I don’t mean to convince anyone that the buy-and-hold strategy is a thing of the past.  There hasn’t been any fundamental change in how the stock markets work to convince me that the markets have lost their upward bias.  That being said, if there is less than 15 years between you and retirement, you would do well to have you money actively managed by someone that isn’t limited in the directionality of their bets.  We really are in a time when traders should be having their run of the markets.  Take the DOW or S&P or any other broad based index, and looking back about two years it is clear that the general stock market bottomed in March of 2009.  And since then has been steadily marching upward and onward.  But, as many economists can tell you that is to be expected as things normalize after a huge panic driven drop.  The disagreement arises when it comes to what happens after the initial market rally. 

Outside of the short-term noise that is produced from security markets being arbitraged, there is still some underlying macroeconomic influence on the long-term performance of the stock market.  Now, the stock market is considered a leading macroeconomic indicator, meaning that its performance foreshadows that of the overall economy by about three to four fiscal quarters.  We saw clear evidence of this with the markets turning around in Q1 09 and the economy officially coming out of recession in Q4 09.  There is some consensus among economists that GDP growth going forward will be subpar for quite some time, so that says to me that there wouldn’t be a fundamental basis for spectacular year-on-year returns being generated by the stock market.  This leaves only arbitrage driven mid-range volatility with some upward bias; a trader’s market.   

For those of you that have the knowhow and ability to short indexes or take on short exposure, I would like to bring a short play to your attention.  I focused on the DOW, even though I don’t think it’s a very good barometer of the true market enough traders and investors pay attention to it to make it relevant.  My technical analysis was very simple but I believe it to be in conjunction with the widely accepted fundamental agreement.  I simply looked at the rate of change of the rate of change [or second derivative] of DOW monthly high versus low prices since the market bottom made last March.  What I’ve noticed is that the second derivative of the highs is shrinking faster than that of the lows.  Meaning the index should soon start making progressively lower highs with lows remaining tightly range-bound, until they too start making lower lows.  All said, I expect somewhere around a 10% percent correction from near current levels which should put the DOW somewhere in the range of 9800 to 9750.  I wouldn’t feel comfortable putting an exact timeframe on this play, but it should be kept in mind as an intermediate term target, it is important to keep in mind however, that my analysis was done using monthly data so this should play out over a period of months not days or weeks.  This information is meant to be used in determining the short-term directional bias for trading not an out right short on the index as this could result in intraday and intraweek margin calls based on overall market volatility.  Data from momentum, relative strength, and rate of change indicators also seem to support my assumptions about the pending directional shift.

Keishaun Mark is an exclusive contributor to Bonds Mutual.

As I sit here watching Cramer give his apology to us suckers that sometimes listen to every word as legal advice from a personal financial advisor something hit me, China is on cocky mode. But being a person that screams bloody murder about how much we should be concerned with the developing economic giant, it seems as though my paranoia may have surpassed education if not for a mere moment.

Numbers aside lets put things into perspective. China loans us money so we can buy goods from them so we can ask for more loans to purchase more goods. What would happen (debt aside) if we were to use another vendor such as Vietnam for our exports? China would lose a substantial amount of business.

A large issue at play currently is the currency manipulation by China. The yuan is being held artificially low by the Chinese “government” (also known as a communist regime). The value of this undervalued currency is being held low by the regime for a reason. It might not be undervalued that much after all. With the developing scenario of Google and GoDaddy pulling out China the bigger picture begins to show itself.

China has their currency based largely on the holdings of US Treasuries and other Bonds and such that they are known to hold in excess of 1 billion dollars of which they have reinvested in the form of the good ole buck. Until they pull the assets out in physical form, they are forced to not bankrupt their investments and 30 years worth of economic warfare.

Being the manufacturing plant of the world, China has the upper hand, but that hand is NOT that good. US consumers love cheap goods and will continue to love them, losing China as an exporter will not substantially raise prices as there are other countries willing to step up to the plate.

To hell with China, lets play hardball and call all in and either make them show their cards or have them fold and revert to cyber attacking our companies and our government. Until then, lets cut back on the health care spending spree and further expand our defence budget and get with the times and expand our cyber security to the point where we can follow Sun Tzu and “When your enemy has the high ground do not ascend to attack them” but follow the thoughts of the great General Jackson and stick it to them before they make you feel how it would feel.

