The Tasgall Group

An important point, philosophy, or whatever is the fact that “the market” is not efficient.

This flies in the face of much academic theory stating that the markets are efficient, and that one assumption is the basis for much of the modern portfolio theory (MPT) and capital asset pricing model (CAPM). That one assumption is why these are both flawed theories (even nobel winners can be flawed).

The market (and in this way I refer to markets in general, not just the equity markets) is not efficient, it is instead an efficiency process. This is important, as it explains why any of us can take above average profits out of the market over the long term. (The average profits would be dictated by the growth of the economy.)

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To see the other side of the argument, check out Bill Gross’s latest Investment Outlook. He calls the end of the bond bear market and gives some good background on why he thinks so.

Recession/no recession is really a faux decision to be entertaining at bond market turning points. Any number of cyclical histories point toward bond market prices bottoming ? and the Fed peaking ? as the economy downshifts into second or first gear as opposed to breaking to a full stop. (more…)

We spend a good amount of time discussing interest rates, but there are a few different ways to look at them…

One way is the yeild curve. It looks at the current rates across many maturities right now, and many people are watching it to see if/how much it becomes inverted. There is even a web page that will calculate the probability of a recession based on the Federal Reserve’s research. (Current answer: 35%) And, of course, there’s the animated version of the yield curve.

We can also look at the yield spread ($TYX:$IRX) which compares the 30 year rate treasury bond rate and the 3 month treasury bill rate over time. (You can use the 1 month yeild ($UST1M), 1 year ($UST1Y) 5 year ($FVX), 10 year ($TNX), 30 year ($TYX), or any other yield you might want.)

As long as the line is dropping, liquidity is contracting. The line should start to rise when the FOMC starts trying to ease again, or if 30 year rates were to shoot up (bond prices would fall). This would indicate that liquidity was expanding.

We can attach a simple moving average to the chart (which StockCharts does automatically) to try and identify when a trend change is underway. This is one of the charts I regularly review to keep the concept in my mind that we haven’t seen the spreads start to widen yet.

You’ve probably heard something like this floating around before,

Fed Funds Futures are currently pricing in about a 36% chance for a 25 basis point Fed Funds rate hike next week to 5.5%.

Ever wondered what they mean by that and how they get that number?? Well here is an explanation by the Fed themselves.

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Here is one of the best breakdowns of our current situation that I’ve read.? It is very “Kessler” in style, linking seemingly separate areas of the?world in a tangled web.? I’m particularly struck by the mention of buybacks (time to dust off that research again) and the possible leading strength of multinationals who can gain profits from a weak dollar.? Hmmm.? How to get a list of those companies?

It seems that the picture both of his models paint is one of swift movements both down and back up in a relatively short period of time.? I see the scenario of both playing out in sequence as being perfectly plausible given the sense of spring-loading that I get from the markets now.? It’s getting tighter and tighter.? I wouldn’t be surprised if the net outcome for the next two years is breakeven for “buy and hold”-ers of equities.? But with some timing, there could be great inflection points for positioning a portfolio.

Some clever guys (NowAndFutures.com) figured out how to reproduce the M3 statistics using public data sources. (Not a big surprise: it’s still going up.)

They also have what look to be good articles on CPI, commonly held false data, some forecasts, a good definition for bubble, plenty on real estate, a short note on the Amero (a common currency for Canada, the US, and Mexico), and even causes of death. They also have a couple of pages that aggregate charts and quotes from other sites that look to be quite handy.

On a personal note, I’m surprised that CPI doesn’t include taxes… it’s currently my largest expense.

They also have a very amusing off-topic flash bubblewrap and smack the penguin… as well asthe disclaimer, “Do your own research and make up your own mind, as usual. If you think we’re conspiracy nuts, that’s fine too.”

More on the yield curve…

Conventional wisdom has it that bonds are the safe haven investment and that they are the alternative to stocks. When stocks are drifting downward, the logical place to put your money is into bonds. Your biggest investment decision is to decide how much asset allocation to put into bonds versus stocks.

Unfortunately, this conventional wisdom came to prominence in the last 20 years which happens to coincide with a rather large bull market in bonds. (more…)

I’ve always thought that?animation was sorely underutilized as an investment tool.

Well, Friday saw the release of the real PCE, my favorite of macroeconomic indicators and the one I feel leads all others down the road.? After revisions, the drop from the last release was pretty intense, from around 4% y/y to only 2% y/y.? This is like a bomb siren.? Rather than buying a new set of Gucci loafers, the consumer may be buying cement shoes for corporate profits.? I expect that the next set of quarterly numbers could begin to paint the next few months red in the equity markets.? And given the recent rally in stocks, the old adage of sell high comes to mind.

Think about all the interconnections that go into this.? Oil/gas demand could finally fall leading to lower prices in a commodity that isn’t in low supply to begin with.? Corporate profits will decline with less spending.? All of this would call for lower interest rates which means a lower dollar.? But the Fed might have a hard time lowering rates now without causing a crises due to the amount of government debt owned by foreign entities (lower rates makes our debt less attractive).? I wonder if Ben likes his new job.

You can draw connections all day long and get pretty tangled up.? The key is to find good value in all of this and exploit it, especially after any declines in asset prices in your favored vehicle.