Saturday, January 26, 2008

Banned From Church

Banned From Church

Reviving an ancient practice, churches are exposing sinners and shunning those who won't repent.
January 18, 2008; Page W1

On a quiet Sunday morning in June, as worshippers settled into the pews at Allen Baptist Church in southwestern Michigan, Pastor Jason Burrick grabbed his cellphone and dialed 911. When a dispatcher answered, the preacher said a former congregant was in the sanctuary. "And we need to, um, have her out A.S.A.P."


Half an hour later, 71-year-old Karolyn Caskey, a church member for nearly 50 years who had taught Sunday school and regularly donated 10% of her pension, was led out by a state trooper and a county sheriff's officer. One held her purse and Bible. The other put her in handcuffs. (Listen to the 911 call)

The charge was trespassing, but Mrs. Caskey's real offense, in her pastor's view, was spiritual. Several months earlier, when she had questioned his authority, he'd charged her with spreading "a spirit of cancer and discord" and expelled her from the congregation. "I've been shunned," she says.

Her story reflects a growing movement among some conservative Protestant pastors to bring back church discipline, an ancient practice in which suspected sinners are privately confronted and then publicly castigated and excommunicated if they refuse to repent. While many Christians find such practices outdated, pastors in large and small churches across the country are expelling members for offenses ranging from adultery and theft to gossiping, skipping service and criticizing church leaders.

Dave Krieger/Getty Images
Hear an interview with Doug Laycock, a professor of constitutional law at the University of Michigan, about the legal implications of church discipline.
Hear the 911 call made by Pastor Burrick.
* * *
Timeline: View a brief history of shunning and excommunication.

The revival is part of a broader movement to restore churches to their traditional role as moral enforcers, Christian leaders say. Some say that contemporary churches have grown soft on sinners, citing the rise of suburban megachurches where pastors preach self-affirming messages rather than focusing on sin and redemption. Others point to a passage in the gospel of Matthew that says unrepentant sinners must be shunned.

Causing Disharmony

Watermark Community Church, a nondenominational church in Dallas that draws 4,000 people to services, requires members to sign a form stating they will submit to the "care and correction" of church elders. Last week, the pastor of a 6,000-member megachurch in Nashville, Tenn., threatened to expel 74 members for gossiping and causing disharmony unless they repented. The congregants had sued the pastor for access to the church's financial records.

First Baptist Church of Muscle Shoals, Ala., a 1,000-member congregation, expels five to seven members a year for "blatant, undeniable patterns of willful sin," which have included adultery, drunkenness and refusal to honor church elders. About 400 people have left the church over the years for what they view as an overly harsh persecution of sinners, Pastor Jeff Noblit says.

The process can be messy, says Al Jackson, pastor of Lakeview Baptist Church in Auburn, Ala., which began disciplining members in the 1990s. Once, when the congregation voted out an adulterer who refused to repent, an older woman was confused and thought the church had voted to send the man to hell.

Karolyn Caskey was expelled from Allen Baptist Church after clashing with the pastor.

Amy Hitt, 43, a mortgage officer in Amissville, Va., was voted out of her Baptist congregation in 2004 for gossiping about her pastor's plans to buy a bigger house. Her ouster was especially hard on her twin sons, now 12 years old, who had made friends in the church, she says. "Some people have looked past it, but then there are others who haven't," says Ms. Hitt, who believes the episode cost her a seat on the school board last year; she lost by 42 votes.

Scholars estimate that 10% to 15% of Protestant evangelical churches practice church discipline -- about 14,000 to 21,000 U.S. congregations in total. Increasingly, clashes within churches are spilling into communities, splitting congregations and occasionally landing church leaders in court after congregants, who believed they were confessing in private, were publicly shamed.

In the past decade, more than two dozen lawsuits related to church discipline have been filed as congregants sue pastors for defamation, negligent counseling and emotional injury, according to the Religion Case Reporter, a legal-research database. Peggy Penley, a Fort Worth, Texas, woman whose pastor revealed her extramarital affair to the congregation after she confessed it in confidence, waged a six-year battle against the pastor, charging him with negligence. Last summer, the Texas Supreme Court dismissed her suit, ruling that the pastor was exercising his religious beliefs by publicizing the affair.

Allen Baptist Church

Courts have often refused to hear such cases on the grounds that churches are protected by the constitutional right to free religious exercise, but some have sided with alleged sinners. In 2003, a woman and her husband won a defamation suit against the Iowa Methodist conference and its superintendent after he publicly accused her of "spreading the spirit of Satan" because she gossiped about her pastor. A district court rejected the case, but the Iowa Supreme Court upheld the woman's appeal on the grounds that the letter labeling her a sinner was circulated beyond the church.

Advocates of shunning say it rarely leads to the public disclosure of a member's sin. "We're not the FBI; we're not sniffing around people's homes trying to find out some secret sin," says Don Singleton, pastor of Ridgeview Baptist Church in Talladega, Ala., who says the 50-member church has disciplined six members in his 2½ years as pastor. "Ninety-nine percent of these cases never go that far."

When they do, it can be humiliating. A devout Christian and grandmother of three, Mrs. Caskey moves with a halting gait, due to two artificial knees and a double hip replacement. Friends and family describe her as a generous woman who helped pay the electricity bill for Allen Baptist, in Allen, Mich., when funds were low, gave the church $1,200 after she sold her van, and even cut the church's lawn on occasion. She has requested an engraved image of the church on her tombstone.

Gossip and Slander

Her expulsion came as a shock to some church members when, in August 2006, the pastor sent a letter to the congregation stating Mrs. Caskey and an older married couple, Patsy and Emmit Church, had been removed for taking "action against the church and your preacher." The pastor, Mr. Burrick, told congregants the three were guilty of gossip, slander and idolatry and should be shunned, according to several former church members.

"People couldn't believe it," says Janet Biggs, 53, a former church member who quit the congregation in protest.

The conflict had been brewing for months. Shortly after the church hired Mr. Burrick in 2005 to help revive the congregation, which had dwindled to 12 members, Mrs. Caskey asked him to appoint a board of deacons to help govern the church, a tradition outlined in the church's charter. Mr. Burrick said the congregation was too small to warrant deacons. Mrs. Caskey pressed the issue at the church's quarterly business meetings and began complaining that Mr. Burrick was not following the church's bylaws. "She's one of the nicest, kindest people I know," says friend and neighbor Robert Johnston, 69, a retired cabinet maker. "But she won't be pushed around."

