Yet Another European Summit

12/10/2011

I feel good about the recent European Union Summit that just ended, why? The short answer is Germany has taken control and drawn a line in the sand. Well yes, they only agreed to agree later, so why would I feel good about that. This agreement to agree later is a move to define rules that will let the strong countries unite and the week countries to leave the European Union. I remember a year ago Dennis Gartman (on CNBC) predicting that we would end up with two Euros, one say, the Northern Euro and the second say, the Southern Euro. He may have missed the speculated result but he has the right idea for the result.

What did the member countries decide to decide later? From John Mauldins report: " A Player to Be Named Later "  John Mauldin http://www.frontlinethoughts.com

“Here are the main points of the agreement, reached in the small hours of Friday after overnight talks.
“• EU leaders described the deal as based on a new ‘fiscal compact’ and ‘on significantly stronger co-ordination of economic policies in areas of common interest’.
“• Eurozone states' budgets should be balanced or in surplus; this principle will be deemed respected if, as a rule, the annual structural deficit does not exceed 0.5% of gross
domestic product.
“• Such a rule will also be introduced in eurozone member states' own national legal systems; they must report national debt issuance plans in advance.
“• As soon as a eurozone member state is in breach of the 3% deficit ceiling, there will be automatic consequences, including possible sanctions, unless a qualified majority of eurozone states is opposed.
“• Voting rules in the ESM (The European Stability Mechanism) will be changed to allow decisions by a qualified majority of 85% in emergencies, although that remains subject to confirmation by the Finnish parliament.”

The incentive to join and submit to these rules, "The carrot is 1% financing for your(countries) banks, which can then buy your bonds at 4-5-6% (depending on the country). That makes it easier for your banks to get whole."

"Germany has made the correct calculation that the only way they can make it in the future is to grow their economy significantly. And they can’t do it if they have to finance the weaker members of the eurozone. So they are in effect creating a “coalition of the strong.” And if you want to play you will have to get your fiscal house in order. Germany will not kick you out, but you will lose access to financing if you don’t get your budget under control."

"Germany is willing to suffer some volatility and pain in the short run to cement their long-run viability. And they want an alliance of strong countries with them. They are willing to allow the ECB to control debt markets in the short term, while the new rules are being adopted and the adjustments made by the individual countries."

For more from John Mauldin's Report use the link above. This report has helped me think through this European Crisis and understand it a little more clearly. I hope this has helped you understand it more clearly, and understanding that they have a long way to go to resolve this crisis. 

Yes there is a lot of speculation here, but markets go on regardless of the speculation. Our Risk Management has reduced our risk in bear markets and corrections since 1994, so we will work throught this. The Asset Allocation Rotation Model is currently 23.54% in equities, 21.239% in bonds, and 55.22% in money market, a good allocation for the current market condition.

Best of holidays, Don

Short Term Rally

10/16/2011

For the past two weeks we have had a strong rally. Will it last is the question? We should look for a pullback and the characterisics of that pullback will be key. We need a short down leg and back up again. Several things look encouraging, some of our buy signals have tripped in the last few days, Large Cap and Junk Bonds have gone on a Buy. We don't use Junk Bonds as an asset class but I personally follow junk bonds as a good indicator of turns in the equity markets. Another encouraging sign is the new life in some of the higher risk asset classes as shown in the chart below.

This table (sorry for the fuzzy image) which is asset classes ranked by RSI/Stochastic which is pure momentum has Interenet, NASDQ, Hi Tech, Large Growth(IVW S&P500 Growth) at the top. These are not defensive catagories. This gives us hope that this rally has legs.

John mauldin's newsletter this week is a real mind bender which has some profound thoughts for you to consider. It is all about how the End Game will turn out in our sweating through the deleveraging process resulting from the world (Developed Countries) credit bubble. Will we be heating our houses with our currency as Germany's history has indicated in this newslwetter. This link will bring up "Can It Happen Here?" From John Mauldin http://www.frontlinethoughts.com

Hoping for a profitable rally, Don 

A Wild and Wacky Market

09/18/2011

What a ride! We have a little bit of everything thrown at us lately. I am just so glad to have developed a Risk Management computer model in 1994. It have kept me in the market at the right time and out of the market at the right time since. Check out these equity curves, (scroll down) my own brokerage account in the 2001-2002 Bear market, and the real time web site account in the 2008 Bear market. We expect to see another seroius Bear market in 6 to 12 months, if fact we may be in one now. Different people have different definitions for Bear markets, our is a 20% decline that has a duration of 2 months or more.

What motivated me send out this Update was John Mauldin's Newletter, Twist and Shout, this week. WOW it is full of valuable scary information. It is, once again talking about the financial crisis in Europe, the FED possible actions, and our Treasury Secretary. I had to read this twice and read parts several times. For your financial health, please read this heady newsletter. Here are some ecerpts:

" Bailing Out Europe’s Banks

Yesterday the Fed announced that along with the central banks of Great Britain, Japan,
and Switzerland it would provide dollars to European banks that have lost their ability to access
dollar capital markets (basically each other and US-based money market funds that are slowly
letting their holdings of European bank commercial paper decrease as it comes due). And if they
are “rolling it over,” they are buying very short-term paper, according to officials at the major
French bank BNP Paribas.
Are US taxpayers on the hook? We will deal with that in a minute. The more interesting
question is, why do it at all and why now? Was there a crisis that we missed? Why the sudden
urgency?"

