Saturday, August 05, 2006

End of Week Report

Today the market rallied initially on an unemployment report and then ended the day lower. The model got stopped out because the NDX rose more than 1.25% intraday. However, I ignored the model as other indicators suggested that was the right course. So far this month my account is up 1.13% though the model is down 1.54% and the market down 0.37%.

Though everyone thinks the Fed will not raise interest rates on Tuesday, I have a suspicion that this time there could just maybe be a surprise (PS: According to Barron's published on Saturday Goldman Sachs have the same suspicion). The Fed almost always raises interest rates too much and induces a recession. Long-bond yields fell today. I have been reading Brian Berry's book on long-wave cycles. The first thing I have read on this that actually makes sense - actually it was Michael Alexander's columns that got me interested. I think we are still essentially in a declining interest rate cycle that started in 1981. After the next recession interest rates will start rising for real along with inflation according to the Kondratieff Cycle Theory. One thing that could help the next cycle be more inflationary is if the Fed triggers a deep recession here and future Fed chairmen dare not be so aggressive. This is just a wild speculation of course. With big bets on bonds, I of course want to see interest rates fall (which pushes up the value of bonds).

At the moment I am still in the real time testing phase of the model. I am only using about a third of the capital that I think would make sense to allocate to the model trading eventually. The eventual plan, if things check out consistently, would be to put about half of my non-retirement capital into it and trade that with about 3 times leverage. The rest of my non-retirement capital would be in unleveraged long-term investments so that the overall leverage is only 2 times, which I believe is a safe level. That is a limiting level. If I felt scared to trade that much I would trade a lesser amount. The ratio of trading to investment capital will also differ in bull and bear markets. The model performs best in bear markets. In bull markets good quality stocks could match it. Problem is finding those stocks!


Adventures In Money Making said...

based on the fact that there's an inverse yield curve, a lot of people believe that the rates are going lower in the mid to long term.

How long do you think this will last before inflation sets in?

I feel we're already in an inflationary period.[but then again, what do i know!]

mOOm said...

Yes, I am one of those people ( a lot of people believe that the rates are going lower in the mid to long term). Yes also inflation is higher now than a few years ago. The Fed will end up cutting rates in the near future and longer term bond yields will likely fall at that point. The fact that the yield curve is inverted shows that the average long-term bond buyer is not concerned about rising inflation and that despite the rising price of oil we are in a deflationary/disinflationary period still. Technological change is rapid and together with global integration of markets is causing wages and output prices to grow slowly. I don't think we will see inflation much higher than this in the next couple of years. If the Kondratieff theory is correct we won't see inflation levels like the 1970s or 80s for another couple of decades. History doesn't have to repeat though...