Karolyn Caskey reads her Bible.

In April 2006, Mrs. Caskey received a stern letter from Mr. Burrick. "This church will not tolerate this spirit of cancer and discord that you would like to spread," it said. Mrs. Caskey, along with Mr. and Mrs. Church, continued to insist that the pastor follow the church's constitution. In August, she received a letter from Mr. Burrick that said her failure to repent had led to her removal. It also said he would not write her a transfer letter enabling her to join another church, a requirement in many Baptist congregations, until she had "made things right here at Allen Baptist."

She went to Florida for the winter, and when she returned to Michigan last June, she drove the two miles to Allen Baptist as usual. A church member asked her to leave, saying she was not welcome, but Mrs. Caskey told him she had come to worship and asked if they could speak after the service. Twenty minutes into the service, a sheriff's officer was at her side, and an hour later, she was in jail.

"It was very humiliating," says Mrs. Caskey, who worked for the state of Michigan for 25 years before retiring from the Department of Corrections in 1992. "The other prisoners were surprised to see a little old lady in her church clothes. One of them said, 'You robbed a church?' and I said, 'No, I just attended church.' "

Word quickly spread throughout Allen, a close-knit town of about 200 residents. Once a thriving community of farmers and factory workers, Allen consists of little more than a strip of dusty antiques stores. Mr. and Mrs. Church, both in their 70s, eventually joined another Baptist congregation nearby.

About 25 people stopped attending Allen Baptist Church after Mrs. Caskey was shunned, according to several former church members.

Current members say they support the pastor's actions, and they note that the congregation has grown under his leadership. The simple, white-washed building now draws around 70 people on Sunday mornings, many of them young families. "He's a very good leader; he has total respect for the people," says Stephen Johnson, 66, an auto parts inspector, who added that Mr. Burrick was right to remove Mrs. Caskey because "the Bible says causing discord in the church is an abomination."

Mrs. Caskey went back to the church about a month after her arrest, shortly after the county prosecutor threw out the trespassing charge. More than a dozen supporters gathered outside, some with signs that read "What Would Jesus Do?" She sat in the front row as Mr. Burrick preached about "infidels in the pews," according to reports from those present.

Once again, Mrs. Caskey was escorted out by a state trooper and taken to jail, where she posted the $62 bail and was released. After that, the county prosecutor dismissed the charge and told county law enforcement not to arrest her again unless she was creating a disturbance.

In the following weeks, Mrs. Caskey continued to worship at Allen Baptist. Some congregants no longer spoke to her or passed the offering plate, and some changed seats if she sat next to them, she says.

Mr. Burrick repeatedly declined to comment on Mrs. Caskey's case, calling it a "private ecclesiastical matter." He did say that while the church does not "blacklist" anyone, a strict reading of the Bible requires pastors to punish disobedient members. "A lot of times, flocks aren't willing to submit or be obedient to God," he said in an interview before a Sunday evening service. "If somebody is not willing to be helped, they forfeit their membership."

In Christianity's early centuries, church discipline led sinners to cover themselves with ashes or spend time in the stocks. In later centuries, expulsion was more common. Until the late 19th century, shunning was widely practiced by American evangelicals, including Methodists, Presbyterians and Baptists. Today, excommunication rarely occurs in the U.S. Catholic Church, and shunning is largely unheard of among mainline Protestants.

Little Consensus

Among churches that practice discipline, there is little consensus on how sinners should be dealt with, says Gregory Wills, a theologian at Southern Baptist Theological seminary. Some pastors remove members on their own, while other churches require agreement among deacons or a majority vote from the congregation.

Since Mrs. Caskey's second arrest last July, the turmoil at Allen Baptist has fizzled into an awkward stalemate. Allen Baptist is an independent congregation, unaffiliated with a church hierarchy that might review the ouster. Supporters have urged Mrs. Caskey to sue to have her membership restored, but she says the matter should be settled in the church. Mr. Burrick no longer calls the police when Mrs. Caskey shows up for Sunday services.

Since November, Mrs. Caskey has been attending a Baptist church near her winter home in Tavares, Fla. She plans to go back to Allen Baptist when she returns to Michigan this spring.

"I don't intend to abandon that church," Mrs. Caskey says. "I feel like I have every right to be there."

Write to Alexandra Alter at

Ron Paul and the Lodestar of Liberty

Ron Paul and the Lodestar of Liberty

By Bruce Walker

Ron Paul is not a nut. He is honorable and intelligent. I have talked with Congressman Paul about politics and policies. He is consistent and principled. Much of what he says is true. The Constitution is routinely ignored by politicians of both political parties. Government spending, particularly entitlements, is wildly out of control. The crucial constitutional concepts of federalism and limited government are tacitly denied and this denial is the crux of many of our social and political problems.

But Ron Paul holds the vain hope that American government would return to constitutional law anytime soon, even if he did win the presidency. Congress, the judiciary, legal education, and tradition have imparted momentum to the living constitution school of thought. Bring about an actual return to the Constitution requires more than a snap of the president's fingers. Federal courts routinely "interpret" the Constitution in ways directly in conflict with the plain language of the document. At best, a president can only appoint judges the Senate will confirm and wait for natural turnover.

A lot of persuasion is necessary before Americans (including our elites and their institutions) change their way thinking. We in fact still need a crusade to change hearts and minds more than a candidacy.

And if we are going to return to first principles, remember that the Constitution is not the foundational document of our American experiment in individual liberty. It was preceded by the Articles of Confederation. Prior to the Articles of Confederation, which were adopted after independence, the Continental Congress acted as the original government of the United States and successfully waged a war against the great superpower on the planet with very little real authority. The fundamental principles of American government were established long the Constitution was adopted.

What does matter is the Declaration of Independence. The divine endowment of all people with liberty comes directly out of this document of 1776 and it is to this document that serious friends of liberty should look for inspiration and restoration. And what was the Declaration of Independence? It was, in effect, a declaration of war against the British Empire.