"Let’s look at just one country. French banks are leveraged 4 times total French GDP. Not
their private capital, mind you, but the entire county’s economic output! French banks have a
total of almost $70 billion in exposure to Greek public and private debt, on which they will have
to take at least a 50% haircut, and bond rating group Sean Egan thinks it will ultimately be closer
to 90%. That is just Greek debt, mind you. Essentially, French banks are perilously close to
being too big for France to save with only modest haircuts on their sovereign debt. If they were
forced to take what will soon be mark-to-market numbers, they would be insolvent."

"George Friedman wrote: Speaking about Geithner going to the Eurozone finance meeting this weekend in Poland, he says:

“Geithner’s presence is particularly useful for two reasons. First, despite the vitriol that is
a hallmark of American domestic politics, American monetary policy is remarkably collegial.
The transitions between Treasury secretaries are strikingly smooth. Geithner himself worked for
the Federal Reserve before coming into his current job, and Geithner’s partners in managing the
U.S. system – the chairmen of the Federal Reserve and the Federal Deposit Insurance
Corporation – are typically apolitical. Geithner holds the United States’ institutional knowledge
on economic crisis management.
“Second, what Geithner doesn’t know, he can easily and quickly ascertain by calling one
of the chairmen mentioned above. This is a somewhat alien concept in Europe, which counts 27
separate banking authorities, 11 different monetary authorities, and at last reckoning some 30
entities with the power to carry out bailout procedures."

"What Is the Fed Really Risking?

This will be where I lose a few readers. The actual answer to the above question is, “Not
much.” The Fed is not lending to European banks or even to the various national central banks.
Its customer is the ECB, which will deposit euros with the Fed to get access to dollars."

The FED FOMC meeting is next week, here is what John had to say about that:

"This next Fed meeting will likely produce a very interesting statement at its conclusion. If
the Fed does nothing, you do not want to be long. If they go “all in” you do not want to be short."

What does John mean, I Take it to mean the market is looking for action from the FED as QE3 or something like QE3 such as in the above providing dollars to the ECB, or some further liquifying our economy. For this you don't want to be short, market is going up. For the FED does nothing, the market woll be disappointed and go down.

On another subject, I am presenting AAR to a money manager and they are evaluating our portfolio and Risk Management skills, in other words doing Due Dilegence on AAR. I answered some questions they had last Firday and made a few comments on AAR. I present them below for you:

"Just a couple notes, what I am presenting to you is truly unique, I have not seen it anywhere in the investment community. Asset Allocation is old hat and it has some great qualities, but it has one bad quality, in Bear markets all asset classes converge on all being correlated and all (for the most) going down. AAR solves this bad quality and turns it into a good quality. If you ever go through a Bear market with AAR you will love it! For the 2008 Bear market, the signals started exiting in October-December 2007 and was 100% Money Market by September 08, 2008. And most went back in the market on March 18, 2009. The attached chart is showing the Growth equity curve which has 0% Bond allocation and comparing to the SPY."

Following the Models, Don

Is Europe Crisis at Our Door?

08/13/2011

I am trying a experiment. I'm putting some charts in a PowerPoint and linking it to this newsletter. If you have trouble opening it let me know. As they say a picture is worth a thousand words. I am a slow typist and this web site editor just takes much time.

The market correction has been crazy and the volatility is still to high to be in the market. Before we get into the market, let's talk about the Europe debt crisis. This is not going away, it will be at our door sooner or later. The solvent EU countries are desperate to prop up the weak countries to save the Euro currency. This will keep it away for awhile. To get a better understanding of the details read John Mauldin's Newsletter "Beginning of the Endgame" of this weekend. He also has some thoughts on "Are we already in recession".
John Mauldin http://www.frontlinethoughts.com

Now for the PowerPoint, Tango5 & TangoETF News,(this is PowerPoint2010, when it opens, at the top click "Slide Show", then From Beginning. The first chart is one of the first steps I use (other than our signals) to find a turn in the trend, in this case a turn up. The small caps lead the market in a turn up or turn down. You can see the turn up in the chart. The Russel2000 and the S&P600 small caps are leading. This is in the early stage so it can change.

The next chart is of the NYSE New Highs and New Lows, you can see the new lows have dried up and are at 24. At this time the Lows are more important than the Highs.

I feel a recession coming, don't know when but lets look at some potential holdings other tha cash in the next recession. The Europe crisis, downgrade of the US debt to AA+, and other bad news have caused an acute "flight to safety". In this next chart we are showing some low volatility holding choices during the 2008 bear market. There are varying risk/reward holdings shown. Just some food for thought, there are also other potential choices. Those shown are all apparent except BMORT, this is an index created from Mortgage Bond mutual and ETF funds. To be clear our TangoETF trading systems will be in cash or a small exposure in an inverse fund (short) and will not hold the funds shown here. We just wanted to illustrate that every thing will not be going down in the next recession.

The next chart is just a closer look at the chart above.

Following the Models, Don

Slipping Into Recession

07/30/2011

The economic news recently has indicated a slow down in economic growth (GDP). The stock market is in a familiar topping pattern. What is ahead? Well I can not predict the future and no one on Wall Street can, but a careful look at the economic news is quite sobering. I will highlight two reports here that provide a hint to what is ahead.

This report from George Friedman http://www.stratfor.com/ " Germany's Choice Part 2" is report on Germany's effort to support the EU.

The second is John Mauldin's weekly newsletter " An Economy at Stall Speed" which has some fascinating insights.

These are all headwinds facing the stock market, our Risk Management Models are all on a Sell with the exception of Commodities so we are ready for the next recession whether it is starting now or sometime in 2012! It is ironic that during recessions is when we really earn our money, these recessionary times are when we add the most value for the investor.

Following the models, Don