Appendix G - For Concise Edition

This section contains good articles from the full version that I believe you may be interested although some have nothing to do with investing.

G1 Secular bull market is coming!

My definitions

A secular stock market is a prolonged period (about 12 to 22 years) that the market is heading in one particular direction. There have been secular bear markets and secular bull markets depending on the direction of the stock market.

Market cycles exist within a secular market. Market cycles last for about 5 years. The market cycle of 2000-2007 lasts for about 7 years and the current one from 2007-to now for about 7 years so far.

Within a year there are usually two mini market cycles (I call them 5% corrections or dips/surges). The surges provide the best time to sell stocks and the dips provide the best time to buy stocks.

The secular market cycle, market cycle and yearly corrections (also known as mini market cycles) are not scientific concepts. Hence, their average durations are very rough estimates. I use 20 years for secular market cycle for the ease to memorize while 15 could be a better average.

Market Cycle vs. Economic Cycle

Understanding the Market Cycle is important to investors and the Economic Cycle (also known as the Business Cycle) is important to economists and businessmen. Do not be confused with the two. The secular economy cycle usually follows the secular market cycle as indicated in the last 60 years. The economy cycle usually (but not the current one) lags the market cycle by an average of 6 months.

My prediction: The secular bull will start in 2017

Whenever a famous person predicts with any certainty that the end of the world is coming or the Dow will double next year, it is loudly broadcasted over the news. I predict that the next secular bull market will start as early as in 2017. Who would take me, a nobody, and his prediction seriously?

Note: After Obama’s election win, I changed it from 2015 to 2017. It could be postponed further due to the unending wars.

If this really happens, remember you heard it (with legitimate reasons for this) from me first! If it does not happen, check out which ones of my many arguments are wrong and/or any unpredictable event or events have happened.

This is a bold prediction! There are reasons why it might happen and also reasons why it might not happen. I could write a book on this topic but I will spare you the details. However, let us carefully scrutinize the coming events to better clarify my prediction. Act on the prediction otherwise all will be lost! I am not responsible if it does not happen.

Timing is everything even though there is nothing truly considered as perfect timing. But be aware that reacting too early to a secular bull secular market can cost you money, and reacting too late to a secular bull market can miss the profit opportunity. Vice versa for a secular bear market.

Past secular markets

If the market is good, the economy would be good and every person would have a job in theory. Even the poor would benefit from the more generous government benefits and the increased individual generosity. Today, global corporations can hire any worker in any place in the world at the least cost to change the US employment picture.

I have identified the last three secular bull and bear markets (again they are rough estimates):

     Secular bear market: 1960-1980
     Secular bull market: 1980-2000
     Secular bear market: 2000-now

I did not include secular markets before 1960 as those times do not resemble today’s market conditions.

In a secular bull market, every investor is a genius. Most of our stocks rise with the tide in a bull market. With the profits from the market, we spend more on disposable consumer products.

During wars, most sectors fall except those making bombs, jets and tanks.

The cause of secular markets: War or lack of war

What causes the secular markets that usually last for about 20 years? My contribution to this theory is that war is the major common denominator to the secular bear markets. Though I have not read any article that distinguishes it out, I am sure the concept is so obvious that someone would have reached the same conclusion.

In the 1960s, it was the Vietnam War and the effects after this war. Today it is the two wars in the Middle East. Wars cost us a lot of resources. When these resources are devoted to the economy after the wars, the economy would grow.

After each major war, our leaders do not forget the harmful effects at least for a while. They cannot get re-elected with a new war, so there will be no major war for a long while. That’s my explanation of the secular bull market from 1980-2000. After the year 2000, our leaders forgot the harmful effects of wars and history repeated itself.

Wars are the primary cause of a secular bear market and bubbles are the triggers to market plunges. Usually recessions follow market plunges. In 2000, we had the internet bubble and in 2007 we had the housing bubble. With minor exceptions, all bubbles are caused by excessive valuation and they will come back to the average value eventually.

In 2000, many internet companies had no profits or their P/Es were very high (some over 40) from the average P/E of about 15. In 2007, the market housing value was too high due to the availability of easy credit. The only exception of the bubbles is the recent price of gold which does not really appreciate that much but the dollar depreciates. The two wars contribute to its appreciation.

