Tuesday, September 25, 2012

Bring on the Fiscal Cliff/VIX-Stable Vix Pattern/Bought 100 STK at $16.12-ROTH IRA/Sold 100 AMLP at $16.54/Sold 50 STKL at 6.64-LT Category/

The bearish case for the Australian Dollar is set forth in this Bloomberg article. I plan to implement an Australian Dollar strategy, similar to my Canadian Dollar (CAD) Strategy, when I can buy at least 1.05 AUDs for each USD.

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A Stable Vix Pattern is about to be formed out of an Unstable Vix Pattern, an event which last occurred in  January 2004: Vix Asset Allocation Model Explained Simply

Start of Movement Below 20: 10/3/2003 ^VIX Historical Prices
Stable Vix Pattern as of 1/5/2004: ^VIX Historical Prices

That prior Stable Vix Pattern lasted until the August 2007 Trigger Event: VIX Chart from 2007: Alerts and Triggers Major Disruption of Cyclical Stable Bull VIX Pattern

S & P 500 on 1/5/2004: 1,122.22

S & P 500 on 8/16/2007: 1,411.27 Historical Prices  (VIX at 30.83)

Trigger Event starts on 8/3/2007 with move to 25.16 from 21.22, though presaged by elevated moves above 20 in late July, and continues for several weeks: Historical Prices The key elements leading to the Trigger Event classification are the high 20 numbers (25-30), two closes above 30 and the uninterrupted duration of the plus 20 numbers (7/26/2007 to 9/20/07),  in combination with several high 20 and low 30 numbers. This was just a clear breakdown in the Stable Vix Pattern that would later be confirmed twice in the characteristic whipsaw movement of the Unstable Vix Pattern (November 2007 and January 2008, VIX Historical Prices). Multiple confirmations add to the credibility of the first sell signal given in August 2007.  

S & P 500 on 9/21/07:  1,525.75  (VIX closes below 20 after Trigger Event-SELL)

Upside Move from 1/5/2004 to 9/21/2007=36%

If the VIX closes below 20 today and tomorrow, which will happen, the Stable Vix Pattern will be formed, replacing the Unstable Vix Pattern in force since August 2007.

The Stable Vix Pattern will last until the next Trigger Event. Mark Hulbert and the Use of the VIX as a Timing Model The duration of this cycle can not be known. Since 1990, there have been two Stable Vix Pattern periods, the one referred to above which lasted slightly more than 3 1/2 years and the earlier one which lasted almost 6 1/2 years. VIX and S & P Compared 1990 to 1997 (May 1991 to October 1997). I suspect that the duration has something to do with whether the Stable VIX Patterns occurs in either a long term secular bull or bear market. A longer duration and far more powerful Stable Vix Pattern cycle can occur within the context of a long term secular bull market which was the case for the 5/1991-10/1997 cycle. A shorter and less powerful cycle would be anticipated for a Stable Vix Pattern formed within the context of a long term secular bear market. That was the case for the 1/2004-8/2007 cycle.

If this next green light signal proves correct, which would mean significantly more upside to stocks based on historical observations, then the next Stable Vix Pattern would have to be occurring within the context of a long term secular bull market given the market's bull move since March 2009, whether or not anyone believes it now.

There can be Unstable Vix Patterns in long term bull markets, such as the one formed before the 1987 crash.  What it Does not Predict is as Important as What it Does/Parallels to VXO 1987-1988 (May 2009);  When VIX Model Gives A Signal To Change Asset Allocation-Each Individual Needs to Assess Their Own Situational Risks (May 2009).

Yesterday's Close: ^VIX: 14.15 +0.17 (+1.22%)

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Goldman still sees stocks declining into year end due to the fiscal cliff. Their Chief Strategist, David Kostin, predicts the S & P 500 will fall to around 1250 by year end, once investors start to focus on the dysfunctional political parties again and the upcoming fiscal cliff That would be about a 14% decline from yesterday's close. How can Mr. Kostin be so positive that jumping off the fiscal cliff will be viewed negatively by the market after a brief period of indigestion? The near universal opinion is that doing nothing will be bad for both the stock market and the economy. The majority opinion also appears to be that Congress will do something to avoid the fiscal cliff, most likely with some patchwork deal before 1/1/13 that kicks the can down the road a few months.

I would not have much confidence in republicans and democrats reaching anything remotely resembling a sensible long term plan to address the U.S. government's looming budget train wreck before 1/1/13 or at anytime thereafter.

Given the inability of the two political parties to reach a sensible deal involving both revenue increases and spending cuts, I have a contrary view about the upcoming fiscal cliff. I view it as a long term positive. Bring it on. End the Bush tax cuts for everyone on 1/1/13 and allow the automatic spending cuts to take effect. That is probably the only plan that can actually be accomplished politically that would deal with the budget deficits in a meaningful way. It is certainly not the best plan for dealing with annual trillion dollar budget deficits, but it may be the only one capable of implementation under the circumstances.

The U.S. economy did just fine under the Clinton tax scheme. Those were good years for job creation and the stock market. The budget was balanced as the baton passed to Bush Junior.

