A Dash of Insight

Bailout for Homeowners and Lenders?

Developments in housing remain crucial for the economy and for stocks.  Nearly any account of the housing situation includes reports of the number of foreclosures, the inventory of empty homes, and the potential ARM re-sets that may stimulate even more foreclosure activity.

Any help for distressed homeowners would help to shift the supply curve for homes.  This would suggest more stable prices and a lower inventory overhang.  Some have speculated that demand has been suppressed by the expectation of further price decreases.  If this argument is true, then the foreclosure bill might affect demand as well as supply.

The House has already passed a version of the bill under the leadership of Barney Frank.  The Senate Banking Committee is now considering a similar bill.  The Chairman, Christopher Dodd remains optimistic that a compromise will be reached.

The Administration is using a veto threat to affect the legislation.  Their position is represented in the Senate by Richard Shelby (R- Alabama).  Shelby, a former Democrat who switched parties years ago, is calling for more aggressive regulation of the Government Sponsored Enterprises (GSE'S) in the home financing business.  He is also concerned about bailing out the undeserving with taxpayer dollars.

Those in favor of the proposal think that the cost of the bill, perhaps $2 B or so, is easily justified by the benefit for the housing market and the economy.

Putting aside our own opinions on the legislation, we believe that the market would react positively to something helping out homeowners.  For this reason, it is important to watch the key players, especially Shelby.

Meanwhile, housing remains firmly at the bottom of the sector ratings.

TCA-ETF Update

There has been a lot of movement among the top sectors in the last few weeks.  While energy and natural resources choices remain at or near the top, we now also see some technology.  All of the financial sectors have again fallen out of the "buy" range.

The percentage of ETF's earning a "buy" signal is down to 53%, well off the recent highs.  The overall strength ratings are also not as high as in recent weeks.

Listed below is the weekly update.

Test Your Economics IQ

Stocks can and do stray from valuations suggested by fundamental analysis.  Despite this, it never hurts to understand the economic background.  Understanding the economy helps to gauge earnings forecasts.  This is especially important for stocks with a cyclical character.

Here are some statements about economic data and the market.  For each statement you need merely to decide "true" or "false".  We are not trying to serve up trick questions, but sometimes those citing the information do so in a tricky way.  It is up to you to see through this!

The Quiz

1. Home prices are now deflating at a 32% annual rate, versus 8% six months ago.
2. Inflation, as measured by the CPI, shows housing costs to be increasing according to the "imputed rent" formula.
3. Planned corporate layoffs rose 68% in April to a total of over 90,000.
4. As long as the largest asset on household -- and bank -- balance sheets continues to deflate, the credit and consumption hits will keep coming.
5. The US economy created about 2.5 million new non-farm payroll jobs last month.
6. The TED spread is now at 86 bp's, down from 204 in mid-March.
7. The Baltic Dry Freight Index has plummeted, showing global economic weakness.
8. The Fed has devoted about half of its balance sheet to "unusual" liquidity efforts.
9. The BLS Birth/Death adjustment has reduced past predictive performance, as measured by actual state employment counts when the data became available (months later).
10. Household liquid assets at $21.9 T and net worth at $31 T are about 1% below the all-time records as of the most recent published data.

Answers

Many wise and regular readers of "A Dash" will do well on this quiz.  We will recognize the best scores submitted by email (note the link at the top left).  Please do not show off by making your answers in the comments!

There will be ample time to discuss and disagree when we publish the answers.

Scooped by Muckdog

On our blog agenda there is a discussion of the "alternate data universe."

There is a rich and thriving discussion of economic data among economists -- that would be the "real economists".  We are talking about those who are (preferably) in the academic world or working on Wall Street.

There is another discussion.  It occurs mostly in the cottage industry of those making a business of criticizing the official government data.  As we have noted, government is an easy target.  The only representatives who speak in public are the political actors.  The hard-working, non-partisan, intelligent staffers do not have any access to the media.  That makes organizations like the BLS an easy target.  They are not paid to go on CNBC.

