Dan’s Blog

Damn You Boeing!

Dan Calandro - Tuesday, May 21, 2019

GONE BABY GONE highlighted my contempt for Nike’s decision to glorify the unpatriotic action of kneeling during our national anthem with a multi-million-dollar ad campaign featuring the leader of the movement, former NFL quarterback Colin Kaepernick. That was reason enough for me to sell the stock and replace it with German competitor adidas in my 15-51i portfolio. And while I am not one to constantly tinker with my portfolio, nor do I advocate such practice, managerial malpractice has once again called. This time it was Boeing who rang the bell.

Two fatal airplane crashes, one in October 2018 (Lion Air) and the other in March 2019 (Ethiopian Airlines), prompted world authorities to ground Boeing’s new 737 commercial airliner called the MAX. A reluctant U.S. Federal Aviation Administration (FAA) – not an innocent bystander in all of this – was the last to make the decision to ground the MAX.

It smelled rotten from the very beginning.

But Boeing’s stock dropped only 7% in the wake of the first crash, as initial reports suggested it was pilot error that downed Lion Air’s brand new 737 MAX. That shift in blame, from airplane-maker to airplane-flier, allowed the stock to completely reverse that loss in just a few days’ time – despite reports of the downed plane’s irregular movement pattern beginning shortly after takeoff, and insinuations that they were connected to faults in Boeing’s new inflight software system, called MCAS.

But Boeing’s stock continued to shrug off any kind of direct indictment, and in fact, reached a new all-time high ($440) five months after the Lion Air crash, on March 1, 2019. Nine days later, on March 10, news of the second crash broke. And it has been all downhill ever since – and rightfully so. Boeing’s behavior has been as egregious as it has been appalling.

Both crashes were related to the same fault: error prone Angle of Attack (AOA) sensors were not properly programmed to overcome corrupted data. This one malfunction has highlighted systemic managerial flaws within Boeing: Flight manuals were lacking; Training was irresponsibly light; Communications were inadequate, inept, and at times corrupt.

Investors should take notice...

Boeing had a glitch in their software that when AOA sensors sent bad data to the autopilot system it was used to maneuver the plane in an attempt to correct a problem the plane didn’t have. Their new software should have discarded, bypassed, or alerted pilots of the inconsistent data being sent by AOA sensors. But it didn’t do that. Instead it used the bad data knowing it was bad.

Crazy.

And to make matters worse Boeing’s new MCAS software was dialed-in so strongly that it was impossible for pilots to take control over the plane even while knowing that AOA sensors were malfunctioning.

Imagine being a skilled pilot incapable of wrestling the plane away from a pre-programmed doom – all because Boeing rushed a new model to market and bought the government’s approval to do so. How else could such a thing happen in this day and age?

Disgusting.

And it gets worse…

Additional safety features critical to override erred sensors, which had been standard equipment with every other version of the 737, were not included with the base model of their new 737 MAX.

Imagine that, with Boeing’s new MAX model vital safety features were offered as options and sold as upgrades. In other words, the brand new MAX jet came with minimal safety features.

Would love to meet the brain surgeon in marketing who thought of that.

Boeing has been such a disappointment that it hurts to watch. For instance, it was recently discovered that Boeing changed its development process with the MAX to dramatically minimize or eliminate the role of their test pilots during the final stages of development and delivery.

Can’t imagine a good reason for that.

And still it gets worse…

Somehow Boeing – the perennial airplane maker in the world, mind you – failed to communicate to Southwest Airlines that AOA sensors were not activated on their new MAX jets. The Southwest planes had the AOA sensors, of course, as all planes do. But they just weren’t connected to Boeing’s new inflight software system.

So the sensors were there, but not hooked up. Hook up was extra, and Southwest didn’t buy it because they thought they had it – for two years!

Scary.

Investing is an extremely personal thing when you make them part of your life. You get to know them in a personal way because you experience them as you watch them compete in the global marketplace. Market experiences, perhaps the best way to assess value and managerial competency, accumulate over time and strengthen the relationship you have with your investment dollars. So it feels great when they make you proud.

But it hurts like hell when they disappoint you.

I am a frequent flyer on Boeing airplanes and have flown on the MAX jet with the largest buyer of that model, American Airlines, who thankfully purchased the safety options for all their planes. If I owned an airline stock it would probably be American because I fly it more than any other brand and like the way they do things. Their attention to detail in the aircraft can be tied directly to their managerial offices – who knew that safety wasn’t standard with the MAX model and worth every penny of its option price. I salute the diligence of their entire organization and their commitment to passengers like me. Shareholders of American Airlines should be very proud of their company today.

Owners of Southwest should be very skeptical of theirs. How could they not know that critical safety features were not included with their new MAX airplanes?

And then there’s owners of Boeing, who should be as angry as a stuck pig because something we thought we knew so well let us down in the biggest and worst kind of way. Our beloved airplane maker put money ahead of safety and threw caution into the wind.

Damn you Boeing!

The managerial weakness displayed by Boeing proves it is no longer fit to be included in a portfolio built to indicate stock market strength. As a result, it has been removed from the 15-51 Indicator(15-51i) as of May 6, 2019.

And while it can sometimes be difficult to replace a partner that has been so profitable for so long, that wasn’t the case with Boeing. My first instinct was to replace it with United Technologies (UTX) and I stuck with my gut.

You may recall that UTX was an original member of the 15-51i portfolio. It was eliminated in 2015 not because of anything it did or didn’t do, but because I needed to make room for Apple, which rejoined the portfolio when it was added to the Dow Jones Industrial Average. A move had to be made in my Technology allocation and either it or Boeing had to go. Boeing won the day back then because I had a closer connection to its products. That was then. Bad management has now disqualified it.  

