The movement in the ^VIX was almost sufficient yesterday to disrupt the formation of a Stable Vix Pattern. The VIX shot up 18.08% to 23.84. The VIX did hit 25.7 intra-day. I only use daily closes in the Vix Asset Allocation Model. This kind of movement in the VIX, however, does not give me much confidence that a Stable VIX Pattern of continuous movement below 20 will form anytime soon. I mentioned in my post from last Saturday that I would be surprised if a Stable VIX Pattern formed, given the velocity and degree of the bursts above 20. GDP Those kind of bursts will often signal that there is something serious which is troubling the market which should not be dismissed, even if I disagree strongly. In short, these bursts are frequently warnings about a change in the market's direction. (see Soaring VIX May Signal More Trouble Ahead for Stocks - CNBC). I have been selling some of my more speculative stock positions after the first burst, including many of my Lottery Tickets, and have been buying more individual bonds along with blue chip dividend paying stocks.
I am less concerned about these bursts from below 20 now, compared to a period where the VIX had been moving below 20 for an extended period of time, measured in years rather than days. This kind of burst out of a long standing Stable Vix Pattern would be troubling, and could lead to a Trigger Event with more upward movement toward 30 under those circumstances. Both the height and the duration of the spike toward 30 are important. It is the Trigger Event which is the most important timing signal in the model. Now, the movement in the VIX is simply disrupting the formation of the Stable Vix Pattern. This gives me less confidence that the current cyclical bull move will last. However, the disruption of a Stable Vix Pattern formation, and a continuation of the Unstable Pattern in effect since August 2007, would be consistent with my opinion that the current move is a strong cyclical move of short duration within the confines of a long term secular bear market, similar to the move in 1974 to 1976 as noted below and in prior posts on this subject.
It would not take much upward movement in the VIX now for me to start the count over. Possibly, if the VIX returned to below 20 by the end of this week, or early next week, and had no closes over 25, I would consider keeping the count without a restart, provided the total number of days of movement over 20 was no more than 10. I think the more likely course at this point will be a restart in the count.
In previous posts, I expressed an opinion that the move off the March 2009 low was not likely to be the start of a new long term secular bull market, but instead a cyclical move in an ongoing long term bear market reminiscent of the move in 1974 to 1976. 1974 or 1982: Start of Cyclical Bull in a Long Term Secular Bear Market or the Start of Secular Bull Market? more on 1982 or 1974 Historical Perspective on S & P Gain Since March 2009 (item #4). The most important rational underlying that opinion was that the debt problems, both at the consumer and government levels, will take more time to heal, possibly another two or three years.
In this scenario, the cyclical move off the March 2009 low is a short term bull cycle, lasting 12 to 24 months, and is a counter-reaction to the catastrophic phase of a long term secular bear market. The catastrophic phase of the current long term secular bear market ended in March 2009. I date the start of this long term secular bear market in 1997. The catastrophic phase of the prior long term secular bear market, which I start in the mid 1960s, ended in October 1974. After hitting the bottom in October 1974, there was a 72% gain lasting until September 1976, followed by almost six years of an ongoing secular bear market. I am still giving the current long term bear market another two or three years of life rather than 5 or 6. I hope that I am wrong about this forecast for one very simple reason. A long term secular bull market involves less stress and work than what has been required over the past twelve years to advance the HK's capital base.
The problem is that the short duration cyclical moves in an ongoing long term bear market look like the kind of moves made at the start of a long term secular bull market that may last fifteen or so years. The difference in characterization from my perspective has to do with my trading rules. Short duration cyclical bull moves in an ongoing bear market need an active and dynamic asset allocation process and trading strategy, unless going nowhere for 15 or so years is your objective. Buy and hold, with far less asset allocation shifts, would be appropriate only in a long term secular bull move. I am still in the trading mode for a long term secular bear market, noted by frequent trading and shifts in asset allocation. Some long term stocks positions were acquired particularly during the Near Depression phase, however, which should always be the case during the catastrophic phase of the long term secular bear market. Some long term bond positions were likewise established in the October 2008 to March 2009 time frame. And the regional bank strategy is a long term strategy.
