Bill Strazzullo - Contrarian?

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Contrarian, or not, Bill Strazzullo from Bell Curve Trading is most definitely defensive. If you watch the video you will also hear him say that he expects rates at the long end of the U.S. yield curve to drop “significantly”. Of course a drop in rates means an increase in bond prices. Like him, I am also more concerned about the possibility of a deflationary, rather than an inflationary event, in the shorter term. I also think his suggestion to wait before trying to continue buying on dips is advice that I will take seriously.

How cautious/defensive are you presently? 

Really!?!

The AIG School Of Finance

I like to read the column in the weekend version of our local paper that highlights the funniest jokes from a variety of late night comedians.  It is always good for a laugh.  There is something else that always makes me laugh.  It is the assertion by financial analysts when they say the market just has to be headed higher since we only had the last market bottom as recently as 2009!  Sounds to me like these people went to the AIG school of finance.

That is like saying you have only had one car accident in your whole life, and since it was just last year it is impossible for you to have another one this year!  That was the sort of logic employed by the actuaries at AIG.  The U.S. housing market had trended higher for decades.  A drop in the housing market was all but impossible since it had not happened for so long.  Such an event was an outlier, a black swan event that couldn't be predicted.  

Cause and Effect
But, guess what?  If we don't solve the economic issues that caused our problem the last time around, it is not just likely to happen again, it is guaranteed to happen again.  It reminds me of the very definition of insanity - doing the same thing over and over again, each time expecting a different result!  Despite the level of denial, actions do have consequences.  The markets are no different.  Sometimes sooner, sometimes later, mismanagement, just like corruption, takes it's toll and growth becomes stunted.

Clearly, these are the same people who think the markets are some random event.  To them there is no trend, or pattern.  They see no discernible cause and effect.  There is no logical explanation for what happens.  After all, if everything is random, then clearly, there is no accountability.  Sounds like the case, or lack of it, for global warming.  We can't hold industry and consumers accountable and demand they change their ways since the disappearance of the ice cap at the north pole is merely some random event.

Actions and Consequences

To think that our problems were not of our own doing does not change the fact we actually do have to do something to fix the situation.  The idea that if we ignore it long enough, it will just go away, is irresponsible and just plain wrong.  I raised my own children to understand that actions have consequences.  I know the rich and powerful have grown to believe they are above the law, and therefore beyond any consequences stemming from their actions.  Those would be dangerous assumptions.  I believe that if I do wrong by someone, the consequences I later face may not necessarily directly involve the person whom I had wronged.

Be careful who you trust with your money - especially your life savings.  Stupid excuses, denial, lack of accountability, failure to learn from mistakes, unwillingness to face consequences - clearly this is an industry, one even supported by our politicians, that should be asking itself why anybody in their right mind would want to have anything to do with any part of it.  I don`t find it surprising so many people want nothing to do with the stock markets.  They are voting with their feet, and vowing never to return.

A Better Method

Myself, I think that is a little extreme.  Instead, we need to make people accountable.  Together, we need to work on new win-win solutions in place of the old win-lose approaches.  We need education to replace misinformation, but when I hear that we can't be headed into a recession because we just had one, it makes me stop and say, "Really!?!"

Have you heard any financial/economic stories in the media that were so ridiculous they made you laugh?     

Is It Time To Sell?



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Dollar Cost Averaging
Rather than Buy and Hope, I mean Hold, I use the 200-day moving average to guide me in my investing decisions.  This has not always been the case.  There have been too many times in my past where I didn't know about things like moving averages.  Having money to invest meant dollar cost averaging into the market by tossing in set amounts of money at set intervals.  While this tends to average out over longer periods of time, I began to learn about a better approach.

First, why hope for average returns, when you can do much better?  Second, nowhere is it written that we must be fully invested all of the time!  Of course, this is total heresy in the eyes of the financial "experts".   Still, repeat after me, "Buy and Hold is, first, a marketing strategy, rather than an investment strategy".  Sorry, I digress.

200-Day Moving Average
My own research and my own experience going back decades, suggests that bad things happen in the markets after prices fall below the 200-day moving average.  Sure, things can go wrong when prices are above the 200-day moving average, but catastrophes can be avoided by stepping aside when below that level.  Did you know the largest single day price drops in the stock markets came after prices had declined below the 200-day moving average? 

Program Trading
If it was true in the past, it is likely even more so, today.  Large fund managers employ something called program trading where large numbers of transactions are executed by computer according to predetermined conditions.  I'm guessing, but I would bet dropping below a 200-day moving average is one of them.  Wikipedia suggests that in 2006, program trading accounted for between one third and one half of all trading on the New York Stock Exchange every single day!

Good News; Bad News
So, am I suggesting we should sell everything and wait for a better day?  First, I will remind people that I am not qualified to make such recommendations, but I will tell you I have taken my profits long ago.  For people still in the market, however, there are some encouraging signs.  Daily charts are in oversold territory which means we should see a bounce higher, and the S&P500 Index and the Dow Jones Industrial Index have not crossed their 200-day moving averages.  Neither has the commodity index.  However, there are no guarantees.  As long as a stock we own, or the TSX, in general, is below the 200-day moving average, there is a greater chance of negative surprises. 

I know there are just as many people out there who believe these conditions make great buying opportunities.  That is what makes a market.  Buying on the way down is great when it works; not so much when it doesn't.  Me, I am into capital preservation.  I'll hold onto my cash for other future opportunities, thank you.

As always, I welcome others' thoughts on this, and other topics, even if they are different from my own views.  What do you think?

Social Media

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What do you think?  Is social media technology evolutionary, or revolutionary?  Will it force corporations, including those in financial services to change?  Why or why not?

Margin

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I blogged earlier about the decrease in stock market volume since the market bottomed in 2009.  While I find the lack of market breadth a little disconcerting, it is by no means a signal the markets are about to crash.  When I found this chart regarding margin, all I could do is shake my head.  First, you and I are paying through the nose for fuel to get to work, and to get from point A to point B, in general.  We saw recently when they hiked the margin requirements for silver, that the price corrected substantially as managers had to raise cash to cover their debts.

How can the regulators not see the affect excess margin is having on the price of fuel?  Given the relatively large amount of margin, it is not difficult to imagine what it is doing to prices.  The chart comes from Doug Short's website http://www.dshort.com/, and is compiled from data that is readily available.

While I am troubled by the regulators refusal to do anything that might have a negative affect on the banks' ability to generate commissions from orders bulked up and on steroids from the application of margin, what concerns me even more is the fact we (fund managers, actually) are leveraging up to the degree that we have only seen twice before, and each time the unwinding of it crashed the markets.

If that wasn't enough, consider that all this leverage is in the hands of fewer and fewer players!  Yet another thing that doesn't feel right about this so-called recovery.  Why do I feel like I am experiencing deja vu all over again?  How about you?

May Portfolio Update

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My portfolio gains in the month of May came primarily from energy stocks during the second half of the month.  After reaching a peak early in March, prices for energy companies came back down to the 200-day moving average and may have put in a bottom.

Bonds began their usual summer rally early this year.  20 year plus U.S. Treasuries bottomed in February.  It remains anybody's guess whether we will see a significant pullback as a good entry point before summer's end.

Meanwhile gold seems to be the only thing showing promise, currently, as most sectors continue flat, or trending down.

Five month return for TSX @ May 31, 2011 = 2.88 percent
Five month return for Basic Timing Model using XIU = 2.27 percent
Five month return for Advanced Timing Model (my returns) = -3.76 percent
Money for charity = $411.27