US Position Payoff Profile

This diagram illustrates my current US portfolio looking towards month end duration.

 Here is the same diagram with all the underlying options making up the portfolio for the US.

STILL NOT 100% SURE

The Bear Growls

Having remained bearish since Mid May it feels like a lifetime. It has
also felt so right quite a few times along the journey to justify the
belief that bear market round 2 has begun.

The month started off with a bang and on day 1 we were up 4.5% and
then we gradually gave it back plus another 3.5% as yet another false
break down materialsed and we made new recovery highs.

Now the market is starting to present another bearish picture yet I am
currently not perfectly positioned for the bear story as there is
another game in play and that is risk management or damage control.

The message here is that in keeping with my policy of no regret it is
still important to build a framework to cater for the probability of
yet another bear fake.

I am comfortable with this overall strategy. What remains for me to
consider is how protective I become over P&L with month end on Wed
next week and Yom Kippur on Monday.

This will be partly decided in the next few hours.

Sent from my iPhone

China I believe continues to lead the way

US REIT downgrade to market perform.

Today BMO recommend taking some profits as they feel the market
reflects fair value.

I sense any profit taking will launch a landslide of selling.

The bearish case is starting to take shape.

Sent from my iPhone

AN OVERVIEW OF THE A-REIT MARKET

23 Sep. 09

This is a rough overview of the A-REIT (Australian) market over the last couple of years. I will essentially present it via charts and tables with a small commentary section.

VISUAL LANDSCAPE OF A-REIT MARKET

Chart 1:

In chart 1, you see a 5yr chart of A-REIT price action as reflected by the index on the left axis. I have superimposed the weekly volatility of the price action as measured on the right axis. You can clearly see the extreme in volatility at the March 09 low.

For sake of comparison to the Global REIT market I have created a relative chart 2, which compares the performance of A-REITs to Global REITs. The dotted black line is the mean of the relative ratio. What is clear is that the A-REITs have clearly underperformed in the last year stretching the ratio more than 2 std deviations away from the mean. Assuming reversion to the mean, Australia offers relative value.

Chart 2.

Using similar logic to the previous chart let us now look at the relative performance of A-REITs to the SA REITs as measured by the JSAPY index. Clearly Australia has underperformed the SA market to a slightly lesser extent than the Global Index.








Chart 3.

 

 

 

A-REIT STATISTICS

In this table you can get a feel for the hammering in market cap the sector has undergone.

	Free Float	Div	Total Real Estate
	Mkt Cap - AUD (million)	Yield	v Listed Real Estate
Mar-07	$121,451	5.36%	38.66%
Jun-07	$124,938	5.56%	38.66%
Mar-09	$40,847	13.84%	33.62%
May-09	$48,546	13.69%	32.71%
Aug-09	$72,928

• The average gearing level across the sector at the end of June 2009 was 31.4% compared to 43% at the end of 2008.
  
• JP Morgan anticipate a further A$8.1bn in write offs over the coming 12 months.
  
• Available liquidity is enough to cover the next 2 years of debt maturities.
  
• Bank lending is currently around a margin of 400bps.
  
• Current valuation cap rates on average 7.9%
  
• Development pipeline over the next 2 years has been slashed to rough A$5.1bn, 45% is applicable to Westfield.
  
• A value of A$12.4 billion traded in August 2009.
  
• Goldman Sachs today lowered their expected dividend yield on the sector for 2010 to 5.4% which is below the 10yr government bond yield of 5.8%.
  

Conclusion

The sector has clearly undergone a massive correction from its 2007 highs. Since March 2009 the sector has rallied some 72%. Clearly there remain valuation question marks; going forward dividend earnings are under pressure and the sector is expensive relative to the bond market. On the positive relative to the global REIT space and South Africa AREITs are cheap.

Global REIT Index

this too looks like it has done enough to begin the down draft.

LOOKING TOPPY

I am fighting myself from getting to excited that the wait is over. If the wait is over I dont have the ideal bearish portfolio, but then again it is more important that I stay in the game so I bought some near dated calls during the session. If this is it I will get my chance to add to the short side. BE VIGILANT as there are not going to be easy entry points on the short side if this is a 3rd wave.

Exhaustion

For some reason I am feeling extremely tired. Late nights early mornings will do it to you.

Hourly US REIT

Short Term Chart

A-REITS ARE EXPENSIVE RELATIVE TO BONDS

.

An Outsiders Wave Count

It was a great treat that I came across this chart from a wave counter that I really respect.

AUTUMN EQUINOX

For some reason, stocks, commodities and currencies have a curious
tendency to make major tops or bottoms on this day, as Paul Macrae
Montgomery points out in a special study edition of Universal Economics
newsletter entitled, "A Date Which Will in Infamy." While it is a bit of
hyperbole to equate Sept. 22 with FDR's characterization of the Dec. 7,
1941 attack on Pearl Harbor, the number of huge reversals that took
place on or about that date is stunning.