If the government concentrates its efforts on the economy rather than wars, it could detect the bubble earlier before its burst and at least the economy would have had a soft landing rather than the hard landing in 2008. Remind the politicians to avoid any future war and use your voting power to enforce it.

We should have learned from the French before we participated in Vietnam War or the Russians before we did the same in Afghan. We have been dragged many times by Israel to the Middle East wars that we have no business there.

We cannot afford to be the global policeman. Our youths should enjoy their best time of their lives in colleges or new jobs instead of being sent to the front line. The national guards should guard in case of emergency and natural disasters, not to be sent to the front line.

I expect we’ll have a prolonged bull market as early as in 2017 after ending the two wars completely. By 2015 and hopefully earlier, the housing problem should be solved by absorbing the inventory and the Euro crisis should also be resolved. The politicians will not forget the harmful effects from the wars, the secular bull market will hopefully continue for the next 15 to 20 years.

War and lack of war determines the secular market. However, there are many other factors playing an important role. In 1974, the oil crisis made the secular bear market even worse.

Secular bull market could be postponed to 2020

The following events may prevent a secular bull market starting in 2017 and postpone it to 2020 and hopefully earlier:

1. A possible war with China due to protecting Taiwan from invasion.

When the Chinese government cannot suppress the internal unrest and to detract attention of its own inability, it would force itself to invade Taiwan. More likely, a trade blockage would be more effective with the tight economic ties with each other.

2. Another probable cause for a war is the U.S. military backing of Japan and other Asian countries on the disputes of the islands near Japan or the Philippines.

It is illogical to borrow more money from China to contain China.

3. World climate change adversely affects the food supply. If the technology that has improved the production of food in last 50 years did not continue, there would be a famine in poor countries today.

Global warming leads to many problems such as the shortage of drinking water. India would suffer most when China, the owner of the water source in Tibet, would re-direct the water flow for its own citizens.

4. Natural disasters such as earthquakes and hurricanes. California is long over-due for a big one. Japan suffered its worst Tsunami in recent history.

5. Huge budget deficit.

If the government continues to spend unfunded, the prolonged unbalanced budget could never get us out of the recession. In addition, the government’s excessive obligations on generous welfare, social security, Medicare and other entitlement budgetary obligations are growing too quickly and lead to imminent bankruptcy.

The Fiscal Cliff has not really been fixed and we are still too deep into debts. We cannot pass our debt obligations to the next generation forever.

6. The trapped gas and oil could provide us with enough energy for the next 50 years. The successful extraction could accelerate the start of the secular bull market back to 2015.

Conclusion

Be realistic: Re-access these developments and adjust such predictions accordingly. An accurate prediction based on current events would better assess the risk of the market.

I do not suggest staying away from the market until 2017. As before, there will be market cycles within a secular market and yearly corrections. When we are in a secular bull market, we can be more aggressive, and vice versa in a secular bear market.

Statistically, there are three recessions in a secular bear market. Is it coincident? As of January of 2014, there were two so far.

Afterthoughts

· I predicted a market top on April, 2012 within days.

· Signs of an economy recovery:

1. Increase corporate profits.

2. Increase employment.

3. Increase housing starts.

4. Decrease Federal deficit.

5. Increase the growth of GDP.

6. Rising values on some sectors such as consumers, high tech., housing, etc.

As of 1/2014, #2 and #3 seem to be improving. #1 is OK. However #4 is not.

When you borrow money (#4) and use them productively, you can improve #1 to #3. I have strong doubts about this economy recovery.

We’re having a non-correlation in the Economy and the market.

The following information is supplied by my friend Norman.

· Traditional theory would say 20 years secular cycle with 10 years between major pullbacks. The first major pullback was called Capital Crisis (1997-2003). The second major pullback was called Real Estate Crisis (2007-2009). According to this theory, the next major pullback will be 2017 (Capital Crisis).

· In between major crisis are business cycle pullbacks (Kitchen Cycle) approximately 5 years each. These are also called inventory cycles.

It should be noted that these have always existed, even before Capitalism in 1720. During the secular bull market, they are muted by the positive market trend. However, they still exist.

· Norman believes we have started the secular bull market in Jan. 1, 2013. The secular 20 year cycle is based on the generations. The X generation has just moved into old age and the millennials are becoming mid-life consumers--This is a huge generation, similar to the Baby Boomers and demand for everything is going up.

