Sunday, May 31, 2009

Sunday Evening Potpourri May 31 2009

This posts assumes familiarity with my VIX Asset Allocation Model. My posts on that model are linked in this Gateway Post: USING THE VIX MODEL AS A TIMING INDICATOR FOR LONGER TERM STOCK ALLOCATIONS

1. VIX Closed Friday Below 30 & VXD at 25.33/Currently Unwilling to Hedge my Stock Portfolio with SDS or TWM: The Vix closed Friday's session at 28.92, down almost 9% from Thursday's close.  I am currently anticipating that the VIX will try to find stability in the 20 or 30 range over the course of the next several weeks. I view the return back to the 20 to 30 pattern after bursting out of that pattern in late September 2008 to be a positive for the market.  I do not plan to buy SDS when and if the VIX approaches 20 or even pierces that important demarcation line in my VIX Asset Allocation model.   

If we were coming out of a long term Stable Vix Pattern and spiked to 28.92 from below 20, then I would be looking to buy SDS as a hedge on a return to below 20.  As the VIX falls, I would expect the S & P 500 to be going up and the double short for the S & P 500, SDS, to be going down about twice as much as the average was moving up. So a fall in the VIX from 30 to below 20 would most likely be linked to a fall in SDS which would normally create an opportunity to buy it at a much lower level, thus increasing its potential effectiveness as a hedge.  I am not going to buy it now for three reasons. 

First, hedging in my opinion needs to be done soon after the start of the Phase 1 Unstable Vix Pattern, which arose in August 2007, when the VIX  returned to below 20 in late September and early October 2007 as the market had its last rally before beginning its long descent, and even more hedging immediately after the formation of the Phase 2 Unstable Vix Pattern in late September 2008. I am just reluctant to put on a hedge 16 months after the start of a bear market, and that hesitation even becomes more acute after 20 months. The current bear market is dated as starting in October 2007.  

Second, so far at least, the market appears to be recovering, there are green shoots starting to appear in important economies around the world, and the VIX is starting to move into a 20 to 30 range possibly as the precursor to finding stability below 20 which would mark the commencement of another investable bull market under the model as now configured.

Third, I reduced my exposure to stocks significantly in 2007, and my current portfolio is weighted more in bonds, cash and alternative assets than to stocks, so a hedge is not really that important to me now anyway.  I am more interested in hedging my bond portfolio by buying TBT and PST at better prices.   I am also more concerned now that a hedge would detract from my performance than add to by reducing my losses. So, I am less in a capital preservation mode than in a capital enhancement mode.   This may change based on some unexpected development.  

There is always the argument that the best hedge is to sell something in need of hedging until there is no real need to hedge it. I will likely do that at some point with my long corporate bonds, just sell a few when I become more concerned about inflation than I am now.  

The volatility index for the DJIA closed at 25.22. ^VXD I view it as the least volatile index, and it was the first to cross below 30 from the elevated levels in the Phase 2 Unstable VIX Pattern.  It will most likely to be the first to cross below 20 too, followed by the VIX, with the Nasdaq and Russell 2000 bringing up the rear. The Nasdaq volatility index is showing more stability than I would expect, closing at 29.44 on Friday. ^VXN

During the last bear market in 2001-2002, the VXN soared to much higher levels of volatility than the VIX.  After an extended period of higher volatility, the VXN found  stability at below 20 in November 2004,  after the VIX found that range 13 months earlier  (Compare  NASDAQ VOLATILITY INDEX Index Chart with  CBOE VOLATILITY INDEX Index Chart)  This time it looks different. It appears that VXN may be able to find stability soon after the VIX or within weeks thereafter.  It can not be said now whether either will soon find that stability.  

2. Dick Cheney is Trying to Lay the Foundation to Blame Obama for any Future Terrorist Attack:  

I never assume a politician from either Tribe is telling me the truth.

I also classify as a lie what a more diplomatic person would say is just an exaggeration or a misleading statement. An example of what I would call a lie is the representation by Bush and Cheney that the aluminum tubes seized by the U.S. before the Iraq invasion could be used to enrich uranium, or their reliance on the forged documents about yellow cake from Niger, or their reliance on the alcoholic former taxi driver called Curveball who the brother of one of  Ahmed's Chalabi's top aides (Ahmed Chalabi - Wikipedia)

In each of those cases, Bush and Cheney ignored the best evidence that contradicted their assertions, failed to even mention the contrary evidence to the public, and instead presented unreliable and false evidence, or bad arguments, as facts. That is what most people use to call lying when I was younger.


One of my many concerns arises from my observation that politicians do not wish to buttress their arguments with facts, free from manipulation, distortion and exaggeration and with due regard to information that casts doubts or questions about their positions. This endemic failure of politicians as a class only makes the voter's path to the truth more difficult, at least for the few of us who still want to blaze that trail. Our task is made that much harder by the many shortcomings of the press and their inability to probe beyond the surface. Tim Russert was an exception and I am not aware of anyone capable of filing his shoes, including David Gregory.

