The Economic and Financial Market Cycle

The 7 Phases of the Financial Markets

Based on the World’s Economic Cycle.

1. Bottom of the market – Time to buy Junk Bonds short term.

2. Beginning of the next bull market – Time to buy stocks that have been beaten down by the market and the economy.

3. Bull Market is over 2 year old – You should be fully invested in stocks and bonds. You should have little investment cash left. You are in position to take advantage of the next great economic and financial move up.

4. Everyone including your dog, cat, and the groundhog digging in your back yard is talking about how well the market is doing and how they are going to make a killing in it. Junk bonds are only returning 3% to 8% and most of your target investments are selling at par or at a premium. This is the top of the market. You should be careful of Junk Bond purchases. In most cases I would not purchase Junk Bonds at this time. You should be getting out of stocks or if you have an advance education in how stock transactions work, you should look for “Short Selling” opportunities.

5. The start of a Bear Market – This is the time when the people on TV, Radio, and in the Newspapers start mentioning a correction. They will call it "Profit Taking." The market starts going down and the Market Experts start talking about buying opportunities. You should be accumulating cash in your portfolio in the form of CDs, Treasury Bills, and etc. You are well into your “short” positions and they are making money fast. The market always falls faster than it went up.

6. The Bears on Wall Street are tearing up the place. At this time the market is falling fast and it becomes front paper news. People at work and on TV are talking about how bad the market is and how much money everyone is losing. Companies are starting to report financial trouble and news people are starting to report companies that you know and use that are filing chapter 11. You are accumulating cash in your accounts and watching your “shorts” make money.

7. The people at work are selling their stocks and mutual funds at a loss. Everyone is blaming everyone else for the failed economy. You should be checking the Junk bond market looking for opportunities such as short term bonds (maturing less than 1 year) selling at deep discounts and yielding over 10%. It is time to start buying. The market is at or near the bottom.


The world economy has a cycle. The stock and bond markets are leading indicators of this cycle. These seven phases may happen as little as 4 years and as long as 20 years. If you pay attention to where you are in these cycles, you can make money by using them to invest in stocks and bonds. Stock prices are depressed at the end of a recession or depression. Junk Bond yields are relatively high compared to other times in the economy. The public is not buying at this time because of the shock of the past stock market disaster. The public generally will not buy Junk Bonds because they have been “brain washed” against them. This is the best market buying opportunity in the economic cycle.

My dog thinks in the present. She only wants food when I have it or she is hungry. She never thinks that she will be hungry next year and how to prevent that. When it comes to investing at the bottom of the market, people never think that stock prices will be higher next year at this time or bond yields will be lower pushing up the price of bonds. At the top of the market, people never think that stock prices will fall a year from now. That is why most people buy stocks when the market has already entered its final phases.

The investor and speculator build their portfolio in the first two years of the Bull Market. At the end of the second year they should be fully invested (over 90% invested). It is hard not to follow the crowd when it comes to the market. But if you think about it, the crowd can’t be right because there is not enough money to maintain a bull market if the crowd is in it fully invested. At the top of the market, it must contract because of it own economic weight. That is why most people lose money in the stock market. Here is why when everyone is talking about making money in the stock market and the TV News Stars are putting it on the 6:00 news, it is time to get out!

At this point, you know that a bear market is coming. You have to prepare for it just like you prepare for a Bull Market. This is when you sell your stock, “short sell” your stock, or buy such things as CDs, Treasury Bill, Money market funds, and things that are highly liquid and does not go up and down in price. (We will spend a full lesson on Short Selling later..)

Then you look for signs that the bear market is just about over. These signs are Junk bonds yielding 10% or more with maturities less than one year. The stock market stops falling in the past 3 months. Everyone is losing their jobs and companies are filing for bankruptcy. This is when you start buying Junk Bonds and as the market start moving up by say 20% since the bottom, you start buying beaten down stocks.

Political Noise in the Financial Markets

Don’t Get Caught Up In Financial Market Politics
　
http://www.brasschecktv.com/page/671.html

This investment expert claims that the financial markets are not as liquid as they have been. He says machines run the markets today, not buyers and sellers. From the video that you just saw, we have several things to keep in prospective;

1) With any asset, only people can place a price on it.

2) Computers or any other machines cannot place a price on assets.

3) Liquidity is the ability to convert investments and other assets into cash.

4) Velocity of Money Circulation is the rate at which money circulates throughout an economy during a particular period, usually a year.

