A Couple of Charts for Motley Fool's "Macro Economic Trends and Risks" Board

Two Must See Charts of the Irrationally Exuberant Chinese Stock Market

To my regular readers on this board:

I have the next two days off. I intend to take some quality time to think about some news about the Chinese markets which is being discussed on the outstanding Motley Fool message board named "Macro Economic Trends and Risks".

I am not going to write a post about China at this moment as I am now digesting some stuff which I have only recently become aware of about the Chinese banking system and their stock market.

However, the discussion on the "Macro Economic Trends and Risks" board is too good to not have some clear pictures added to the discussion about the insanity of the Shanghai exchange.

A note to all about these charts:

These charts are static Photographs of charts at the end of business for 25 May 07. They will not update. So, as a courtesy to all my readers, I will update these charts weekly now, shooting for a Friday morning look every week here in the USA. If the Shanghai market crashes, I will of course give updated photos of the market daily on this blog.

To see either chart in an easy to read size, simply click on them.

The reason for showing the charts here on this blog instead of trying to post them to the Motley Fool board directly is I have had too many people from Fool write me emails telling me my trendlines move around, or my Fibonacci lines are not showing, or my comments printed on the chart are truncated or missing. By posting charts here, I know that what I see on my end is what you should see on your end with no more distortions of trendlines, mussed up comments, missing averages, etc. By the way, I did not use a moving average on my monthly chart as I don't normally use them at all on my longterm charts.

The first chart above shows the Shanghai Exchange's trendline and monthly candlesticks from 1990 to the present. I have no idea when that exchange began its existence. I do know that stockcharts.com only gives data for many stocks and indices going back only as far as 1990. So, this exchange may have gone up more than 4200% in its existence. (Perhaps someone on Fool can research the beginning of the Shanghai exchange?)

Secondly, this monthly chart is followed by a daily chart.

The daily chart is one where I have added a 200 day moving average. (The red line). I have also added a 50 day moving average. (The blue line).

I did this because I read something in a great piece by Ty Anrdos on freebuck.com which made the following point which I will not comment on here. I only offer this as a giant red flag flapping in a hurricane wind that is picking up, and I will offer my own opinions and thoughts later . . . and maybe it would be better if all of you reading this would scoot over to the Motley Fool "Macro Economic Trends and Risk" board to lurk because I believe this is going to be as lively a discussion as there has been in quite some time . . . That said, here's the bit from Ty Andros great commenatary which pertains to this daily chart and its 200 day moving average:

“But we should point out that the Shanghai market is currently approximately 95% above its 200 day moving average. To put that in perspective, in the history of the Dow Jones Industrial Average, including wild speculative binges such as 1929, we are unable to find a market high that was more than approximately 55% above its 200 day moving average.

Perhaps the amazing upward explosion in the Nasdaq leading to the March 2000 peak comes to mind as a similar market bubble to be compared with Shanghai. That market also stopped its runaway phase right around the 55% mark above its 200 day moving average.

In our experience, these types of bubbly blow off market phases are more conducive to subsequent crashes than they are to subsequent economic booms. It is difficult to conceive that a market almost 100% above its 200 day moving average will end up in any way but a negative fashion. Only time will tell.”

Roger Shiller's Advice: "Stay Away from the Pack"

Money Magazine's Jason Zweig Interviews Robert Shiller

Readers of this blog know that I hold Robert Shiller in high esteem. He is, after all, the man who warned us all that the Internet stock mania would end badly. In fact, his book which clearly outlined this warning, "Irrational Exuberance", became the most famous two words uttered by ex-Fed chief, Alan Greespan, when he warned Congress the markets were valued way beyond sanity.

In an earlier blog of mine "How Stocks Have Done Since the Millenium: Why Buying My Rental House is a Losing Bet Today", I quoted from an early article by Shiller published on the Internet in 2005 which warned that Housing would crash as surely as the Nasdaq crashed in 2000.

