Weekend June 29, 2013
What's Wrong with REITs? this writer considers all possibilities except the correct one. Which is that the markets have topped and we are transitioning to a bear market in the economy. As that happens, commercial rental space will be come more and more vacant as renters worry about the future. REITs were one of the very worst performers in 1973-74. And this time around there are other alternatives to renting space for three years with offices available by the day, week, or month. And then there is working from home.
Mark Hulbert cites a study on the P/E for gold. Ths is a sober assessment and I will address it later, but gold is still high relative to historic valuations. Which suggests it needs to go lower than normal valuations to wipe out bullish sentiment among the gold bugs. Sentiment is low single digit among investors already.
What Happened to the AMerican Dream? This writer suggest the top 1% contribute more than the rest of us. I disagree. DennisWilson founder of LULU, a retailer of yoga togs, has been selling his stock options all the way up as the stock price has advanced. Wilson has overcome a millionaire multiple times over, but not from selling yoga clothing. He got rich selling stock that was bid up by fund managers believing in the yoga craze. Selling the clothes never made that kind of money.
As I note to my accounting classes, the funny part is how at the same time he and former CEO Day are selling like crazy, they are touting the stock to analysts. Does it never occur to the analyst to ask why insiders are selling while touting the stock to others? At any rate, my point is that those of us working for a living can hardly duplicate such activity. Sell Instragram for a billion and you can appear to contribute more yourself!
Overview
We further refine our strategy for playing the move to higher interest rates. No less than John Murphy suggested today that the low in interest rates is probably behind us, I suggested as much last week as the long bond crossed our line in the sand at 3.5%.
We are refining a strategy to switch between bond funds on the long side and short bond ETFs as a trend play. We will seek appreciation and dividends from the long side. My suggestion was not TLT which pays less than 3% but closed end municipal funds now paying 6.5-7%. Admittedly we may miss the ex dividend date on occastion but there will be appreciation to be gained. Once bond prices peak, we plan to switch to TBF to play a drop in bond prices. Here is a short term look at how we are refining our signals.
TBF versus Long Bond
TBF a 1x short bond fund based on teh 20 year bond is in red black. The green line is the price of the 30 year long bond. As they are opposite, we can juxtapose their price action at extremes. We are experimenting with various exponential moving averages. The faster the moving average, ie the lower the number, the faster we get a signal. After experimenting with 5,8,13, then 8,13,21 or 13,21,34. On this daily chart the shortest 5,8,13 has worked well for the last two cycles spread over four months.
One can subsitute one of the muni funds for USB but they do not have the volume and are subject to more erratic moves. This pairing seems to give more reliable signals. We will also be using these combintation of exponential moving averages on longer term weekly MAs to further test signals.
This is the number series first described by Leonardo of Pisa. Starting with one, each number is added to its subsequent outcome in the series, as 1 + 1 =2, 2+1=3, 2+3=5, 3+5 = 8. As one quickly reaches higher numbers, the series bears a near constant .618 ratio to the previous sum. This is known as the 'golden ratio.' It appears in both nature in the spirals of a nautilus shell and in master art and architecture works as this ratio is pleasing to the human eye. It has also proven to be of value in time series of financial markets.
At this point I am long MUH, BTA, and MHD, all Blackrock funds. Each moves in slightly different patterns. I have chosen three to smooth out the differences. The high discounts to NAV of these funds has pretty well been eliminated indicating the panic dumping has ended for the time being. That will be another tool we use to track trading in those funds. My primary background in trading was the bond market. We will cntinue to refine this strategy.
Typical Past Interest Rates
Rates since year 2000 were significantly lower in this period of stagnation than in the prior period, 1982-2000, of stock market expansion. So we have a long way to go to even reach 6-7%, last seen in the late 1997-1999 period. This is to remind readers, do not get comfortable being long any bond fund at this point, our visits will be temporary!
Stock Market SPX
If the stock market manages to stay above its April lows at far left, it has the chance to resume a rally into late summer and early fall.
Summation Index
The summation index bounced at the same level it reached on the trade able bottom last November. Price is as previously noted, still much higher. This next week July 4 is on a Thursday. We just completed end of quarter window dressing this past Friday. We will be watching to see if the internal indicators have a decisive turn up.
The US Dollar
The US Dollar in red black has risen since mid June. The CRB index of commodity prices continues to fall. Commodities move opposite the dolalr.
Central Fund
The break of the uptrend line since 2006 is ominous. Viewed from that perspective $10 is a realistic target by the seasonal low expected in October. AS techs like to say, old tops become new bottoms.
We suggested that the drop in metal prices would lead to bankruptcy trouble among the miners. Sure enough see page B1 in the Weekend WSJ, gold Drop Uncovers Miners Woes. We linked to Mark Hulbert's article in our open links at the start of this post. To cut to the chase, he notes a study that concludes 'the ratio of gold price to consumer price index is about 3.4 for an historic average. It was 8 to 1 last Sept when we exited. Today it is still 5.3 to 1 suggesting more price weakness ahead. Gold would have to fall to $780 to reach that level. Seeking Alpha and Kitcom both continue to feature articles about why gold and silver MUST be finally be a buy at the latest drop in prices. So far they have all been wrong. We expect an important low in October.
We will mention gold in the future but are far more confident in the bond strategy outlined above. We encourage readers to track our results.
Sentiment towards gold and silver is so low a bounce could be expected here. But we think that is all it will be.
Bottom Line
Stocks could rally again if they stay above the April lows.
We are moving to a new strategy of attempting to capture move up in bonds plus interest. Alternately we will move to TBF to take advantaage of moves down in bond prices. We suspect the 30 year lows in interest rates are behind us. As noted here, Apple's timing with its bond offering was perfect catching the interest rate lows of the last thrity years amid massive demand for just that. Massive demand for bonds at all time lows in interest is the perfect market signature for a historic low in rates.
Sentiment is highly negative towards metals but we are focused on a low due in October.
Crude Oil remains high despite all this.
Socionomics - Negative Mood on Display World Wide
Three more photos in teh WSJ feature Taksim Square, Istanbul Turkey, Tunisia, and Egyptians protesting Morsi (a year ago they protested Mubarak).
A companion article headline,
Air Goes Out of Emerging Stocks
Once Bullish Investors Pare Back Amid Disappointing Performance Apprehension in Short Term
Weekend WSJ Page B5
Last weekend we compared the recent performance of the BRICS and found them all failing. And so the topping process continues but...
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So Happy Together
Bright colors and graphci prints are the perfect pariings for a his an dhers wardrobe that puts now prep in class prep.
This article on page 39 of the monthly WSJ Magazine more than suggests that bright colors and inclusionism, his and hers no less, are still a staple of the fashion world. A preference for bright bold colors and inclusionism are bull market passions. This supports our suggestion that if the markets stay above their April lows, we could have another rally into late summer early fall.
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