September To Be "Nasty"?

If you are familiar with my blog, you probably know I advocate using the 200-day moving average as a buy/sell signal.  Bad things tend to happen when the market is below its 200-day moving average.  David Mcalvany compares today's markets to 1987 - low volume and high volatility.  The big drop in 1987 came just after the market had sunk below its 200-day moving average (in October).  Currently the markets are above their 200-day moving average, but I do not expect that to continue during September/October.  When that happens, it could be a good sign to take some money off the table, if you haven't done so, by that time.

What would it take for you to reduce your equity portfolio?

Odds Are?

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The closer we get to the U.S. election date this fall, the less likely it is we will see any intervention in the markets by the Federal Reserve.  Recent economic data has been just good enough to forestall any immediate intervention.  In order to not appear as they are meddling in the elections, there is a period of time just prior to that when they have their hands tied.  Few seem to agree, but to me, there is little that the Fed has left to do.  Perhaps many more would agree with the fact that much of what the Fed can do is already baked into the markets.  Regardless of what the Fed might do, the fact is, we are only a couple of weeks away from what, historically, has been the worst month of the year in the stock markets.

Bearishness

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Risk On; Risk Off
My desire in writing this blog is to share my years of experience in the stock market in the hope of helping others to be successful.  My approach has evolved over the years, and continues to, as the opportunities arise.  Currently, I am trading Exchange Traded Funds (ETF's), rather than individual stocks.  Lately, the market has all but ceased trading on fundamentals, and is following some irrational "risk on", "risk off" approach.  ETF's add diversification and more predictability during these highly volatile times.

Nothing To Show
Because of the market volatility I am trying to develop more of a trading methodology, with mixed success.  Since I am not at the point where I feel this would be helpful to others, I decided earlier in the year to share my investing club trades in this blog.  The problem is there hasn't been any trades.  Prior to the end of last year we purchased two inverse ETF's.  One makes money as the Nasdaq goes down, and the other as the TSX goes lower.  We are also holding some silver coins.

Moving Averages
None of those positions in our investing club has proven profitable, year-to-date.  With the exception of the Nasdaq, neither has there been any longer term signals which would justify reversing these positions.  You might know from other posts on this blog that I recommend using the 200-day moving average to manage risk.  The TSX has been below its 200-day moving average most of the year except for a brief high it made at the end of February.

Invest Responsibly
I have three reasons for remaining bearish.  In order to take a responsible and more conservative approach, I am not going to recommend bullish trades to my readers or to members of my investing club while the TSX remains below its 200-day moving average.  While I might take a more aggressive approach with my own personal money by making very short-term tactical trades, sharing those would not be helpful to people who aren't sitting in front of their online investment account all day.

Long Term Trends
Secondly, long term trends are negative.  The deleveraging required to restore government budgets and remove most of the unnecessary  risk in financial markets is going to take years to come.  Demographics will not substantially improve before the end of the decade.  If we look at the U.S. markets they have already reached a peak according to the Elliott Wave theory.  Trust in government intervention is almost all that is currently propping the markets up.  Wait until everyone wakes up to the fact it isn't going to make any real difference!

Head & Shoulders
The third reason is the technical pattern called a Head and Shoulders which the TSX is making.  This is a very bearish pattern which, if we break the horizontal neckline just beneath the recent lows, it could mean a possible return to our 2008/2009 lows.

Cash Is King
I know there is a segment of investors who would scoff at my lack of returns this year.  They would say four or five percent dividend returns is good in this environment.  Those are likely the same people who lost half, or more, of their life savings during the last great recession.  Let's see - four percent upside and 30 percent downside, that is not a bet I am willing to make.  As for not knowing when to get back into the market, I know where that point is, and it is NOT here, except for very short-term tactical trades.  In the mean time, my funds are mostly in cash, thank you very much.

That is my outlook.  Does your outlook differ?