I quoted from Shiller's article the last two paragraphs verbatim:

"Well, we are looking upon a real estate boom again, and we are likely to observe the same end to speculative feeling, at least before many years have passed. Human nature is unchanged. In a bubble, high prices are sustained only by the expectation of more high prices. That is what makes a bubble a bubble, prone to bursting.

The reason we cannot expect a soft landing today is that right now people are willing to pay these very high prices only because they expect them to go up even more in the future. Prices can't just level off, because when people no longer expect them to go up, some of them will not want to hold at the high price."

Yesterday, a new interview with Shiller appeared on the Internet titled "Robert Shiller: Mr. Worst-case scenario." The interview was conducted by Money Magazine's Jason Zweig, placed on Yahoo Finance, and I've cut just the interview from the piece for your reading pleasure:

Question: What caused the stock bubble, and why did it end as it did?

Answer: Some sociologists talk about collective consciousness. We humans evolved to be very closely linked, and our minds focus on the same ideas. Those [ideas] get reinforced because we hear them all the time.

Back in the late 1990s, you kept hearing that you had to stake your claim on the Internet or you'd miss out on the future. No one cared about the present.

Then something happened around March 2000. There was an acceleration of public talk about doubts. You could no longer declare at a cocktail party that Internet stocks were going up. Such statements had become embarrassing -and just like that, word of mouth changed. Embarrassment is a powerful emotion.

Question: Is that about to happen in real estate?

Answer: It doesn't seem like we're there quite yet. But this is the biggest boom in housing prices since, well, ever.

Nothing seems to explain it, and nobody forecast it. It seems to me...wait a minute. Please don't quote me as forecasting the markets.

Question: Okay. What you're about to say is not a forecast.

Answer: Well, human thinking is built around stories, and the story that has sustained the housing boom is that homes are like stocks. Buy one anywhere and it'll go up. It's the easiest way to get rich.

Question: So how rich can you get on real estate?

Answer: From 1890 through 1990, the return on residential real estate was just about zero after inflation.

Question: Excuse me? That's all? Hasn't it been higher lately?

Answer: Since 1987 it's been 6 percent [or about 3 percent a year after inflation].

Question: So real estate doesn't go up roughly 10 percent a year?

Answer: It can't be true that homes rise 10 percent a year. If they did, in the long run no one would be able to afford a house.

Question: Let me grab a calculator. If real estate really rose 10 percent a year, a $25,000 home in 1957 should be worth roughly $3 million now.

Answer: And that flies in the face of common sense. In fact, I'm inclined to think there's a good chance that the return on real estate will be negative, substantially negative, over the next 10 years because all booms reverse in the end.

Question: All right. We won't call that a forecast either. So how should people think about their home as an asset?

Answer: Avoid concentration of risks. You need a house, but I would avoid a second one - or at least avoid an outsize house. Over-investing in real estate now would be a recipe for disaster.

Question: You also write about the risk to human
capital. What's that?

Answer: What you're trying to do is to invest in skills that somebody else will want to pay you for. Let's say you want to work at Bethlehem Steel.

That would have been a good idea in the 1950s, not so good by the 1970s. The world went the wrong way on you.

Question: How can you manage that risk?

Answer: I used to coach children's soccer, and I would tell my players, "Stand away from the pack, and sooner or later the ball will come to you."

In your career choices too: Get away from the pack. Also, you associate your home country with safety. But the rest of the world is pretty peaceful too, on average, and the average is all that matters.

I think relatively few [Americans] are getting away from the pack, investing more outside the U.S. than in.

Question: How are you investing now?

Answer: I'm probably a little over 60 percent in stocks, almost all of it outside the U.S. I have a lot of cash. And I've been reducing my exposure to real estate. It may be at the end of a cycle.

Since the late 1990s, Blue Chip Big Caps have been ignored by investors. Big Caps have sorely underperformed Emerging Markets, small caps, Real Estate, and so on.