Montgomery recalls living through the October "massacres" of 1978 and
1979, the crash of 1987, the mini-crash of 1989, the 1997 Asian collapse
and the Long-Term Capital Markets plunges, which started to cascade
downward in late September. And while gold bullion topped in January
1980, gold stocks made their highs on Sept. 22 of that year, he adds.
That date also saw the peak in many oil stocks.

Why the apparent coincidence of these market upheavals beginning around
Sept. 22? Montgomery posits a possible link to the Autumnal Equinox,
which takes place Tuesday afternoon in the Northern Hemisphere. And he
also observes an increasing incidence of market reversals around the
time of Vernal Equinox in the Spring.

This year's Autumnal Equinox comes after a historic six-month rally in
stocks and a persistent, if much less dramatic, drop in the dollar, he
says. Traders should be alert for reversals in stocks, currencies and
gold for possible reversals, Montgomery advises. Long-term position
accounts shouldn't act without corroboration from other models, he adds.

Correlations are not causality, of course. Montgomery contends that the
typical explanations for market swings, such as the Lehman collapse or
Russia's debt crisis, are ex post facto. He asserts that certain cycles
tend to recur because of the human nervous system.

"At certain predictable times, subtle neurologic extremes are going to
occur, and these extremes are going to prompt behavior aimed at
ameliorating the attendant perturbation," he writes. Those reactions
supply the fundamental events, such as wars, political upheavals or
devaluations, that become the fundamental events to explain the market
swings, he concludes.

Whether you believe such alternative explanations for market actions is
beside the point. The notion of perfectly rational and efficient markets
has taken a huge, if not fatal, blow by the events of the past two
years. That so many wild things happen on this date is reason enough to
take note.

Ahoy there are ICEBERGS AHEAD

Most U.K. Commercial Property Loans Are in Default, CBRE Says
2009-09-22 12:32:26.35 GMT

By Chris Bourke and Simon Packard
Sept. 22 (Bloomberg) -- Most U.K. commercial property loans are now
in default after values slumped in the past two years, according to CB
Richard Ellis Group Inc., the world's largest real estate broker.
About 200 billion pounds ($327 billion) is needed to refinance
existing loans secured against 450 billion pounds of properties during
the next five to seven years, though only about half that amount is
available, the company estimates.
"Almost every senior, and every junior, loan is in technical
default," Robin Hubbard, a director of CBRE's real estate finance group,
said at a press conference today in London.
"There's limited financing available for new loans or refinancing other
people's loans."
Investors borrowed 360 billion pounds to buy stores, offices and
warehouses in Britain using about 90 billion pounds of their own cash,
according to Los Angeles-based CBRE. They now owe more than the
properties are worth after the global financial crisis ended the
market's five-year boom.
Average property values have fallen 44 percent since mid- 2007,
according to Investment Property Databank Ltd.
Banks are choosing to extend most of the 45 billion pounds of
commercial real estate loans due to mature this year, though only for
short periods, Hubbard said. This is only deferring the defaults, he
said.
The biggest challenge facing owners of U.K. commercial properties
is the leasing market, which "could be the straw that breaks the camel's
back," Hubbard said. The recession and rising unemployment are leading
to more vacancies and fewer tenants.
"Nobody's going to throw money in to get things back, unless it's
for new, nice, prime kit," Hubbard said. "There's only so much magic
dust you can sprinkle on the rubbish stuff."

For Related News and Information:
For more U.K. real estate news: TNI UKECO REL <GO> CMBS loan reports:
LRP <GO> Real estate resources: RE <GO> Top Bloomberg News bond stories:
TOPH <GO> Top Bloomberg News real estate stories: TOPR <GO> Stories on
banking: NI BNK <GO>

--Editors: Anne Pollak, Ross Larsen

To contact the reporter on this story:
Chris Bourke in London at +44-20-7073-3808 or cbourke4@bloomberg.net.

To contact the editor responsible for this story:
Alan Mirabella at 1-212-617-4149 or amirabella@bloomberg.net.

Volatility is Going Cheap

The market is back to the old days, "bullish" with low volatility. This promises to end in tears.

I think wae v up just started

 

Relative Trade

I am holding myself back from entering the relative trades I like to enter at momentum extremes.
Ideally I would prefer being long Australia relative to short the US but for now I remain steadfast short across the board.

All The Same Markets

Check out the correlations of these property indices relative to the S&P500, it is also worth noting the Beta of the US REITs to the broad equity market.

Where Does China Fit in

Is this index the leading indicator to the next leg down in world markets?

Check the DAX

I was busy looking at the DAX and couldnt get over how similar this final wave C of wave 2 is identical to the IYR chart in the US.