July 2012 Returns

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Seasonality at this time of year favours Energy, Gold, Agriculture and Natural Gas.  The heat wave has done it's part in driving up the price of Natural Gas.  Energy companies and Agriculture have also shown some signs of improvement.  I continue to watch gold closely for signs of a turn-around.  Despite the political rhetoric, I remain unconvinced we have seen the worst in this year's markets. I see opportunities for profitable trades, but am still monitoring the 200-day moving averages closely.  The TSX index remains below it's 200-day moving average while, currently, the U.S. markets seem to have their 200-day moving average as the bottom of a trading range.

19 month return for TSX @ July 31, 2012 = -13.32 percent
Return for Basic Timing Model Using XIU =     8.41 percent
Return for Advanced Timing Model =             -4.36 percent
Money for charity =                                        $0.00

Evil Corporations, Or Corporate Evil?

The Root Of All Evil
An acquaintance of mine believes that the corporation is the root of all that is evil in this world.  Personally, I don't believe corporations are any more evil than nuclear power is.  By that, I mean to say that nuclear weapons are a misuse of nuclear power.  Nuclear power, like the corporation, is not bad in itself.  Whether corporations are good or bad for society depends on the people within those companies.  To say that corporations have no conscience, is to see them only as legal entities.

Life and Death?
Despite all of the hype and war-related allegories, business is not war.  It can be a struggle, but very seldom is somebody literally holding a gun to one's head.  Terrible things happen in war because of the fierce struggle between life and death.  The death of a company is the death of a legal entity.  Sure, real people lose their jobs when a company ceases to exist, but to compare that to people being killed, is, at the very least, an extreme comparison.

Profits
To say the profit motive is the reason "companies" misbehave, is to excuse the behaviour of the people running the company.  Why not just assess a fine to the company for wrong-doing?  Again, to hold the company accountable for the actions of people within it, only shields those people and allows for such bad behaviour in the future.  Worse yet, it passes the real costs onto shareholders (which is why we don't want to invest in such organizations).  Yet, time and time again, I hear the talking heads in the media recommending an investment in so-called sin stocks, for example.  Take the profits and give some to charity, they say.

Trust
I believe in the saying, "If they will do it with you, they will do it to you!"  Apart from the fact nobody is holding the bad guys accountable, these days, I don't understand why companies fail to see the benefit of acting in an ethical manner, and why the media and analysts excuse any such bad behaviour.  Stephen Covey Jr. wrote a whole book on the concept of how much easier (and less expensive) it is to transact business in an atmosphere of trust.  When people don't trust you to do things in their best interest, they tend to need more convincing, and bigger guarantees (and more lawyers).  If people representing a company have no difficulty selling a product which is dangerous to its clients, how much more regard do you think they will have for outside investors?

By The Numbers
Just for giggles, I checked out the curriculum of a popular MBA (Masters in Business Administration) program.  While it talks about learning how to maximize or minimize everything and anything business related, it failed to mention a single topic which might be seen as ethics related.  This further contributes to my belief that business, these days, is thought to be about the numbers, and nothing to do with ensuring an atmosphere of trust within which all acts of commerce would benefit.

Those Days Are Numbered
Again, I just don't understand what they are thinking.  Any entrepreneur will tell us we can only ever expect to do business with the people who actually trust us.  Have corporate business people never heard of word-of-mouth, and social media (which I have heard described as word-of-mouth on steroids)!  The idea that there is a sucker born every minute may even be true, but no company can afford to be seen acting on such a belief in today's world.  How long or well would Toyota have survived the recent bashing they received had it not been for the integrity of senior management, and their putting customers first?  The "old boy" network is dying out.  As long as there are other companies willing to remain loyal to the old way of doing things, they will be able to find buyers for whatever they are selling, but those days are going to end soon enough.