However, I firmly believe this is the time to be loading up on familiar Big Cap names with Global exposure. I especially urge anyone buying stock to focus on the following three top performing sectors since the beginning of the S&P 500 in 1957:

1. Energy
2. Personal Staples
3. Healthcare

I have two energy stocks I will be discussing on this board in the near future which I would urge anyone to buy, sock away in a Roth IRA or other retirement account, and re-invest the dividends forever until you are ready to retire.

I have two personal staples stocks I would recommend here and now.

I have two healthcare stocks I will recommend to anyone in the near future.

And I have one mid-cap stock which is a play off all three sectors and other stocks which have sustained growth while paying dividends.

I will be publishing my first official stocks picks soon on this board. And these picks will be looked at monthly on a Watchworld scorecard.

That said, Shiller is urging us to invest overseas. What Shiller did not bring out is this: you can buy multi-national companies which have large presences overseas.

In fact, four of the seven stocks above which I will soon recommend make more money overseas than they do in the USA . . . and I think when I mention some of these names . . . you will be stunned to learn that these "American" companies have larger exposure off-shore and are making big profits by currency exchanges added into the mix.

For now, however, go back and read what Shiller is telling anyone who is thinking about buying Real Estate in these exuberant times.

He believes:

• You know the Real Estate Bubble is finally dead when people are too embarrassed to talk about it openly as a way to make money. (You know we haven't reached that point in Key West as the local NAR branch is still running ads "Now Is a Great Time to Buy a Home!")
• From 1890 - 1990, the return on Real Estate was zero after inflation was factored in.
• From 1987 through 2007, Real Estate has only gone up roughly 6% annually. In reality, the reutrn is only 3% annually after inflation is figured in.
• Real estate could not possibly go up 10% a year as some NAR wags claim as that would make a house which cost $25,000 in 1957 worth $3 million today. (The house my parents bought for $7,000 in 1950 would not be worth $60,000 today in Richmond, VA . . . which means it doubled in price only three times in 57 years for only a 3.84% compounded annual growth rate . . . and this includes the last five to seven years of the Housing Bubble)
• Avoid concentrations of risk. Go where others are not already crowded.

p.s. Disclosure: I am very heavily weighted in gold, silver and oil in my real life portfolios. In fact, I own real gold and silver proof coins.

Anyone who does not own gold, silver and oil in their portfolios at this time in history is simply playing Russian Zip with an Uzi machine gun loaded with a full clip, IMO.

If you can't make yourself buy real gold and silver as a hedge, please, understand where oil is today with prices already skirting $4.00 a gallon in the Florida Keys.

Read the Mogambo Guru's weekly column you see headlined on the margin of this blog. His humorous writing is a compendium of knowledge he has gleaned from other writers during the past week. Mogambo is crazy as a fox. Read and learn.

You will also want to see a Matt Simmons slideshow about oil. Just google his name. Look for a slideshow. All you need to know about oil is right there in 50 or 60 slides that Matt has put together to wake you up.

Look about you. Start thinking about the obvious. See all those For Sale signs in your town? Who can afford to buy those homes now that the EZ Credit train has jumped the track leaving millions of bagholders on the platform scratching their asses wondering who is going to take them away from all the masses scratching their asses?

Keep reading this blog to learn that Real Estate has gone colder than Walt Disney's head.

Meanwhile, use your head.

Gold, silver, oil. Get those hedges first if you are just starting out. Then we can add in the healthcare and personal staple stocks later. As Mogambo would say, you can thank me later.

Ohio: "A tsunami of Foreclosures is on the way!"

So Many Mortgage Related Problems in Ohio, Legal Aid Can't Handle Them All . . . What's More, It's Going to Become a Lot Worse . . .

Every once in a while, you read a short news item on the web which doesn't make the front page of say the New York Times, Raw Story, the Drudge Report, USA Today, etc., yet the story contains something which tugs at your heartstrings.

I read such a story just moments ago.