Attacking the non-farm payroll report, GDP, or inflation data is an inviting target for the gonzo-economists, the non-economists, and those with a paid-site business model.

We were looking for a way to describe this "alternate universe" and even had the Twilight Zone in mind, but we were scooped by Muckdog.  (Regular readers of "A Dash" sometimes ask why we recommend Muckdog, with whom we have never spoken, when his source seems to lack the official credentials we admire and is also anonymous.  The answer is simple.  We are not advocates of credentialism.  We do hold anonymous sources to higher standards of helpfulness.  We include them among featured sites when there is a real investment payoff.)  Muckdog gets to the point much better than we would:

From Barry Ritholtz:  GDP Alternate Measure. It's the whole conspiracy theory thing about understating inflation and overstating GDP.  Maybe "alternate universe?"  Sure, but those make for good Twilight Zone and Star Trek episodes, no?  And Barry's always a good read.

The Choice for Investors and Traders

It is pretty simple.  One can go into the Twilight Zone where no official report means anything -- there is always something wrong.  The prime source for this, which we will not link to, is a paid site on a mission.  The serious economists do not cite this source.  The bearish non-economists frequently do so.  The mainstream media, with a couple of exceptions, do not travel this path.  It is a trail which requires certain dubious assumptions:

• "Government" is some unitary actor, like the manager of a business, with a mission of punishing certain people -- mostly senior citizens, in an effort to cut costs and balance the budget.
• The Boskin Commission was some sort of conspiracy with this aim in mind.
• Various Administrations and the Fed have joined forces to foster this approach.

In the beginning government classes students learn that we have a pluralistic society.  Many different interests are represented, and quite effectively.  Senior citizens have a special  pull with Congress, since they represent a powerful voting block.

In fact, the Boskin reforms, discussed in a bipartisan Commission, have been reviewed by economists.  If anything, the adjustments to CPI are still inadequate.  CPI remains overstated.  As we have noted, that is what the Fed believes.

Investors have a simple choice.  They can choose to follow the alternate universe, where  everything has gotten  much worse over many years during a time when wealth increased.  This is an ideological choice, not an investment choice.

Alternatively, investors can accept the debate among real economists, those trying to generate accurate data, and those offering real public policy alternatives about economic issues.

Conclusion

Like the many economic sources available on the Internet, we are not going to engage in a debate on specific calculations.  It is too time-consuming  to fight this battle when the alternative universe has this as a single-minded mission.

A trader or investor who wants to profit is well-advised to deal with the data generally accepted in the economic and investment community.  If no one with real credentials chooses to engage in a discussion of the findings, that is meaningful and should be respected.

An Anecdotal Afterthought

Our mission at "A Dash" is helping investors and traders.  We were in some doubt about whether this was an important issue until we had a recent visit from one of our most intelligent and informed investors.  He asserted that some of these issues were "controversial."

We were surprised.  We suggested an analogy of the debate over cold fusion.  This theory, suggesting a potential for vast energy creation, was almost universally disputed by a broad spectrum of scientists.  Nonetheless, it won popular support, some grant money, and some academic followers.  This was a controversy principally among non-scientists.

There is plenty of room for debate over data and findings.  Unless you are yourself an expert, your mission should be in discovering and following the real experts.

That is what we do at "A Dash."

Developing and Evaluating Trading Systems

Improved technology, more power.  We would expect this to be good.

In fact, more power can enable us to do exactly the wrong thing.

This happens all of the time with the world's most powerful computer, the human mind.  A year ago we reviewed analysts who thought the market looked like a replay of the 1987 crash.  This type of analysis crops up all of the time, often using old charts as evidence.  With the power to search among thousands of choices, picking the time frame, and adjusting the scales, the human computer can "prove" nearly anything.

Those developing computer-based trading systems face the same problem.  The modern software makes it easy to include many variables --- too many!

Some Helpful Illustrations

Bill Rempel missed the Kentucky Derby by a few days, but his story highlighting horse race handicappers is excellent.  A group of handicappers were tested, using gradually increasing amounts of information.  The extra data increased their confidence, but not their performance!  (Read the entire discussion.)

