Week of 8-31-2008

Timing Model = -1.5
20% long, 80% cash

Global allocation of long positions
MSCI EAFE Index 20%
MCCI Emerging Markets Index 10%
Russell 3000 Index - U.S. 70%

Top U.S. Sectors
Small Cap Growth 3.0
Small Cap Value 3.0
U.S. Biotechnology 2.5
U.S. Oil Equipment, Services & Distribution 2.5
Precious Metals 2.0
U.S. Basic Materials 2.0
U.S. Oil & Gas 1.5

Top Intl. ETFs
MSCI Canada Index Fund 1
MSCI Brazil Index Fund 1

Strategy 3
Money Market 25.0%
U.S. Long Bonds 25.0%
Energy 25.0%
U.S. Small Cap 25.0%
Agriculture 0.0%
Precious Metals 0.0%
Industrial Materials 0.0%
Emerging Markets 0.0%
U.S. REITs 0.0%
U.S. Large Cap 0.0%
Intl Real Estate 0.0%
EAFE 0.0%

Strategy 4
U.S. Long Bonds 25.0%
Energy 25.0%
U.S. Small Cap 25.0%
Agriculture 25.0%

This Is Not Good

The charts above depict the trend components of my timing model and the picture isn't pretty. The S&P500 never got a head of steam out of mid-July and the Value Line Composite is in full rollover mode. The 5 week rally we witnessed is a very typical of a bear market rally. Keep in mind trend indicators have zero predictive value, but the current status of the broader market is down.

Sentiment is currently neutral, so the trend indicators are dominating my timing model, which is currently calling for 100% cash.

Week of 8-24-2008

Timing Model = -1.5

20% long, 80% cash

Global allocation of long positions

MSCI EAFE Index 20%

MCCI Emerging Markets Index 10%

Russell 3000 Index - U.S. 70%

Top U.S. Sectors

U.S. Oil & Gas 3.0

U.S. Biotechnology 2.5

U.S. Oil Equipment, Services & Distribution 2.5

U.S. Basic Materials 2.5

Small Cap Value 2.0

Small Cap Growth 2.0

Precious Metals 2.0

U.S. Pharmaceuticals 1.5

U.S. Technology 1.5

Top Intl. ETFs

MSCI Canada Index Fund 1

MSCI Brazil Index Fund 1

Strategy 3

Money Market 20.0%

U.S. Long Bonds 20.0%

Energy 20.0%

U.S. Small Cap 20.0%

Agriculture 20.0%

Precious Metals 0.0%

Industrial Materials 0.0%

Emerging Markets 0.0%

U.S. REITs 0.0%

U.S. Large Cap 0.0%

Intl Real Estate 0.0%

EAFE 0.0%

Strategy 4

U.S. Long Bonds 25.0%

Energy 25.0%

U.S. Small Cap 25.0%

Agriculture 25.0%

The Value Line Composite retreated below it's 200 day moving average and is now just above it's 75 day moving average. Given that sentiment is now neutral, my trend indicators will play the determining role in my timing model and equity/cash allocation. If the Value Line composite can thrust above it's 200 day moving average, my equity exposure will bounce to 60% long. If it falls below it's 75 day moving average, I will move to a 100% cash position.

Week of 8-17-2008

Timing Model = 3.5
100% long, 0% cash

Global allocation of long positions
MSCI EAFE Index 20%
MCCI Emerging Markets Index 20%
Russell 3000 Index - U.S. 60%

Top U.S. Sectors
U.S. Biotechnology 3.5
Small Cap Value 3.5
Small Cap Growth 3.0
U.S. Oil Equipment, Services & Distribution 2.5**
U.S. Basic Materials 2.0**
Precious Metals 2.0**
U.S. Oil & Gas 1.5**
U.S. Health Care 1.0
U.S. Mobile Telecommunications 1.0
U.S. Banks 1.0
U.S. Micro Cap 1.0
U.S. Utilities 1.0*

*Deeply oversold
**Deeply oversold with residual 12 month momentum

Top Intl. ETFs
MSCI Canada Index Fund 1
MSCI Brazil Index Fund 1
MSCI Mexico Index Fund 1

Strategy 3
Money Market 25.0%
U.S. Long Bonds 25.0%
Energy 25.0%
U.S. Small Cap 25.0%
Agriculture 0.0%
Precious Metals 0.0%
Industrial Materials 0.0%
Emerging Markets 0.0%
U.S. REITs 0.0%
U.S. Large Cap 0.0%
Intl Real Estate 0.0%
EAFE 0.0%

Strategy 4
U.S. Long Bonds 25.0%
Energy 25.0%
U.S. Small Cap 25.0%
Agriculture 25.0%

Lots to report this week. My timing model flipped to a 100% long equity allocation because the Value Line Composite breached both it's 75 and 200 day moving average last week. This could reverse pretty quickly, so I'll be monitoring my timing model daily this week and will use a 2x inverse fund to transfer assets to just in case. One of the great things about using Profunds is you can change overall equity exposure pretty quickly without incurring a lot of commissions.

