The 1 penny plan

Senator Rand Paul was on Larry Kudlow’s radio show today and he pointed out that neither the Boehner plan nor the Reid plan cuts Federal expenditures.  Rand Paul is a proponent of cutting actual spending by 1% per year for a number of years until we can balance the budget.  They call this plan the 1-penny plan since it cuts 1-penny from every dollar.  I was surprised to learn that the current debt “negotiations” are about reducing the amount of GROWTH in spending not cutting actual spending! 

That is the reason that there is little serious discussion about a Balanced Budget Amendment to the Constitution.  It appears that only the radical right (at least that’s the way the media portrays them) wants a balanced budget.  Democrats don’t support it because it might hurt the poor (and the Demos chances for re-election); the Republicans (for the most part) don’t want it because it might hurt the military industrial complex and business in general (and the Repubs chances for re-election).

If we are not talking about real cuts in spending, and not really balancing the budget, our country may be truly finished.  Can we afford to keep talking about the short term with no consideration for the long term?

The Commonwealth of Virginia works very well with a balanced budget requirement in our Constitution.  We need a balanced budget amendment in the Federal Constitution to force the politicians to do their jobs.  

More on the Debt issue from the CATO institute

Here’s a little more on the Debt issue from the CATO institute at http://www.cato-at-liberty.org/cbo-report-reveals-spending-disaster/

They point out that over the last 40-yrs federal revenues have been around 18% of GDP.  Bill Clinton was able to balance the budget on revenues of 18-19% of GDP.

The recession and high un-employment exacerbate the Debt because revenues drop during the recession.  The Blue column shows revenues of only 15% GDP in 2011

The Congressional Budget Office projects that by 2021, revenues will again reach the typical 18% of GDP value.    

Spending projections in Red show the problem is on the spending side. 

I think you can make an argument for increased taxes until the economy becomes stronger; then you could reduce taxes to hold revenues at 18%, based on past history.  Either way the cuts required to balance the budget are huge.

Bad data gave a Bad signal – NTMS didn’t issue a Sell last week

Verizon “over-nighted” a router that we got yesterday so I am back in business.  The news wasn’t all good when I started going thru the data, because some of the data was bad.

I know a lot of people just read my blog and don’t buy and sell following the daily guidance; however, it is a huge irritant to get bad data from Yahoo and act on it, only to find out later that the data was bad.  Yahoo reported very high volume on 27 July at the close.  I commented at the time it seemed high, but I checked it vs. the NYSE and it seemed possible that it was correct, given the big down day. 

Now Yahoo is reporting only 3.5 billion shares traded on the 27th…a lower than average day.  When I input the historical Yahoo data (or a higher value adjusted for NYSE volume) for the 27th, the analysis did not result in a sell signal last week.

So I sold unnecessarily (at least as far as the Navigate the Stock Market system goes).

My portfolio is structured so that all I have to do is sell my 401k and I am 30% invested.  The reason I leave 30% in stocks, rather than going to zero, recognizes that I may be wrong and hedges the bet somewhat. 

An easy way to structure a portfolio to buy and sell without too much work is to put about ½ of your stock portfolio in SPDRs (SPY), the S&P ETF.  Then if you want to cut back in stock holdings, just sell the SPDRs.

NTMS remains HOLD.

At this point I am 30% invested and will watch market action before I move back in next week.   NTMS could easily drop to a Sell next week and we might look smart in spite of the bad data.  I think we will have a big rebound if the Politicians take effective action. 

BUT…the market could judge that the agreement (if they make one) will not be effective or may actually hurt the economy.  There is no certainty that an agreement will result in upward movement of the market for more than a day or two if that.

Some issues follow:

DEBT CRISIS.

If you had asked me a few weeks ago, I would have said that Obama seemed to have the right mix.  Reversing some of the Bush tax cuts seemed reasonable, but a look at some data shows a dangerous trend.  The Federal Budget is now 25% of GDP.  That is a new record for peace-time.  It was around 50% in WWII.  While we call Afghanistan and Iraq wars, the expenditures aren’t anywhere near WWII.  So it would seem that the Tea Party has a legitimate point.  When Government crowds out private industry, then you no longer have free enterprise – you have Government as the economy and I have no confidence in the ability of Government to manage any part of the economy.  Where should you draw the line?  25% seems like a reasonable place to me.

Libertarian Congressman Ron Paul said he would not vote to extend the Debt limit again.  He pointed out that it was intended to set a limit on the debt (duh) and the Government was already bankrupt.  What did he mean?

I did some math a year or two ago and found that if we paid off the Debt in 30 years at 2% interest it would take additional taxes from every taxpayer (100-million of us) of about $1,000…every month!  Sounds crazy, but the debt was $140,000 per tax payer 2-years ago, so basically, we each owe another mortgage.  Ron Paul is simply stating the truth – we won’t pay the debt back.  That is why the Federal Reserve and treasury want inflation.  If we have inflation of 4% per year, the Debt will be cut in half in 18-years (vs. GDP), because we are paying back the debt with inflated dollars.  Those dollars will be worth half as much. 

Another “benefit” of inflation is that your house will be worth twice as much in 18 years (assuming 4% annual inflation) and you feel richer.  But in fact, since all money will have ½-of today’s buying power, we will all be much poorer unless we get 4% pay increases each year.

Enough said. 

IMPACT TO THE STOCK MARKET.

The bottom line of all this is that we are entering a period of austerity immediately after one of the largest spending sprees in history brought to us by Bush and Obama.  (Pick your poison, Republican or Democrat makes little difference.)