· Nikolai Kondratiev would say the generational economic cycle has 4 seasons. He said it lasted 50-60 years.

http://en.wikipedia.org/wiki/Nikolai_Kondratiev

G2 My Coconut Theory

Coconut Theory

In a tropical island, every one sleeps under a coconut tree assigned to him. He wakes up only when a coconut falls on his head once in a while; he does not have to think when he just wakes up and eats. He eats the coconut and goes back to sleep. He is lazy due to the nice weather (no need to find shelter) and the nice resource (the coconut tree). He is happy and rich by his own standard. However, he is lazy, fat, and stupid due to the lack of any need to work, exercise, and think out of his ‘perfect’ environment.

The worst that happens to the natives is borrowing coconuts from other natives with the coconut tree as collateral or cut down the coconut tree to make a canoe without plans on how to replenish coconuts in the future.

This is a simple theory. It can be used to explain how and why many countries are rich, poor, and continue to be so. Let’s check how this theory stacks up with countries.

U.S.A.

The U.S. is the richest country due to its developed and highly educated citizens, hard-working immigrants and the huge natural resources per capita (i.e. having a lot of coconuts in my theory). The U.S. is declining as we spend more time enjoying our wealth (borrowing coconuts so he can eat more; on credit – living beyond our means!) rather than creating more wealth (i.e. eating up most of the coconuts and not planting new coconut trees in my theory).

The wealth is equivalent to the bountiful of coconut trees that were available originally and the many that were planted by our ancestors. There were fewer natives to consume the total number of coconuts, so there was a surplus of coconuts grown, eventually to be given away (as welfare and entitlements). Are you incentive to plant more coconut trees (work) when you have unlimited coconuts (generous welfare)?

Because of WW2, most coconut trees in the world were destroyed while ours were fine. We were rich to ship our better coconuts to the rest of the world.

God gave us plenty of natural resources, good soil and climatic wealth (coconuts hidden under the land) and hopefully we continue to be wealthy. Unfortunately, we’re now consumers (of coconuts) instead of producers (planting new coconut trees).

Norway

Norway is the richest to its population group (3 millions) while Brunei is richest in its own category. Norway has more money than God because of its long coastal line and its intelligently governed oil wealth, so everything works better there. I hate to compare any country to Norway as most likely we are comparing Apples to Melons.

From its long coast line Norway has rich off-shore oil fields and abundant fish exports which is second in the world-- only 6% of its export, after China but far, far #1 per capita wise. Because of the world's oil addition and food dependence secures its income flow.

Peru has a long coast line, but it is not wealthy. My theory does not apply fully here, as there are always exceptions. It could be Norway’s educated citizens, close location to its trade partners and buying assets around the world (planting more coconut trees). The dividend payments allow Norway to prosper for decades. They have about 600 billion sovereign fund to be shared by 3 million citizens. Simple math!

Iceland

Some smart guys suggested cutting down all the coconut trees to make canoes so they can earn a rich life by fishing. The world loans them with coconuts. When the fishing fails, their land is lost with no coconuts and no coconut trees left. Do not bet all the coconuts in one venture.

Singapore and SE Asia

Singapore is rich due to its important location for the sea route for trade and commerce, as well as being the cultural intersection between the east and the west and its industrious citizens (most are Chinese). When the hard-working folks land on a land of coconuts (i.e. resources), they naturally become rich.

Mekong River is a good resource providing fishing, irrigation, transportation, and fertile land in the delta for SE Asia. Hence, SE Asia should be rich, and at the same time attracts hard-working immigrants from India and China to enhance their wealth.

Japan

Japan has few natural resources. Its only resource is the educated and hard-working citizens. With a decreasing population and the policy not welcoming immigrants, Japan will face problems.

Haiti

Haiti used to have enough coconuts for its small population. French imported African slaves to the sugar cane plantation and changed the allocation of natural resources per capita. Coupled with frequent natural disasters and bad governance, Haiti becomes the poorest country in the world. Corruption in poor countries is natural.

UAE

When the west helped UAE to explore its oil resources (the hidden coconuts under the sand) about 50 years ago, UAE becomes the richest country on earth. She expands in different areas and it could be over-expanded. When the oil dries up in 100 or so years and/or the shale energy competes better, they could be in big trouble.