A longer term perspective

Close but still not there yet

US REITs still need one more rally

Short term REIT wave count

StockCharts.com: Favorite Chart (IYR)

http://stockcharts.com/c-sc/sc?s=IYR

THOUGHT THIS DESCRIPTION OF MARKET INTERNAL MOOD WAS INTERESTING

Moreover, there may be a shorter time rhythm to the Dow’s moves since last November, with a low-to-low-to-high directional change occurring every 68 trading days (± 2 days). If this rhythm remains intact, the next reversal window is now through next Tuesday; September 18 (± 2 days). Interestingly, this time span encompasses September 22, the Autumnal Equinox, which expert analyst Paul Macrae Montgomery has for years identified as a period whereby neurological extremes emerge as well as the resulting actions needed to “ameliorate” such anxieties (crudely put, “stuff” tends to occur around this time period in nature and in humans, from earthquakes to interest rates).

StockCharts.com: Favorite Chart (IYR)

Playing it safe we still need a small iv pullback and then a wave v high, then crash boom splash.

Mike

 

VERY BULLISH REITs

NOT SURE WHAT THIS CHART TELLS other than it is reflecting positive sentiment.

 

CLASSIC ELLIOTT WAVE COUNT FORMATION

COHEN & STEERS KNOW MORE THAN THE CENTRAL GOVERNMENT

These guys have called an end to the recession, whilst the world Central Banks are reluctant to make such bold claims, lets see.

 

Real estate bear market has run its course, says Cohen & Steers

Fri, 04 Sep 2009, 11:53

       

The two-year bear market in real estate stocks has run its course and fundamental recovery is already underway in key markets in Asia, to be followed by the US next year and Europe in 2011, according to analysts from investment firm Cohen & Steers.

Cohen & Steers' co-chairman Robert Steers and global portfolio manager Scott Crowe were speaking at the European Public Real Estate Association annual conference being held near Brussels.

Steers said: 'In recent months we have seen significant and rapid change in the global real estate securities markets as the monetary and fiscal stimuli provided by governments has helped to bring an end to the recession. The recapitalisation of listed real estate companies is also progressing well, and together these factors will initiate a new positive return cycle for stocks.'

In a research paper the firm said the real estate total return cycle is likely to unfold in three phases, starting with the completion of the equity recapitalisation that is underway to deleverage companies from their debt burdens. This has already realised nearly USD40bn in capital raisings around the world since December 2008 through secondary issuance, rights offerings and corporate bond offerings. 

The second phase, preceding the final fundamental recovery in markets, will be characterised by significant acquisition opportunities in the US, Spain, Germany and France, and to a lesser extent in Asia.

Crowe said: 'In the longer term we believe real estate values will settle at higher levels than are generally expected by the market, as we do not see capitalisation rates (yields) spiking as high as many people anticipate. Net asset values for many real estate stocks are rising, driven by better-than-expected cash flows and improving cap rates. Furthermore, companies are starting once again to acquire assets, which should also contribute to value creation.'

The Cohen & Steers report concluded that the traditional four pillars of attributes drawing investors to listed real estate investment trusts, including competitive total returns, attractive current income, moderate volatility and low correlations with other asset classes, are beginning to reassert themselves.

As correlations with other assets start to diverge, volatility comes down and yields fall towards historical levels, the advantages of investing in listed real estate, and particularly Reits, will return, the company said.

 

HOW TO TRADE WELL

The Components of Trading Well

by
Van K. Tharp, Ph.D.

This article is an excerpt from Part 1 Working on Yourself: The Critical Component That Makes It All Work, from the book, Super Trader: Make Consistent Profits in Good and Bad Markets

I’m a neuro-linguistic programming (NLP) modeler and a coach for traders. As an NLP modeler, I encounter a number of people who excel in something, determine what they do in common, and then determine what beliefs, mental strategies, and mental states are required to perform each task. Once I have this information, I can teach those tasks to others and expect to get similar results. My job as a coach is to find talented people and make sure they learn and follow the fundamentals.

I remember doing a workshop with the Market Wizards Ed Seykota and Tom Basso around 1990. All three of us agreed that trading consists of three parts: personal psychology, money management (which I subsequently renamed position sizing (TM) in my book Trade Your Way ...), and system development. We also agreed that trading psychology contributes about 60% to success and position sizing contributes another 30%, which leaves about 10% for system development. Furthermore, most traders ignore the first two areas and don’t really have a trading system. That’s why 90% of them fail.

Over the years I’ve done extensive modeling in all three areas, and I now disagree slightly with our conclusions in 1990. First, I would argue that trading psychology accounts for 100% of success. Why? This conclusion is based on two findings. First, people generally are programmed to do everything the wrong way. They have internal biases that seem to lead them to do the exact opposite of what is required for success. For example, if you are the most important factor in your trading, you should spend the most time working on yourself, but the majority of people totally ignore the “you” factor in their success. Read over the checklists in this part that deal with good trading. If you’ve worked extensively in all the areas listed, you are probably very successful and are certainly a rarity.

Second, every task I model requires that I find the beliefs, mental states, and mental strategies that are involved. All three ingredients are purely psychological, and so it’s hard not to conclude that everything is psychological.