My dog does not value anything except food, seeing me, and taking a walk around the neighborhood. She does not care about what goes on in the news. She has no opinion on Obama, the state budget impasse, or Mayor Reed leaving office. Everyone that I know places a value on things that goes on and everything that they have or what their neighbors have.

Computers place less value on things than my dog. At least my dog will place a value on food, me, or a walk around the block. If people like me stop programming and running programs on computers, these machines would just be another piece of junk in the corner of a room. People program computers to give things value and that value is measured by the programs placed in it by people.

Velocity of Money Circulation is the rate at which money circulates throughout an economy during a particular period, usually a year. Liquidity is the ability to convert investments and other assets into cash. If 10 of my friends placed a value on a book and sold it to each other over a period of 10 minutes, that book would be very liquid in that room and demand a high velocity. But what if I had been trying to sell the book over the past 40 years and in the forty-first year, I found a buyer? This book would not be very liquid and the velocity of money circulating around that book would be very low. Cars usually have a high velocity of money circulating around it. Missiles usually have a low velocity of money circulation around it.

I said all this to say that stocks on the New York Stock Exchange are more liquid than most Corporate Bonds. However bonds sold on the New York Bond Exchange are more liquid than stocks sold on the "Pink Sheets." Most Stocks and Bonds sold on exchanges are more liquid than Real Estate. Know how you want to use your money in the future. Learn how to place future value on things, not project present day value for future sale. For example, the people who bought copying machine stocks in the early 1970s lost money in relation to inflation thinking that in 2008 these stocks would be worth 100 times their value. In this case timing was everything.
So what this man is talking about in this video means nothing to the average investor or speculator.

The moral of the story is listen to what everyone says but know how to determine what is political noise and what you can use in the financial arena. This may sound trivial but knowing this fact could save investors and speculators a lot of time and money in the long run.

My 6 month Report in the Junk Bond Market

Well it has been 6 months since I told the public to rearrange their IRA accounts so that they are buying Junk Bonds or as they say now, “non-investment grade Corporate Bonds.” As many of you have read in the Business Section of such newspapers as the Patriot News, they quoted financial experts as saying that junk bond investing is a risky business. You can do better in the stock market as they would say.

The Dow Jones Industrial Average Index has come back from 8,000.86 at the close of January 26, 2009 to around 9,068.83 at 3:00 PM today, July 24, 2009. That is a gain of 13.25%. If you listen to the experts and you guessed right in picking the right stocks or mutual funds, you could be doing as well as the Dow. I confess I am not that smart. That is why I am not an expert. Instead, I told you, the public, to buy junk bonds, the same junk bonds that I was buying for my own accounts. In six months, my accounts have gone up 27.95%. That is twice what the Dow has done in the past 6 months. Since I buy these bonds in my IRA, I make this money tax deferred. That means that when I retire and I have nothing but Social Security coming in, I will start withdrawing my money at a 15% tax rate.

As my bonds mature, I am buying new bonds. In the coming months, I will tell you what I am buying. But sometimes, under the right conditions, I will buy stock. The conditions in which I will buy stock is now. I use a strategy called, “Buy and Hold, Cost Averaging.” I buy stocks of companies that have been beaten up by the economy and by the stock market. When the stock market is booming and the economy is running at top speed, I sell my stock to the unsuspecting greedy people just coming into the market.

For the past two months, I have been buying Ford Motor Co (Stock Symbol f). As you know, I have been telling you to buy Ford Corporate bonds. Many issues at the time were giving as much as 36% interest. Over the past two months this stock sold for as little as $5.26. Lately, it as been selling for $6.75 to $7.10. The car manufacturing business is cyclical. At the moment, they are seeing hard times. Ford is the only one of three domestic companies that has not been forced into bankruptcy. The stock was as low as $1.43 per share because no one could figure out if all three companies would go under. Remember, in bankruptcy, the bond holder gets paid before the stockholder. So bonds are a safer bet than stocks.

But in the past two months, the smoke cleared a little to where most business people felt that the company will turn around. This is the time to buy and buy over a period of time. My buy range is under $7.00 per share. My sell range is over $14.00 per share for 50% of my holdings. I will sell the rest when Ford cannot keep its car in the show rooms because of the high demand. At that time, the stock should be over $30 per share. At $14.00, I would have taken out my investment. After that, I would only have my profit making more profit.

But keep in mind, when we talk about stocks we are talking about speculation. That means that we have no idea how much money we can make. We have a higher risk of giving your money away. When we talk about bonds, we have an amount that we expect to make and a time when we will have the money. That is called investing. Bonds have less risk than with stocks because bonds are first to be paid interest before stock dividends and return of our investments before stockholders when a bankruptcy occurs.