Russia

Russia is a country full of resources (coconuts). Its citizens become lazy having a good time under the ‘coconut’ tree. Chinese are just the opposite. That’s why the Russians hire the hard-working Chinese to tender farm in the border while they enjoy life with plenty of Vodka J.

The primary reason why USSR fell was the temporary low prices of their resources oil and timber (coconuts). Trying to be #1 was another reason.

China

China has roughly 20% of the world population, but it has far less than 20% of the world resources (coconuts). For example, it has only 6% of the world land area. The situation was worsened in the last 250 years during the Opium Wars, and then semi colonization by the eight countries (helping the opium pushers). It bankrupted China by their colonial masters. It caused massive migration to escape from the land without coconuts. It was followed by WW2, war lord era and then the bad governance. Their bitter lessons ensure this generation and the next generation to work hard and be smart. When they do not have ‘coconut trees’ (the colonial masters cut most of them down), you have to work hard or die.

China ranks #2 in the economy. It is only important to its trading partners. Its own citizens care about their living standard which is about the middle in the rank of all countries.

Ancient civilizations too

Greece, Iran, India, China and Italy are among the oldest civilizations. Most do not do well in today’s economy and many of their citizens have immigrated to other countries. My theory suggests that they have exhausted their coconuts (farm land and metals) throughout the long history. Hence, they have to migrate to lands with more coconuts.

To illustrate, there is a huge discrepancy in natural resources (oil, metal and farm land) between China and the U.S., which has a relatively short history.

Corporations too

Microsoft was a tougher company with more innovations fifteen years ago than today. However, they are enjoying easy profitability of upgrades of Windows and Office (coconuts planted by their ancestors). For a long time, she only has one successful new product, the Xbox. Her managers are counting their bonuses instead of taking risk. The Coconut Theory works again.

Rich families too

It is very rare to have rich families that last over three generations. The first generation grows the wealth (planting coconuts), the second generation enjoys the wealth, and the third or fourth generation usually becomes poor due to the easy life.

Conclusion

So far, no one tells me that this theory has been ‘discovered’ by others. Shamelessly I claim it is mine. To me, it is just common sense.

Afterthoughts

· I did not have a coconut tree (i.e. financial aid or money from my dad), and that is why I worked two jobs in my first summer while attending college here. The first one was a bus boy job from 5 pm to 10 pm. The other one was cleaning slot machines from 4 am to noon for 5 and most likely 7 days a week. Lack of coconut makes you desire to work hard or you die. With an average IQ, I can make it by working hard in a land of coconuts.

My children have too many coconuts and they live in a more lavish life style than the old man. They ask me why I work that hard during my retirement or why I still go to Burger King with a coupon even they do not treat me like a king.

According to Norman, the problem with a small place filled with coconuts is someone would likely to colonize you and steal your coconuts as happened to Norway during WWII. Similar to China about 250 years ago. Once a while, need to cut down one among many coconut trees to make spears to protect the rest of the coconuts.

G3 Education by example

A good economy has to be supported by an educated workforce. We still have the best higher education system in both quantity and quality. Our pre-college education is failing with a high percent of dropouts.

When you find out your store under charged you by $1, do you go back to pay them back?

I do not go back all the way to give it back for two reasons:

1. The store has cheated me before intentionally or unintentionally, so it breaks even.

2. We also need to teach our children to conserve energy. J

Despite the above reasons, I’ll go back to set up an example for my children. The primary problem with our education system is education should start at home. No matter how much money you throw into the system, it will not work if the students do not want to learn. With so many single-parent and teenage-mother families, I do not see a bright future.

It happens all the time that you have a convict and a doctor in the same class as indicated by this video. It proves my point again that education should start at home.

(http://www.youtube.com/watch?v=Xu1Q0E7oGQU)

Some of our discrimination and biases are passed to our children unknowingly. That will hurt them eventually. Be careful what we talk / act in front of children.

Education by example is the most powerful and most effective, but unfortunately it is the most neglected. It is about time for the politicians resolve our root problems NOT by throwing our money (not their money) recklessly at the problem. Everyone with a first grade education can write a check.

We need to limit the generous welfare for teenage mothers and preach family value to stop the vicious cycle.

Afterthoughts

This short article attracted a lot of feedbacks including myself.

