Week of 11-30-2008

Timing Model = 0
50% long, 50% 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. Pharmaceuticals 5.5
U.S. Telecommunications 4.5
U.S. Biotechnology 4.5
U.S. Consumer Goods 4.5
U.S. Oil & Gas 3.0
U.S. Health Care 3.0
Small Cap Value 3.0

Top Intl. ETFs
MSCI Malaysia Index Fund 1
MSCI Japan Index Fund 1
MSCI Switzerland Index Fund 1

Strategy 3
Money Market 50%
U.S. Long Bonds 50%

Strategy 4
U.S. Long Bonds 25%
Agriculture 25%
U.S. Small Cap 25%
U.S. Large Cap 25%

My timing model moved back to a fence sitting allocation of 50/50. Short term sentiment indicators are signaling the market is extremely overbought, so if we are indeed near an intermediate bottom, I'd expect to see some backfilling this week.

Not to beat a dead horse; we're long way from breaking above the 75 or 200 day moving average for the broader market. Seasonality could be a factor in December, but I believe the piles of cash being thrown at the financial industry in addition to talk of a $500B stimulus package may be prove to be a more important factor in stemming significant equity meltdown from here.

$8.5 trillion with more on the way

Click the image below to see a blow by blow accounting of what our elected (and unelected) leaders have been up to:
The fed is doing their part. Let's hope they don't run out of ink.

The new paradigm: Don't Ask, Don't Tell

Is anyone amazed at the media's rave reviews of Obama's economic team? Fortunately there are a few folks left in the MSM who apparently didn't drink the whole glass of Kool-aid:

Timothy Geithner: Obama's Teflon Treasury Secretary

Week of 11-23-2008

Timing Model = -1.0
30% long, 70% 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. Pharmaceuticals 5.5
U.S. Health Care 5.0
U.S. Oil & Gas 5.0
U.S. Biotechnology 4.5
U.S. Utilities 4.5
U.S. Consumer Goods 4.0

Top Intl. ETFs
MSCI Malaysia Index Fund 3
MSCI Japan Index Fund 3
MSCI Switzerland Index Fund 3

Strategy 3
Money Market 50%
U.S. Long Bonds 50%

Strategy 4
U.S. Long Bonds 25%
Agriculture 25%
U.S. Small Cap 25%
U.S. Large Cap 25%

My timing model lost a couple points this past week as sentiment dipped back into extremely pessimistic levels. This development could be short-lived if we see the market begin to rally this week and next. Last week I hinted that an almost perfect double bottom seemed almost too good to believe, and it was. Hitting a new low was more in keeping with historical bottom formations but the price action was downright ugly.

You can probably guess I believe we're close to an intermediate bottom. Unfortunately my timing model has been at least five weeks early and I've paid for it. I'll be curious to see how things play out this week.

One note about this recession: My wife and I went furniture shopping this weekend and the showrooms seemed pretty crowded if you ask me. I realize we're entering the holiday shopping season but I've never bought nor received a piece of furniture for Christmas. I suppose anedotes like this don't matter much, but I see a huge disconnect between the "almost great depression recession" being reported by the MSM and my personal observations of parking lot, street, and store traffic. Apparently a lot of Americans haven't got the message they should be hunkered down in their homes.

Will we bounce from here?

The market is tracing out a momentum divergence although failing to close below it's October low. Classic bottoms usually make a lower low before moving higher, and this usually coincides with very pessimistic sentiment readings.

Despite all the volatility we still haven't been able to break out of the 1000-850 range. Sentiment reversals have failed to propel the market higher, in a sustained way, and the market remains far from breaching either the 75 or 200 day moving average. If you're a pure long term trend follower you would have been sitting on your hands all year and probably wouldn't be planning to enter the market anytime soon.

There's always a bull market somewhere

Obama election triggers run on gun sales in state

Many folks are betting handguns, assault-style weapons, and ammunition prices (and taxes) will skyrocket under an Obama administration.

Week of 11-16-2008

Timing Model = +1.0
70% long, 30% 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. Pharmaceuticals 5.5
U.S. Health Care 5.0
U.S. Biotechnology 4.0
U.S. Consumer Goods 4.5
U.S. Telecommunications 4.0
Small Cap Value 3.0
U.S. Oil & Gas 2.5

Top Intl. ETFs
MSCI Malaysia Index Fund 2
MSCI Japan Index Fund 2

Strategy 3
Money Market 50%
U.S. Long Bonds 50%

Strategy 4
U.S. Long Bonds 25%
Energy 25%
U.S. Small Cap 25%
U.S. Large Cap 25%

As expected my timing model ticked down a bit this week to 70% long. The reversal in sentiment we've seen over the past few weeks hasn't resulted in a sustained rally, and we continue to bounce around in the 850-1000 range. Given the technically oversold conditions and year end seasonality, I'm still expecting higher prices over the next 6 weeks. It's hard for me to fathom the market hasn't digested and discounted most of the bad news. Also, the fact that governments are throwing truckloads of cash at their ecomomies has to eventually result in at least a short term lifejacket.

Politics or Markets?