It was not an isolationist document but a universalist document. It speaks, pointedly, to the rest of the world. It talks about the reasons that governments are formed (not just our government.) It was bold, sweeping, and international. And it was seen by the rest of the world as just that: A revolutionary document for all peoples, even if it applied specifically only to thirteen embattled colonies in North American.

Ron Paul wants to return us to the Constitution, as if it were a sacred document which granted us freedom. Our spiritual lodestar should be the Declaration of Independence, which remains a much more dangerous, much more powerful, and much more relevant document to our times.

Some policies Paul proposes are admirable. Why do we still have armies in Germany and in Korea, when both are rich, modern industrialized nations? Why does government have to do so much and why does "government" more and more mean centralized government in Washington? Why have a tax code which punishes productivity and which requires contortionist behavior from business?

But other parts of Paul's policies simply do not fit our age. The notion that we should disengage from the Middle East, for example, suggests that Israel is "just another nation," like, say, North Korea or Syria. The foundation of the Jewish state was based upon the undeniable facts of history continuing, dreadfully, through the Holocaust, that Jews are not "just another people," but are rather a persecuted people who were not welcome when escaping Nazified Europe. Ignoring that is ignoring salient history.

Likewise, the stark contrast between Israel and its neighbors (except, until the last three decades, the successful state of Lebanon) cannot be ignored, and the murderous intent of neighbors who seriously read in large numbers Mein Kampf and the Protocols of the Learned Elders of Zion is also a grim, absolute fact of the modern world. The notion that, on paper, Israel can make peace with these neighbors is not just pure theory, but it is theory which has failed the test of experience.

Paul also seems to doubt that people wish to do America harm because it is America, and that nuclear weapons change everything. Ever since H.G. Wells first used the term "atomic bomb" in his science fiction stories more than a century ago, it has become almost inevitable that true, horrific global war power was inevitable. Happily, America acquired fission weapons and then fusion weapons first. Happily also, America has had leaders willing to use that power to protect our nation and allies who would otherwise be unprotected.

And, as we learned from the Japanese in the Second World War and from radical Moslems today, the calculus of economic benefits and political rights which works very well in moderating and balancing the behavior of most people, simply does not work with everyone. Does anyone doubt that the Japanese would have used the atomic bomb on American cities or that radical Moslems will use thermonuclear bombs on America, if they can, even if it means massive casualties in our retaliation?

Liberty can no longer stand safely behind two vast oceans and decent men can no longer ignore their human brethren after Hitler, Stalin and Mao. As Lincoln today might have said "This world cannot long endure half slave and half free." This was also perhaps the greatest victory of the greatest conservative leader of our age: Ronald Reagan. Congressman Paul might recall the Gipper's Cold War strategy: "How about this: We win; they lose?"

Ronald Reagan, like Abraham Lincoln, understood the supra-constitutional importance of liberty in the fulfillment of America, and liberty to them meant more than just the liberty of American citizens. If the ideal which is America is to survive the totalitarian impulse which we see not only in North Korea and the Taliban, but among the Leftists in our own nation, then we need to recapture the fortitude of Washington, the vision of Lincoln and the clarity of Reagan. If we can do this and preserve the vestiges of the Constitution, fine.

But the vision of America is much more than the Constitution. It is much more than Congressman Paul sees. What Ron Paul proposes is not bad or dishonest. It is simply no longer enough for liberty and decency to survive in America or in the world.

Friday, January 25, 2008

Saving and Investing: The Impact of Time

This is part sixteen in a series that will occupy the “money hacks” slot at Get Rich Slowly during April, which is National Financial Literacy Month.

During the first fifteen days of this video series, Michael Fischer explained the basics of saving and investing, introducing us to stocks, bonds, and compound returns. This week he pulls this information together to show how these concepts affect our investment decisions and our use of credit. He begins by looking at the impact of time:

The impact of time (7:15)

In this video, Michael uses several graphs to demonstrate how long-term investments in the stock market tend to minimize short term fluctuations. Because these exhibits are difficult to see in the presentation, I’ve scanned them from his book, Saving and Investing.

The market’s returns fluctuates wildly from one year to the next.

Even three-year periods show a huge range of returns, from -15% to +30%.

But move to five-year periods, and there are only a few minor dips into negative territory.

At ten years, there’s not a single period that yielded a negative return.

When we look at twenty-year investment periods, the numbers are strongly positive.

At thirty years, we see average annualized returns of 9-14%.

Now you know why it’s often claimed that the market offers a 12% average annualized return. Over the long-term, it certainly does. They key, though, is to minimize exposure to factors that would reduce this return. You can’t do anything about inflation, but you can take steps to reduce taxes and to avoid transaction fees.

Michael Fischer spent nine years at Goldman Sachs, advising some of the largest private banks, mutual fund companies and hedge funds in the world on investment choices. Look for more episodes of Saving and Investing at Get Rich Slowly every weekday during the month of April. For more information, visit Michael’s site, Saving and Investing, or purchase his book.

Jim Cramer: Dow Could Drop 2000 points

Jim Cramer: Dow Could Drop 2000 points

Yesterday Chris Matthews interviewed Mad Money's Jim Cramer.

About 2 minutes, 50 seconds into the interview Jim Cramer says the following:

"The stimulus package doesn’t do anything. … But there is an element – there is something I would urge all our candidates to think about and our Treasury Secretary. Which is that there are a group of insurance companies that insure all these bad mortgages. And I think they’re all about to go belly up and that will cause the Dow Jones to decline 2,000 points. They’ve got to be shut down and the insurance given to a new resolution trust. This is going to happen in maybe two, three weeks. It’s going to be in the front of every paper and no one in Washington is even willing to admit it. … This is MBIA and Ambac. … Remember Merrill wrote down a lot of stuff the other day and Citigroup. All these companies are relying on insurance to save them. The insurers don’t have enough money. There is also personal mortgage insurance – PMI is a company that does it – MGIC. … If these companies do not have the capital to make good, when they do fall - and I believe it is when – if the government does not have a plan in action you will not be able to open the stock market when they collapse. … No one is even talking about it, other than the New York State’s Superintendent of Insurance. … I have not heard a single politician mention the fact that these major insurers, who have insured $450B of mortgages, are all about to go under."