Taking a look at what happens when deficits are pursued for the hell of it we find some things to be more surprising then others.  Governments can fund deficits in two main ways: first (if the option is available) it can borrow from the pool of domestic savings by selling bonds, notes, and bills to the public, however, this has the effective of a dog chasing its own tail.  In Laments terms the government borrows the savings of the public, then pays them either to do a job, redoing a a previous job just to stimulate the economy or worst yet, for just being a citizen.  The income is then saved because its not expected to be a permanent cashflow stream, and the government then later borrows those savings to further perpetuate its deficit.  This trend slows inflation over time until real rates of return are higher than nominal returns and then you have deflation.  Deflation is very beneficial to savers as the purchasing power of their savings increases and so encourages them to save even more, all while forcing the government to take further action to stimulate spending.

Usually, monetary policy takes the lead in the attempt to correct a recession with falling interest rates.  If interest rates hit their natural limit of zero and fail to spur a sufficient increase in the level of investments, then the economy can end up in a liquidity trap.  This basically occurs when borrowing rates are so low (near zero) that corporate borrowers commit borrowed funds to savings vehicles (usually government debt) and earn some spread, instead of making capital investments.  To better understand this you must keep in mind that the nominal interest rate minus the rate of inflation is equal to the real interest rate.  For example, if a corporation borrows funds to make some capital investment, and inflation goes up, then the real interest rate paid on the loan goes down as each repayment amount is worth less than the one before it.  Inversely, if a corporation borrows funds to make some capital investment, and inflation goes down, then the real interest rate paid on the loan goes up as each repayment amount is worth more than the one before it.

Once in this particular situation, raising interest rates would only stifle out whatever little investments there are with higher borrowing costs, or decreasing government spending would drive down the yields on government debt closing to spread that corporations rely on for income, putting some out of business and negatively affecting employment levels (which would require more government spending to deal with).  Needless to say, this is quite the precarious scenario to get an economy out of: see Japanese economy from the 1990s to present.(With the fastest aging population the government will have its hands full)

The second way governments can fund deficits is by borrowing in international capital markets.  However, this approach does have its natural inhibitors.  The increased government outlay, if again viewed as temporary would only increase the savings rate and not necessarily consumption.  The increased supply of government debt in the international capital markets would (in normal times) drive the yield on the instruments up, which effectively raises long-term borrowing rates for the economy which is not a good way to incubate growth.

Again, monetary policy should have lead the way in the bout to correct the recession with interest rates.  But, monetary policy only controls the short end of the yield curve, fiscal policy controls the medium and long ends. Being that most investment loans are multi-year loans, their rates would most likely be tied to some level of government borrowing cost.  For example most corporate debt  instruments are priced as a some spread above treasurys of similar maturity, or mortgage rates as a spread above the 10 year treasury note rate.  The increase in long maturity borrowing costs would definitely put a damper on both private and corporate investments.  In this case, the fact that government borrowing to fund its deficit absorbs so much of the international savings pool that the cost of borrowing increases across the board, it results in a crowding out effect where basically there isn’t enough capital left over for businesses and households to tap for their long-term investment needs.  This leaves only the marginal increase that would have occurred in the domestic savings pool from the increased government outlay for businesses and households to compete over which means higher money market rates to savers, which is an incentive to save more and consume less as a result (also bad for economic growth).

Matters of business cycle management need to be left in the hands of a capable, credible, [and this is key] independent central bank.  I hope I don’t live to regret this statement but, monetary economics works, its too fragmented and filled with confused arguments, but it works.  I hope I haven’t given anyone the impression that I, in my “infinite wisdom” am against government deficits in response to a recession, because that is not the case.  Government deficits are necessary in my eyes during a recession because there is a human element to every economic downturn.  When unemployment increases by one percentage point, hundreds of thousands of people no longer have a source of income to support there lives.  That is where the government deficit is needed and where it should be directed.  And not sold to the public as a means of getting an economy in recession back to growth.

I believe that to move an economy out of recession and back into growth, monetary policy needs to flirt with the specter of inflation through an expansionary policy which should in some extreme cases include quantitative easing.  I refer you back to the concept that the nominal interest rate minus the rate of inflation is equal to the real interest rate, and the example of a corporation borrowing funds to make some capital investment.  If inflation goes up, then the real interest rate paid on the loan goes down as each payment is worth less than the one before it.  This is the type of scenario that is an incentive to businesses to invest, as well as to households to consume instead of save because they expect rising prices which devalues their savings.