You'll notice there are several sectors in my ranking system that are deeply oversold - energy, gold, and basic materials. My sector model is heavily weighted towards momentum indicators, but I do included a couple contratrend indicators. Energy for example is still a momentum leader over the past year, but the recent deep selloff has actually helped this sector stay in my top sector rankings. If my model used momentum alone, my sector strategy would never be able to take advantage of snap-back rallies from sectors that have been recently beaten down.

International equities have performed very poorly relative to U.S. equities as of late. I'm not sure if this is going to develop into a multi-year trend or if this is just a temporary situation due to the rebounding dollar.

My gut tells me stocks will soon give back gains and energy, basic materials, and precious metals will rebound - at least temporarily. Whether this scenario begins to play out by next week, if at all, who knows?

I was very surprised to see half the participants in my basic materials poll believe it will be 12+ months before this sector takes out it's highs. My wild guess was in the 6-9 month range.

"Magical money pot"

Thank God there's an alternative media to out the deceit and stupidity of the leftist MSM. In a New York Times story titled "Study Tallies Corporations Not Paying Income Tax" reporter Lynney Browning demonstrated his ignorance by estimating unpaid corporate taxes by multiplying the gross revenues of the companies in the GAO study by 35%:

"At a basic corporate tax rate of 35 percent, all the corporations covered in
the study in theory owed $875 billion in federal income taxes."

Ummm, companies are taxed on their net income, not their gross receipts. Keep in mind Browning is a business reporter and this story appeared in the Business section of the Times. Frightening.

The bigger point is Democrats like Levin and Dorgan, as well as their accomplices in the MSM, view companies as "some kind of magical money pot for the government to steal from" (quoting Hinderaker). I'm continually confounded by this naive, two-dimensional thinking.

In 1850 Frédéric Bastiat wrote a paper called That Which is Seen, and That Which is Not Seen. In the introductory paragraph, Bastiat explains:

"Between a good and a bad economist this constitutes the whole difference - the
one takes account of the visible effect; the other takes account both of the
effects which are seen, and also of those which it is necessary to foresee. Now
this difference is enormous, for it almost always happens that when the
immediate consequence is favourable, the ultimate consequences are fatal, and
the converse."

Levin and Dorgan are examples of the "bad economist", those who are incapable of foreseeing the effect of their policies. These simpletons believe higher taxes on "corporations" generate higher government revenues, but have no effect on the price of goods, wages, employment, capital investment, R&D, or where these companies decide to set up shop.

The current Democratic party are Irreponsible Socialists. They don't have the balls to enact out-in-out state ownership like a responsible Socialist would. They prefer to enact laws and taxes that allow the government leach off the productive in society in order to bestow goods and services unto their constituents - the same constituents who will eventually feel the effect of what bad economists (Democrats and unfortunately most Americans) are unable to foresee.

The Ultimate Marriage Penalty

From the 8/14 WSJ Op ed page by Obama politburo members Jason Furman and Austan Goolsbee:

Sen. Obama believes that one of the principal problems facing the economy today
is the lack of discretionary income for middle-class wage earners. That's why
his plan would not raise any taxes on couples making less than $250,000 a year,
nor on any single person with income under $200,000 -- not income taxes, capital
gains taxes, dividend or payroll taxes.

According to these geniuses, if a couple earning $125,000 each decide to get married, Obama's going crucify them with a huge tax increase. Great plan Barack! Does this double as your economic stimulus plan for divorce attorneys?

Unanswered question

Back in April I asked: 'have basic materials peaked?'. In retrospect it seems as though I might have been a bit premature with that question (see red arrow on chart), but ultimately the question is yet to be answered. The Dow Jones US Basic Materials Index has only recently violated it's long term trend line, and is also exhibiting oversold conditions. Bears would say seasonality is still negative and economic conditions call for weak demand into the fall. Bulls would say basic materials are oversold and long term demand will only increase.

I don't really have an opinion on the matter. What do you think? There's a poll in the right column.