Supporting Jim Cramer was an article in yesterday's Wall Street Journal - Default Fears Unnerve Markets By SUSAN PULLIAM and SERENA NG. They describe how these "insurance companies" work:

"At the center of these concerns is a vast, barely regulated market in which banks, hedge funds and others trade insurance against debt defaults. This isn't like life insurance or homeowners' insurance, which states regulate closely. It consists of financial contracts called credit-default swaps, in which one party, for a price, assumes the risk that a bond or loan will go bad. This market is vast: about $45 trillion, a number comparable to all of the deposits in banks around the world. … If they default, everyone is supposed to settle up with each other, the way gamblers settle up with their bookies after a game."

It looks like we have a lot more to worry about than how to spend our $800 or $1600 dollars!

Wednesday, January 23, 2008

How market tops are formed

Q&A: Paul Desmond of Lowry's Reports

By Barry Ritholtz Contributor

2/18/2006 9:39 AM EST
Click here for more stories by Barry Ritholtz

Editor's Note: What follows is part I of Paul Desmond's interview with contributor Barry Ritholtz. Tune in tomorrow for part II.

Paul Desmond, president of Lowry's Reports, is known as a "technician's technician." In 2002 he won the Charles H. Dow Award for excellence in the field of technical analysis for his studies on how market bottoms are formed.

More recently, he's been looking in the other direction, studying how market tops are formed. It has been a long time coming: Many years ago, Desmond's firm bought microfiche of The Wall Street Journal for 1920-1933. They laboriously converted the printed stock tables into digital form -- that's all market activity for every operating company stock listed in the stock tables, including the opening and closing prices and high and low volumes. From this unique data source, Desmond analyzed the 14 major market tops from 1929 to 2000, trying to identify similarities. His findings are startling and impressive.

Let's talk about bottoms a little bit because I recall reading a paper that you did that won the 2002 Charles Dow Market Technician Association award. The study on 90% downside days.

Yes. I had been reading a great deal of material about what market bottoms looked like. And one of the people that I happened to be reading was a fellow named of S. Gould, who talked about a classic market bottom in which he assumed it all occurred in a single day. That the volume was very heavy in the morning on the down side, that is stabilized in midday, and then by the afternoon, it was again rallying strongly again on substantially expanding volume. I simply went back through our history -- which extends back to 1933 -- and I was looking for those classic bottoms as Gould had defined them. I found very few, maybe one or two cases that fit his definition. But it became apparent to me that what he was talking about was an idealized situation and not actual experience.

So I went not only through his work, but through a number of other people's work where they were talking about what a market bottom looks like. I could not find any of them that really worked or fit preconceived notions. So we started looking for some pattern that would help us to identify a market bottom. We knew that the most important consideration of a market bottom was panic; the final step in a downtrend is that investors panic and throw in the towel. They want to abandon the stock market without any consideration of the value of their portfolios.

The classic expression is, just get me out, I don't care about the price, I gotta make the pain stop.

That's exactly right.

Looking at 1987, many people generally think that that was a one-day wonder to the downside -- that it was a one-day debacle. But I've looked at the month before and saw a big build-up in volume and a pretty hefty decrease in price before that single-day crash. How did you find 1987 to be, compared to other bottoms?

Well, the panic stages of it occurred in three particularly important days. The first one was on the 13th of October, a Wednesday. And then the 14th was a Thursday, and that was a 100-point downside day. Now at that point, a 100-point downside day then was something very spectacular. The 14th was a 100-point downside day on the Dow and it showed intensity, and that is where we had our major sell signal on the 14th for October. Then Friday the 15th, the market also dropped 100 points. So, to have two back-to-back 100-point downside days was pretty spectacular. Then on Monday morning, the 19th, the real crash, the 500-point drop, occurred. Now that was 90% downside day, which showed that there was real panic. (Editor's note: Lowry's defines a 90% downside day as a session with 90% downside volume in conjunction with 90% downside price action, meaning 90% (or more) of the price movement of all stocks on a given exchange is lower.)

I'm looking at a chart of October '87, and the Dow was about 2700 in the beginning of the month. Before we even got to that Wednesday (the 13th), the Dow was down to 2500. The volume really started ticking up on that 13th, 14th, 15th. The 19th and 20th were both the biggest-volume days of the selloff.

That's right. Actually, the interesting thing about 1987 is that most people incorrectly say 'it just came out of nowhere.' That the market was going up one day and suddenly crashed. And yet, we had a whole series of classic warning signs that the market was weakening. For example, the advance/decline line, which is a simple measurement of the number of stocks going up vs. the number of stocks going down, topped out in early April of 1987, showing that that was the point in which the largest bulk of stocks was starting to peak in price.

Our buying power index, which again is the measurement of the amount of buying enthusiasm present in the market, topped out in late March of 1987. From that point on, the market was still going higher but was doing so with less gas in the tank, so to speak. And also we run an index called the selling pressure index that measures the amount of selling activity present in the market in any given time, and that was in a strong uptrend pattern, particularly starting in early August. And during that last rally attempt -- the failed rally attempt in early September -- the buying power index was dropping at a very rapid pace and the selling pressure index was rising at a very rapid pace, showing that buying enthusiasm had really been lost and that the sellers were trying to dump stocks as quickly as they could. That all occurred almost two months ahead of the actual break in prices.

Not Your Father's NYSE

A question that has come up about your work is how are your buying power and selling pressure calculated. Is it proprietary, or is it something that anybody could find in the daily market data?

Well, it is proprietary in the sense that Coca-Cola is proprietary (laughs). In other words, you can look at a bottle of Coke and it will tell you exactly what the ingredients are, but they won't tell you how they cook it.

Without giving away the secret formula, what goes into your buying power and selling pressure indexes?

Well, the buying power index is a measurement of demand, based on the law of supply and demand. So the ingredients that go into it are upside volume and what we refer to as points gained. Points gained are simply a very simple calculation of the amount of price change in every stock that advances for the day.

And you only count operating companies, not closed-end funds? Or bond funds, REITs, things like that?

We do now. Back in the 1980s and so on, there were not the distortions in the listings on the New York Stock Exchange that there are today.

In fact, you recently said we should not be calling it the NY Stock Exchange. More than half of the companies actually aren't operating companies -- now NY 'Fund' Exchange is more like it.