Many members of the press have been cowed by the forces from the right who are quick to label any factual assertion, or even a question with a fact in it, inconsistent with their rigid ideology to be be proof of bias. Nor, does it help that many journalists are not trained in any field that is the subject of their reporting, a factor that leads to a superficiality. So, when I am critical of a politician for not telling the truth, or misleading the public, I am not making a political statement as a member of one of the two Tribes, since I am critical of politicians in general. Instead, I am simply making an observation, in a saddened state, about what passes for intelligent conversation by our leaders on matters impacting us all.

One of the most truth challenged politicians in my memory is Dick Cheney. Cheney is the kind of person who creates his own reality, and then warps and distorts information to fit whatever view he wishes to advance. He gave a speech recently before the self styled conservative organization, the American Enterprise Institute, where he claimed that the "half-measures" taken by Obama against the terrorist threat made America more vulnerable to attack. I am not exactly clear about what he means by half measures, other than the prohibition on torture championed by Cheney. 

Apparently, a full measure is being willing to waterboard a prisoner of war 183 times. That is not my point however. Cheney made at least 10 serious misstatements of facts during the course of that short speech, some would use the term lies, but not me when I am trying to be diplomatic about someone who has caused a great deal of injury to the U.S. and betrayed virtually every real conservative value. Cheney's reality creation in his most recent speech is documented by the two journalists who started to poke holes in Cheney's false claims that he used to justify the Iraq invasion, at a time when virtually all journalists were eager to act as publicists for the administrations claims.  This is a link to their excellent article from those two real journalists about Cheney's speech. McClatchy

Some of the points made in this article, such as the assertion made by the FBI Director in a Vanity Fair article have previously been discussed by me, where Mueller asserted that the torture approved by Cheney as a "full-measure" did not prevent any attacks vanityfair.com, The torture did, however, produce a large number of bogus leads as you would expect which wasted the FBI's time and manpower. Another point previously referenced was the conclusion by the CIA's own inspector general that the torture did not stop any terror attacks. McClatchy

None of that will stop Cheney from claiming that torture saved hundreds of thousands of lives by preventing a second wave attack. I view Cheney to be the most untrustworthy American politician currently living, bested only by Bill Clinton when Bill was answering a question about his sex life. But there is a material difference between a politician lying about their sex life and another one misleading an unfortunately gullible public to justify a war. I know that I am in a minority when I make that point here in the SUV Capital of the World, where virtually no one questions the words of the Dark Force as being anything other than the equivalent of the gospel according to Jesus.

3. Rush Limbaugh Tries to Inflame the True Believers about Sotomayor: Rush is almost never interested in conveying accurate information.  Instead, he has a feel for the worldview and mind set of his audience and knows how to pull their chain, which is not hard to do. I believe that I could do it if I was so inclined. The most recent example is his statement that Sotomayor, while sitting as a judge on the Second Circuit Court of Appeals, ignored the law and supported discrimination against white firefighters in a one paragraph decision in the Ricci case. This is not an accurate portrayal of the decision.  The Court merely affirmed a District Court decision that upheld city of New Haven's right to throw out test results which it reasonably believed led to racially disparate results.  PolitiFact 

One thing that I discovered was that Sotomayor had ruled against the plaintiff who brought discrimination charges  45 out of 48 times. On the three occasions that the discrimination claim was upheld, the decision of the Appeals Court panel was unanimous and Sotamajor was joined in the decision by one Republican appointee. Judge Sotomayor and Race | SCOTUSblog

Has Rush mentioned that tidbit to the True Believers? 

I could go on about Rush, Cheney and James Dobson and other Jerry Falwell imitators. I would imagine that the Democrats are just gleeful that many true independents, willing to vote for candidates from either party,  currently view the GOP as revolving around the Axis of those three individuals.

It is impossible for me to visualize the GOP except in those three white faces, none of whom have much if anything in common with conservatism.

While there is no doubt 20 or even 25% of the voting population who fervently support those gentlemen, and will vote for the GOP no matter what, they are not popular among the true swing voters in a national election and a few senate races. (Most congressional districts have been gerrymandered to insure the re-election of an incumbent which increases polarization in American politics, and diminishes the influence of moderate and independent voters).

The GOP seems intent on self-immolation by allowing themselves to be so identified with this Axis. The best thing that could happen for the GOP now would be to put Cheney out to pasture, just shut him up, and for a few leaders to at least try to distance themselves from Rush, rather than kneeling down and licking his shoes incessantly. If some slight criticism of Rush sends the True Believers into their normal vitriolic, venomous spiel and apoplexy, as it certainly would do, then the GOP politician who wishes to  Man Up  may be able to put together a winning coalition in the next election, sending the Beanpole back to teaching,  by not being so subservient to GOP's assorted wingnuts and religious zealots.

Reagan barely paid any attention to them.

At least the Democrats learned not to become to closely identified with some of their problematic supporters. I really hope that a some point in my life a real and true conservative party will emerge as an alternative to the Democrats. 

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