I now think that there are five components to trading well:

1. The trading process. The things you need to do on a day-to-day basis to be a good trader.

2. The wealth process. Exploring your relationship with money and why you do or do not have enough to trade with. For example, most people believe that they win the money game by having the most toys and that they can have it all right now if their monthly payments are low enough. This means that they save zero dollars and are over their heads in debt. If this is you, it also means that you don’t have enough money to trade.

3. Developing and maintaining a business plan to guide your trading. Trading is as much a business as is any other area. The entry requirements are much easier because all you have to do is deposit money in an account, sign a few forms, and start trading. However, the entry requirements for successful trading require that you master all the areas listed here. That requires a lot of commitment, which most people do not have. Instead, they want trading to be easy, fast, and very profitable.

4. Developing a system. People often consider their system to be the magic secret for picking the right stocks or commodities. In reality, entry into the market is one of the least important aspects of good trading. The keys to a moneymaking system are elements such as determining your objectives and the way you exit a position.

5. Position sizing to meet your objectives. We’ve discovered through our simulation games that 100 people at the end of a set of 50 trades will have 100 different equities. (They all get the same 100 trade results). This extreme variability of performance can be attributed to only two factors: how much they risked on each trade (i.e., position sizing) and the personal psychology that determined their position sizing decision.

Based on the five components of trading well, rate yourself by asking the following questions:

How well have I mastered the discipline of trading well each day? Do I do a daily self-analysis or a daily mental rehearsal to begin each day? If not, why not? (I will give you a lot of ideas about how to improve in this area throughout the Super Trader book).

Do I really have enough money for trading to make sense? If you do not, you probably need to work on yourself and the wealth process.

Do I have a working business plan to guide my trading? If you don’t, you are not alone. We estimate that only about 5% of traders have a written business plan. Then again, perhaps you’ve heard that only about 5% to 10% of all traders are really successful. Super Trader will guide you toward developing this kind of working document.

Do I have a set of objectives thoroughly written out to guide my trading? Most people don’t. How can you develop a system to meet your objectives without having objectives?

How much attention have I paid to the “how much” factor: position sizing? Do I have a plan for position sizing my system to meet my objectives? It is through position sizing that you either meet or fail to meet your objectives.

How much time do I spend working on myself? You have to overcome your psychological issues and develop the discipline necessary to carry out the processes described above, which are necessary for success.

Most of the items described here could be the topic for an entire book. However, my intention was to give you an overview of what is required for successful trading, and my job as a coach is to find talented people and coach them on following the fundamentals I’ve described them here.

About Van Tharp: Trading coach, and author, Dr. Van K. Tharp is widely recognized for his best-selling books and his outstanding Peak Performance Home Study program - a highly regarded classic that is suitable for all levels of traders and investors. You can learn more about Van Tharp at www.iitm.com. 

 

MYOPIC LOSS AVERSION

As a slight departure from my usual month end newsletter I write this on a gorgeous day at a café overlooking Bondi Beach with 4 trading days left of the month, and not at the beginning of the new month as usual. This letter is addressed primarily to myself as a source of intellectual reinforcement, but I believe we can all take something from its message.

 

As a discretionary fund manager there are many times when ones market calls do not go exactly according to plan and it is during these times that we need to dig deep into our resolve, to question the basis of our research and our overall methodology and ultimately deliver on our stated objectives. Whilst the current market has moved with more persistence than I anticipated, it has by no means behaved in a manner at conflict with my overall market views. In fact what has developed over the last 6 weeks I believe is a fantastic gift for a sentiment extreme trader such as myself. The most reputable sentiment indicators are currently registering extremes above their 2007 highs with bears in extremely short supply. This combined with momentum indicators stretched to severely overbought levels paints a superb picture for an aggressive market reversal.

 

So let me once again re-look at the stated objectives of the Freestyle REIT Hedge Fund. The objective is to achieve a 30% annual return with a Sharpe Ratio of 1 displaying an asymmetrical return distribution over a full trade cycle of 9 - 12 months. Having a clear objective and sticking to its goals is the key to achieving success, even more so in the face of adversity. Our strategy is very clear in that we look to make outsized returns when market calls are correct and keep losses to a minimum in the event of us being wrong. We have described at length in previous letters that markets behave according to their own time line and hence we accept returns to be asymmetrical as the market doesn't respect a hedge fund managers calendar performance needs. Having reaffirmed the funds objectives and feeling calm about the current portfolio composition it will be good to analyze the financial industries short term bias which places so much pressure on short term performance, consequently at the expense of longer term performance (talk about shooting ones self in the foot).

 

The bias I am referring to is Myopic Loss Aversion; ("MLA") ( Benartzi and Thaler 1995) where too greater emphasis is placed on short term (myopic) performance causing investors to underweight risk and as a consequence underperform. In order to understand where the theory of MLA originated we need to take a few steps back and look at a problem Mehra and Prescott identified in 1985 called The Equity Premium Puzzle which questioned the quantum of the equity premium for stocks over bonds as should be explained using the classical economic paradigm. According to their analysis of +- 100 years of market data the equity risk premium which is the equity return less the risk free rate should have been a lot lower than evidenced by the data, thus implying a far greater need for compensation for taking on market risk than a symmetrical model would suggest.