As in both types of recessions, whether normal or deflation plagued, there is an approach that a central bank can use to get an economy back to normal growth levels.  Quantitative easing is only to be used after standard monetary policy of lowering interest rates has been exhausted.  It’s basically the central bank printing money to purchase illiquid assets from large financial institutions through repurchase agreements.  Which are agreements where the central bank purchases the assets from the institutions, and the institutions agree to repurchase those assets back at a later date, which frees up cash for the institutions.  The goal is to have so much cash on corporate balance sheets that it catalyzes positive inflation expectation.  In the face of expected inflation, businesses invest and households consume, which gets an economy growing again.  The increase in business investment and personal consumption will lead to more employment, more wages and rising price levels, to which the central bank would have to respond by first slowly eliminating its quantitative easing procedures and later normalizing interest rates.

Its understandable that government likes to get involved to feel like its making a difference, but it should not for a minute forget that its role in certain matters of economic importance is secondary, and only of social importance.

How will losing all those overdraft fees that the bank would collect help the bank? Simple, you cant spend the money if you don’t have the money. The banks are now going back to vanilla type of banking. Banks make money when you have money, but what if you don’t have money, the bank will make money on you by giving you money in return for you giving them back more money.

Banks dont want to give bad loans out because they are still reeling from screwing up with the sub prime mortgage collapse.  But banks need money to make money, so how can they get you to give them money you dont have? By giving you money to use when you dont have money!

Think of your debit card now functioning as a credit card that you don’t have a choice of if you will pay the balance or not. Banks are great speculators and whats an easier speculation than the fact itself? Given the fact that the bank loan out a certain amount of money that they know they will collect when your direct deposit goes through, they can use those impeding “paychecks” to put to work.

The question at stake is if the others banks will follow suit or wait to see if BofA has a goldmine or a caving coal plant. BofA is being proactive and is taking aggressive action in the laggard financial sector.

Most of the unclaimed tax refunds are attributed to the elderly and the young. Due to the fact that filing is only necessary if an individual has made a certain amount, most students and elderly without a steady income do not file. What most don’t understand that a refund is still possible without reaching the set benchmarks in place for those that are required to file. The IRS has stated that the average refund is north of the 600 dollar mark.

The unclaimed tax return money is available to be claimed by April 15, when it becomes property of the US Treasury, just as every unclaimed tax returns become after three years of original file year.

So if these individuals didn’t claim then, they most likely wont file this time around so the question of the day is “What should the US Government do with 1.3 billion dollars?” Feel free to let us know what you would do with the money if you were the Government in the comments below.

When constructing a portfolio, assets are not chosen simply based on their expected return and variance characteristics. Instead, other important factors are taken into consideration, such as correlation coefficients and/or covariance of assets in determining the level of return variation built into the portfolio. Modern Portfolio Theory also uses Capital Asset Pricing Models in determining expected returns for assets when optimizing their portfolios. With this model, assets are correlated to indexes that are supposed to represent market expectations for return, as well as introduced to other unique variables to determine their individual expected returns. Past this point portfolio managers carry these concepts forward into more complex and detailed operations but the basic idea is the same.

Now, for my opinion; first of all, Modern Portfolio Theory has one key assumption that after much academic deliberation has resulted in a seemingly unsatisfactory conclusion. Mean variance portfolio theory was developed to construct an optimum portfolio when focused on return distributions in a single period. Therefore, all correlations or covariance, as well as expected return and variance calculated are for a single period. The assumption is that asset returns and their derived calculations are independent of each other between periods. Intuitively, I just don’t see how last period’s returns don’t affect this period’s returns, and so on, but that’s just me.

There’s no big picture view for the portfolio, and so no chance of preparing for any changes in underlying relationships. Mean variance theory calculations are supposed represent 2-3 standard deviations (95% – 99.7%) of all possible observable market outcomes. And they work just fine when observed market data falls within the 2-3 sigma range, but when we witness for instance a 6 or 7 sigma event like the 2008-09 financial crisis, mean variance calculations just can’t accurately predict return distributions. Within the spectrum of all possible observable market outcomes, 2-3 standard deviations can capture and model events relatively accurately. But when we start looking at outcomes that have a less than 0.3% chance of occurring at any given time they begin to become much harder to model and adjust for. At the point where you get black swan events as far out as 6 or 7 standard deviations, the probability of occurrence is very low (but not zero).

I think this is exactly what goes wrong when we see a protracted market-wide correction or even just a consolidation period turn into a market crash. Some exogenous factor disrupts the underlying correlations and associational assumptions that Modern Portfolio Theory relies so heavily upon, and since the success of the portfolio approach depends on these relationships, when they breakdown portfolios breakdown. Simply put, if variation can’t be accurately estimated then it can’t be accurately hedged and investors ‘freak’ out.