The economy will experience very slow growth…no growth…or recession.   

The stock market is likely to advance slowly, at best, and be downright negative at worst.  The Bear market is far from over.  

The market turns negative and so does the NTSM system

The Navigate the Stock Market analysis changed to SELL as of today’s (Wednesday’s) close. 

Price: Price action that had been positive for some time turned to neutral today on the huge volume. 

Volume: Our volume indicator went negative on the big volume.  Volume was about twice normal.  It was so high on the S&P 500 that I wasn’t sure it was correct, but the volume on the overall NYSE was double yesterday’s so Yahoo’s data is probably right today.

VIX turned negative after several huge days of increases.

Panic Indicator: Our Panic indicator also flashed Sell on the huge down day.  (Today would have been a Sell even without the Panic indicator.)

Big down days are often followed by some movement in the opposite direction so maybe we’ll get a reprieve Thursday…at least for a while…but there’s no gurantee on that call.

I think this is cause for concern so I will get out tomorrow unless there is some movement on the Debt negotiations.

Our router died today so I am writing this from Starbucks using their WiFi.   Since I doubt that Verizon will get us going anytime soon, there may be a couple of days where I don’t post.  Hopefully, I’ll be able to get over here tomorrow and post.

Unless there is some very good news on the debt negotiation front (or a huge panic down day) Thursday, I will sell some more stocks and move to a 30% invested position.  (I won't sell on a huge down day because I'd expect a reversal and another chance to sell later.)

We could have a rapid reversal to the upside, so I am not wild about selling, but I will follow the NTSM analysis and be cautious.  There are some talking heads on CNBC pointing out that no one is talking about actually solving our debt problems and the bandaids proposed don’t really address the issues.

Remember, we are still in a Bear market and I recommend a level of caution much higher than normal.

Navigate the Stock Market analysis remains HOLD as of Monday's close

Not much change in the overall NTMS model.  VIX got worse. Other indicators improved.  The market believes that the Debt ceiling will be raised. While there was increased volatility Monday, we didn’t see a huge breakdown in price.  Apparently, the market does not share my pessimistic (or perhaps I should say defensive?) view regarding the debt ceiling.

Yahoo reported volume 10x higher than normal Monday, but I think that is an error since the NYSE volume was right in line with norms.  Over the past year I have noted several times when the Yahoo volumes were wrong so this is not unprecedented.

NTSM is HOLD today.  Since we had a previous Buy indicator we are holding long. (See the page “How to Use the NTSM System” – the link is on the right side of this page).

I remain 50% invested.  That is my fully invested position for the time being.

I am still Long – the Navigate the Stock Market analysis is HOLD

The NTSM model improved slightly at Friday’s close.  Some further up movement may switch it to Buy, however, that will not change my invested position because I am already fully invested on the long side…at least until the Debt negotiations are resolved.

Here’s an excerpt from last Monday’s weekly Market Commentary by John Hussman, PhD.  He wrote, “The overall market picture continues to have the look of a broad topping process, in which it's very common to see the market confined to a trading range of about 5-7% for 6-8 months. Still, our investment position isn't driven by the expectation of an oncoming bear market, and we'll remain flexible to changes in the ensemble of market conditions.” - John P. Hussman, Ph.D., 18 July 2011 Weekly Market Comment, http://www.hussmanfunds.com, used with permission.

I couldn’t agree more.  The reversals we’ve seen in the NTSM system have indicated a lack of direction in the market for several months.  That may change (for better or worse) depending on what the clowns in Washington manage to work out to solve the National debt. 

I am not at all convinced this will end well.  With only 50% invested now, I have some cash available if we get a big pull back that looks like a buying opportunity.  It also provides some protection if the pullback looks like more than a short term event.  If we get a Harry Potter ending (happy), I’ll miss the first day or two of the rally – I can live with that.

NTSM is HOLD today.  Since we had a previous Buy indicator we are holding long. (See the page “How to Use the NTSM System” – the link is on the right side of this page).

I remain 50% invested.  That is my fully invested position for the time being.

The S&P trend is now UP

I commented a few days ago that I thought the S&P 500 was in a down trend.  That view changed today because today’s up move to 1344 pushed the S&P above the 1 July value of 1340.  To discern the trend, I look at only days that I call statistically significant.  They tend to be the bigger days (up or down) that exceed NTSM statistical parameters.  1344 is greater than 1340 (another statistically significant day) so now we can state that the trend is up.  That’s a curious way of looking at the market, but it seems to work and provide a valuable piece of information.  If you look at the S&P chart since the end of April you’d have to say the overall trend was down since we haven’t broken above the old high.  So we know something that other traders will take a while to figure out.  Well, I won’t tell anyone if you won’t.

I have also noted that there is a tendency for big (statistically significant) days to be followed by some retracement in the opposite direction.   About 60% of the time the next day is down.  The correlation-% is higher over the next week or so.  In other words, if you look out a week or two, it is, surprisingly, down 75% of the time.  Sounds like we should be rich right?  Unfortunately the numbers I just gave are only true if there is a lot of volatility and we don’t have that now.  So it becomes an academic exercise.

Let’s talk about the Navigate the Stock Market analysis.

The up moves keep getting bigger so our Price indicator is bullish.  The other 7-indicators in the categories of Sentiment, Volume, and VIX are all neutral.

NTSM is HOLD today.  Since we had a previous Buy indicator we are holding long. (See the page “How to Use the NTSM System” – the link is on the right side of this page).

I remain 50% invested.  That is my fully invested position for the time being.