Systematic Relative Strength

Kuwait must have very constituent-friendly legislators. Apparently their populace is tired of paying off their consumer credit, so the legislature has introduced a bill to have the government reschedule everyone’s debts. On the other hand, this might be cheaper than having the government pay off the debts of the entire banking system like the U.S. did!

[As it is of general interest this time of year, we opted to include one of our client letters, with the client's permission, of course. Although we have many notable clients, this particular client is both unique and well-known. My comments are in brackets.]

Annual Managed Account Review for the Trustees of North Pole Inc. and Elf Ltd. Pension Plan

Dear Nick, [we're on a first name basis]

As always, we appreciate your business. It’s quite a feather in our cap to have a client such as yourself. It was great to talk to you periodically this year [unlisted number, sorry], especially since you were always of good cheer in what was quite a turbulent year in the financial markets.

Probably no one else on the planet has as good a view of the global recession as you and your elves. I was surprised to find out that even business at the North Pole was affected when you mentioned to me that you had to cut back the reindeer, except for Rudolph, to seasonal employment and reduce their hourly earnings this year. [This year was just tough all around--when there is a bull market in coal, I can tell there were a lot of bad little boys and girls. Indicted politicians and Bernie Madoff come to mind.] As you know, consumer spending is still weak, but there are some very hopeful signs for the market and economy in 2010.

In terms of the economy, the yield curve is very steep right now. The market is suggesting that economic growth next year could surprise on the upside. That might provide a nice lift for the market as well.

The best sign of all, though, particularly for your pension plan is-finally!-an indication that relative strength could be returning to favor as a return factor in 2010. The spread between the leaders and laggards had been very weak for most of the year, but has now flattened out. Very recently, there are even signs that the relative strength spread could be moving in a favorable direction once again. We expect that most investors will not notice or take advantage of the trend until it is in place for a year or so, which is part of the reason we appreciate your patience and steadfast good cheer. It’s quite possible that you and the elves will have a lot to celebrate next holiday season. [And we hope the reindeer will be back at work full-time.]

Say hello to Mrs. Claus for us, and good luck with your upcoming journey.

Yours truly,

Dorsey, Wright Money Management

What good is Christmas if Santa can’t get in trouble with the World Trade Organization?

Wow. We thought we were data geeks… Wired Science reports that some parents are taking baby development tracking to the extreme.

With the help of the Trixie Tracker website, they know they’ve changed exactly 7,367 diapers for their three-year-old son and 969 for their three-month-old daughter. They also have a graph of precisely how many minutes each of their children slept on nearly every day since birth. During their daughter’s first month, the data shows she averaged 15 hours of sleep a day, which is two hours more than her brother at the same age and well above average for other Trixie Tracker babies.

Peak oil definitively linked to bad music.

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The chart below is the spread between the relative strength leaders and relative strength laggards (universe of mid and large cap stocks). When the chart is rising, relative strength leaders are performing better than relative strength laggards. Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

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As you can see, the relative strength leaders have had much better performance than the relative strength laggards over time. However, the last 8 months have been brutal for most relative strength strategies. Although none of us know what will come next for relative strength strategies, let’s have a little fun and take a guess. It is important to point out that due to differences in holdings, some relative strength strategies may perform well even when the relative strength spread is declining (and the opposite is also true.)

The WSJ reports that weekday circulation for the largest U.S. newspapers dropped 10.6%, based on a cumulative average for the six months ended Sept. 30 compared to a year earlier. It was the sharpest falloff in more than a decade.

In related news, Dorsey Wright’s blog was launched in early 2009!

The real reason for the dollar’s decline: Drudge did it.

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Calvin and Hobbes put their finger on the problem.

I have no idea whether this strategist is on to anything or not, but this is the best indicator name I have seen for a long time!

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Via: Greg Mankiw’s Blog