Yeah, that is the thing that most investors are not aware of. That more than 52% of all the issues traded on the NYSE are not domestic common stocks. They are made up of closed-end bond funds. So those are issues that are actually bonds trading on the NYSE. There are real estate partnerships, REITs, a lot of ADRs and foreign stocks that don't necessarily represent our economy. For example, back in the days when the Japanese market was in an incredibly strong uptrend pattern, the ADRs such as Sony listed on the NYSE were creating quite a distortion, showing strength in our market that was really a reflection of strength of the Japanese market, rather than the U.S. market.

As we saw this tendency of the NYSE to list more and more issues that were really not domestic common stocks, we felt the need to create a series of computations that excluded all of the things that could be considered to be distortions. So what we run our analyses on is what we call our operating companies-only statistics. For that, we create upside volume, downside volume, points gained or lost, advances and declines, new highs and lows, and a whole series of other indicators as well.

It sounds somewhat similar to the Trin or Arms index, in a way, what you are actually looking at.

Well, the Trin Index or the Arms Index is based just on the advances and declines, and that index to my knowledge, the last time I talked to Dick Arms, was based on the traditional advance/decline numbers as are found in The Wall Street Journal that do include all of these potential distortions that I was talking about. So to my knowledge, Arms has not ever gone back and redone their indicators because of these things. In fact, the last time I talked to Dick about it, he said that he had done some studies and felt comfortable that the distortions were not significant enough to worry about.

But what we have seen in some instances -- one of the classic instances occurred in August of 2001, a few months before 9/11 -- in which stocks were in a relatively dull period, in which most stocks were just moving sideways, but all of a sudden, the advance/decline line began to rise sharply. And a number of analysts pointed to that sharp increase in the advance/decline line, and I think it was reflected as well in the Arms Index. They viewed that improvement in the advance/decline line as a sign of strength, a building up in the market ... that would clearly lead to a strong advance. But our operating companies-only advance/decline line at the same time was in a strong downtrend pattern, precisely the opposite direction of the conventional advance/decline line. So it was pretty clear that the difference between the two was primarily bond funds and foreign issues. But when we looked at foreign issues, foreign issues weren't doing anything particularly strong. So the improvement in the A/D line [at that time] was coming primarily from bonds -- and not from stocks.

Greed and Fear

You mentioned Japan: Do you look overseas? I have been bullish on the Japanese market for a couple of years, but I am starting to get a little concerned when I see these up 500-, down 500-type days. Is that a churning top? Is it something to watch? What are your thoughts on what has been going on with the Nikkei?

We don't watch them with the same degree of intensity that we concentrate on the U.S. markets. I have tried on several occasions in the past, dating back to the mid 1970s, when I first got the idea that it would be fun, if not profitable, to be a world-wide investor. In other words, when our markets were topping out, rather than going into defensive position into Treasury bills, wouldn't it be better to find some other market somewhere else in the world? At that time, in the mid-70s, there were very few investors who were really interested in foreign markets.

What we found was that the currency conversions created an incredibly complicated system for investors to keep track of. In other words, there were many cases in which you might have bought into a foreign market and made money in the market but when you tried to bring the currency back into our markets you ended up losing money. So we tended to stay away from the foreign markets because of the currency factor. But the new ETFs, exchanged traded funds that are all -- or a very large number of them -- are dollar-denominated, they make a wonderful way to watch foreign markets.

You are a pure technician, looking at market-derived data. Do you care about things like 'Are rates particularly low?' or what Goldman Sachs has called the Brics countries -- Brazil, Russia, India, China -- and their newfound demand? Did they change the calculus of bottoms or tops? Or is that just background noise?

Well, that's the interesting thing about it. On a fundamental basis, the fundamental factors are always different in every bull market or every bear market. But the technical factors are based upon something much simpler. They are based on human psychology.

Investors tend to go from periods of extreme depression at market bottoms, to extreme elation at market tops. And there are always a different set of circumstances that help boost that change in psychology. But the range of human psychology remains pretty much the same. And we simply move from panic at market bottoms, fear at market bottoms, and finally we move to greed at market tops. And that is the limit of what technical analysis is really doing -- measuring the psychology of investors regardless of events that may have inspired their bullishness or bearishness.

This is a good a point as any to transition away from talking about bottoms in general, and talking about tops. You recently did an analysis of 14 historical tops of the past century, ranging from 1929 until 2000. One of the things that I find pretty fascinating is the Nasdaq, which was really the dominate index of the 2000 crash, dropped about 78%. And the 1929 crash in the Dow was down a comparable amount. Before we specifically talk about identifying tops, I am curious, how would you compare the 2000 crash to the '29 crash?

Well there are always areas of extreme speculation in any market advance. In the '29 case, the equity market in the U.S. was much simpler, less complicated than it is today. The NYSE was by far the dominate exchange, the Amex was simply a shadow of the New York. All of the technology stocks at that time were listed on the New York Stock Exchange, stocks like RCA and so one. Now, the markets are more complex and we have several places that we have to look. The Amex, for a period of years, developed into what the Nasdaq is today. In other words, the Amex was a place where companies that couldn't qualify for listing on the NYSE went to register. And that is the way the Nasdaq really started out, as initial stocks were just getting off the ground. Now it is still the dominate area for micro-cap companies and therefore an area of extreme speculation.

Editor's note: Tune in tomorrow for part II of the interview, where Desmond discusses his theory that market tops, as well as bottoms, give very, very identifiable signals and offers his thoughts on the current environment.

Editor's note: In part I of Barry Ritholtz's interview with award-winning technician Paul Desmond of Lowry's Reports, Desmond discussed his research identifying market bottoms. Today, he talks about a more recent analytical paper that looks at how to identify market tops:

I just got an email from a friend who I had pinged before and mentioned I was speaking with you. He writes: 'Tell him I loved his early work with the Dave Brubeck Quartet.' I don't know how many times you've heard that joke.

(Laughing) Oh, many, many times, yeah.

OK, all kidding aside, let's talk a little more specifically about your most recent paper analyzing market tops. You've put forth the idea that markets at tops give very identifiable signals, that markets can be timed, that "buy-and-hold" really ignores a lot of information that comes at you. Is that a fair statement? .

Yes, it is very fair. I think the problem is there are an awful lot of investors who will say you can't time the market.

