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  • The Treasury Market Doesn't Like This Tax Cut Idea One Little Bit
    It may surprise some of you to know that here in America, we are in a new stage of  democracy. In this new stage, how individuals behave at the polls is not relevant when it comes to governing the country. What matters is how people buy and sell assets, and how asset prices reflect the public's ire or pleasure with the way Congress and the Executive Branch are running the country. In that sense, we are not directly a democracy per se, but rather, a financial instrument-intermediated democracy. We are, to give it an official-sounding acronym, an FIID.
     
    Now, in a FIID, such as ours, it doesn't matter what individual voters say they want (individuals are, after all, prone to hyperbole and whining), or how individuals express their political desires through the polls (whether actual voting polls, or merely public opinion polls). Nor does it matter what economists might warn (economists are prone to doom, gloom, error and disagreement amongst themselves).  It does not matter what a politician reasonably feels would be in the long-term, medium term or indeed, short-term best interests of the country. After all, who is to say what "best interests" means or whether one policy or another is in the country's "best interests"? Who, that is, but the capital markets - which in an FIID act as "The Voter". Substantial scholarly research proves that the capital markets are highly efficient when it comes to digesting information and predicting future outcomes. You can bet that what The Voter says is likelier than not to be correct, which is why it actually makes sense for politicians to ignore economists, their constituents, and their own common sense and simply do what The Voter tells them to do.
     
    Accordingly, if Congress does something and The Voter registers displeasure (for instance, by sending bond yields soaring), you can assume Congress has acted foolishly and, in fact, Congress should quickly reverse itself (as we saw during the TARP debacle of 2008). If The Voter registers pleasure, or perhaps, only a muted reaction to whatever Congress has done (or failed to do), then Congress has actually gotten it right and all the politicians can pat themselves on the back and take credit for causing the Dow Jones to run up higher (which we saw Senator Kerry do just this past weekend when he pointed out that since the Dow Jones is up 60%, it follows that Obama must be doing a great job).
     
    Now that we have established that America is an FIID, it's clear why we must now turn to The Voter and see what The Voter has to say about the new tax cut proposal. Well, Treasury yields seem to have exploded around 10% higher in the past few days, while stocks have sort of tread water.  This is how The Voter expresses displeasure with higher deficits.  The Voter is, in the loudest terms possible, giving two big thumbs down to Congress and our President. Thus far, nobody on Capital Hill is paying much attention to The Voter, but not to worry. As we have seen now in multiple examples around the globe, from Ireland to Greece to the EU at large, The Voter doesn't quit that easily.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Tags: TLT, DIA, SPY
    Dec 08 5:12 PM | Link | Comment!
  • Concession

    Contrary to previous expectations, the equities markets worldwide have staged remarkable comebacks. Many broadly traded ETFs have seen their 50 day moving averages vault above the 200 day moving averages - often a bullish signal.Other factors support the bullish picture:
    1) Ten year US Treasuries are at almost historic highs, and now offer negative real returns. After a 14 year bull run, bonds are, quite simply, over-valued. Other assets, including equities, should benefit as capital rotates out of fixed income.
    2) The Fed will launch into QE2. QE1 forced equities into an explosive bull market. It seems unwise to assume it will be different this time.  
    3) corporate earnings continue to surpass expectations. Higher earnings combined with dour expectations is the stuff of bull markets.
    4) Political strife is rampant, suggesting a very sour and pessimistic national (indeed, international) mood. Many widely read news stories deal with the un-sustainable path the world has come upon, and many new celebrities are perma bears. Sentiment is probably at a low point, which characterizes market bottoms and not market tops.

    It seems likelier that a bull market will continue to push equities prices higher. The approach I have implemented to capitalize on that thesis is to invest in high yielding equities and equity-like assets - master limited partnerships, junk bond funds, high dividend growth stock ETFs, and preferred stock ETFs. My notion is that many of the investors leaving low yielding, high tax paying bonds will rotate into other income producers such as those I have already added to the portfolio model.

    Going forward, the cash flow will be used to acquire relatively high beta ETFs with strong growth potential. These might include, for instance, ETFs focused on high growth regions - India, Latin America, China.

    Should my overall thesis on a bull market prove wrong, the portfolio will churn out enough cash to help cushion the losses if the equities markets tank, and to capitalize on the fall by continuing to invest into market weakness. I can take losses in high risk equity ETFs, such as HAO, EPI, ILF somewhat in stride because I will be using income, rather than principal, to fund those purchases. Free money.

    By the same token, if we do see a huge bull market in equities, my portfolio should lag somewhat. Preferred stocks are somewhat bond like, and will not offer the returns of common stock in a bull market context. Similarly, they are not poised to fall as far should the equities market tank.  Junk bond performance is only somewhat correlated to equities, and would likely lag unless the credit markets stage a jarring recovery. MLP performance has little to do with anything, although a recovering economy may follow should equities perform well. Stronger economic growth often gives rise to more oil and gas getting pumped through pipelines, more shipping activity, and more energy infrastructure usage in general, which would benefit MLP performance.

    Oct 20 2:06 PM | Link | Comment!
  • 200 day resistance
    The S&P 500, having risen to test the 200 day simple moving average, is observing the area as technical trading resistance. It typically wakes some days to establish an area as resistance, but if the 200 day continues to hold, it is likely that the markets will fall lower from here from a simple trading perspective. With September and October as historically weak months, that scenario seems particularly plausible. On  the bright side, though, it seems markets are almost universally viewed as being likely to fall in the near term. Assessing the overall market tone, and investor sentiment, is practically impossible, but there are sufficient annecdotes out there to confirm that most people appear bearish. That may be the best news for equities markets, given that from a macroeconomic and technical perspective, and also as a matter of valuation, equities are not particularly attractive at this moment.
    Sep 07 10:18 AM | Link | Comment!
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