimates, and the $2.5 billion Citigroup lost last quarter manages to be less than feared.

Another great reason for the boyancy in fiannciasl were the regulators finally realzing that the specualtors need to be warned and have their hands slapped. The market got a boost from the Securities and Exchange Commission, which ordered a ban on naked short-selling of shares of primary dealers including the biggest banks and investment banks — and mortgage companies Fannie Mae and Freddie Mac - naked short selling is selling shares short before you’ve arranged to borrow them.

The ban, which takes effect Monday, altered the trading world for these stocks. From their Wednesday intraday lows, Fannie Mae shares doubled to $13.40; Freddie Mac shares more than doubled to $9.18. One reason for the gain: Freddie Mac won approval from regulators on Friday to sell the stock needed to overcome mounting losses, and the Wall Street Journal said the mortgage finance company may seek $10 billion.

The too-convenient rule change promises to make it costlier for traders to bet aggressively against some financial stocks. The 150 stocks within the S&P 1500 with the heftiest short interest jumped 15% over two days, while those with the least short betting struggled to scratch out a 2% gain.

Can financials survive the summer without falling back? It helps that investor expectations were almost nonexistent. Among companies that have reported earnings so far, only 49% of financial stocks have beaten estimates — the worst among S&P sectors, says Bespoke Investment Group. But those beating estimates saw shares jump 10.1% in the ensuing sigh of relief, and even those missing their marks shimmied up an average 3%. Contrast that with the crowded shelter of consumer staples, where 71% of companies have so far beaten estimates only to see their shares pull back 4.7%.

U.S. financial stocks beckon because nearly every major company now trades for under 10 times projected 2009 profits. Though there is considerable uncertainty about ‘09 profits, considering the tough economic outlook, what is comforting is that many financials combine low forward P/Es with and low ratios of price-to-book value, derived by subtracting liabilities from assets and dividing by the company’s outstanding shares. It historically has proven profitable to snap up major financials around book value because purchasers effectively are getting the ongoing businesses for nothing.

The last time financial stocks were hit so badly was in 1990, when the group fell 24%. That was followed by a 43% gain in 1991.

Buffett was a big buyer last year of Wells Fargo — at an average price above the current level.

But financial stocks are not out of the woods yet. Henry Paulson the US Treasury Secretary and Benny B did say that some 90 small banks could go bust

OIL

Just as important: Stocks’ rise was lubricated by oil’s slide, as crude fell $16.20 or 11.2% to $129 a barrel — its biggest weekly drop in dollar terms ever! Here, too, I suspect, Congress’ huffing and puffing about commodity-index speculation sent a bit of a shiver through futures traders.

The Friday decline followed tumbles of $5.31 on Thursday, $4.14 on Wednesday and a drop of $6.44 on Tuesday.

Just last week, crude traded above $147 a barrel.

The last time oil fell by 2% or more on three consecutive days from its year’s highs was in September 2000, which marked the start of a rocky patch and a year-long decline in Oil.

“If this is not the bubble’s implosion, then it’s a reasonable facsimile,” said analyst and trader Stephen Schork in daily market commentary.

“Perhaps all we have witnessed was a replay of last August’s subprime induced sell-off. Time will tell. Nevertheless, for the time being we no longer care to hold a bullish view,” Schork said.

GOLD

Global demand for gold fell 16 per cent year-on-year in the first quarter of this year. Demand in India dipped 50 per cent in the period. 50 percent!! and India’s one of Gold’s biggest purchasers, so if the demand has gone down, and the supplies about the same - Why is the price so bloody well high - Speculators!!

Google disappoints

Investor disappointment was directed at Google, whose earnings jumped 35 per cent to $1.25 billion (U.S.) or $4.63 per share, missing analyst expectations by 11 cents per share. Google stock fell $52.12 or 9.77 per cent to $481.32 amid worries that the ailing U.S. economy is hitting the Internet search leader.

Uhmmm, let me get this right increase in earning sof 35%, missed some stupid analysts bogus expectations by 11%, so the stock that just made $1.25 billion drops some 10%. Am, I the only one that’s confused,a nd wondering what these analysts are smoking?

Can the rally continue?

So, can stocks can continue to move higher — and will oil move lower?

Let’s start with “Can the market move higher?”

Stocks could be buoyed if crude’s big drop can continue and pull the already-weakening energy sector lower.

Since stocks have tended to move in an opposite direction to oil, further drops in crude could boost stocks.

There is increasing evidence that global demand for oil and various fuels is falling under the weight of sharply higher prices. Motorists around the world are being more careful in how much they drive, and airlines are cutting flights and mothballing increasing numbers of planes, hoping just to survive.

But there’s a big caveat: Iran. The United States will sit in on meetings with Iranian diplomats in Geneva this weekend, and the hope is to get the Iranians to reduce their nuclear program. If there’s progress, crude oil could drop further. If there isn’t, crude could move higher.

We will need to see which of the small loaded with real estate will go bust.

Also the poor consumer, is shopped out and being hammered by falling home prices, falling equity prices, falling jobs and incomes, rising inflation.

Stay rational because Speculation is darn easy and very seductive but rational investing is difficult. Difficult because it requires;

Patience, patience, patience and more patience
Discipline
No emotion
Going against the crowd

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