November 2012


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A lot of digital ink has been spilled on discussing the fiscal cliff. Over the last few days the politicians have again demonstrated their seemingly limitless incompetence and markets are gyrating day-to-day, frustrating any number of trading strategies.

There are two concerns: [i] economy [ii] market. Looking at the market exclusively in relation to the fiscal cliff you have to say that the shorter your trading strategy in time is, the greater the correlation will be to various headlines/shocks etc.

A longer term strategy irons out the day-to-day fluctuations. That is not to say that you abdicate entirely on market timing, simply that you ride the bigger longer lasting waves rather than every minor fluctuation.

Bonds are pretty much toast. The big money has been made. Nominal interest rates cannot go much lower. Real interest rates can go lower as inflation eats away any real returns. Bonds need to be avoided like the plague for the near future. Because bonds tend to decade+ trends, when/if interest rates start to rise, they will rise a long way. At some point of course, like the late 70’s early 80’s bonds will again become a great investment.

Which leaves common stocks for most of us. Commodities are available via futures and some ETF’s, but for the most part probably should be avoided by most of us. Stocks however should be embraced. Inflation that will be an ongoing feature courtesy of the Federal Reserve, will, under continued debt destruction continue to be somewhat contained, at least by CPI measures. Nominal earnings will continue to rise.

Will markets crash? Quite probably at some point. In which case you need to buy. To buy, obviously in your allocation you need to hold some cash. The system that I have and detail the results more or less on a weekly basis, allocates capital between cash and stock. Selling stock as it rises, buying as it falls. To date, I have made no trades. I have the same position as from December 2011.

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Whatever the market historians say about the 2012 stock market years from now, they will certainly have to at least mention how difficult it was for those who practice tactical asset allocation. Not just difficult, actually it was a graveyard.

I’m going to show you why:

In 2012, there were very few ways to win and lots of ways to lose if you were doing any kind of market timing at all.

First of all, you had to have come into the year fully-invested, both barrels loaded. You also had to have been at least equal-weighted to Apple. Thus, if you had a value-bent (versus a growth-bent) to your allocation, you got smoked. The year’s gains are front-end loaded, which means if you lagged that January to April run, you almost never had a chance to catch up.

Second, there were two major fakeouts for those employing a 200-day or ten-month moving average as a buy/sell signal. The Spring sell-off, driven by Europe, culminated in one of the nastiest bull reversals I’ve ever seen. You got taken out of stocks only to watch a V-shaped snapback humiliate you within hours – not days but hours! It was insane.

By September, the performance chase had pushed the market to a new year high, only to suck everyone back in right before the fiscal cliff / global recession zeitgeist started to make itself felt again. A horrible earnings season in which “uncertainly” punctuated every conversation had ended with a second fakeout for the tacticians to impale themselves on. Just when it looked as though we were finally going to get a real correction and stocks had broken below the 200-day, the unthinkable happened: The light-volume and shortened holiday week saw one of the most incendiary stock market runs of all time. In three-and-a-half days the S&P had gained back almost the entire correction in a run that seemingly included no one. Apple alone had ripped from 505 to 590 within what seemed like seconds! Forgetaboutit!

Once again, trend-followers and timers got smoked before they even knew what had happened. In the time it takes you to open the Yahoo Finance app on your iPad, the reversal had beclowned all but the buy-and-holders.

Many years from now, people will see the 2012 stock market’s 15% return in a box on one of those periodic tables of asset class returns and they’ll say, “Hey, 15%, that was a good year.” They will have no idea how terribly tough a year it was for anyone who wasn’t aggressively long Apple from January through the spring.

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My returns are from last week. The current returns are circa 15% and of course that does not include any dividends and sold option premium which add a further return.

I have not yet been able to demonstrate the “timing” aspect of my strategy as the market simply hasn’t moved enough in any one direction to trigger any trades. This has saved much brokerage and angst.