An article in the NYT highlighted the problems in Spain, where unemployment recently hit 20%, and the federal and regional governments have done virtually nothing meaningful to reign in spending. Spain's debt is just one problem among many that does not appear to be headed in the right direction. And it is really difficult to see why a nation running trillion dollar deficits is viewed as a safe haven. The fear trade returned yesterday, as the dollar and U.S. treasuries gained while most other asset classes fell in value. The short part of my long/short strategy worked fine, with EPV gaining 8.24% as an example. Investment grade corporate bonds rose in value as a class (LQD). There was some positive action in large cap pharmaceutical, as shown in PPH gaining 15 cents yesterday. MRK and PFE, both components of PPH, had decent up days after reporting earnings before the opening bell yesterday.
1. Duke Energy (DUK)(owned-Core Electric Utility Holding): Duke Energy beat the consensus expectation by four cents, reporting an E.P.S. of 34 cents per share for its 1st quarter ($.36 excluding items), compared to 27 cents a share in the year ago quarter. Operating revenues were 3.594 billion, higher than the 3.38 billion analyst estimate. DUK: Analyst Estimates for Duke Energy Corporation
2. Emerson Electric (owned-core industrial holding): Emerson reported earnings of 54 cents per share from continuing operations, one cent below the consensus estimate. Revenues were reported at 5.14 billion, up just 1%, and below the forecast of 5.21 billion. Emerson did raise its forecast for 2010 to an E.P.S. between $2.40 to $2.55 per share, up from its February estimate of $2.20 to $2.40. In its press release, the President of EMR made the following cautionary comment: “While the pace and strength of the global recovery continue to gain momentum, we remain concerned about the sustainability of the U.S. and European economies compared to historical recovery cycles."
3. ADM (own): Archer Daniels Midland Company reported its fiscal third quarter earnings missing estimates by 6 cents. Still, I view it as a positive earnings report. ADM had net earnings of 421 million or 65 cents per share. Net sales rose to 15.145 billion, up from 14.842 the year before.
4. Merck and Pfizer (own indirectly via PPH): There is a lot of noise in the earnings reports from both Pfizer and Merck. Merck, for example, had 74 cents of charges. Excluding charges, Merck earned 83 cents per share, beating the consensus estimate by 8 cents. Merck sees 2010 Non-GAAP earnings in the range of $3.27 to $3.41. The estimate before the report was for earnings of $3.4. MRK: Analyst Estimates for Merck & Company
Pfizer reported adjusted earnings of 60 cents per share beating the estimate by 7 cents. (see discussion of PFE report at MarketWatch) PFE reaffirmed its 2010 guidance of adjusted earnings between $2.1 and $2.2.
5. Greece: The market is not convinced yet that the Greece will change its ways. And as noted in this WSJ article, there are already questions whether or not 110 billion EUROs is enough to support Greece until it can access the credit markets on its own.
It does appear that the majority of the Greek citizens are in an an aggressive form of denial. The protests continued, as union employees shut down hospitals and schools, demanding that their bankrupt government continue paying their benefits without any sacrifice by them. The strikes are being led by the ADEDY union federation that represents more than 500,000 civil servants in Greece. Bloomberg.com The population of Greece is just over 11 million people: List of countries by population I would assume that the 500,000+ number excludes children too young to join the civil service or one of Greece's commissions, and those who retired in their 40s or early 50s. I may be wrong about the children. It is entirely possible that they join the government dole while still in the womb. It would also be reasonable to assume that the Greeks see nothing odd about 51% of the government's budget being devoted to civil service pay and benefits.
Although it is difficult to gauge what is happening in Europe sitting here at a desk in the SUV capital, I gather that the Greeks believe that it is the obligation of the Dutch, Germans, and other European nations to sacrifice in order to finance the Greek entitlement society. As many in Europe now realize, it was a mistake to admit Greece into the EU. NYT Greece is undermining the market's confidence in the EURO even though its GDP represents only 2.5% of Europe's GDP: Debt Rising in Europe - Map - NYT
The market appeared to be jolted yesterday when Greece hired Lazard for financial advice. This firm helps countries that have defaulted on their debt obligations: - NYT Greece denies that debt restructuring is on the table, but who believes the Greek government? If I had to guess what sent the market in a tailspin yesterday, I would say that this was it.