Ohio’s Foreclosure Prevention Task Force held its fourth meeting today in what was billed as an opportunity for borrowers facing foreclosure or people who’ve been through the foreclosure process to tell their stories.

Instead, almost all of the 21 speakers who signed up were officials from agencies that represent borrowers or businesses involved in mortgage lending – and all had an opinion on how to stem foreclosures in Ohio, which rose 24 percent in 2006.

Mark Lawson, a senior attorney for the Legal Aid Society of Southwest Ohio, told the panel that his organization has so many people calling for help with mortgage-related problems that it can’t begin to handle them all.

“This is an epidemic. You think it’s bad now? You have a tsunami of foreclosures on its way,” said Tom Conley, a self-described foreclosure intervention specialist from Columbus who said he went through a foreclosure a year ago.

Investor seminars are being offered around the country teaching people how to profit from people saddled with overvalued houses and mortgages they can’t afford, Conley warned.

Gov. Ted Strickland set up the task force this spring to foster foreclosure prevention, as well as intervention and strategies to assist distressed mortgage holders. The task force includes representatives from local governments, lenders, non-profit sector and private sector..

Inside this story is vignette about a scumbag Realtor who also wears the hats of mortgage broker and construction contractor. This man took advantage of an ignorant working woman. Here's the few paragraphs detailing how this poor woman was deceived by a black hearted businessman who is probably still out there making more deals of this type.

(I know a similar Realtor/Mortgage Broker in Key West with the same sociopathic tendencies. I pass this along as a public service. The more stories like this you read, the lower your chances you will be taken advantage of in the future when you decide to finally buy Real Estate.)

As I've said before on this blog: don't put your trust in strangers who only look at you as a big hefty commission:

Lawson cited one example of an unidentified woman who bought a two-family house in 2005 with an adjustable-rate mortgage that started with an interest rate of 9.5 percent.

The property was appraised at $130,000, although an earlier appraisal put its value at only about $70,000.

She bought it on the recommendation of a real estate agent who, Lawson later discovered, was an owner of the company that arranged the mortgage.

The loan included $15,000 for repairs necessary to make the second unit rentable, which the real estate agent contracted to perform himself, Lawson said. The repairs were never completed, and the woman will probably have to give up the property, he said.

Real Estate Weenie for This Week: Angelo Mozilo

Yo, Angelo, You Might Be Full of It . . . But You Look "Mah-velous"!

Meet the CEO of Countrywide Finance, one of the biggest lenders in the USA for people seeking to buy a home.

In a Reuter's newswire story from yesterday, Mr. Mozilo shows that he is not altogether cognizant of the abuses his industry has pushed upon American homeowners.

The story is short . . .

Countrywide Financial Corp Chief Executive Angelo Mozilo on Monday said regulation in the subprime mortgage industry will help crooks while hurting lenders and the housing market.

"It's better for the crooks," Mozilo told Reuters before speaking at a Mortgage Bankers Association conference in Manhattan.

"It's only the good people who have to comply. Regulation, in my opinion, has caused part of the problem. When they attacked the pay option and interest- only loans, that really put a dent in a lot of the product, which is perfectly good product."

Mozilo also said current guidelines proposed by regulators will exacerbate problems in the housing market.

"The reason why people can't sell their houses is there is (sic) no buyers around," Mozilo said. "And there are no buyers around because they can't get the financing."

Now let me get this right: the lending industry is filled with crooks and white collar slime who've taken advantage of ignorant working class folk who could no more afford a $550,000 home in 2001 than they could in 2005 when they were pushed to just forget the 24 pages of the loan application and sign on the dotted line.

But all of a sudden, these swine have sprouted halos and angel wings and now these pigs really can fly?