Bill discusses Occam's Razor and points out the importance of reducing the number of independent variables:

I use this paring down or pruning technique at work as well as when examining trading strategies or opportunities. My first question, when faced with complex models, has for a long time been “I wonder how many of those variables actually do most of the work?”

This is pretty convincing to us, since Bill sounds just like our own Vince Castelli.  It is easy to develop a model using all of the available data and lots of variables.  You will generate a perfect "post-diction" but not anything useful for prediction.

The result:  Over-fitting and over-confidence, a dangerous brew!

Unfortunately, consumers of system strategies, including a few big-time "gatekeepers" we have met, have become accustomed to seeing eye-popping (and unrealistic) results.  They apply an automatic discount, regardless of the methodology employed.

The TCA Model Applied to the S&P 500

For the purposes of comparison, the chart below shows our TCA Model (Trend, Cycle, Anticipation) as applied to the S&P 500.  Without giving away the store, we can say that the model uses a relatively small number of variables -- some designed to choose between trend and cycle, and others representing indicators for each.  Much of the power comes from advanced techniques for filtering and smoothing data, thereby improving signal to noise.  The chart below is not a back-test, but the signals actually used in trading during the last year.

The overall performance shows a gain of about 6% during a time when the S&P declined by a few percent.  It accomplishes this while reducing risk by staying out of the market for significant periods.

A key point is that the model gets the investor into the market to enjoy the big moves.  The cost?  There are some losses at times of rapid changes or churning.

Finding the big moves is very important.  Some traders have trouble joining in when the market has already made a move.  They are reluctant to "chase."  It is difficult to show gains when missing the big rallies.

Anyone interested in trading systems should join us as regular readers of The Rempel Report, where he updates and reports on several interesting trading systems.  One of these is similar to our own sector rotation approach.

TCA-ETF Update

Each Thursday (a day late this week) we share with the investment community a recent report from our ETF ratings.  We have been doing this in real time for eight months.  Our purpose is partly to gain visibility for the approach (free report available on request), but also as information for other ETF traders, and most importantly to provide a laboratory for others trying to develop trading systems.  We discuss the issues surrounding system development in many of the articles in this series.

As we noted last week, we have expanded the ETF universe, and we seek more additions.  Adding more targets is helpful, as long as they can be shown to have characteristics suitable for one's model.

The current ratings show some dramatic changes from recent weeks, and include one of the new ETF's, KOL.

Investors Seeking Foreclosure Riches

One of the ingredients for "bubbles" is the quest for the home run.  Investors look to how much they wish to gain rather than to risk and reward.

What happens when this quest intersects with a major downturn in an asset class?

The Foreclosure Boom: Donald Trump

Our local papers have featured ads from Donald Trump, explaining how you can profit from the foreclosure explosion.  This article, while a few months old, is typical of what is happening.  It is from Seattle, a pretty strong housing area which we visit four times a year for board meetings.

But not to fear, capitalists, because one man's misery is another man's meat. In the same issue of the P-ITrump University"," a class where Trump promises "If you're not a millionaire by December 2008, you didn't attend my foreclosure workshop." Yes, that's right. Your struggling neighbors who are losing their homes in the subprime fiasco, are easy prey. The ad enthuses that "Foreclosures soared 94% in 2007!" What a paradise for the entrepreneur. The ad features a full-length Trump (who won't actually be at the seminar, by the way) staring you down, challenging you to become as rapacious, amoral, and loathsome as he is. If you don't have the guts to let Donald make your rich at the expense of the suckers of Pottersville, well, you're fired!

The LA Times also reports on the Trump approach:

An ad in this very newspaper showed a picture of The Donald and quoted him as saying, "Investors nationwide are making millions in foreclosures . . . and so can you!

"I'm going to give you 2 hours of access to one of my amazing instructors AND priceless information . . . all for FREE."

OK, I know what you're thinking. You're thinking there has to be a catch, such as the fact that the ad doesn't mention anywhere that the free two-hour seminar is only a "preview" of the three-day workshops that Trump offers for $1,495.