The ones predicting disaster now seem to me to be high income types whose taxes are about to be raised significantly with a slightly higher marginal tax rate and, more importantly for the Mitt Romney types, a higher tax rate for dividends and long term capital gains. {I would add that the higher taxes on dividends and capital gains would probably not be paid by most high income taxpayers until the filing of 2013 returns, sometime in 2014}

Now if the Republicans cause the U.S. to default on its debt by refusing to raise the debt ceiling, unless the Koch brothers receive a big tax cut, then all bets are off. The automatic spending cuts grew out of the GOP linking an increase in the Federal Debt Ceiling to spending reductions earlier this year. Linking anything to the approval of a debt ceiling increase is viewed as exceedingly irresponsible and potentially disastrous for the U.S., but that will not deter Know Nothings from doing it again.

It is my understanding that Medicare, Social Security and military pay will not be subject to the automatic spending cuts. About $103B in spending would be cut for the current fiscal year ending in September 2013 and $984B over nine years plus an estimated $216B in interest savings. WSJ

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Romney will not disclose his tax returns prior to 2010 for one simple reason. Such disclosure would cost him way too many swing voters and would be the final nail in his political coffin. (see discussion at Romney's Tax Returns)  

His 2011 tax return mentions the Cayman Islands on at least 28 pages.

The personal return is 379 pages. There are three trust returns with another 434 pages. The Romneys are sending the IRS paper copies of those returns, rather than filing them electronically, and someone from the IRS will have to key in over 800 pages of numbers. 

Romney recently stated that he had never paid an effective tax rate of less than 13%. Video - ABC News The tax rate for 2011 was artificially picked by the Romneys at 14.1%. This was done by not claiming the full $4 million in charitable deductions. By deducting only $2.25M of the $4M, Romney was able to raise his 2011 tax rate from about 10.4% to 14.1%. WSJ ABC News In other words, he intentionally paid more than was owed to the government in taxes.

As several commentators have already noted, Romney told an interviewer from ABC that he would not be qualified to be President if he voluntarily paid more than he owed in taxes. Page 2: Transcript: David Muir Interview With Mitt Romney - ABC News

1. Sold 100 AMLP at $16.54 Last Friday (see Disclaimer): I have mentioned in several recent posts that I was cutting back on MLP ETFs due to the double taxation issue. I decided instead to go with ETFs that keep their ownership percentage in MLPs to less than 25% of total assets. Item # 2 Bought 100 MDIV at $20.51;  Item # 2 Sold 100 MLPA at $15.31 & Bought 100 MDIV at $20.4-ROTH IRA (9/24/12 Post)

I bought the AMLP shares in July and will receive one quarterly dividend payment. Bought 100 AMLP at $16.19 

Yesterday's Close: AMLP: 16.56 -0.06 (-0.36%)

2. Sold 50 STKL at $6.64 Last Friday (Lottery Ticket Basket Strategy)(see Disclaimer): I am simply clipping some profits in LT selections. Sunopta has rallied strongly since early August 2012, STKL Interactive Chart, rising about 36% since the $4.91 close on 8/6 to the $6.69 close last Friday. 


2012 STKL 50 Shares +$56.1

Item # 2 Bought As Lottery Ticket:  50 STKL at $5.25  In that post, I also include a snapshot of two earlier 100 share trades in STKL shares where I netted $807.93 with the last sale being at over $15 per share. Those 2008 transactions occurred before the bottom fell out, which led to my downgrading STKL's common stock to the lowly Lottery Ticket category and to the first LT buy at $1.65 (December 2008). Buy of 100 Sunopta at $1.65Sold 100 LT Sunopta at $4.06 (snapshot in same post). 

This last STKL transaction brings my realized gains for the LT basket strategy to over $11,000, see snapshots at Stocks, Bonds & Politics: Lottery Ticket Strategy: New Gateway Post.

Yesterday's Close: STKL: 6.48 -0.21 (-3.14%)

3. Bought 100 of the Stock CEF STK at $16.12 Last Friday in ROTH IRA (see Disclaimer): I recently bought this security in a taxable account.  Item # 1 PEO NLY/Bought 50 STK at $16.3/Bought 100 of the Stock CEF $29.52/Sold 50 HMA at $8.41-LT Category/Bought 100 of the Stock CEF GAM at $29.52

I have nothing to add to that discussion except that many large cap technology stocks appear undervalued to me.

Some forward P/E ratios for large cap techs based on YF's data from yesterday:

IBM Key Statistics: 12.32
CSCO Key Statistics: 9.0
INTC Key Statistics: 10.36
AAPL Key Statistics: 13.04
ORCL Key Statistics: 11.07
GOOG Key Statistics: 15.06
MSFT Key Statistics: 9.33
QCOM Key Statistics: 15.49
TXN Key Statistics: 13.79
HPQ Key Statistics: 4.10 (despised by many)
SYMC Key Statistics: 10.25
CHKP Key Statistics: 13.41
GLW Key Statistics: 9.33
SNPS Key Statistics: 14.69
KLAC Key Statistics: 9.56

Those numbers will change with the respective stock prices, the period covered by the forward P/E, and the consensus analyst estimate numbers. With the exception of GOOG, CHKP and GLW, the ratios decreased slightly yesterday based on stable consensus estimates and decreases in price. As noted in the YF Key Statistics pages for these companies, most of them are loaded with cash.

I currently have an abnormal amount of cash in my ROTH IRA money market account earning nothing.

Yesterday's Close: STK: 16.15 +0.02 (+0.12%)
Columbia Seligman Premium Technology Growth Fund: Stock Quote 

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