An emerging alternative is Hybrid Portfolio Theory. Actually, it’s not an alternative in the complete sense. Hybrid Portfolio Theory is based on the concept of positive asymmetric income, which if you are familiar with the cashflow pattern of a call option, you already understand the concept of positive asymmetric income. For those that aren’t; it’s simply limiting the downside while partaking in the upside of the security’s cashflow in the presence of volatility. Now the reason that I said it’s not an alternative in the complete sense, is because to accomplish such a cashflow structure within a portfolio requires a minimum of two sub-portfolios (or a portfolio of all call options). And even with an all call option portfolio, in a worst case scenario where the correlations used to structure the portfolio break down you would watch the portfolio mature to a value of zero.

In its simplest form, two sub-portfolios with opposing objectives can be used to structure the positive asymmetric income of Modern Portfolio Theory. For example, the first can be directed towards capital preservation, liquidity, and current income; call it sub-portfolio A. And the second can be directed towards absolute returns through leveraged or multiple beta investments; call it sub-portfolio B. The two combined gives you the [master] portfolio. Sub-portfolio B carries above average risk and is meant to benefit from upside volatility, which boosts the overall return on the [master] portfolio combined with the current income from sub-portfolio A. In the case of downside volatility, sub-portfolio B suffers losses, but sub-portfolio A (if constructed properly) should still be earning current income, which puts an effective floor on the losses of the [master] portfolio. The qualifier of course, is that the sub-portfolios be constructed properly, and the only accepted way of constructing a ‘proper’ portfolio is with the use of Modern Portfolio Theory. Therefore, the only added benefit that I personally think Hybrid Portfolio Theory brings to portfolio management is that it gives the manager a second (or however many sub-portfolios they utilize) chance to get it wrong before loosing all of their invested capital.

Keishaun Mark of Foresight Investment Fund is an exclusive Contributor to Bonds Mutual

Take the case of JPMorgan Chase. It spent more than $5 million lobbying Congress last year and has already doled out nearly a half-million dollars in campaign donations to curry favor with lawmakers from both parties.

Among the key issues for the Wall Street giant is to kill or substantially revamp President Barack Obama’s proposed bank tax, which could cost the company about $1.5 billion a year — or 38 cents a share, according to an analysis by Sean Ryan at Wisco Research.

“Using tax policy to punish people is a bad idea,” JPMorgan Chase Chief Executive Officer Jamie Dimon griped after the proposal was unveiled.

The final framework of the tax could be known later this week, when a bipartisan bill is expected to be unveiled in the Senate. But the increasing desire of lawmakers to appease angry voters by inflicting some pain on Wall Street means the betting is against the banks.

In fact, the intense emotional swings of voters in the past year have created a host of new hurdles for corporate lobbyists this year.

While the House was moving regulatory reform last summer, at a time when the tea partiers were just beginning to have an impact, senior aides for the House Financial Services Committee were openly hostile and essentially declared any representative of the financial industry persona non grata. When the Senate began focusing on the legislation earlier this year, the bankers made a mess of things all by themselves by handing out a new round of record bonuses, rekindling that voter anger and prompting Obama to propose the bank tax.

JPMorgan is hardly alone in dispatching its lobbyists to limit the damage.

Bank of America has spent nearly $4 million on lobbyists and donated more than $650,000 to lawmakers. But it, too, is facing a more than $1 billion annual payout if the bank tax is approved.

Ditto for Citibank, which enjoyed a victory lap after the bailout money was approved and now is looking at an annual cost of about $1.4 billion to help defray its costs.

White House officials dispute such high estimates of the tax but say that even if they are correct, big companies that can afford more than $20 billion in bonuses last year can also pony up the tax payment.

Moreover, the officials said, such a fee will discourage risky behavior in the future, since banks will be on notice that taxpayer bailouts don’t come free.

But Ryan sees more punishment than policy in the tax. He predicts the banks will simply pass on the cost of the new fee to their corporate customers, which quite likely will move it along to consumers when possible.

“You can understand the appeal of trying to craft a tax that exclusively comes out of the hide of bankers and the bank industry. As a practical matter, that is extraordinarily difficult to do, and this doesn’t even come close to it,” he said.

That’s the problem.

The report, by Yale economics professor Gary Gorton, says subprime mortgage securitization was a mess — a house of cards probably doomed to fall — but subprime by itself simply wasn’t big enough to put the entire financial system at risk. That required a failure of the Renew Sale and Repurchase (REPO) market for collateralized securities that over the last 30 years had come to backstop global finance.