Well they are saying 'they' can't time the market. They're not saying 'you' can't time the market (laughs).

'They' can't time the market. And I think what they are doing is looking at fundamental information. And if you are looking at fundamental information, I think you are absolutely right. You cannot time the market off of fundamental information, because the stock market operates off of expectations as to what is going to happen six months or nine months down the road. In other words, investors don't buy stocks because of what they know today. They buy because of what they think they are going to know six months or nine months from now. So the market is always ahead of the economy. And as a result, if you are trying to look at fundamental information, you are always too late.

If you look at technical information, you can see signs of changes in investor psychology that are consistent from top to top. And that's what this study that we just did shows very clearly, is that there is an extremely repetitive pattern that occurs at major market tops, and that pattern is one of selectivity.

Meaning the market becomes increasingly narrow as it progresses?

Exactly. There is a process that goes on from day to day, when investors begin to run out of money. They've invested everything that they've got to invest, and therefore they are out of the game of buying stocks. At that point, they are simply holding, expecting the prices will go higher.

Let me ask you a question about that, though, because the counter argument would be: Well, people get paid every other week, and they are making contributions to 401(k)s and IRAs. These days, there is some $3 trillion in money market accounts. Do they ever truly run out of money or is it more a matter that the sentiment begins to shift?

Sure. Well it occurs at a whole series of different levels. For example, some investors simply invest everything they've got and they're out of money. Others will look at stocks and say, you know, I was enthusiastic about it when it was $20 but now it is $60, I'm not so enthusiastic. Others will say, my wife wants to take a vacation, so I have to spend the money on a vacation instead of investing in stocks.

Whatever the reasons are, the enthusiasm for continuing to put money into stocks begins to fade. And as it fades, the demand side of the equation diminishes, but the selling side begins to pick up, so sellers then are dominating in the market, and that is what tends to send prices down.

And this is not the way we tend to see bottoms, like a 90% downside day. Tops are really processes, while bottoms are a specific point?

Exactly. The major emotion that's present at a top is one of complacency, where people are fully invested in stocks, or are invested as far as they are going to get, but they are convinced that prices are going to keep going forever, and therefore they are willing to ignore the initial market declines that come along from time to time. As they say, they are 'in for the long term.'

At market bottoms, you have a completely different pattern in which the dominate emotion is fear and panic. And what we found at market bottoms, for example, was that in a typical major market bottom, you see a series of 90% downside days, 90% of all the volume, 90% of all the price changes are on the downside. Now the interesting thing that we found was that you can have a whole series of 90% downside days. During the 1973 and 1974 bear market, there were 15 90% downside days.

Over how long a period of time?

Over about 15 or 16 months.

So you don't necessarily buy the first 90% down day.

No. And that is the really critical point about market bottoms, is that you can have signs of panic-selling and it doesn't really mean anything. The only thing that will turn a market around and head it higher, is when buyers are wiling to step up to the plate and begin to buy.

The real signal of a major market bottom is to first see a series of 90% downside days, which say, investors are panicking, and in their panic, they are exhausting the desire to sell, because everybody that wanted to sell will have done it. But the key ingredient is to watch for a 90% upside day, indicating the prices have dropped low enough.

So you were saying the first 90% up day is a sign that sentiment has shifted dramatically.

That's right.

And is that a buy signal?

I think the history of this indicator shows that if you were to wait for a series of 90% downside days followed by a 90% upside day and bought after that 90% upside day had been recorded, typically you would be buying at major market bottoms.

Top of the Charts

Let's focus on the tops. We talked a little bit about breadth and we talked about how a top is a process, unlike the bottom being more or less a point. If investors are a little concerned, what should they specifically be looking for in order to see signs of a market top?

Well, if we were in the fall foliage season prior to winter, what we would tend to see in the trees up north, we'd start to see leaves dropping off the tree one at a time. And the stock market is very, very similar, that as you get into the latter stages of a bull market, individual stocks tend to peak out and begin to drop into their own individual bear markets, while there are still a lot of stocks continuing to advance.

As the bull market becomes more and more mature, a greater number of individual stocks tend to fall off the trees, so to speak, and drift to the ground, whereas the investment community is not watching the leaves, they are watching the indexes. They say, 'gee, the Dow Jones Industrial Average has made a new high today.'

Let's talk about that. You recently gave a presentation to a room of professionals where you asked them a series of questions. You were surprised by them, and they were surprised by what you told them. Would you talk about that?

Well, I had a group of professional portfolio managers that we were addressing, and I wanted to tell them about this new study that we had just done. And I asked them, 'What percentage of stocks would you expect would be making new highs at the top day of the bull market?' In other words, when the Dow Jones was making its absolute high, what percentage of stocks were also making new highs?

I asked, 'How about 80%?' and there were a lot of hands. Then I said, 'How about 70%?' and there were a slightly smaller number of hands. 'How about 60%?' and smaller number yet. And I think I took it down to about 50% or so.

And I said, 'would you believe 6%?' There was this complete silence in the room. Of the 14 major market tops, between 1929 and 2000, inclusive, when the Dow Jones Industrial Average reached its absolute peak, the average percentage of stocks also making new highs on that day was 5.98%.

How about within a few points of their highs?

Well we also looked at stocks within 2% or less of their highs. That number was 16.88% on average for these 14 occasions. Now those numbers range significantly, the lowest point was 6.23% up to a high of 22%. But that still meant that 80% of stocks were not making new highs at the same time the Dow Jones Industrial Average was at its high.

And you also point out that a significant number of stocks not only were not make making highs but had already dropped more than 20% from those highs.

Yes, that's right. On average, the number of stocks making new highs along with the Dow was 5.98%, but the number of stocks that were off 20% or more from their highs was almost 22%. And in the 2000 case -- which I thought was particularly interesting -- as the Dow Jones Industrial Average made its all-time high on Jan. 14, 2000, 55.33% of stocks were already off 20% or more from their highs. So that meant that the bear market had really started substantially before, at least many months before, the Dow Jones Industrial Average reached its peak.

Typically, I think most investors have a kind of a dream in the back of their minds that wouldn't it be a terrific trick to have sold out on the absolute top day of a bull market. The bragging rights from that would last a lifetime. But the actual facts are if you were to have sold out on the absolute top day of bull markets over the last 100 years, your portfolio would on average be off probably 10% or more and 20% to 22% of your portfolio would already be off 20% or more -- just as the Dow Jones Industrial Average was just reaching its peak.

