What are Financial Markets telling us? (page 1 of 4)

I was recently in one of these expensive Zürich taxis and asked the driver how business was. According to him his income had dropped by about 25% compared to a year ago.

A few days later, I was in Chicago and had a drink in a restaurant while waiting for a friend. En passant, I asked the barman how business was. He replied that it was very quite and down compared to a year ago. Then on the way back to Chiangmai, where for the last few weeks I have been very busy writing, I stopped in Hong Kong for a few days.

As I came out of the hotel, a taxi was waiting on the curb and on the way to the city airport train terminal the driver tried to convince me to take me to the airport instead. Now, normally the fare from Hong Kong to the airport with all the tunnel and highway charges comes up to around $47, but this driver was prepared to charge me only $ 26.

As always, I also spent some time at Hong Kong's night entertainment spots. I have been doing this fairly regularly for the last 29 years I have stayed in Hong Kong, so I have at least some insights into its nightlife. I have never seen Hong Kong's bars so empty. At several place, which up to recently had never offered special prices during the early happy hours prices had been cut by 40%.

I am mentioning this because if you listen to government officials and the majority of economists, the economy is growing and the risks of a double dip recession are believed to be minor. But, when you talk to ordinary people, most of them will tell you that business is sluggish or down. In the case of the US, it seems that the strength of the economy is largely based on the housing and the automobile industry, which in turn owe their vibrancy to extremely rapid consumer and mortgage credit growth.

In the summer of 2000, shortly after the Nasdaq had peaked out, I turned very negative about the outlook for corporate profits, principally based on the poor performance of so many stocks, which by then - even on strong earnings' reports and despite the persistently bullish mumblings by analysts - failed to move up.

In other words, in the spring of 2000, stocks began to decline in anticipation of the corporate profit squeeze that followed in 2001 and so far this year, while the investment community was sleeping the slumber of confidence and self-delusion. I have to admit that I have some reservations about technical analysis, but in general I agree with Joe Granville (the world's most famous technician and market timer in the 1970s) who in his excellent book, 'Granville's New Strategy of Daily Stock Market Timing for Maximum Profit' wrote that, 'news is of little or no value in playing the market game successfully. News is generally for suckers. It misleads more often than it guides.'

Granville added that while news was not important, it was the way the market reacted to the news that is important. If the news is bad and the market acts well in the face of it, that is a bullish reaction and, therefore if one is looking for market guidance one can only get it from the market itself and not the news.

Therefore, I pay a lot of attention to how the market or a stock reacts to specific corporate, economic or political news. If the news about an industry is very good and stocks no longer rise, but decline, then I regard this as an important warning signal. Or if the government and its lackeys continue to make optimistic statements about the economy - such as is now the case and was the case in the 1929 - 1932 and 1973-1974 bear markets - while the market declines I also get nervous about the state of the economy.

Conversely, when all the magazines are filled with negative comments about gold, as happened a year ago and gold shares start to move up, I become intrigued by such market action.