Let's get real here, Mozilo. You and your cronies went on a feeding frenzy during the Housing Bubble. You sharks handed out loans to anyone who could leave vapor trails on a mirror held under their nose. And now you want to blame the problems of your business on there not being enough buyers because the government is stepping in and ruining your Ponzi Scheme by actually tightening up on things like falsified No Doc loans? Is your brain connected directly to your rectum Mr. Mozilo? I ask, because your thinking sure is stinking.

Mozilo, if you ever lose your job, you could go to work spinning the Big Lie for Fox Network, Muqtada al-Sadr, Vladimir Putin, Rush Limbaugh, CNBC, Hillary Clinton, Alberto Gonzales, the NAR, the Neo Con side of the Republican Party, Fidel Castro or Hugo Chavez. Take your pick, you're a lock and a crock, Mr. Coppertone.

How To Give Yourself a Perpetual Pay Raise Every Week. . . As Long As You Reinvest Your Dividends

Perpetual Weekly Pay Raises
(Exponentialsim 101)

Posters on the boards for the Motley Fool Rule Breakers Newsletter know me as an investor who likes highly volatile stocks such as Blue Nile (Nasdaq: NILE), Akamai (Nasdaq: AKAM), and Exelixis (Nasdaq:EXEL).

Today, Blue Nile is more than a double in my portfolio. Akamai is about a four bagger. And Exelixis is only up double digit percentages . . . but I am still holding 200 shares "forever" as I believe this company will become a 21st Century type of early Pfizer story with a focus on cancer fighting drugs.

As mentioned in an earlier post on this blog, I also took a flyer on 500 shares of Calpine (Nasdaq: CPNLQ) for .28 cents a share. Today, those shares are now roth over $3.00 each.

Yes, I like my surfing on fast moving lava flows and hitching rides on rocket ships when it comes to riskier growth stocks.

But the stocks I really enjoy most for buying and holding long term are those sleep-on-the -beach and never worry class of stocks we know as dividend payers.

Enter the “Weekly Pay Raise” part of the portfolios I manage.

I check my portfolios of stocks usually at the end of every month. And when I click on the “history” button to see which stocks paid out dividends the last 30 days . . . cha-ching. . . I always have a new list of updated fractional shares for certain stocks which show increasingly larger dividend totals!

This kind of no-brainer money growth excites me. Recently, I’ve taken these growing quarterly dividends and started dividing them by 13 to see how much extra money is paid out as a weekly pay raise during the past quarter.

Let me illustrate this look by using just one real-life holding I manage in my girlfriend’s Roth IRA.

We bought her 200 shares of Eagle Shipping (Nasdaq: EGLE) in September 2005 @ $14.26 per share for a total of $2,852.00 (not including the small trading fee).

Last Friday's closing price of $21.91 would give those 200 original shares a new worth of $4,383.00, for a total gain of about 53.65 % in 20 months time. I don't know about you, but I’ll take that kind of return any day of the week, any month of the year.

But as Ron Poppel would scream, “Wait, that’s not all. There’s more!”

EGLE paid monstrous dividends during 2006 and during the first two quarters of 2007. The dividends were for .57, .50, .50, .51, .51 and .50 cents respectively over those six quarters.

Let’s look at these just passed quarters and their fractional share growth in 2006 and 2007 as applied to the 200 shares of EGLE which we purchased in September 2005.

Q4 2005 – 200 share purchase

Q1 2006 – 208.8490 shares (8.8490 new shares purchased with free dividend money)

Q2 2006 – 216.3290 shares (7.4800 new shares purchased with free dividend money)

Q3 2006 – 223.9180 shares (7.5990 new shares purchased with free dividend money)

Q4 2006 – 230.8150 shares (6.8770 new shares purchased with free dividend money)

Q1 2007 - 237.0420 shares (6.2270 new shares purchased with free dividend money)

Q2 2007 - 242.3160 shares (5.2730 new shares purchased with free dividend money)

Notice how the returns multipled as the stock price was still ascending?

So, my girlfriend started with 200 shares of EGLE in September 2005 and now has a little over 242 shares?

Here we go!