The reporters are skeptical of the Trump seminars, but we are offering no opinion.  We merely suggest this information as an interesting piece of information about identifying market bottoms and investor behavior.

Books on Foreclosures

There were a number of books on foreclosures in the last real estate bust, and now we see some new ones and also some revisions.

• Foreclosure Investing for Dummies is a year old now, so not a good bottom call.  Nonetheless, we are always interested when dummies get into the game.
• Here is one that came out in April.
• This "insider's guide" is almost a year old.
• This "complete guide" came out in January.
• If you want something that no one else knows, and only a couple of months old, this is your choice.
• And finally, here is something for "dummies" who want to fight foreclosure -- with or without help from Barney Frank and Congress!

What Does it All Mean?

We do not know!  When will the wave of foreclosure buyers intersect with the foreclosure sales?  Perhaps we need to wait for the cover of a major magazine before we have a clear contrarian signal.

While we are confident of the knowledge base of our regular readers, let us make it clear that we are neither endorsing the foreclosure course nor the books cited.  It is information for investors to consider -- that is all.

The Individual Investor Experience

At "A Dash" we let the big guys do the marketing research for us.  Television ads for online brokers indicate that "leading investors" are thinking for themselves instead of relying upon help from their former investment advisors.  Not wanting to be completely alone, however, investors want some help and comfort.  The online firms have "licensed representatives" available to offer help 24/7.

How is this working out?

We are interested in learning more about the experiences of individual investors who have decided to direct their own investments.  We are also interested in investment advisors whose clients direct all or a portion of their own accounts.

The information is for our book research, would be quoted only with permission, and names withheld in any references.  The names or email addresses will not be used for any commercial purpose beyond our research.  Please submit via our email address, at the top of the page on the left.

Questions

We are open to any and all observations, but the following questions might stimulate some thought.  There is no need to answer all of them.  It is just a list of ideas.  Feel free to raise or suggest any other questions.

How long have you been making your own investment decisions?

Do you stick to big issues like asset allocation, or do you pick your own mutual funds, bonds, and stocks.

Do you invest in ETF's?  Commodities?  Sell short?  Trade options?

What sources of information do you use in reaching your decisions?  In particular, do you read popular mainstream publications?  Do you watch financial TV or listen to radio programs?  Do you use stock screens?  Informational Internet sources?  Opinion and advisory sources?  What else?

How much time do you spend on your investments in an average week?

How many trades do you make in a month?

Do you follow a specific system?  What is your investment "style"?

How are you doing?  In particular, are you meeting your own expectations?  Do you check your performance records?

In a general sense -- say for the next six months or so -- do you see investment opportunity?  Are you bullish about stocks?  Bonds?  Commodities?

Why not a survey?

We have conducted professional surveys many times, both in the university setting and for consulting work.  A good survey starts with a good sample, and we are not going to get one.  There is no reason to infer a level of pseudo-science as one sees in some online polls.

We are simply interested in stimulating some opinions and comments about going it alone as an investor.  It is a reality check -- a way of finding out what works for people and what does not.

A little help from our friends

Thanks in advance to anyone helping with this project.  We will find some appropriate way to share some of the results on "A Dash" for the consideration of all.

Please do not be bashful.  We need to hear from a range of people regardless of their results.  Once again, please submit via our email address, at the top of the page on the left.

Informational Power: Interpreting the Payroll Employment Report

What is the market impact from the interpretation of data?

It is an open and free debate, but there is a problem.  The results follow from advanced statistical methods and processes.  Even the smartest hedge fund managers, columnists, and pundits cannot draw independent conclusions.  They did not take the right classes.  They never did any time series modeling or survey research.  Briefly put, they lack the necessary skills to evaluate most data.

The result:  Nearly everyone relies upon the analysis of those accepted as experts.  What choice is there?

This is a recognized principle in social science, called the two-step flow of communications.

Application to the Monthly Payroll Employment Report

When do we know that data interpretation has a market impact?  One test might be the widespread citation of a conclusion.

