…Of everything I read Terry Laundry’s Magic T Theory made the most sense to me. …Terry was an eccentric genius living out on Nantucket Island. He was a fellow Marine, a jughead, who’d graduated from MIT and was now using his considerable engineering skills to analyze the market. Terry believed that the market spent the same amount of time going up as it did going down…When you look at the letter T, hence, the Magic T Theory…With the Magic T there was order in the universe a high and low tide every…The Magic T and I became as one.
- Marty Schwartz, legendary trader and author of the “Pit Bull"
Welcome to Terry Laundry's T Theory Observations site which provides T Theory Updates each Sunday afternoon. These updates are brought to you by Terry's Management company American Shareholders OnLine. This link provides background info on T Theory and its application to investment management.
For introductory T Theory Tutorials go to this link T Theory Foundation . For Daily updates go to this link at T Theory Foundation then to the Calculation page for the latest daily chart and my short daily comment posted by 8AM ET the following morning.
Terry's email address is linked at the upper left. I will try to answer your questions on T Theory topics as time and circumstances permit but I am very busy. The tutorial for the volume oscillator calculation is at the Saturday August 29 2009 post below.
Update for Sunday January 31 2010. This week I summarize the status of the ongoing bullish Advance-Decline T#13 and the current correction. Open the PDF Chart below and listen to the accompanying audio file.
Audio CommentaryDownload TTO20100131 with PDF Chart Download Advance-Decline T#13Status
Update for Sunday January 24 2010. This week I summarize my current T Theory project on the 40 Year Cycle as it applies to the coming Depression. Open the PDF Chart below and listen to the two audio files that refer it it.
Chart Download 40YCycleDepressions with first Audio Commentary Download TTO20100124A and second Audio Commentary Download TTO20100124B
Update for Sunday January 17 2010. This week I summarize my current Company project on the Best Bond Strategy in the following text. Next week I hope to get the 40 Year Cycle Article completed then I can do a commentary on the combined picture for the next bear market.
ASIC's Proprietary "Best Bond Strategy™"
By the year 2000 my T theory forecast had concluded the era of great growth during the 1980s and 1990s had reached a dangerous over extended condition with great risk to equities for some years to come. In response, I spent the following years devising a new, more conservative bond investment strategy which has become unique to our company. It is derived from the Confidence Index, devised and maintained by Barrons Financial and has been published for many decades as a basic indicator of investor confidence in the future economic outlook. We call ASIC's interpretation of its logic the "Best Bond Strategy". Its annual back performance since 2000 is summarized in the table below.
The Barrons Confidence Index is derived from the bond investors basic need to choose between a higher yield, but riskier, low quality bond that promises a greater income return, or alternatively, choosing a safer, higher quality bond that promises default protection in hard times but which necessarily provides a lower yield. The Confidence Index monitors ongoing investor preference between these two options. Thus the trend of this indicator provides an insight as to investor confidence as the bond market judges the relative future prospects for these alternatives. This process is constantly being re-evaluated by bond investors in light of ongoing economic developments, thus a dynamic and insightful indicator can result.
In our program we simplify these two basic choices to either the Fidelity Capital and Income fund, a high yield, well managed bond fund of lower quality, but which the fund manager thinks can ultimately survive economic setbacks, or alternatively to a very high quality Vanguard US Government long term bond fund that places safety above current yield. My business partner Paula Burke spends much of her time evaluating the relative performance of these two alternatives and her conclusion is that Fidelity Capital and Income provides the best low quality high yield fund for our program while the Vanguard organization provides the best and most efficient, safe alternative with either the Vanguard Long Term or Vanguard Intermediate Term US Government bond fund.
Its basic operation is to own the safer, lower yielding Vanguard US Government Bonds when confidence in the economic outlook is declining, then switching to the higher yielding Fidelity Capital and Income once the Federal Reserve makes it clear they are committed to pulling the economy out of a crisis situation.
As noted in the Table above the Total Return for the S&P 500 benchmark, which includes gains/losses plus dividends has over the last decade, returned a disappointing average return (1.1%). This has resulted from the recent gross over valuation of equities, the failure for regulator to limit past speculative practices, the general inability of the US economy to compete with Asia, and the US preoccupation with running up ever increasing debts which it can ill afford.
In contrast, we see the average returns over this same period for the either of the two bond alternatives to be far more attractive. If one had implicit faith in the management of Fidelity's Capital and Income (whose symbol is FAGIX) to prosper long term no matter what the negative economic consequences going forward, then the average performance of FAGIX since 2000 looks to be quite attractive (9.9%) relative to equities (1.1%). On the other hand if one were ultra conservative, the Vanguard Long Term US government Bond fund would have provided an alternative superior average return (7.9%) although not as high over this period as the lower quality fund Capital and Income return.