A couple readers expressed a similar sentiment regarding my last post. Politics have fallen to their backburner and they're keenly focused on the market. So let's start there:

The backfilling I thought was mostly over last week continued in earnest this week. Call me superstitious but I find the S&P 500 chart (closing prices) a bit too perfect to expect a big rally from here. Jason Goefert is talking about many sentiment divergences, but in order for those to play out in textbook fashion, we'll need to see a new market low first. But who knows? We could see a picture-perfect double bottom. In either case, I still believe we're close (within 4%) to an intermediate bottom. Unfortunately I'm a lot less encouraged about the duration and extent of the next leg up.

Now for politics:

I realize many you are sick of politics, especially after being subjected to the longest POTUS campaign of all time. That said, I don't think all politicians are corrupt, although I agree most politicians will do what's in their own short term best interest, as well as what's in their constituent's short term best interest. Unfortunately both of these are usually NOT in our country's long term best interest.

Like it or not, political decision can have an impact on both the economy and the markets, and that's one reason I write about politics on this blog. Secondly, I grew up as a son of a commercial plumber who started his own company as a contractor. I saw first hand the sacrifice, the long hours, the personal financial risk, and the insanity of government policies that almost seemed designed to punish anyone who attempted to run a company and create jobs. And God forbid if you made a profit - Uncle Sam was right there with hand open and arm extended.

Most people believe the economic impact of political decisions are immediate. They erroneously judge the success or failure of presidents and their policies by looking at job, stock market, and GDP growth from inauguration day until new drapes are hung. This is ridiculous of course, but try telling that to the dolts in the MSM.

Here are a couple examples:

1. Our country has yet to pay the piper for entitlement programs, programs that began decades ago with the FDR administration. Since then, both parties have ignored the actuarial tables and sold Americans a mathematical lie. There's no way in hell future generations can keep this system solvent without a massive overhaul. And the Medicare situation is worse. To many Americans, especially older Americans, FDR is seen as a savior and Social Security has enormous political support. Even politicians who believe the system is fundamentally flawed and see an impending day of reckoning don't dare speak the truth in public. I find it ironic the same people who are wringing their hands about the current banking/mortage mess (e.g. Bill O'Reilly) are so willing ignorant and disinterested in the impending entitlement implosion.
2. Ronald Reagan was roundly critcized by the media and Democrats for boosting defense spending during '80s, but for a few leftist historians, most agree that his build up played a role in greatly reducing the military threat of our then arch nemesis, the Soviet Union. Fast forward to the Clinton administration, who Democrats and the media applaud for generating budget surpluses in the late '90s. Clinton supporters never point out his administration cut military personnel from 2.1 million to 1.6 million. Of the 305,000 employees removed from the federal payroll during the Clinton years, 286,000 (or 90%) were military cuts. Could he have made such cuts were it not for Reagan's policies? Forget the tech bubble and the Revolution of 1994, Clinton cashed in the peace dividend and is now seen as an economic Houdini.

Barack Obama believes a bigger government and more spending is the answer to every problem. I do not. I'm deeply concerned that we no longer have any policy or ideological checks and balances in this country.

Most Americans aren't news, market, or political junkies. They get their news from Katie Couric and political advice from Oprah. They watch David Letterman and listen to the politics of Bruce Springsteen. They drink from the trough of an unending stream of leftist professors and watch movies that lambast conservatives at every turn.

Mark my words: The policies we're about to witness will result in a mountain of debt which will eventually result in economic circumstances that will effect our market negatively.

Absolute power corrupts absolutely

From Politico.com:
Obama likely to escape campaign audit

The Federal Election Commission is unlikely to conduct a potentially
embarrassing audit of how Barack Obama raised and spent his presidential
campaign’s record-shattering windfall, despite allegations of questionable
donations and accounting that had the McCain campaign crying foul.

Adding insult to injury for Republicans: The FEC is obligated to
complete a rigorous audit of McCain’s campaign coffers, which will take
months, if not years, and cost McCain millions of dollars to defend.

For those of you who haven't been paying attention, Barack Obama raised millions of dollars on his website that had disabled the Address Verification System (AVS) used by most sites that handle credit card transactions. This allowed donors to easily contribute above FEC limits because the donor's name did not have to match the credit card holder. It also opened the door to completely untraceable donations via disposable “gift” credit card as well as donations from non-U.S. citizens.

Obama has refused to voluntarily release the names, addresses and employers of donors who gave less than $200 each. The McCain campaign released data on all of their donors.

This is only one example of the corruption, indoctination and smoke screens you can expect when followers of a single political ideology control or dominate:

• The POTUS
• The U.S. Senate
• The U.S. House of Representatives
• Federal Employees
• The Mainstream News Media
• The Entertainment Industry
• Educational Institutions

"Absolute power" is the most important news story of 2008/2009, but don't expect to find anyone in the MSM covering it. If you expect tranparency, fairness, and ethical behavior from the left, you're going to be disappointed.