 

The answer to this puzzle came by way of MLA an adaptation of the seminal work Prospect Theory (Tversky and Kahneman 1979), whereby Benartzi and Thaler used two of its key principles, namely Loss Aversion and Mental Accounting to clarify the problem. These two theories are huge pilllars of the Behavioural Finance landscape and will need far deeper analysis, which we will hopefully get to in future letters but for now it is sufficient to say that Loss Aversion is the thesis that one feels the pain of financial loss a lot more than the joy associated with financial gain. Mental Accounting describes the way we evaluate outcomes to our decision making process, in the case of MLA it refers to the way we frame financial performance in a very narrow time frame.

 

With this basic framework in place let us look at the case in point. The Freestyle Fund believes it takes between 9 - 12 months for it to achieve its stated objective of 30% per annum. Theory tells me and the acid in the pit of my stomach validates the theory that the more frequently I look at performance the greater the likelihood of feeling discomfort, hence the greater the probability of avoiding risk in the portfolio the very source of the funds performance. It is therefore imperative that I put aside the industries need for neatly boxed monthly returns in an effort to stay true to the funds objectives and in so doing by lengthening the funds performance evaluation in line with its objectives we will be able to at this most crucial point in the trade cycle embrace the appropriate amount of risk in order for the fund to achieve its performance goals.  

 

By focusing on the funds last 3 months of small losses and ignoring the superb performance over 15 months it is very easy to become negative and too risk averse at a time when  our market research is pointing to the highest probability of outsized gains for those few mavericks committed to a market reversal. In conclusion, Bavlatskyy and Pogrebna (2006) found experimental evidence supporting a process of tilting the very behaviour responsible for MLA and in so doing neutralizing its damaging effects. I believe the validation of the funds stated objectives and the emotional acceptance of the funds performance time line is great step towards avoiding the bias of Myopic Loss Aversion afflicting fund managers and investors.       

 

BEING A CONTRARIAN IS TOUGH

By Vadim Pokhlebkin Tue, 25 Aug 2009 15:45:00 ET

Raise your hand if you agree with this famous quote from Baron Rothschild, an 18^th century British banker and a member of one of the world's richest families:

 

"The time to buy is when there's blood in the streets." 

 

Good advice, no argument there. OK -- now, how about this adage:

 

"Buy low, sell high."

 

Again, you'd be hard-pressed to find an investor who disagrees. Then why in the world do so few investors actually follow these rules?

 

In October 2007, when the DJIA topped 14,000 -- how many sold their shares? And when stocks scraped the bottom below 6,500 in early March of this year -- how many called their broker and yelled, "Buy, buy, buy!"?

 

It's no stretch to say that in each case, only a small minority of investors acted. The rest waited. At the 2007 top, paralyzed by greed, they waited for "the Dow at 40,000." At the March lows, they waited paralyzed by fear and hope. In both cases, the eternal cycle of greed and fear did what it always does: It transferred money from weak hands to the strong ones.

 

Harsh? Yes. But that's just how the market works. Despite a common misconception, it's not a place where everyone gets rich quick.

 

I will go one step further and suggest that even those gutsy investors who bought at the March lows are hesitating to sell now that the DJIA is almost 50% higher -- thus fulfilling only one part of the "buy low, sell high" adage.

 

Why is it so? The Elliott Wave Principle explains it best: investors herd. Human beings perceive safety in numbers -- and it's very, very hard to break away from the crowd, whether at market tops or bottoms. Being a contrarian is not for the faint-hearted.

 

Still, some manage to do it. Baron Rothschild bought when everyone sold. Sir John Templeton (look up his investment philosophy if you don't know it) sold tech stocks in 2000, and as early as 2004 warned (along with Elliott Wave International's president Robert Prechter) of the real estate bubble, also saying it was "a dangerous time to own stocks."

 

How do these investors do it? Well, some simply have both the uncommon intuition for extremes in crowd psychology and the guts to act while others wait. Others, like Bob Prechter, have a method -- a contrarian method like Elliott wave analysis.

 

The DJIA is up BIG from its March lows. Do you know how much longer the rally may last? Will you know when to sell? Our Financial Forecast Service can give you forecasts on multiple time frames right now. Try some contrarian thinking for a change. (Risk-free, as always.)

Tags

 

Classic Contrarian Signal

Investor optimism about the global economy has soared to its highest level in nearly six years, with portfolio managers putting their cash back into equity markets, according to the Merrill Lynch Survey of Fund Managers for August.

A net 75 per cent of survey respondents believe the world economy will strengthen in the coming 12 months, the highest reading since November 2003 and up from 63 per cent in July. Confidence about corporate health is at its highest since January 2004. A net 70 per cent of the panel respondents expect global corporate profits to rise in the coming year, up from 51 per cent last month.