6. Sold 50 GY at $ 6.4 (See Disclaimer): This is not a reflection so much on GY but simply reflects a continuation of LT sells to improve the income generating capacity of the portfolio. This was a good percentage gain with the GY shares purchased at $3.7 last February.
7. Sold 50 EWBC at $19.04 (See Disclaimer): LB wanted to sell all of the banks in the regional bank basket that paid only a penny a quarter in dividends. A compromise was reached to sell the 50 shares of EWBC, one of the most successful investments in this basket, based on the prior dividend history of this bank before the Near Depression. The reasoning for selecting this one to sell rather than WBS was explained in a prior post from last month:
" EWBC was not exactly generous with its payout when times were good. The annual dividend was kept at 20 cents for 2003, 2004, 2005 and 2006 and was raised to 40 cents annually for 2007-2008. The dividend is currently 4 cents annually. This history is viewed negatively. Prior to 2008, the payout ratio to net profits hovered in the 10% to 15% most of the time. This is also view negatively.
I have very large percentage gains in EWBC and WBS. I would expect WBS to be more investor friendly on its dividend policy during favorable economic times. So I am inclined to keep WBS and to sell EWBC. Both positions are currently unrealized long term capital gains. EWBC was trading up over $20 in late night trading yesterday. I have, however, not reached a decision." Item # 9 EWBC
I intend to plow the $900+ in proceeds into another regional bank that is not so miserly with its dividends in both good and bad times. The shares were bought at $5.7 in April 2009: Buy of 50 EWBC
"I gather that the Greeks believe that it is the obligation of the Dutch, Germans, and other European nations to sacrifice in order to finance the Greek entitlement society."
ReplyDeleteMy mirrored sentiment in the U.S.: "I gather that those in Washington, the Fannie's, Freddie's, and AIG's believe it is the obligation of America's taxpayers to sacrifice in order to finance America's corporate entitlement society."
I am personally frustrated with this current culture of corporate entitlements which socialize their losses while rewarding/enriching those who drove their businesses into the ground.
Are the Greek citizens any worse than many of our leaders in Washington and the leaders of our quasi-private corporations.
The U.S. is potentially the greatest Ponzi scheme of all time whose purpose is to finance an entitlement society than has run amok on a far larger scale than Greece. The main difference is that we can fund our entitlements and excess spending by issuing debt in our own currency that foreigners are still willing to buy in very large quantities, for reasons that escape me.
ReplyDeleteThe entitlements in the U.S. have many names, and are paid directly or indirectly to the Masters of Disaster on Wall Street and to tens of millions of our citizens.
In an earlier post I drew parallels between our government workforce and the one in Greece. During the Near Depression, the federal government employees increased their compensation and benefits while unemployment among the private workforce skyrocketed. A recent USA Today story highlighted that the number of federal employees making over $100,000 per year grew from 14% to 19% of the workforce during the recession. In addition to the salary, there is the extremely generous lifetime pension and benefits. The state and local governments in the U.S. have promised their employees far more benefits upon retirement than anyone can afford to pay. The unfunded pension liabilities of state and local governments in the U.S. are staggering. (California's unfunded pension and health benefit liabilities are close to 500 billion-just google "California unfunded liabilities")
I am in effect paying for the bailout of the financial system now in numerous ways. The most important is a multi-year Jihad by the FED to keep interest rates low for savers in order to reliquify the banks balance sheets.
The U.S. bailout of financial institutions, while disgusting on so many levels, was necessary in my view to avoid the Great Depression II. Unfortunately, the side effect was to further enrich the Masters of Disaster who were in large part responsible for the near destruction of virtually every single major U.S. financial institution. Thus, those individuals were paid handsomely to engineer the near collapse of Western Civilization, and rewarded again when it was necessary for governments and their innocent and responsible citizens to clean up their mess with large infusions of capital and abnormally low rates for an "extended period of time".
But there are large numbers of U.S. citizens who contributed to the mess by buying a home that they could not afford or worse, lying about their income to qualify for a loan. The politicians used Fannie and Freddie to encourage home ownership by people who could not afford a home. In effect, I am paying for their irresponsibility and/or fraud too.
Now, as an investor, and indirectly as a U.S. citizen whose government is the main benefactor of the IMF, I am apparently receiving the opportunity to pay for the greed of Europeans living well beyond their means too. So, that is just the way it is.