Before accounting for reinvested dividends, we were already up 53.65% share price gain. Remember?

But look what happens to this great 53.65% return when we add in the dividend “free money” to buy those extra 42.3160 fractional shares:

Let’s multiply 242.3160 shares by $21.91 (Friday's closing price). We get $5,309.12.

Divide this latest closing balance of $5,309.12 by our original investment of $2852.00 and we’re now looking at an unbelievable 20 month return of 86.16% instead of the original 53.65% on just 200 shares!

Hence, you now see first hand how Dividend Re-investing is giving bigger returns that you would expect of a growth company which pays no dividends. Damn, this dividend re-investing stuff sure makes sense.

Better yet, my girlfriend’s dividend dollar totals are increasing quarterly: every fractional share added the previous quarter was paying extra dividends to the total the following quarter.

To hell with Existentialism, teach me more of this Exponentialism!

Check out the total dividend payouts multiplied by those burgeoning fractional share amounts:
Q2 2006 - $104.42 total dividends divided by 13 = $8.03 weekly extra pay

Q3 2006 - $108.16 total dividends divided by 13 = $8.32 weekly extra pay w/ .29 cents a week pay raise

Q4 2006 - $114.20 total dividends divided by 13 = $8.78 weekly extra pay w/ .46 cents a week pay raise

Q1 2007 - $117.72 total dividends divided by 13 = $9.06 weekly extra pay w/ .28 cents a week pay raise

Q2 2007 - $118.52 total dividends divided by 13 = $9.12 weekly extra pay raise w/ .06 cents a week pay raise

How Do You Get Bigger and Better Pay Raises Every Week? Buy More Stock in Companies Which Will Never Go Out of Business

Do you see that Magic of Compounding going on here? And when you have a portfolio of great stocks such as Budweiser (NYSE: BUD), Wrigley’s (NYSE: WWY), Colgate (NYSE: CL), and other Steady Eddy dividend payers, you can see how these weekly pay raises translate into a rewarding “wealth effect” which grows forever.

Be your own boss, folks. Diversify your portfolio with great dividend paying companies for the long term. Learn to give yourselves weekly pay raises while you sleep.

p.s. The other day I was speaking to a rep at my local bank, First State Bank. We were talking about routing transfer numbers, so I could send a bunch of my savings into a safe "forever" stock which pays huge dividends bigger than Eagle Shipping.

The woman representing my bank of 17 years wanted to know why I would buy stocks at a time like this instead of investing in CDs at her bank or a Money Market fund.

I told her:

1. Your passbook savings rate is only one-half of one percent. (No that is not a mis-print.)
2. You money market fund is offering only 5.0%
3. Online banks such as Everbank are offering 6.01% on chekcing accounts at this time
4. Your CDs for 6.0% and more would lock up my money for months at a time. Should I need to cash them out for a purchase of an undervalued asset, I would be assessed a penalty by your bank.
5. You are now advertising you have $250,000,000 to lend business and home buyers in the Florida Keys at this moment in time when Real Estate is crashing. I don't like the idea of my hard earned money being distributed to people who don't have a clue as to what an overvalued asset class looks like
6. I have made more than 21% or more in the stock market for the past four years . . . and this year looks to be my best ever as I continue to load up on Blue Chip Big Caps which pay dividends.
7. If the economy crashes, I am hedged with real gold and real silver. Plus many of my stocks are based on commodities which are in a bull market. The last place I want to keep my money is in a passbook savings of a bank which will lose money as more homebuyers turn in the keys to their overpriced Real Estate in Key West.

I was not rude to this woman. I was simply trying to help her understand that some people make money in bad markets and good using their brains to not follow the herd.

She asked me the name of the stock I was buying recently.

Actually, there are more than one, but in a post I will lay here soon, I will give you my two top recommendations for new money now. Both picks pay healthy dividends. And both picks are invested heavily in either energy . . . in particular, Oil . . . or consumer staples.

More later.