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5. William J. ONeil, "Program Trading vs. Investing in a New U.S.," Investors Daily, 10 7/89, p. 1.

6. A contact on the floor of the exchange helps, too!

Chapter 7

1. This information is readily available in the financial section of good bookstores. A good starting point is to buy and study a Series 7 primer, which will give you an excellent broad overview of the mechanics of the marketplace. Your broker can fill you in on the different margin requirements.

2.1 say the "equivalent of" because Dow Theory deals only with the change of the primary trend and secondary corrections in the stock market averages, whereas this definition applies to all markets.

3. On the floors of the exchanges, monitors watch the activity on the floor, and each time the instrument is traded at a new price, they enter the new price, which is then transmitted to the monitor screens on the floor and through wire services around the world. In a "fast market," the activity is so rapid that the monitors cannot keep up with the changing prices, and prints do not reflect price changes with absolute accuracy.

Chapter 8

1. I feel compelled to say that someone who really knows Dow Theory very seldom waits until confirmation dates to take a position. So while Gordon chose the only objective criterion possible to compare Dow Theory to the moving averages, it is my absolute conviction that, day in and day out, Dow Theory is a much stronger predictor of market price movements than is the 200-day moving average.

2. William Gordon, The Stock Market Indicators (New York: Investors Press Inc.. 1968), pp. 28 -39.

3. This is a philosophy which states that the only measure of truth is that which gets the desired result. In other words, the ends justify the means.

4. See New York Stock Exchange Daily Graphs, William ONeil & Co., Inc., P O. Box 24933, Los Angeles, California 90024.

5.1 leamed about this oscillator from Justin Mamis in his pu blication. The Professional Tape Reader, in January 1975, currently published by Stan Weinstein.

6. Gordon A. Holmes, Capital Appreciation in the Stock Market (New York: Parket Publishing

Company Inc.), p. 32.

7. Ibid., pp. 27-40.

Chapter 9

1. A "bubble" is an artful but unsound scheme to raise money which appeals to a desire to get something for nothing. Typical examples are chain letters, pyramid schemes, and deficit financing of govemment expenditures.

2. The Modem Austrian School of Economics was founded by Ludwig von Mises (18811973), who fled Vienna for Geneva in 1934, fearing Austrian capitulation to the Nazis. He came to the United States in 1940 and lived here for the rest of his life. Nobel prize winner Frederick Hayek was one of his many pupils who has had an impact on modem economic thought. The Austrian School advocates pure and unfettered laissez-faire capitalism.

3. Ludwig von Mises, Human Action (Third revised edition, Yale University Press, 1963), p. 10.1 highly recommend that anyone interested in teaming more about the Austrian School read Thomas C. Taylors An Introduction to Austrian Economics (Aubum, Alabama: Ludwig von Mises Institute, 1980). For further information contact The Ludwig von Mises Institute for Austrian Econ omics Inc.,

Aubum University, Aubum, Alabama 36849.

4. von Mises, p. 92.

5. The Random House Dictionary of the English Language, College Edition, 1969.

6. The subjective nature of value, along with the fact that differences in perception of value drive the trade process, seems like a simple concept but was in fact introduced and formalized by von Mises. Adam Smith and the other classical economists thought that trade must be of equal value.

7. Fiduciary media consist of the quantity of bank notes or money certificates issued in excess of hard currency deposits. This is artificially created money.

8. There has never to my knowledge, however, been a totally unregulated banking market.

9. Your checking account is a demand deposit, which means that at any tim e you can go and demand actual currency. Our currency consists of Federal Reserve notes. But think about it-a note is an lOU backed by collateral. There is nothing behind our so called "notes." This is why John Exter, former VicePresident in Charge of Foreign Operations at the New York Federal Reserve Bank calls them "lOU Nothings"!

10. The way the reserve system works and how money is created within the Federal Reserve system are discussed in detail in the next chapter.

11. In May 1989 in China we saw a perfect example, as the guardians of communist ideology flagrantly rewrote history in spite of eyewitness accounts and videotape records of the slaughter in Beijing.

12. I am deeply indebted to the late novelist and philosopher, Ayn Rand, who expounded on these views with greater clarity and precision than anyone before or since. A partial list of her works is included in the Bibliography.

13. Throughout this book, unless otherwise stated, when I use the term "inflation" I mean an increase in the money supply, not rising prices. Rising prices are a result of an increase in the money supply relative to other goods and services on the market. In other words, inflation can lead to, but does not always cause, rising prices.

14. Ayn Rand, "Capitalism: The Unknown Ideal," What Is Capitalism? (Signet, First Printing), p. 17.

15. For a complete discussion of originary interest, see Human Action, pp. 524537.

16. Capital goods can be either goods used in the intermediate stages of production or goods ready for consumption used for sustenance during the pursuit of longer-range and more profitable goals. Both are derived from the application of savings.