Week of 11-9-2008

Timing Model = +1.5
80% long, 20% 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. Health Care 5.0
U.S. Pharmaceuticals 5.0
U.S. Consumer Goods 4.5
U.S. Biotechnology 4.5
Small Cap Value 4.5
U.S. Telecommunications 2.0
U.S. Banks 2.0

Top Intl. ETFs
MSCI Switzerland Index Fund 2
MSCI Japan Index Fund 2

Strategy 3
Money Market 50%
U.S. Long Bonds 50%

Strategy 4
U.S. Long Bonds 25%
Energy 25%
U.S. Small Cap 25%
U.S. Large Cap 25%

My timing model didn't budge last week but we got the backfilling I expected. Now lets see if the market can begin to climb the wall of worry and make a successful push higher. There is significant resistance around 1000 - it would be nice to see a breakout above that level.

Sentiment will begin to cycle back to a more neutral posture by next week, so I expect my model to begin losing points by then. We are still a very long way from breaching the 75 day moving average on either the S&P 500 or Value Line Composite, so I'm not very optimistic about capturing significant gains if the market does continue to move higher. This is an inherit weakness in my timing model - periods where there is a gulf between the market and long/intermediate term moving averages are difficult to address. Sentiment can only juice the model for so long before they lack meaningful guidance - my model always defers to trend indicators when the juice is gone.

It also looks like the international markets may be ready to challenge the U.S. market on a relative strength basis, at least over the short term. It won't be enough to change my global allocation of long positions, but I won't be surprised to see the international markets out performing near term.

Hoodwinked

The American people unwittingly voted for a Socialist yesterday; a proponent of a larger government and wealth redistribution. When you scrape away all the pretty but empty rhetoric, Barack Obama and the current Democratic party is far more leftist than the majority of Americans. Given the propensity for the MSM to support (and cover for) a politician with whom they agree, it will likely take three or more years for this realization to hit moderate Democrats and Independents.

What can we expect over the next 4 years?

Debts and the deficits
The national debt grew under the Bush administration, but it wasn’t because of conservative policies – that’s the conventional wisdom we’ve heard from the MSM and Democrats over the past eight years. The truth is Bush never was a fiscal conservative, nor is most congressional Republican's.

We have a spending crisis in this country, not an income crisis. Obama and the Democrats don’t understand this or don’t care. If you thought spending was out-of-control during the Bush Administration, you haven’t seen anything yet.

Increasing taxes on those who earn $250,000+ and corporations isn’t going to fill the income gap. Federal tax receipts mirror economic growth. Increasing tax rates won’t spur economic growth, especially to levels necessary to reduce deficits.

Economic Growth
Will the economy recover on Obama’s watch? Absolutely. You could appoint Mickey Mouse to the POTUS and the economy will recover from the cratering we witnessed this year. The more important question is what growth rates will we see over the next 4 years? My guess is they’ll be anemic, but masked by boat loads of government spending and debt. Trickle up economics doesn’t lead to innovation and entrepreneurism; doesn’t offer the rewards necessary to encourage prudent risk-taking and job creation. Government busy-work jobs don’t add to national prosperity or sustained growth. They amount to eating your seed corn while gutting your house of 2x4s to keep the furnaces burning.

Thugocracy and the squashing of dissent
I find it amusing to listen to those railed against “Bushitler”, those who call themselves privacy advocates. We saw how principled they were in their beliefs when Democratic pubic officials rifled through government databases to dig up dirt on Joe Wurzelbacher. We've learned if you disagree with Obama and the Democrats on anything and you can expect to be called a “hater” or “racist” – you might even be targeted by one of Obama’s “truth squads”.

And now we see Democrats chomping at the bit to pass the “Fairness Doctrine”, legislation that conveniently crafted to ignore the fact the MSM and entertainment industry is dominated by liberals. We also see them ready to pass The Employee Free Choice Act, and unbelievably despicable, anti-Democratic pieces of legislation. What's next, government officials looking over my shoulder in the voting booth four years from now?

Expect many more examples of ideological thugocracy under an Obama administration. These folks are only getting started.

The greening of corporate welfare
For those of you who rant about handouts to corporations, don’t expect that to end under an Obama administration. He has his list of more deserving corporations. Expect a massive boondoggle as the Democrats hand over truckloads of cash to the greens, the construction industries, and the education establishment - but don’t expect much return on that “investment”.

Week of 11-3-2008

Timing Model = +1.5
80% long, 20% 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. Consumer Goods 5.5
U.S. Health Care 5.0
U.S. Pharmaceuticals 5.0
U.S. Biotechnology 4.5
U.S. Telecommunications 2.5
Small Cap Value 2.0

Top Intl. ETFs
MSCI Switzerland Index Fund 1

Strategy 3
Money Market 50%
U.S. Long Bonds 50%

Strategy 4
U.S. Long Bonds 25%
Energy 25%
U.S. Small Cap 25%
U.S. Large Cap 25%

Sentiment reversals continue to give bullish signals even though the equity indices I watch are still a long way from their 75 day moving average. I'm anticipating some backfilling this week, but wouldn't be surprise if this market rockets past 1150 on S&P 500 sometime during the next few weeks. That's not prediction, but would be typical given current sentiment.