August's survey shows that investors are matching their sentiment with action, by putting cash to work. Average cash balances have fallen to 3.5 per cent from 4.7 per cent in July, their lowest level since July 2007. Equity allocations have risen sharply month-over-month with a net 34 per cent of respondents overweight the asset class, up from a net seven per cent in July. Merrill Lynch's risk and liquidity indicator, a measure of risk appetite, has risen to 41, the highest in two years.

'Strong optimism in August represents a big turnaround from the apocalyptic bearishness of March. And yet with four out of five investors predicting below trend growth for the year ahead, a nagging lack of conviction about the durability of the recovery remains,' says Michael Hartnett, chief global equities strategist at Banc of America Securities-Merrill Lynch Research. 'The equity rally has been narrowly led by China and tech stocks. We have yet to see investors fully embrace cyclical regions such as Japan or Europe, or Western bank stocks.'

Global emerging markets, led by China, and technology stocks are the strongest engines behind the early recovery. Investors would rather be overweight emerging markets than any other region, and by some distance. A net 33 per cent of the panel prefers to overweight emerging markets while investor consensus is to remain underweight the US, the eurozone, the U.K. and Japan.

Technology remains the number one sector, with 28 per cent of the global panel overweight the industry. Industrials and materials lag with global fund managers holding 11 per cent and 12 per cent overweight positions respectively.

Further behind are banks. Global fund managers remain concerned about the sector, holding a ten per cent underweight position. In contrast, investors within emerging markets are positive about banks with a net 17 per cent of fund managers in the regional survey overweight bank stocks.

Some of these sectoral and regional imbalances are starting to erode, however. Global fund managers have scaled back their underweight positions in bank stocks from 20 per cent in July. Industrials and materials have recovered from underweight positions one month ago. Emerging markets are less popular than in July when 48 per cent of the panel most wanted to overweight the region. And Europe is a lot less unpopular. In July, a net 30 per cent of respondents wanted to underweight the eurozone. That figure has dropped to just two per cent in August.

Within Europe, fund managers appear as excited about the outlook as their global colleagues. A net 66 per cent of respondents to the regional survey expect the European economy to improve in the coming year, up from a net 34 per cent in July.

The net percentage expecting earnings per share to rise nearly trebled, reaching 62 compared with a net 23 per cent a month ago. Investors in the region took an overweight position in basic resources, a cyclical sector, and radically scaled back their overweight position in pharmaceuticals, a defensive sector.

In contrast to global respondents, those in Europe have failed to inject new money.

'European growth optimism has finally caught up with other regions, but fund managers have yet to fully act on this and cash levels have actually increased and overall sector conviction is near record lows,' says Patrik Schöwitz, European equity strategist at Banc of America Securities-Merrill Lynch Research.

CURRENT SENTIMENT

O baby it is hard to be a contrarian.

 

Hedged.biz reports: Most Western Central Bankers, and virtually all private sector economists have now declared the recession over. Probably around three months late, but better than their forecasting record going into said recession.

Consensus growth for China in 2010 is now 9% plus. Most stocks in our universe are at or above pre-Lehman’s levels. A lot of respected (?) commentators are talking ‘V’shaped recoveries on the back of a rebound in inventories. Property markets appear to be stabilising in the West and moving sharply up to near record levels in parts of the East.

 

INVENTORY

A lot has been said on this topic, and I frankly never took much note of it.

 

If I understand it as the economy slowed down and consumers stopped spending like they did in the past, inventory built up and production dropped off to cater for the lower demand. As production numbers dropped as evidenced by weaker GDP numbers the consumption that was taking place drew inventories down to a level that required replenishing.

 

So we have now witnessed a topping up of inventories to cater for consumption even though it is still muted, but this inventory build up has caused production to increase and will therefore be reflected in the current GDP numbers as an increase.

 

If my summary of how inventory works on a simplistic level, then surely we are completing cycle 1, to draw inference that this is the bottom surely needs further evidence whether demand is likely to pick up significantly, or will we go through another cycle of weak demand, increased inventory build up and lower production and lower GDP.

 

Am I missing something or are we ignoring the cyclical / secular debate.

TANGERINE TECHNIQUE

One of my gurus’ taught me this technique, for some reason I haven’t been using it like I used to. I hope to start using it again.

 

************************************************

Welcome to Genius Sparks from Paul R. Scheele ************************************************

 

The concept of mind over matter is a fascinating one. It can explain such phenomena as how objects move telekinetically in a research lab to how humans achieve feats of greatness in the face of unimaginable pain.

 

And mind over matter is about to go mainstream.

 

Brain researchers and toy developers alike are using biosensors with computer interfaces to measure electrical impulses in the brain and decipher and interpret actual mental states such as attention and meditation.

 

In fact, two competing toys aimed for the market later this year will challenge the user, wearing a simple sensor, to focus their concentration to levitate and move a ping-pong ball with their thoughts.

 

The ability to measure and monitor the brain’s electrical activity isn’t new. I remember when I first used an electroencephalograph (EEG) years ago while PhotoReading, which uses both the left and right brain hemispheres—the whole mind—to mentally photograph the pages of a book.