The problem here, of course is that hardly anyone has even heard of REPO, which manages to be an unregulated, uninsured $20 trillion business that is absolutely essential to keeping money flowing in the world. Subprime is only $1.2 trillion — not big enough by itself to wag this dog.

According to Gorton, the entire basis of global banking changed in the 1980s, thanks to money market funds and junk bonds, which took all the profit out of being a traditional bank. So banks began securitizing loans to regain those lost profits.

The REPO market of interbank loans had always existed but it grew dramatically in the 1990s to support securitization. But since there was no deposit insurance for institutional loans measured in hundreds of millions of dollars, counterparties demanded collateral to back these overnight REPO loans that generally replaced demand deposits in the banking system.

While the subprime mortgage crisis began in January, 2007, the ensuing bank panic didn’t happen until August of that year when lenders began making collateral calls and demanding haircuts (collateral fire sales at discounted prices) from borrowers that led to all the big banks being seriously under-capitalized.

The government, while well prepared to respond to a demand deposit bank panic like those of 1907 and 1933, was not only unprepared for the 2007 panic, they didn’t even know there was a panic until it was well underway.

The panic meant that the value of all types of bonds declined, trillions of bank capital evaporated and the REPO market, itself, collapsed as all counter-parties lost faith in each other and the basis of the entire banking system literally disappeared.

So what does this mean? Well it explains why the banks still aren’t lending money, because they don’t have the means to back the loans they’d like to make, absent government intervention. It means that until the REPO market regains some steam there isn’t going to be much natural progress in getting the economy to start growing again (take out the government stimulus and we’re screwed). And it shows that the Fed and Treasury in the United States were no better able to protect us than you could keep your dog from running into the road and being hit by a car.

But it wasn’t strictly a subprime mortgage crisis

Leading the way is Manchester United with a value of 1.87 billion. Considering the fact that it was purchased for 1.45 billon in 2005 by Malcolm Glazier, this number is not unreal, surreal but not unreal.

A surprising 2nd place team is the Dallas Cowboys. Considering that prior to this year, the Cowboys had a tough time making the playoffs or winning a game in the playoffs they were valued at 1.65 billion. Helping the valuation is the fact the the Cowboys run their own merchandising business and their new ballpark that comes hand in hand with PSL(personal seat licenses).

Gather around the computer screen to be baffled by the number 3- the Washington Red Skins! The Skins were given a price tag of 1.55 billion American Dollars. Despite only two winning seasons over the last 10 years, the Skins sell out their stadium consistently. Its also nice to be able to charge your fans top 10 ticket prices and raking in 7.6 million a year from FedEx for the naming rights to their stadium.

At the number 4 spot we have a team that most of us at Bonds Mutual thought and believe to be severly undervalued, the reigning World Series Champions- The New York Yankees. Awarded with a 1.5 billion dollar valuation Forbes has us scratching our heads. With the powerhouse YES Network providing unprecedented coverage of any sports franchise and playing in a brand new Stadium Forbes has without a doubt overlooked the actual worth of the most powerful brand name in sports.

Rounding off the top 5 are the New England Patriots. Having suffered through a miserable season the Patriots were still pegged for a hefty 1.36 billion price tag. Amassing serious profits from the 87 luxury boxes and 6,000 club seats Gillette Stadium has seen its fair share of playoff games and wins in this decade.

With all of the top 10 franchises having received a nod for at least one billion dollars, three of the next five teams all came from the National Football League.

6. Real Madrid – $1.35 Billion
7. Arsenal – $1.2 Billion
8. New York Giants – $1.18 Billion
9. New York Jets – $1.17 Billion
10. Houston Texans – $1.15 Billion

VUDU currently claims to have about 16,000 movies for rent and sale. The company streams the movies to Internet enabled tv’s as well as Blue Ray players.

This isn’t the first time Wal-Mart tries to get into the online movie rental business. Although previous attempts were of a much lesser financial commitment, the move does not seem to be an industry changer.

Personally being an avid Netflix user digitally on the Xbox 360 console, I have little faith in any other competitor in the industry outside of Apple with the Itunes store.

Netflix boasts an expansive selection of new and old movies available to stream digitally and it has a serious mountain to climb in regards to customer satisfaction with the platform. VUDU has yet to decide what target audience they are trying to reach and in what avenue.

With VUDU being behind Netflix and the only way it can surpass their deficit in this aspect is if Wal Mart throws some serious amount of money their way, the deal looks sour off the bat.

People do not want to purchase another box to plug more cables in. With the ability to plug in an Ipod or Itouch into a tv and watch a movie that was purchased at Itunes and can be watched on the train and at home is an easier and more enjoyable way of watching a movie.