Week of 8-10-2008

Timing Model = 0.0
50% long, 50% cash

Global allocation of long positions
MSCI EAFE Index 20%
MCCI Emerging Markets Index 20%
Russell 3000 Index - U.S. 60%

Top U.S. Sectors
U.S. Biotechnology 3.5
Small Cap Growth 3.0
U.S. Health Care 2.5
U.S. Oil Equipment, Services & Distribution 2.5
U.S. Basic Materials 2.0
U.S. Mobile Telecommunications 1.5
U.S. Pharmaceuticals 1.5
U.S. Consumer Goods 1.5
Precious Metals 1.5
U.S. Oil & Gas 1.5

Top Intl. ETFs
MSCI Canada Index Fund 1
MSCI Brazil Index Fund 1
MSCI Taiwan Index Fund 1

Strategy 3
Money Market 25.0%
U.S. Long Bonds 25.0%
Energy 25.0%
U.S. Small Cap 25.0%
Agriculture 0.0%
Precious Metals 0.0%
Industrial Materials 0.0%
Emerging Markets 0.0%
U.S. REITs 0.0%
U.S. Large Cap 0.0%
Intl Real Estate 0.0%
EAFE 0.0%

Strategy 4
U.S. Long Bonds 25.0%
Energy 25.0%
U.S. Small Cap 25.0%
Agriculture 25.0%

Hammer Hits Nail On Head

John Hinderaker of Powerline wrote a brilliant post this morning about the energy debate between Obama and McCain campaigns. Here's a brief excerpt:

There is a fundamental difference between developing new energy resources and
using less energy, whether through tire inflation, canceled vacation plans, or
whatever. I don't need the government to tell me to maintain my car. I'm already
doing that. As John McCain said yesterday, Obama's obsession with tire inflation
isn't an energy policy, it's a public service announcement. Likewise, I don't
need the government to tell me that if I want to save money I should drive less,
buy a smaller car, turn off my air conditioning, or whatever. These are basic
facts of life that everyone knows. We do, however, need the government to
increase energy supply--not because the government should go into the energy
business, but because various statutes and regulations are now blocking private
industry from developing energy reserves. Government action is necessary because
past, ill-advised government action is the problem.

Obama and his parrots are still trying to convince the public that McCain's energy policy is to simply to drill offshore. I'm not sure if this is an intentional mis-statement or they just can't read. It has to be one or the other.

The truth is, Democrats are not really interested in increasing the net supply of energy or reducing the overall cost of energy. They're so deeply invested in the idea that humans are responsible for "global climate change" that they don't dare enable the burning more fossil fuels. Never mind 31,000 scientists (9,021 PhDs) say they are wrong.

Finally, if the U.S. didn't use another drop of oil beginning tomorrow, does anyone really believe that the rest of the world wouldn't continue to burn every barrel of oil until world supplies are exhausted (or just plain too expensive to recover)?

Uncomfortable Juncture

My timing model is designed to begin adding long exposure when pessimism reaches extreme levels. As sentiment reverses, becoming more optimistic, my model will suggest even heavier exposure to the long side. That's where we've been for the past couple weeks.

Sentiment reversals are like a shot of adrenaline, and like adrenaline, the impact of a sentiment reversal on my timing model will fade after a given period of time. In order to maintain and/or add to the long side, prices need to begin signaling a change in trend by hitting certain trip wires; in this case, the 75 day moving average.

You can also think about this as an old fashion rollercoaster approaching it's first incline: gravity will pull you down an initial slope, generating enough momentum to push the coaster partially up the incline. However, a tow chain needs to engage the cars in order to pull the coaster all the way to the top. Trend indicators are my tow chain and they have yet to engage.

As you can see from the chart above, the Value Line Index is getting closer to reaching its 75 day moving average. Unfortunately it looks like the effect of my sentiment components will begin to fade this week. Unless we start breaching some trend triggers soon, my timing model will likely begin signalling lower exposure to equities.

Week of 8-3-2008

Timing Model = 1.0
70% long, 30% cash

Global allocation of long positions
MSCI EAFE Index 20%
MCCI Emerging Markets Index 20%
Russell 3000 Index - U.S. 60%

Top U.S. Sectors
U.S. Biotechnology 3.5
U.S. Oil Equipment, Services & Distribution 3.5
Small Cap Growth 3.0
U.S. Health Care 2.5
U.S. Mobile Telecommunications 2.0
U.S. Oil & Gas 2.0
U.S. Pharmaceuticals 1.5
U.S. Consumer Goods 1.5
U.S. Basic Materials 1.5
Precious Metals 1.5

Top Intl. ETFs
MSCI Canada Index Fund 3
MSCI Brazil Index Fund 2
MSCI Hong Kong Index Fund 1
MSCI Singapore Index Fund 1
FTSE/Xinhua China 25 Index Fund 1

Strategy 3
Money Market 50.0%
U.S. Long Bonds 50.0%
Agriculture 0.0%
Precious Metals 0.0%
Energy 0.0%
Industrial Materials 0.0%
Emerging Markets 0.0%
U.S. REITs 0.0%
U.S. Small Cap 0.0%
U.S. Large Cap 0.0%
Intl Real Estate 0.0%
EAFE 0.0%