US REITs TOPPING

After a very long topping process I do believe we have finally reached a point where the market is likely to run out of steam.

The Dow is now up ~8% since the 19 December low, including 21 sessions with no more than a 1-3 session pause. The VIX is 18 and showing extreme complacency.

Coming back to our chart IYR representing the US REIT market, the wave count as it stands is extremely clear, and the corrective wave has now reached a deep 78.2% fib retracement.

Hold on to your hats we are about to start a whole new wild ride.

Dualism and its Market Impact

I find myself writing this note in a reflective mood in a cocktail bar overlooking the gorgeous Shoal Bay. There are no shortage of market forecasts doing their rounds, as is common for this time of the year, and quite frankly the argument for a positive 2012 is about as equally compelling as is the argument for a negative 2012. I shall do the sensible thing and avoid making an absolute forecast for the year ahead. My focus is rather to develop a tactical portfolio around the probable risk vs. rewards on the dataset with which the market presents us with. In plain language without going into the detail of the analysis the mar-ket is offering us puny returns for the current risk environment, despite all the positive “surprises” from essentially lagging and coincidental indicators. This makes me cautious and unwilling to accept “normal” degrees of market risk. Our portfolio con-struction approach is a highly dynamic process and it is therefore best for me to leave the outlook for 2012 as one of caution for now, this may change at some point in the year.
With the concept of brilliant people discovering brilliant models of economic and psychological behaviour, how is it possible that there can be such vast differences of opinions as to what the outcome of these models is likely to be into the future.

In 1994 a scientist, Francis Crick, one of the discoverers of the molecular structure of DNA wrote a book about consciousness called The Astonishing Hypothesis. His theory posits that “a person’s mental activities are entirely due to the behavior of nerve cells, glial cells, and the atoms, ions, and molecules that make them up and influence them.” Crick claims that scientific study of the brain during the 20th century lead to acceptance of consciousness, free will, and the human soul as subjects for scientific investigation. Crick’s controversial message, “You, your joys and your sorrows, your memories and your ambitions, your sense of personal identity and free will, are in fact no more than the behaviour of a vast assembly of nerve cells and their associated molecules”.
Over the last few years I have read a number of books on the fast growing field of neuroscience and while I am immensely impressed with the progress made, I am somewhat disappointed in how many people are taking sciences discoveries as holy writ without the requisite amount of questioning. Can it be as Crick would have us believe that the mind is simply a circuit of brain impulses. In fact Crick is echoing the words of Thomas Hobbes in his classic book Leviathan published in 1651.

As I move onto my 2nd beer I wish to reacquaint you with the Theory of Dualism as taught by Rene Descartes (1596—1650). The concept of a separate mind and body with the mind being the soul was presented by Plato almost 2,000 years ago, and I believe is probably a comfortable fit for most of you reading this letter. Descartes was determined to prove his existence, as he believed it was possible to doubt every aspect of his physical existence. He said how is it possible to prove that I am a man living in the world with a family and a job, etc; surely it could all be a dream. He proceeded to cast every aspect of his life into doubt, except for one thing he said that he cannot deny that he is thinking, and from there came the famous words, “I doubt, therefore I think; I think therefore I am”. So using Descartes approach the mind can be seen as an entity separate from the body, with a process of causal interaction.
Now is probably a good time to ask the question what on earth has this to do with the managing of money and investing in the stock market. Armed with this theoretical background I aim to introduce a novel idea as to how we should understand the stock market and the vast number of opposing market views (this is probably well documented somewhere but is original to me with my current knowledge). I fear what I am about to say may be construed as heretical but it is a belief I have and because we don’t trade the market but rather we trade our beliefs about the market I think it is worth committing this belief to paper.

I believe the market has its own mind/soul/personality, made up of a combination of all market participants wants and desires. The sum of all buys and sells make up the body of the market; however, the mind of the market is determined not from a classic mechanical or physical process of how the economy or psychology of the brain should work according to a formulae given the current circumstance, rather the mind acts with causal influence but independence as a separate entity. It is for this reason that making mechanical forecasts about how the market will behave in 2012 are likely to be guesses. Rather a better approach to forecasting how the market will behave in 2012 is to focus on the markets personality.

I end with a quote from Steve Jobs that I believe best explains my point, “I began to realize that an intuitive understanding and consciousness was more significant than abstract thinking and intellectual logical analysis”.

Student Loans the new Subprime

The thesis that an even bigger debt crisis will follow the bursting of the Student Loan debt bubble was put forward more than a year ago. I came across the idea from Steve Eisman a hedge fund manager that made a fortune by playing the CDS market with subprime. The main stream media never picked up on this idea, and frankly I haven’t really followed the trade as I wasn’t sure how to play it.
With the focus all on European debt, the media hasn’t been focusing much on Municipal Debt and Student Loan debt. I have a feeling that not before long these debts will be confronted in a nasty way.

Take a look at the size of the student loan market, this is much larger than subprime, when it eventually catches up with the debt servicers it will have devastating effects.

Debt Ceiling Limit “Hit” Again

have you seen the mainstream media pick up on this??

According to U.S. Treasury figures, Uncle Sam bumped up against the debt ceiling a week ago yesterday.

The current ceiling, as provided for in the sleazy deal between the White House and Congress last August, is $15.194 trillion.

This morning, the debt totals $15.236 trillion. Thus is the Treasury once again dipping into government pension funds to pay the bills, just as it did last year.

The president will ask Congress to raise the ceiling again within “days, not weeks,” says White House spokesman Jay Carney.

Under the August agreement, an increase of $1.2 trillion will likely pass easily. The next one, not so much.

Hmmm… $1.2 trillion. That might not be enough to keep the lights on through Election Day. Could be interesting…

Government manipulated GDP vs Shadow Stats

The post below is from the highly reputable http://www.shadowstats.com website.

Alternate Gross Domestic Product Chart

The SGS-Alternate GDP reflects the inflation-adjusted, or real, year-to-year GDP change, adjusted for distortions in government inflation usage and methodological changes that have resulted in a built-in upside bias to official reporting.

Annual Growth (Year-to-Year Percent Change) in GDP is shown in the chart on the right. This is not the annualized quarterly rate of change that serves as the headline number for the series.

Note: The GDP headline number refers to the most-recent quarter’s annualized quarter-to-quarter rate of change (what that quarter’s percent quarter-to-quarter change would translate into if compounded for four consecutive quarters).

This can mean that the latest quarter can be reported with a positive annualized growth rate, while the actual annual rate of change is negative. Such was the case for the 3rd quarter of 2009.