This divergence is not unexpected. As a general rule it is always true, when viewed over sufficient time, that if one seeks safety and security above all other considerations, one must accept a lower return as the price for "sleeping at night". Our first principle is that not that one kind of bond is superior to the other going forward, as there is room for both considerations because both look to be superior. Rather the over-riding consideration is that there is an alternative approach to the common equity investment for growth that we used in our early decades. Our program makes use of these two types of bonds. It is not a simple income approach as can be seen by the best Bond Total Return (21.6%) when the better of the two alternatives is selected retrospectively for any one year.
There are important points to note for the 10 year average total return for the Best Bond. First is a retrospective view, second its results are not guaranteed, and third it does not require trading within a one year holding pattern. Because it is retrospective it should be noted that the selection of which fund we use in our program is dictated by my T Theory which involves time symmetries in the chart below of Fidelity Capital and Income's price movements over the last 12 years. These time symmetries are represented by the graphical Ts which essentially conclude the the period of maximum price appreciation of the fund coming out of any major low has to be equal to the period of prior decline.
So for example, T#1 has its graphical pattern fixed by the decline from the early 2000 peak down to the late 2002 bottom pattern. This defines the time span that becomes the left side of the T. In 1973 I discovered that the duration of the subsequent advance must last an equal time period to the point of maximum appreciation rate. So the Time symmetrical T forecasts a peak in the funds price in early 2005. It is true the fund price moved higher into late 2007, but the maximum rate of price appreciation was completed in the equal time requirement of T Theory.
T # 2 develops along similar lines except the duration of the decline was shorter, so the projected up time ends rather quickly in August 2010. (Click on the image to get the full view) In our program that means by the end of this coming summer we will have sold our Fidelity Capital and Income holdings after capturing the maximum price appreciation that T Theory sees as likely. By September 2010 we will be invested primarily in the highest quality US Government bonds until the next attractive opportunity presents itself.
In general, the direction of this fund price tracks the Barons Confidence Indicator reasonably well. That is, a declining trend in the price FAGIX parallels a decline in investor confidence as bond investors, fearful of the economic future, move more of their income investments away from the riskier low quality bonds to the relative safety of the higher quality alternatives. In the event of a serious loss of confidence, such as occurred at the center of both Ts, extreme concern can depress the fund to the point that its indicated yield rises above 10% per annum to 15% per annum or so.
At these major price lows the fear of lower quality bond default keeps bond investors at bay, but in time all recessions end, and at some point these very high yields can be captured in our program by converting the high quality US bond assets which have appreciated during this period of declining confidence, into a very high yielding investment which has high capital appreciation potential once the crisis blows over. This process is basically how our "Best Bond" program operates over the very long term assuming an ongoing systemic bond default risks exist.
Terry Laundry
Update for Sunday January 10 2010. This week I summarize the long term outlook and introduce a new T Theory concept called the "null echo" in order to better lay out the details of my 2010 forecast. In the second audio topic I describe some new short term projects of interest to traders.
As always it is best if you first click on the audio file below and get it started, then put it into the background, then open a new window in your browser and pop open the PDF chart in the new window to follow the chart's in-progress audio discussion.
Today's PDF Chart Download ADTvsSPXnull100108
First Topic Audio Download TTO20100110A
Second Topic Audio Download TTO20100110B
Update for Sunday January 3 2010. Happy New Year. This week and next week I will be spending most of my time updating the year-end data at American Shareholders OnLine. Our Managed accounts gained 40% for the calendar year with very low volatility based on my "Best Bond" strategy. Part of my updating for the new year requires reviewing this key approach to accommodate the current Advance-Decline Ts projection of a major August 2010 equity peak as the logical endpoint of the rally from the March 2009 low. This very long term view will become the basis for a whole new strategy needed to accommodate the next Bear Market.
So this week my single topic is consideration of my Longest Range MegaTs which provides the necessary 10 to 20 year perspective to prepare us for the next bear market. This equity decline should last from the current projected August 2010 major peak to the next 40 year cycle low expected around 2013.
To view this discussion it is best if you first click on the audio file below and get it started, then put it into the background, then open a new window in your browser and pop open the PDF chart in the new window to follow the chart's in-progress audio discussion.
Open Audio Commentary Download TTO20100103A then open Chart Download MegaT20100101
