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The Simple Accountant  

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  • The Bulls Are Pausing For A Breather [View article]
    There are a couple of areas of concern. One is that many retail investors hold bonds through funds rather than buying directly. Bond fund shares can lose money when rates rise. As I wrote in the article, I don't see this as an imminent threat, but bond fund holders in particular should not ignore the risk.

    The other area of concern is for those who have gone into lower grade/high yield and levered bond funds to generate yield (we hold both in our income portfolio). The former can take a hit in a general market downturn, and the latter can take a hit when short term rates rise or - as in the financial crisis - liquidity dries up.

    Again, I don't see any imminent danger here, but when you take on risk to get yield, you just have to be more careful. It's not like holding money markets or rolling over IRAs, you are actively monitoring and managing risk. Hope that helps.
    Feb 13, 2012. 09:41 PM | 1 Like Like |Link to Comment
  • The Bulls Are Pausing For A Breather [View article]
    Thank you, much appreciated.
    Feb 12, 2012. 07:52 PM | Likes Like |Link to Comment
  • Year End Window Dressing, Or A Real Rally? [View article]
    Good call Tony; I agree with you about the S&P 500 being the more representative index, but looking at what is happening with the NAS and small caps gives some indication of overall market health. Moves in the large caps are more suspect when they aren't participating.

    I also think you may be right in your 2012 outlook, but for now volatility is really decelerating. As you noted, so much hinges on the events in Europe, and we should probably add China as well. The ongoing bear market in Shanghai can't be ignored.
    Dec 26, 2011. 11:47 AM | Likes Like |Link to Comment
  • Year End Window Dressing, Or A Real Rally? [View article]
    Sorry Steve, that's an error - the word "sector" was omitted. My analysis always includes a review of the S&P 500 sectors.
    Dec 26, 2011. 11:39 AM | 2 Likes Like |Link to Comment
  • The Fed Won't Play Santa Claus This Week [View article]
    Good comments all around, thanks to everyone. I'd like to do an informal survey: what is your overall expectation for U.S. equity markets in 2012, and why? I expect a positive year based on an improving U.S. economy, reasonable current valuations, and some kind of less than disastrous resolution in Europe.
    Dec 18, 2011. 04:28 PM | Likes Like |Link to Comment
  • European Impact On U.S. Equities Is Overstated [View article]
    My take on the European situation is as follows:

    1. The basic problem is that there is outstanding debt that will not be repaid. This point is non-controversial.
    2. Policy makers are going through the process of figuring out who will take the losses, and how. This is a delicate matter and must be handled astutely to avoid creating more problems.
    3. Until #2 is settled, there will be uncertainty - and higher volatility in the financial markets. We are talking about some material numbers here.
    4. In a high volatility market, if you are a trader you already know what to do. If your focus is longer term you have to factor in a wider range of probable outcomes with the information at hand. Jeff's advice to buy quality assets on the cheap is very sound, in my view. We have been putting this into practice.
    Dec 16, 2011. 12:20 PM | 1 Like Like |Link to Comment
  • Market Outlook: Breaking Bad [View article]
    This is a very fair question, and the way it's posed - do stocks have to go down when the dollar goes up? - seems to be asking whether there is a causal relationship.

    My answer is I don't know if there is a causal relationship, and have not seen any research to suggest that one exists. While causation may be an interesting academic question, as a trader I am only concerned about whether there is an empirically validated correlation. My answer there is emphatically yes, I have been observing it.

    However that correlation is valid only for the current market cycle. There have been earlier cycles, for example the great 1990s bull market, where the dollar and U.S. stocks did not move inversely. I have little doubt that this correlation will end at some point.
    Dec 15, 2011. 03:58 PM | 1 Like Like |Link to Comment
  • Market Outlook: Breaking Bad [View article]
    Hello Mr. Harris,

    I'm uncertain how to interpret it; the obvious answer is the market doesn't like what it sees. In general my practice is to watch price and volume action, it has worked for me and helps to tune out some of the noise. Whatever the external driver, the market internals generally signal the direction, which is another way of saying events are less important than the market's reaction to them.

    Quick note on the article timing: it was written a day prior to publication here, so "yesterday" refers to Tuesday, and "today" and "currently" refer to Wednesday.
    Dec 15, 2011. 12:18 PM | Likes Like |Link to Comment
  • U.S. Markets: Look For A Short Term Stock Rally, But Keep Watching The Dollar [View article]
    Excellent question, I have been wondering when someone would ask it. As we know correlation is not the same as causation. The correlation is reasonably well established empirically for the current market cycle (it has not always been this way). Causation is up for debate.

    One clue might be the timing so, as an experiment, we might look at a series of short term charts, say with five minute bars of the dollar index and SPX overlaid, to see if one consistently turns ahead of the other. I have not found any conclusive evidence to establish causation, and would be interested to see if anyone has.