Return On Investment
As for the banksters?  They will continue to hide out within and behind their organizations until regulators and customers hold them accountable.  Yet, that day, too, will come.  I suppose they think, until then, who cares?  I say, use and invest in the companies run by people that aren't just trying to stuff their own pockets.  As in the case of Toyota it is clear that integrity is, in fact, economical in ways that can't be achieved by adopting less than ethical approaches.  While I think of it, maybe somebody should let the MBA students in on that well kept secret!  

Do you have an opinion as to whether or not you think corporations are evil?

     

    

Expectations

Wide Open
Part of the reason for my fewer than normal updates lately has been my visit to western Canada for my son's wedding.  It is always a great joy for me to meet people there.  For a guy that lives in Southwestern Ontario, and spends a certain amount of time in Toronto, I am simply overwhelmed by the openness, and friendliness of western Canadians.  

Family
I suppose it is because the region where I was visiting is more rural, as a whole, that I seemed to find more people who work for a living rather than living to work (although not, perhaps if I was to spend time at Fort McMurray!).  Probably because of the wedding, there was a large emphasis on family, especially on their part.  People came from far and wide out there to attend the wedding, while few from my family in Ontario could interrupt their busy schedules.

Old Theme
While there, I found myself engaged in a particular conversation over and over again.  I may not notice something if it happens only a couple of times, but several times within a few days I found myself discussing the expectations of people, and how those expectations seem to have changed over the last number of years.  The actual conversations took different form, and involved different people, but each time the theme was the same.  That theme was, in short, immediate gratification.

The Lost Art
Whether it was the store owner, the retired worker, the corporate adviser, or simply, parents, I was surprised when the same theme kept coming up.  In each case, I found myself discussing the seeming loss by people to see any benefit in "paying their dues" or adopting a longer term approach as a means of achieving their goals.

Debt
We also see much of this in the media these days.  Apparently we taught our children everything we know.  The willingness of people to accept debt in order to get what they want today is what resulted in the last Great Recession.  Credit, in itself, is not so bad, but neither is saving first, before making a purchase.  I come from a humble family, and growing up, the family home was the only thing we purchased on credit.  If I wanted to buy anything, I had to save, not just ten, or twenty percent of the purchase price, I had to have an amount of cash equivalent to the total.  Think how much money I saved myself in interest payments!       

No Worries?
What I learned growing up was how to live within my means.  We need to budget not just for our expenses, but for our savings, as well.  Most people I talk to have very little in investments, other than the family home.  "No money!", they say.  Imagine if they took all of the money they have already paid in interest and could use that to create an investment account!  Most people point to their credit card when I ask if they have an emergency account.  No wonder Mark Carney of the Central Bank is so worried about household debt levels in Canada.   

A Line In The Sand
I understand the Banksters have done everything they can to get us into as much debt as possible, and how easy and harmless it is made to seem when it comes to not paying off that credit card balance at the end of the month.  Yet, there comes a point when one must draw a line in the sand.  If we are smart, that line is a whole lot less than our total income.  Understand that the world is currently in a deleveraging cycle which could last for a decade, or more.  Everyone is going to be demanding a larger share of our wallet.  We need to ask ourselves where that money is going to come from.

As for my son, everything I have seen would indicate his bride is as prudent with money as the rest of her family - one of her many great qualities!

Which way is your level of debt heading?

June 2012 Returns

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The behaviour of the banksters continues to be nothing short of appalling.  All of the largest economies are struggling.  Even so, June was positive for the markets.  Seasonally, the latter part of July is good for the gold and the energy markets.  I expect both to improve.  As for the broad markets, overall, I expect some good shorter term trading opportunities, but fail to see any real catalyst which could propel them to new heights.  The Elliott wave pattern of three waves followed by two in the opposite direction would suggest we will see a lower low than the May/June correction we just saw.

18 month return for TSX @ June 30, 2012 = -13.89 percent
Return for Basic Timing Model  using XIU = 9.03 percent
Return for Advanced Timing Model = -4.36  percent
Money for charity = $0.00