· My elementary class in Hong Kong of 45 students produced one world-known chef, one movie director, one MIT Ph.D., one pharmacist, one doctor… I am the under achiever. Our teachers were not from Hong Kong University (the best there). The incentive to learn is simple: If you do not study hard, you will be a nobody. No one will bail you out. Our average class size is 45, so do not use class size as another excuse.

· We need to select college trainings in the fields that the society or the corporations need. It is a luxury to take a major you’re interested in but is not demanded by the society. I did not have that luxury. However, even though I could not speak English well, I managed to start a professional job as a programmer while some college graduates with perfect English Xeroxed manuals for me.

· The problem of many high school students is the loss of respect for their teachers. You cannot learn from someone you do not respect. I feel bad for the teachers in many urban cities as your lives could be at risk every day and many lose their initial enthusiasm to teach after they face their cruel reality.

Norman added:

My wife taught reform school in Richmond and was threatened several times. Once the girls in her food service class grabbed her and held a pair of scissors to her throat.

· The U.S. college education is a big export. It does not seem to be counted in our GDP and it should be. In addition to the highly–qualified professors, we have the best research (both on equipment, procedures and systems).

The landscape has been changed. Though most professors are still born here for more than one generation, a lot of students are foreigners and the children of the first generation of immigrants. Our high school systems are not graduating qualified students in the same scale as the last generation and foreign countries especially Asians are catching up and some are even passing us.

· Some Chinese students here are tutored by their parents on science and mathematics every night and a lot of students in China go to tutor schools after regular school. If you do not have the dedication of the parents (vs. single parents in many families in the U.S.), you cannot catch up with them. We cannot let your children play video games or watch TV all day long.

· 'Leave no one behind', 'Race to the top', 'No homework '... are just ideals and bear no fruits in the real world except for the big-mouth politicians.

After our best effort to educate the problem kids, should we still leave them to disturb the rest of the class?

· There is no controversy that Chinese and Indian students are passing the U.S. counterpart in education.

The controversy is: China’s one-child policy gives rise to better education of the next generation. The child is raised by two parents and four grandparents. It is all good as long the child is not spoiled. In addition, the female has a better chance to find a richer, better educated husband due to the gender imbalance. The richer family enables the child to receive better education from the mother and the better school. My theory.

· One guy who was among the top in the unified examination for high schools in Hong Kong drove a bus to make a statement. We need these geniuses to create more jobs such as discovering a new drug to save many lives, not driving a bus.

· Why Mass. is rich? It is due to the large number of high tech companies including those involved in bio tech formed by former researchers of higher-learning institutions such as MIT and Harvard. It proves the point that we need about .5% of geniuses to provide jobs for the mass.

· Robots will be harmful to the employment of the unskilled workers. In next five years, we can see the more replacement by the robots.

Five years ago, robots could not do much. Now, they can do something useful from vacuum cleaners to bionic limbs. In ten years, they can do almost everything like a human being except one task (i.e. reproduce but they can assemble robots).

Robots are still expensive for many jobs today. To illustrate, Apple can assemble thousands of workers to assemble a new product in China. They cannot have that large number of robots and program them in a short time.

· Non-correlation of education and the economy.

Brazil’s booming economy (due to high natural resources including oil) can benefit more with better education and harder working citizens. The education is lacking in Brazil. It gives rise to corruption and widens the wealth gap.

Brazil is one of the major countries participating in today’s globalization. When China slows down, Brazil will feel the pain too.

Philippines has the opposite problem. It has a lot of college graduates working at factories. The economy does not support enough professionals. The poor economy is due to lack of natural resources (or resources to be extracted), long-term corruption, poor governance, etc.

Hong Kongers hire nurses and teachers from Philippines to be their household servants. It appears to be inequality, but actually it reduces inequality.

My Coconut Theory explains partly why it happens.

· More.

http://ebmyth.blogspot.com/2013/11/more-on-education.html

Links

· Click here for Asian education model.

http://tonyp4idea.blogspot.com/2012/10/asian-model-for-education.html

· Stuffs that college do not teach.

http://tonyp4idea.blogspot.com/2012/11/stuffs-school-does-not-teach.html

· Click here for more Afterthoughts.

http://ebnation.blogspot.com/2012/11/afterthoughts-education-by-example.html