Well, after 2000, I'll bet there were plenty of people who would be thrilled to be off only 10% or 20%, given the destruction we saw on the Nasdaq after that.


So, it sounds like this is really a fascinating way not only to look for market tops, but to think about market tops. Meaning that, when the market is actually topping out by these narrow indexes -- be it the Dow, or the Nasdaq -- it really means that a lot of other stocks have already started to fall off the trees, as you suggested. And the highest profiled, best-known stocks are the ones that are continuing to go up, and that is reflected in both the breadth data and the new 52-week high data. Is that a fair way to describe it?

That is exactly right.

To an individual investor who may be reading this, is there an indicator they can follow? The dominant theme of the chatter seems to be pretty bullish lately. If people want to know if the market is in a topping process, what would you suggest they look at? Meaning, what would you advise someone's mother-in-law? When do they throw in the towel and wait for a sunnier day, to mix metaphors?

I think the first thing an investor has to do is realize that when the news gets so good, that it just can't get much better, that that is the time to look out, to be careful. Major market bottoms are always surrounded by enormous amount of bad news, and yet that is the right time to be buying.

You have to be willing to buy in the face of bad news. By the same token, at market tops, the news is dominated by good news, and that is the time to watch out because if the news can't get any better then all it can do is get worse.

How would you describe the news environment we are in? I thought the news was pretty cheery in the fourth quarter, but we have started to see some cracks in the facade this quarter.

Well, I think generally the news is pretty positive. People are convinced that the Feds are about to stop raising rates, the unemployment numbers are down substantially and the politicians are out promoting the idea that the economy is stronger than it has been for a long time. And generally the news is good.

Outside of the geopolitics out of Korea, or Iran, or Iraq, or Israel, or Russia or China, but domestically, you think generally the tenor is pretty positive. If that is the case, what are you seeing in terms of the advance/decline line? What are you seeing in terms of new 52-week highs at this point?

Well, number one, one of the things you want to watch as a long-term indicator is the number of stocks reaching new highs. And usually that is recorded in the paper as new 52-week highs. And that indicator reached its peak back in July of 2005 and has been diminishing since that time.

Now that is your proprietary operating company [list] , and not the full NYSE?

Yes, that is right. But even [with] the full list of NYSE-traded stocks, we show pretty much that same pattern. Distortions will come in periods like now where bonds are tending to be a little bit stronger than they were from time to time. But still even with the unadjusted numbers, the number of stocks making highs peaked quite some time ago, and each rally since then has tended to be a little weaker than the previous rally. So we made two peaks in January that were about 150 new highs per day, whereas those numbers in July of 2005 were in the 225 range. So you see they have dried up substantially and we think they are going to continue to do that. I was looking at [Tuesday's] data a little bit earlier, and whereas we had been running several hundred stocks making new highs per day, today we have 103.

As we are speaking [on Tuesday] , we are up 140 on the Dow. Are you suggesting, considering the strength of today's pop -- the Nasdaq is up over 1%, straight across the board, the NDX, the S&P, the Nasdaq, the Dow, they are all up over 1% -- that we are seeing a modest amount of 52-week highs, given that across-the-board strength?

Absolutely. Yes.

So according to your analysis of bull-market tops, where do you think we are in the cycle. Are we close to the top, getting near the top? Weeks or months away? What's your general take, without scaring the bejesus out of everybody?

We are well in the process of forming a top, but we are not to the final stage of this thing yet.

If we were to measure the final top, based on the Dow Jones Industrial Average, -- which is not the best way to judge a bull-market top -- it is very possible that the Dow has not made its final high yet.

This past week, we took a look at the Dow Jones Industrial Average stocks, the 30 component stocks of the Dow, and what we found was that there were, based on our way of analyzing individual stocks, three of the 30 stocks in strong uptrend patterns -- just 10%. And 20 out of the 30 stocks were in well-defined downtrend patterns. So you can see the selectivity that is present there, with 3 of the 30 stocks in uptrends, 20 in well-defined downtrends.

That same type of selectivity is occurring across the broad list [of stocks] as well. Not to the same extent, but it is occurring. And so we think that it is possible that the final highs in the major market averages have not occurred yet, but that a lot of individual stocks have already rolled over into their own bear markets.

Now investors generally don't buy the market averages, they buy individual stocks. So what we are telling people is that you have got to be watching your own individual stocks at this stage of an old bull market. What you should be doing is holding onto the strongest issues in a portfolio but culling out any stocks that are failing to participate in rallies. So for example, today, an investor ought to be going back through his portfolio and saying, 'Well, the Dow was up 140 points today, did my stocks participate?' And if they didn't, that might be a sign that for that individual stock, the bull market is at or near its end and greater caution should be taken in holding onto to those kinds of stocks.

Let me personalize this a little bit, [in] your own retirement account ... are you still primarily long? Have you moved to cash? What are you doing personally?

I tend to use ETFs more than individual stocks, because my job is to take care of my clients' portfolios rather than my own, and ETFs make it much simpler to manage portfolios. So I am still heavily invested in mid-cap stocks. Everything else, every other area, I have been out of for quite some time.

So I can assume you are not buying into, 'Hey, this is the year of the big-cap?'

Oh, no. We have heard that repeatedly.

Five years running.

But when we go through and look at the evidence of, is there any signs of actual buying enthusiasm present there, what we see is that investors are absolutely ignoring the call to go out and buy big-cap stocks. Investors simply are not moving in that area. And part of that is a reflection of what I just pointed out, with the weakness in the Dow Jones stocks.

Even on a plus-140 point day, you still see, based on the trends of the majority of the Dow, that they are not really looking particularly healthy?

No, they are not looking healthy at all.

Now, I know you don't do forecasting or make predictions. You think that sort of stuff is folly. But the question that I know people are going to ask me is, 'Well if Paul Desmond thinks we are in the process of topping, how much further is this going to go?' How much more time do we have to start culling individual names? Can this process take another year, or are we looking for significant trouble sometime in 2006?

Our expectation is for a sharp decline throughout most of 2006 that may well reach its low sometime around September of October.