    As a more practical matter, my regular analysis looks at the dollar and all the other asset classes together, as well as technical indicators, scanning for divergences from established correlations to suggest that we should be on the lookout for a turn in the markets. John Murphy's work on inter-market analysis is a classic on this subject.
    Nov 30, 2011. 09:46 AM | Likes Like |Link to Comment
  • Predicting The Outcome In Europe And What It Means For U.S. Stocks [View article]
    In the long, fraught history of Europe, less than a century has passed since the last time the unthinkable happened. A highly recommended read is Barbara Tuchman's classic "The Guns of August" - or at least the opening chapters. All sides could see that an unmitigated disaster was about to unfold in the summer of 1914, a disaster that was within their power to avert, and yet...they marched headlong into it.

    Certainly the circumstances are very different today, and I do share Jeff's optimism to some degree. As a native of one of the countries at the center of the crisis, and a student of history as well as of the markets, I also understand that folly on a colossal scale is well within the realm of possibility here.
    Nov 18, 2011. 03:12 PM | 2 Likes Like |Link to Comment
  • U.S. Markets: Still Bullish, But Watch For A Short-Term Correction [View article]
    No, this is not a pair trade. We hold both in our income portfolio, which is a diversified current income strategy, and neither in the total return portfolio, which is an actively managed all asset strategy.

    LQD is a long term core position, HYG is a tactical position that we would sell if our outlook on junk turns negative. Preservation of capital is the first rule of the income portfolio.
    Oct 31, 2011. 08:05 AM | Likes Like |Link to Comment
  • Risk Is Back In Favor, But Watch The Dollar [View article]
    Thank you for your comments

    Abegaz, you may be on to something with natural gas. Last week the contract traded higher and picked up volume. I had some very good gains with gas in 2007-08 but it's been a long dry spell since then.

    Untrusting, the article did say I was looking for a pullback in stocks - that is an easy call after a nine day rally, but my positive bias stands. Just following the weight of the evidence (market data) there. If the data turns the other way, then so will my outlook.

    Again, watch the U.S. dollar index. On Monday it moved back up before reaching the 76 support level, and risk assets sold off. A big rally in the dollar may put the brakes on the bulls.
    Oct 18, 2011. 09:44 AM | Likes Like |Link to Comment
  • Is The Market Putting In A Bottom? [View article]
    Thanks Chaser,

    Inter-market analysis is something I learned early on from John Murphy's work, and it has been very helpful. In particular my focus on the bond market often helps to sort out the noise coming from the equity and commodity markets. Barry Ritholtz often refers to the bond market as "adult supervision" and that is probably what he is getting at.
    Oct 10, 2011. 02:45 PM | Likes Like |Link to Comment
  • Is The Market Putting In A Bottom? [View article]
    These are legitimate questions, and I did wonder about the consumer credit number myself. However, what matters to those of us who are in the markets - particularly in the shorter run - is not so much the macro data itself as the market's reaction to it. We have all seen times when the data comes in pretty good and the market sells off, as well as times when the data is very uninspiring and the market catches a bid.

    My own view is not quite so conspiratorial, although there is no denying that the market is moved primarily by the large institutional buyers and sellers. Following them is the "I" in William O'Neill's famous "CANSLIM" system. However, there is no way mathematically that all the big players can be on one side of the trade and all the small players on the other. We just don't bring that much volume to market.
    Oct 10, 2011. 02:32 PM | Likes Like |Link to Comment
  • The Euro Endgame [View article]
    Thank you for this fine analysis Mr. Staines. Any attempt to address current economic problems - whether in the U.S., Europe, or Asia - without addressing the significant and long running trade imbalances, is likely to be ineffective at best, and counterproductive at worst.

    My own focus is on the U.S. economy and financial markets, and observing the policy debates here is rather frustrating, as they present a false dichotomy between austerity and stimulus without understanding that the accounting identities you mention will by necessity produce large deficits so long as the U.S. runs large current account deficits.

    The difference between the present and the boom years is that the private sector's ability to absorb capital inflows (take on debt) blew up, and the capital went into the public sector instead. To those who understand this, it is no mystery that government debt issuance exploded as private debt issuance imploded. Those Dollars going to China, Japan, and the oil exporters had to go somewhere. Once they could no longer run through New York and into the mortgage markets, etc, they turned to Washington.

    In the case of the U.S., as with the eurozone periphery, debt fueled prosperity is an illusion that cannot last. In the case of the U.S., though nominally it is not in a currency union which would make it impossible to restore competitiveness through exchange rate adjustments, it is effectively in something quite similar, as PBOC and BOJ intervention prevents the currency markets from making what would be the natural adjustments.

    Other than vague complaints about undervalued Chinese currency, I have yet to see any U.S. policy maker present the kind of analysis that suggests they understand this. Instead we get the sort of ridiculous theatrics we have seen, and the problem grinds on.

    It's difficult to say what the end game will be in either Europe or the U.S. My own outlook for Europe is not very optimistic, but for the U.S. it is more hopeful - as dismal as things look here, the obstacles to a workable solution are far fewer.
    Sep 20, 2011. 09:00 AM | Likes Like |Link to Comment