17. The concept of time-preference as the driving force behind credit is distinctly that of the Modem Austrian School of Economics and was best developed by Ludwig von Mises in his major work. Human Action.

18. There are exceptions to this statement. Any govemment program which operates on a fee for service basis, such as the Post Office, may operate at a profit and g enerate wealth. In addition, while you cant eat tanks, the profits generated from spin-offs of defense spending generate wealth. But overall, govemment consumes far more wealth than the little bit that it produces, and it produces far more inefficiently than the free market.

Chapter 10

1. Ludwig von Mises, Human Action (Chicago: Contemporary Books, Inc., 1966), p. 572.

2. All the information in the following story is taken from Extraordinary Popular Delusions and Madness of Crowds, by Charles Mackay (New York: Harmony Books, 1980), pp. 1-45.

3. The livre was Frances monetary unit at the time, originally equivalent to a pound of silver. The currency had been devalued, however, through recoinage and deficit financing of govemment expenditures, so that the exchange ratio with the British pound sterling at the time was approximately 24 to 1.

4. Louis XIVs successor to the throne was seven years old, and the Duke of Orleans assumed the regency.

5. The concept of originary interest may at first seem a little bit obtuse. It is. however, an essential economic principle which must be understood in order to understand the business cycle. Basically, originary interest is the subjective foundation for the existence of real interest. It exists in the minds of all individuals and determines their choice whether to consume the product of their labors now or save it for later consumption.

6. A study of the current savings and loan crisis would bring these points to bear in dramatic form.

7. Virtually all banking systems in the world are now fractional reserve systems. I will discuss the nature of fractional reserve systems in detail below.

8. The Federal Reserve System: Purposes and Functions, fifth edition, published by the Federal Reserve Board, 1965, p. 1.

9. Ibid., p. 4.

10. Depository institutions are defined as commercial and savings banks, savings and loan associations, credit unions, U.S. agencies and branches of foreign banks, and Edge act and agreement corporations.,

11. In addition to loaning reserves to lending institutions on a short-term basis, the Fed can also loan money through the discount window to individuals or corporations under certain conditions. These kinds of loans are what is meant by extended credit.

12. The adjusted monetary base is a number calculated by the Federal Reserve Bank of St. Louis consisting of the total of bank reserves plus currency, adjusted for reserve requirement changes and seasonal factors. It is designed to reflect all Fed actions which affect Ml, a monetary aggregate number consisting of currency, travelers checks, demand deposits, and other deposits with unlimited checking privileges such as NOWs and Super NOWs.

13. All data in this paragraph are taken from Grants Interest Rate Observer, April 27,1990, Vol 8, No. 8, p. 5. For further information on this publication, write to 233 Broadway, New York, NY 10279, or call (212) 608-7994.

14. IbidAL

., pp. 2, 5.

Chapter 11

1. Note that, in this case, condition 2 was met before the break of the trend line. There is no ru le which says the 1-2-3 criterion for a change of trend has to occur.

Chapter 12

1. Henry Clasing, The Secrets of a Professional Futures Trader (Brightwaters, NY Windsor Books, 1987) p. 15.

Part II Intro

1. Paraphrased from a conversation with Jim Brown, a broker and asset manager with Rotan Mosle Inc. in San Antonio, Texas.

2.1 use the term "man" here in the general sense, to include both men and women. Maybe someone needs to invent a new noun and and pronoun for human beings as a species, so guy s like me can write accurately without offending anyone.

3. Dr. Karen Homey, Neurosis and Human Growth (New York: W W Norton & Company, 1950).

Chapter 13

1. Bond futures prices move in Y32 increments, so a tick is 1/32 of a point, or $31.25 per contract pe r tick.

2. W. Gaylin, The Rage Within (New York: Simon and Schuster, 1984), pp. 17-18.

3. Ibid., p. 23.

4. Nathaniel Branden, The Psychology of Self-Esteem (New York: Bantam Books, 15th edition, 1969) p. 69.

5. Ayn Rand, The Virtue of Selfishness (New York: New American Library. 1964), p. 28.

6. Ibid., p. 5.

7. By the subconscious, I mean that part of the mind not immediately available to conscious awareness, as opposed to the "unconscious" mind postulated by Freud and others, which has an identity unto itself.

8. Ayn Rand, op. cit., p. 27.

9. The concept of false pride will be discussed in detail in the next chapter. Chapter 14

1. Ayn Rand, The Ayn Rand Lexicon (New York: Meridian, 1988) p. 254.

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