All new subscribers are offered as part of the subscription the chance to use the system. Even if you are totally sceptical, follow along on the blog for 6 months or so and view the results for yourself.

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This case is one of the leading cases with regard to Novus actus interveniens. The defence rests upon the definition: that the actions of a third party will produce an outcome that few would have expected: making the plaintiff’s claim too remote.

Facts of the Case.

Borstal Officers, supervising Borstal inmates who were working outside the borstal premises on Brownsea Island in Poole Harbour. The Officers went to sleep, against instructions [orders] allowing the inmates to escape. A number of the inmates had previous histories of escape and all [most] had criminal records.

In the escape, damage was done to private property, yachts. The claim for damages against the Home Office was for the value of the damage.

The Home Office claimed that they owed no duty of care to the plaintiffs or any member of the public. The Home Office advanced its defence on two primary points: [i] that there is [virtually] no authority for imposing a duty of this kind and [ii] it is said that no person can be liable for a wrong done by another who is of full age and capacity and who is not the servant or acting on behalf of that person.

The negligence however is not owed by the borstal detainees, rather by the borstal Officers. The detainees were the mechanism of the damage, albeit, and this is the point of contention, human intervention via action. The Home Office claims “novus actus interveniens” as their defence. This is a question of “remoteness”.

“Remoteness” is decided in law rather than in fact. Which in reality means the arbitrary decision of the Judge, although he may well consider the precedent cases, ultimately, “policy” seems to be a major factor. Of course if there is a jury, the jury supposedly only finding on the facts, may well find on the law, confusing the two issues.

What about the “but for” test? The “but for” test is apparently a test for factual causation. Therefore for deciding in law it would not be employed. The “but for” test would clearly make the Officers liable and vicariously the Home Office.

The two tests therefore form the basis of proceeding in tort: first, determination is made whether “but for” in respect to all and any that may stand in the tortfeasor’s shoes, whether there is any liability.

If it found that there is liability, then the second leg of the test is applied. This is that on one hand the claimant would not be worse off as a result, nor any better off as a result.

The Court found that the Home Office was negligent. That the state owed a duty of care to the respondents. As such, the Justices extended the category of negligence to include the State, which prior to this case was held to be “above the law” based on policy considerations.

The internet crashed today…only just being restored. The market is already closed.

A long post that really lacks clarity.

The title includes this word...Endogeneity So what exactly are we talking about? I have read the post, and quite honestly it doesn’t really require the number of words allocated.

In addition there is a material error:

The mechanism causing this reduction in nominal income presupposes that the fixed amount of inside money in existence is exogenously determined; once created, it stays in existence. Since the amount of inside money can’t change, it is the rest of the economy that has to adjust to whatever quantity of inside money the banks have, in their wisdom (or their folly), decided to create.

Which after 2008, surely would suggest that the above is total nonsense…which it is.

Banks via fractional reserve lending create deposits, or “inside money”. This expands the “money supply”. It is debt based. That same “money supply” can contract if debt is defaulted upon. Which is exactly what happened and is still happening currently.

The reason that inflation today is so much lower than you would expect under the various QE programs…more “inside money” is the continued destruction of previously created debt through defaults. While the money supply continues to grow, it grows less than the full inside money creation, netted by the inside money contraction.

Of course there is in addition a world of difference between the inflation that you pay out of your wallet…groceries, petrol and bills to the statistical CPI inflation.

This article really just muddies the water.

I’m watching the close in trading, particularly in AAPL, and there seems to be a lot of bear trades going through, yet, no real effect on price.

This market is trading higher. Resistance is already behind us, we possibly retested it today. The way is clear over the next couple of days for higher prices. The recent dip is over, if you bought it, the reward looks to be on the way.

Update
The market closed quite strongly, its remarkable how the last few minutes change the tenor of tomorrow’s open.

Well late yesterday the COT report was released. As the trading week is already underway, there seems no point in preparing this weeks newsletter, so I’ll simply skip this week.

Nice.

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