Our "go to guy" for those on the NYSE floor is Art Cashin.  In his daily comment (very valuable and available to UBS customers) he wrote as follows:

Payroll Numbers – Three pros, Dennis Gartman, John Mauldin and Greg Weldon each deconstructed the non-farm payroll data. Their conclusions were that the data was, actually, anything but bullish. Things are not always what they seem at first glance.

So the perception on the floor relies on these influential interpreters of data.  What are their sources?

John Mauldin

John Mauldin does a number on the number!  Even though this is an extended excerpt, readers need to check out the entire analysis.

Without that addition from the birth/death number, total private employment would have dropped by 296,000. Now, if that had been the headline number, the market would have tanked. Now, I have no doubt that the economy did create a lot of new jobs last month. But when the final revisions are in, we will see that job losses were well south of 100,000. If memory serves me correctly, the BLS had to add about 800,000 jobs that they missed during the recovery in 2003-4. (The birth/death model misses job growth during recoveries, the opposite result of the miss in slowing periods.) They did this just last year, in a major revision of the data. We will see the same type of revisions in 2010, only this time it will be downward.

And even the BLS says that the birth/death numbers have little statistical meaning. The following is from their own website (courtesy of Dennis Gartman) [emphasis obviously mine]:

“Birth/death factors are a component of the not seasonally adjusted estimate and therefore are not directly comparable to the seasonally adjusted monthly changes. Instead, the birth/death factor should be assessed in the context of its effect on the not seasonally adjusted estimate... The components are not seasonally adjusted separately because they do not have particular economic meaning in and of themselves.”

Mauldin also cites Gartman and The Liscio Report.

Barry Ritholtz

Barry Ritholtz did his regular review of the employment numbers, with, as usual, a special focus on the birth/death adjustment.  The overall conclusion is that employment growth is overstated and the BLS methods are seriously flawed.

He also quotes at length from Alan Abelson, doing his monthly bearish take on the BLS report.

David Merkel

David Merkel undertakes his typical thoughtful analysis of the problem, well worth reading in the entirety.  David looks at the addition of jobs from the B/D adjustment and compares these to the net job change over time.  He graciously notes our dissent on some of the key issues.

Importance

The significance of these analyses is demonstrated by Art Cashin's citation.  The notion that the BLS methodology is wrong has become accepted as conventional wisdom.  Nearly everyone thinks that these are "phantom jobs", added by a flawed methodology, and that "turning points" in  the market are missed.

It is not part of the job description for BLS employees to write on blogs or to appear on CNBC.  As a result, there is no spokesman for their method.  It is a one-sided debate.

All of the sources cited in this article have significant power.  Their arguments have influenced active traders to believe that economic data have been artificially inflated.

Our Approach

After many months of attempting to refute specific claims about the BLS approach, we have decided to take a different tack.  More to come....

Sell in May?

There are many Wall Street adages.  Some seem to have predictive power, including the idea that one should "sell in May and go away."

Such slogans have extra influence because of the catchy, alliterative qualities.

When Indicators Conflict

There are a number of conflicting adages at the moment.

There is the Presidential Election Cycle. We have not been big fans of this because the causal model is elusive.  This year, however, we have both the Fed eases and the stimulus package.  If ever the theory were to work, this might be the time.  We also note that the popular bearish commentators embraced the theory when it suggested market weakness, but have fallen silent during the period when it suggested strength.  This should be interesting to contrarian investors.

There are technical considerations.  Can the market break through apparent resistance?  That is the current battleground for traders.

There is the question of earnings forecasts and targets.  First quarter earnings and outlooks were not as gloomy as expected.  Financial writedowns?  Yes.  Other companies?  Not so bad.  It was an unexpected double-digit gain for non-financials.

Summing up the Prospects

Two of our favorite sources provide some insight.

Bespoke Investment Group notes as follows:

Bespoke readers might remember that Goldman got rid of bullish strategist Abby Cohen when the market was cratering in March.  Cohen had a 2008 price target of 1,675 for the S&P 500, and after replacing Cohen at the market's bottom, Goldman's new strategist (David Kostin) lowered the firm's year-end S&P 500 price target from 1,675 to 1,380.