The traditional months for those sorts of things.

Yes, those are just the most common months historically, more bottoms occur in the September-October period than at any other time.

I have Jeff Hirsch's Stock Trader's Almanac right on my desk, and they've looked at that data on a calendar basis, nine ways from Sunday, and most people think it is October. September seems to be pretty bad also. So, in terms of positioning, you would continue to stay with mid-caps until they show signs of rolling over.

Well, I think it is entirely possible that we are seeing the start of the rolling-over period now. In other words, this rally that's beginning here in the last two days, will be an important test of strength of this bull market. If the majority of mid-cap stocks do not get back to their highs along with the market averages, then that would be a sign that the mid-caps have started to rollover, and I would be anxious to cut back on my holdings of mid-caps at that point.

So is it safe to say, to go back to your ... New England metaphor: The leaves have already changed colors, we are starting to see leaves drop and it is a matter of time before they all hit the ground. Is that a fair way to describe where you are?

Yes, the important things for investors to realize is that market declines start out with complacency as being the most dominant emotion at that time. And the means that most people are half asleep, and they are just not paying attention. They don't think the markets can go down, so they don't think there is any need be watchful, but that is exactly when an investor needs to be particularly alert. The last stages of a decline, the very last couple of months of a market decline are the most intense, because that is when the panic sets in, and that is when it is absolutely essential that you are already out of the market. You surely don't want to go through that final stage.

So, I am trying to pin you down a little more as to where you think we are in this process. It is apparent that you are concerned and you are cautious and that you think the technicals and the market internals are implying that -- I don't want to say that we are in the ninth inning -- but is it safe to say that we are late in the cyclical bull market within a broader secular bear market, or do you not make that distinction?

I don't make that distinction. I think that those terms tend to block an investor from really clearly seeing what is going on.

I prefer to just concentrate on the idea that about every four years on average we have a setback in the market that typically last for anywhere from nine to 11 months, and prices typically drop in excess of 20% on average. I think that is the major thing to concentrate on. Investors simply have to go back through history and realize there is a very consistent pattern of market bottoms about every four years. You can go back and see, for example, there was a major bottom in '49, '53, '57, '62, '66, '70, '74, '78, '82, '87...

'87 missed by a year, but...

What a miss. Then '90, '94, '98, 2002 and that would lead us four years later to another major bottom in 2006. And I think the consistency of that over many, many, many years simply says that there is a cycle to the stock market, much like the cycle of weather. Every year has a summer and a winter to it. And we are used to that and we adjust to it. At the same time, the stock market has a cycle to it that is about very four years and investors need to realize that that cycle exists and to accept it and adapt to it.

People seem to have a hard time looking at cycles that are longer than they are used to. The day and night cycle ... the full moon, even the seasons are the type of cyclicality that humans very easily conceptualize. But thinking about four years, unless you are talking about presidential elections or Olympics, people don't really think that sort of cycle applies to the stock market.

Well, that is where the old saying comes from: Those who fail to learn from history are doomed to repeat it.

Paul, that is the ultimate point to stop on. Thank you very much for your time.

Tuesday, January 22, 2008

How to Make a Million by Age 65

How to Make a Million

by Mary Beth Franklin,
Tuesday, January 22, 2008
provided by

Strategies for saving at every age.

The road to $1 million starts early, but there's hope, and help, for late bloomers.

Choose your age category below to see how much you need to save each month to accumulate $1 million by age 65. You'll also find strategies to fit retirement saving into the rest of your life.

At age 25, you're starting from scratch. At ages 35, 45 and 55, we assume you already have money in savings on which you're earning 8% annually. Even if you can't save quite this much now, our step-by-step guide will help you set priorities for every stage of life.


You've Saved: $0

To reach one million by age 65 you need to save $286 per month.

Successful Savings Strategies

You're just starting your career, so this is your chance to build a solid financial foundation. Time is on your side.

Contribute enough to your company 401(k) plan to capture your employer match. If you don't have a retirement plan at work, fund an IRA.

You'll be investing for 30 years or more, so you can afford to keep 100% of you account in stocks.

Pay down credit cards and other high-interest debt. That will free up money to save for a house.

Set up an emergency fund equal to three to six months of take-home pay. Stash it in a readily accessible account in an online bank that pays interest of 4% or more.


You've Saved: 0$

To reach one million by age 65 you need to save $671 per month.

If You've Saved: $50,000

To reach one million by age 65 you need to save $304 per month.

Successful Savings Strategies

You may be starting a family or preparing to buy a home. Balance you short-term needs with long-term savings goals.

Although you have added responsibilities, don't neglect retirement.

Aim to save 15% of your gross income (including an employer match in your 401(k). If one parent leaves work to care for the kids, consider opening a spousal IRA.

Shift your assets to 90% stocks and 10% bonds.

Invest in a 529 college-savings plan. Many states offer a tax deduction for your contribution, and qualified distributions are exempt from federal taxes.


You've Saved: 0$

To reach one million by age 65 you need to save $671 per month.

If You've Saved: $50,000

To reach one million by age 65 you need to save $304 per month.

Successful Savings Strategies

You may be starting a family or preparing to buy a home. Balance you short-term needs with long-term savings goals.

Although you have added responsibilities, don't neglect retirement.

Aim to save 15% of your gross income (including an employer match in your 401(k). If one parent leaves work to care for the kids, consider opening a spousal IRA.

Shift your assets to 90% stocks and 10% bonds.

Invest in a 529 college-savings plan. Many states offer a tax deduction for your contribution, and qualified distributions are exempt from federal taxes.


You've Saved: 0$

To reach one million by age 65 you need to save $671 per month.

If You've Saved: $50,000

To reach one million by age 65 you need to save $304 per month.

Successful Savings Strategies

You may be starting a family or preparing to buy a home. Balance you short-term needs with long-term savings goals.

Although you have added responsibilities, don't neglect retirement.

Aim to save 15% of your gross income (including an employer match in your 401(k). If one parent leaves work to care for the kids, consider opening a spousal IRA.

Shift your assets to 90% stocks and 10% bonds.

Invest in a 529 college-savings plan. Many states offer a tax deduction for your contribution, and qualified distributions are exempt from federal taxes.

Copyrighted, Kiplinger Washington Editors, Inc.