 

The computer immediately registered a decrease in conscious, analytical brain wave patterns and a corresponding rise in deep learning brain wave patterns. It convincingly demonstrated to me the power of training to get into state for learning.

 

Human brain waves normally operate in a range of frequencies from 1 to 30 hertz, or cycles a second. Smaller frequency modes within this wider range are associated with a variety of brain functions or capabilities.

 

These modes are like “brain channels,” similar to television channels. At each of these channel settings, different personal resources are available to you. The slower brain frequencies are associated with remarkable powers, seemingly miraculous to those who use the faster brain frequencies of the conscious mind.

 

Just as you change channels on your TV, you can change your brain channels to tap more of your mind’s full potential.

 

Simply get into a state of relaxed alertness, the ideal state for reading, learning, or performing any mental activity. You can easily do so with the “tangerine technique” from our PhotoReading process. Here’s how:

 

• Hold an imaginary tangerine in your hand. Experience the weight, color, texture, and smell of the tangerine.

 

• Gently close your eyes and place the tangerine so it delicately balances on the top, back part of your head. Touch that area gently with your hand. Become aware of the feeling. Now, imagine that tangerine floating up and behind your head, 6 to 12 inches. • Imagine your field of vision opening up.

 

• Maintain the relaxed feeling of alertness as you open your eyes and begin your desired activity.

 

Use this simple technique anytime you want to quickly access your vast brain power—even if just to keep a ping-pong ball floating in the air!

 

http://www.LearningStrategies.com/PhotoReading/DeluxeCourse.asp

 

 

 

RISK DASHBOARD

Beta adjusted
Long GROSS	0.0%
Short GROSS	100.0%
Gross Exposure
Net Exposure	-100.0%
NAV
Leverage X	0.67
$ mkt exposure	-66.9%

 

BEAR SQUEEZE

This has been a bear squeeze of note, I am starting to think with this blow-off and the fact that DSI-sentiment on the Blue Chips has matched and exceeded the August 2007 highs that this may be the end of all of wave 2. If so this is incredibly bearish and I will need to keep vigilant to see how the selloff develops. For now I will still treat it as a pullback for further highs, but I am dropping my confidence in this count to around 55%.

LAND SECURITIES

I may need to cover my Land shorts on weakness as I am not sure if there isn’t another high to come in this bounce.

We are near a short term pullback

 

GOLDMANS PROFITS

I have a hunch, call me a cynic but a lot of the $2.7b trading profits Goldman recorded in its recent 2^nd quarter are likely to turn into losses during the 2^nd wave downturn in the markets.

I know nothing about which markets they trade in, but I have a hunch a lot of the profits were marked to market in a very dicey environment. If the same m-t-m principles apply in the leg down watch these boys go from hero to zero.

SENTIMENT DIFFERENT TO FUNDAMENTALS

Another example of how people behave as survivors.  People living in South Africa no doubt see a worrying big picture. They see rampant crime, a criminal justice system floundering, unemployment too high, an economy in recession, a brain drain, etc. Yet with the recent Confed cup a renewed enthusiasm towards the country is to foot. This weekend the country enjoyed the unity and goodwill from Mandela turning 91.

 

This is another example of how human emotion waxes and wanes despite the facts on the ground. People have a need and hope to survive this manifests with spikes in optimism.

HUSSMAN ON REACTING

July 20, 2009

Tending Seeds - Reacting, Responding, Planting, and Watering

John P. Hussman, Ph.D.
All rights reserved and actively enforced.
Reprint Policy

In recent weeks, I've emphasized the very mixed nature of market conditions, which regardless of longer-term headwinds, remain very ambiguous regarding near term direction. For investors, the shifts in trend and the lack of clear direction create some difficulties, particularly for those who tend to react rather than respond to market fluctuations.

For our part, our focus is to ask the same basic questions every day – “What is the opportunity,” and “What is threatened?” We rarely have any sort of forecast for the market, and certainly don't have short-term forecasts here. Instead, we are responding to market fluctuations as they occur. For example, in response to last week's powerful rally, which brought the market again to overbought conditions, we took profits on the index call option position we established the prior week, and moved back to a fully-hedged investment stance. I certainly don't know whether that shift will be “right” in this instance, but it is the appropriate response from the standpoint of our investment discipline. Meanwhile, we continue to focus on individual stocks demonstrating favorable valuation and market action on our measures, with an eye toward buying higher ranked candidates on short-term weakness, and selling lower ranked holdings on short-term strength.

The distinction between reacting and responding is one that I've emphasized often over the years. To react is essentially to change one's plans abruptly based on what the market has just done – usually involving a certain amount of panic or worry that essentially forces one's hand. In contrast, to respond is to take the most recent market move as a piece of information, and to change the investment position accordingly, following a very specific discipline (ideally which allowed for the move in the first place).