Readers should check out the entire article.  The Goldman economics team is very bearish and that has now expanded to their strategist team.  These are often quite different within a single firm.  This is a classic case of "global strategists" versus bottoms up analysts.  It bears watching, but regular readers of "A Dash" know that we think the bottoms up guys are under-rated.  Everyone is still fighting the old war of the 2000 tech bubble when companies and analysts hyped.  When will we learn that the world is different now?

Muckdog wisely highlights some research from Sy Harding via Mark Hulbert.  The gist of the story, which you should read for the full account, is that the "sale date" might be delayed this year.

That is consistent with our current model output, and our sense of the fundamentals.  To check this out, readers might wish to revisit this article, from April 3rd.

And by the way ---

What happened to "Don't Fight the Fed"?  We highlighted this as a "top secret" investment opportunity -- early, but not wrong.

Fishing in the Right Pond

Having a good trading method is only part of the problem.  One must also find the right trading "universe."

The original Turtle Traders learned this, and so should we.

We have been getting some good questions about our TCA-ETF system and why we chose the IShares universe that we have reported each week for many months.

Our criteria were logical and not overly restrictive:

• We wanted an open-ended ETF, since we did not want to be concerned with a possible discount or premium to NAV.
• We wished to avoid ETF's that were cap-weighted in sectors where a very few stocks would dominate.
• We wanted plenty of liquidity, so that the program could be scaled up as our assets grew.
• We also wanted enough trading action so that the slippage from our moves would not be too great.
• We needed enough data so that the model could be employed effectively.

The last point has been a big restriction, since we needed about one year's worth of data before a new fund could be added.  Unless there was a simulated history, we could not effectively employ a new ETF for nearly a year.  (At one point we were devising our own sectors and avoided this problem, but the ETF's are a popular and inexpensive alternative.)

Some Additions

In response to a suggestion from one of our smartest and most knowledgeable investors, we reviewed several of the Van Eck Global Market Vector ETF's to our trading universe. 

Since some of the prime candidates did not have the requisite trading history, although all other criteria were met, we asked Vince to revisit his methodology.  Without giving away Vince's secrets, let us say that his approach does a lot of filtering to reduce the signal-to-noise ratio.  He made some adjustments to achieve greater stability.  It is non-linear filtering that involves a "pathological time series."

The happy result is that we can now include ETF's with a four-month data history.  One of the new choices is currently in the top eight, so we will be buying it on tomorrow's opening.  The new ETF's will become part of our weekly report.  The new alternatives include alternative energy, gaming, coal, agribusiness, Russia, and nuclear energy.

An Invitation to Readers

We have offered our results as a general benefit to the community, reporting with a one-day lag on a weekly basis.  We now have a weekly program for investors as well as our sector partnership which trades daily.

We are open to suggestions about new ETF's that should be part of the universe.  Our experience has been that any ETF that meets our screening tests, improves long-term performance.  Feel free to make suggestions.

Candidates and Fuel Prices

Sophisticated market observers and economists joined today in objecting to Presidential candidate positions on energy issues.

The Statements

Sen. McCain was first with a proposal for a "gas tax holiday" this summer.  Sen. Clinton joined in, leaving Sen. Obama as the only holdout for maintaining federal gasoline taxes.

Sen. Clinton has been even more aggressive about high profits for oil companies.  This afternoon, as spotted by Colin Barr, her campaign complained about the decline in ExxonMobil stock, in spite of excellent earnings. 

There is something seriously wrong with our economy when Exxon’s record $11 billion in quarterly profits are seen as a disappointment by Wall Street,” Clinton said. She went on to use the company’s latest gains to reiterate her call for a gas tax holiday — a proposal has been criticized by economists who say it won’t result in lower prices for consumers. “I believe we should impose a windfall profits tax on big oil companies and use that money to suspend the gas tax and give families relief at the pump.

The Reaction

Not surprisingly, these proposals generated near-universal dissent from the economic community.  The complaints about profits and the ExxonMobil stock decline of 3.6% created similar objections among sophisticated market observers, like the panel on Kudlow and Company.

Barry Ritholtz is ready to give a good lesson to the candidates.  Check out his article about how the candidates fail Econ 101 (a course frequently cited at The Big Picture!).

We are delighted to find ourselves in agreement with Barry, the economists, and the savvy market observers on Kudlow's excellent program.

But here is the question:  Do the candidates really not understand how economics and markets work, even at the level of Econ 101?  Or is their motive a different one?

Is This Credible?

Well -- McCain admitted that he was soft on economics and was reading Greenspan's book to bone up!!  In spite of this, we think his team has enough economic horsepower to "speak truth to power" as we say in the public policy business.

Senator Clinton's case is even more clearcut.  She turned $1000 into $100,000 in only ten months of cattle futures trading, a record that none of us can claim.  She did it by "following the market closely" and "making her own decisions".

So she understands markets.  Her campaign also knows the proper role of experts, according to the Wall Street Journal.

Clinton’s position on the gas tax runs counter to that of economists across the political spectrum who argue that a temporary tax reprieve would do little to lower gas prices this summer.

“There are times a president will take a position that a group of quote-unquote experts will agree with and there are times when a president will take a position that a group of quote-unquote experts won’t agree with it,” campaign spokesman Howard Wolfson told reporters today, “Sen. Clinton believes this is the right policy.”

An Alternative Explanation

Instead of assuming that people intelligent and successful enough to be Presidential candidates are stupid, let us instead assume that they are smart.  As time winds down in a life-or-death struggle, the candidate looks for anything that might work.

It is natural to look at the issues of the day and gauge the public reaction.  Everyone is worried about high fuel prices.  Whom do they blame?

Here are data from a 2007 poll.  We follow such polling questions constantly and the numbers do not change that much.  The data show that the average person blames big oil or government for high fuel prices.  They do not understand much about market forces.  They go for conspiracies and simple-minded answers.  It is a winning tactic, at least in the short run.

If you were a candidate, would you try to educate the 2/3 of the people who are wrong-headed, or would you "go with the flow?"

Here is the poll question:

Who do you blame the most for the recent increase in gasoline prices - oil producing countries, oil companies, President Bush, Americans who drive vehicles that use a lot of gasoline or normal supply and demand pressures.

Oil companies	43%
President Bush	20%
Supply and demand	13%
Oil countries	11%
American drivers	4%
Not sure	9%

Pandering?

Barry calls the candidate efforts "pandering" and the term seems to fit.  Let us take careful note of the circumstances:

• An issue where nearly all of the top experts -- people who have relevant credentials and have reflected carefully -- draw a conclusion different from many average  people.
• Many consumers of the information believe in conspiracies and simple, common-man explanations.
• The candidate, someone in a position of leadership, chooses to exploit the public mis-perception rather than to educate and to lead.
• The resulting pandering helps the candidate, but might well hurt the average voter -- the person consuming the candidate's message.

This all has an eerily familiar pattern.  It is something to think about.

And by the way, we do not think any of the energy proposals have a ghost of a chance of passage.

Weekly Sector Update

The apparent shift in Fed policy was partly anticipated by the markets.  As a result, the expectations concerning the dollar changed.  The TCA-ETF portfolio from last week had a number of "weak dollar" plays, foreign markets, energy, and basic materials.  The data for this week (as of Wednesday's close) show a shift in the rankings, with more emphasis on technology.  (This is evolving rapidly).

The table below shows this week's rankings.  Vince has adjusted the strength scale to aid in the interpretation.  The underlying method has not changed.  A reading of zero indicates the average expected performance of a sector over a one-month time frame, the general time horizon for the model.  A reading of 50 indicates an expected return that is one standard deviation above the average, roughly the top third of returns.  A reading of 100 indicates an expected return of two standard deviations above the average.

While we update the model daily, we have introduced a program for average investors that does weekly trades unless emergency adjustments are required.  A report on this program is available upon request.

(Click to see the chart)