For example, a reactive investor tends to reverse existing investment positions only when provoked by pain. Investment positions are sold when they have declined enough to trigger fear or panic. Investment positions are purchased in a rush to “catch” or “ride” them. My impression is that the single best mark of a reactive investor is the tendency to measure investment success by the amount gained or lost on any particular day. In contrast, the investor who responds puts much more emphasis on daily actions than on daily outcomes. That doesn't mean ignoring outcomes, but it means following a specific, well-studied discipline with the expectation that the results will emerge through repeated application. As usual, those results are best measured in terms of long-term return and risk over the complete market cycle.

As I wrote years ago in Force of Habit

"Over the years, I've written a lot about “daily action.” You decide on a set of actions that you believe will lead to good results if you follow them consistently. Then you follow them consistently. Unless a goal translates into daily, present action, focusing on that goal is simply a way of escaping reality. As Jean Paul Sartre wrote, “Je ne suis rien autre que mes actes” – I am nothing other than my actions.

"If an investor consistently takes positions based on forecasts, and changes those positions only when the market proves those forecasts wrong, that investor's life will predictably be dominated by hope, uncertainty, disappointment, reaction and frustration. If an investor constantly takes positions by responding to opportunities and conditions as they develop, with equanimity to what will happen next, making a habit of purchasing favorable value or early strength, and a similar habit of selling overvalue and early weakness, that investor's life will most probably be dominated by a sense of peace and control. Though it is not obvious which investor will have better results, my own opinion on that should be fairly clear.

"This doesn't mean that an investor who responds – rather than reacts – will know what will happen next. Rather, it means that this investor will be able to accept what happens next, knowing how to respond whatever the outcome. The point is to live in reality, and to take the next action from where one stands, without ignoring inconvenient aspects of reality in the hope of justifying one's position, and without wishing for the starting point to be somewhere else. The greatest source of human frustration is the desire for reality to be something other than it is.”

In short, as Robert Louis Stevenson wrote, “Don't judge each day by the harvest you reap, but by the seeds you plant.”

Tending Seeds

If you'll forgive the discourse (and at the risk of wandering a bit afield), over the years I've found thinking about the world from the standpoint of seeds to be enormously helpful. My friend Thich Nhat Hanh puts it this way:

“Consciousness is said to be a field; a plot of land in which every kind of seed has been planted – seeds of suffering, happiness, joy, sorrow, fear, anger, and hope. The quality of our life depends on which of these seeds we water. The practice of mindfulness is to recognize each seed as it sprouts, and to water the most wholesome seeds whenever possible.”

The basic idea is that, confronted with a whole host of seeds in our daily lives, the ones that we water will generally (though not always) be the ones that grow. So if we tend and water the negative seeds; worry, anger, disappointment, fear, and so on, the energy we put toward those seeds will tend to make them grow and become very big in our daily lives. If instead we tend and water the positive seeds; friendship, gratitude, discipline, peace, and happiness, then those are the seeds that will grow. That doesn't mean walking around like a Polyanna (which is unlikely for a crusty skeptic like me), but it does mean that there is some tendency, however imperfect, to reap what we sow, even just by what we choose to habitually think about. As the Buddha said, “with our thoughts, we create our world.”

To take this back to the practice of investment, it's clear that an investor who constantly waters a particular seed – fear of being wrong – will be forced into a particular set of daily actions, specifically, the investor will tend to hesitate when faced with opportunities that require deliberate, active choice, and at the same time, the investor will panic to adjust the investment position in reaction to every significant disappointment. While those adjustments can very well be rewarding when the market is running in a very clear direction, it is more generally a recipe for buying on strength and selling on weakness, and the cost of doing that on a repeated basis will tend to whittle down returns over a long period of time. Investors who tend the seeds of greed tend to reduce their returns more quickly and often spectacularly, but not without some amount of excitement and victory first. Tending and watering greed translates into the daily action of looking for improbable outliers and long-shots, and of accepting far more risk than can ultimately be tolerated.

But there are all sorts of other seeds to water. An investor who waters the seed of curiosity will not be content with investment platitudes and will stare at lots of data to figure out what actually works in the markets, and what the pitfalls are. An investor who waters the seed of discipline will emphasize consistency and persistence over one-off decisions and attempts to “make a killing” on a particular trade. Tending the seed of patience, on the other hand, can be either a help or a hindrance, depending on whether it is coupled with sober analysis or instead with blind hope. Patience, coupled with discipline and analytical curiosity, is not a bad combination of seeds from my perspective.

All of this may seem silly or simplistic on its face, but the reason for spending some time with this idea is that it can also be very powerful in re-orienting your actions and perspectives. It's worth the time to ask which seeds you habitually plant, tend and water, and what you expect them to grow to become as a result. This is true for investing, and isn't completely removed from relationships or parenting either.

Seeds not planted or tended by choice tend to be weeds, so at least for me, it's very helpful to consciously and periodically choose which seeds I want to water, and to think through what I expect to happen from that watering. Investors can spend a lot of time and energy reacting to the latest bits of news and trying to predict the next surprise, rather than choosing a consistent set of daily actions that they can carry out as things develop, regardless of how they develop.