Boeing and United Technologies service the same markets, differently, and generate revenue from the same spending classes – and both are Dow components. Together these characteristics helped my portfolio maintain the same level of connection to “the market” as it had with Boeing.

Familiarity, solid management, and a long track record of success made the change easy to make. UTX was simply a good fit.

So a new chapter in the history of the 15-51 Indicator™ begins, and that’s always a good time to review the entire portfolio scheme – especially because it hasn’t been performing as strongly as I expect, and demand. And while it remains a dependable above-average performer, the 15-51i portfolio is not without its flaws. Its year-to-date performance speaks for itself. See below.

Ironically the biggest portfolio of the bunch, the S&P 500, is the best performing so far this year; it’s up 14%. The Dow Average has gained 11% and 15-51i Strength has added just 8%. And while eight-percent is a legitimate five-month return I am way too competitive to be happy with a below-average trend, regardless of ROI.—And while I wish I could blame all of my performance woes on Boeing, I can’t…

United Healthcare began to correct just two days after THE FAILURE OF OBAMACARE SHOWN IN ONE STOCK was posted in the midst of an ever-expanding MEDICARE FOR ALL movement. Before that 3M disappointed with a big earnings miss and lowered expectations for its future. It has been the biggest loser in my 15-51i portfolio this year, down 11%. Wells Fargo and Honda Motor Co. haven’t lost much this year but their persistent lack of performance is starting to annoy me. All four stocks are under review.

But I’m not going to make any more changes right now…

Pricing anomalies always occur, especially in the short term, where larger portfolios can outperform smaller ones. While those abnormalities are infuriatingly possible, they’re not worth obsessing over as long as your portfolio continues to achieve long-term objectives. And mine has.

Remember the purpose of the 15-51 Indicator is to indicate how stock market strength is performing, not stock market greatness. It produces above-average results, not great results, because it is an above-average portfolio, not a great one. That’s why I can live with a few underperforming stocks and still succeed.

The 15-51 Indicator is a successful portfolio because it consistently delivers on its dual objective mandate: market-like movements and superior long-term performance as compared to the Market Averages, which it does reliably. See below.

In the eight-years since publication the 15-51i has produced an above-average 209% (or 27% per year) return on investment compared to the Market Average[1] of 109% (or 14% per year). Long-term success, and because industry allocations remain close to targets, are why I am comfortable not making any additional stock moves at this time. There’s plenty of time for that.

Right now it’s strictly United Technologies for Boeing – because any CEO thinking safety isn’t standard equipment is not worth the risk of investment.

Stay tuned…

  The road to financial independence.



[1] The Market Average is the average of the DJIA and S&P 500.

The Failure of Obamacare Shown in One Stock

Dan Calandro - Sunday, April 07, 2019

The only reason the whole MEDICARE FOR ALL thing has any mojo is because there’s something seriously wrong in the healthcare and medical insurance markets. The Affordable Care Act only exacerbated the faulty pre-existing condition of those markets. The law misplaced billions of dollars to no avail while screwing taxpayers, consumers, and service providers in favor of freeloaders, bureaucrats, and insurance companies.

Let’s start with some basics…Governments control markets through laws and regulations, tax policy and interest rates. Their policies change Market conditions and dynamics, and thus affect corporate performance and stock prices. This can be evidenced by showing how the healthcare insurance market performed while operating under the Affordable Care Act (a.k.a. Obamacare). Allow me to demonstrate…

The Affordable Care Act was rammed home for Christmas in 2009. And although it began taking effect in March 2010 the law was implemented in phases, with the first significant stage arriving after the law cleared courtroom challenges in 2014. You may recall that the law was advertised to save families on average $2,500 per year – a fallacy only Kool-Aid drinkers could possibly believe at the time – as it is economically impossible to expand demand by tens of millions under level supply and effectuate lower prices. Reality just doesn’t work that way.

It is equally obvious that it is impossible to lower healthcare costs to consumers (or make them more “affordable”) when a main intention of the law was to raise deductible limits and co-pays. Obamacare demonized low deductible and nominal co-pay policies as “Cadillac plans” and either made them illegal or entirely unaffordable. Such action had no choice but to raise costs to individuals.

The Affordable Care Act was a fraud from the very beginning – proof of which can be seen vividly through a stock market comparison. Four trend-lines appear in the chart below: United Healthcare (an indicator of the healthcare insurance market), the 15-5 Indicator (indicating stock market strength), the Dow Jones Industrial Average (representing the stock market average), and GDP (which is the actual market economy, or the total of all markets). The time period covered in the chart begins with the enactment of the Affordable Care Act (ACA) in 2010 and extends through today. It’s a nine-year period. First the picture then the analysis.


The bottom green line is GDP, which besides the economy, can be viewed in this exercise as the actual base price of all goods. It grew 41% during the nine-year period, or 4.5% per year. Of that number 2.4% was growth and 2.1% was inflation. In other words, Real annual growth was 2.4% and average prices increased 2.1% per year. Remember that, actual prices up 2%.

The Dow Jones Industrial Average is a stock market indicator of the economy (GDP). Consider it also the average price and the average movement in price. It grew 147% during the Obamacare period, or 16% per year. Or put another way, the average inflation rate of stocks was 16% during the ACA era, because inflation is defined as the general rise in prices.

The 15-51 Indicator produces an above-average price trend because it is comprised of higher performing stocks in higher performing industry segments. It posted a 377% nine-year return, or a stunning 41% per year. Consider it also a premium-pricing index for quality brands of goods and services. That is to say premium prices rose at a rate 2½ times greater than the average (41% versus the Dow's 16% per year).

Healthcare, via United Healthcare (UNH), posted an eye popping 763% inflationary gain over the nine-year Obamacare period, or 83% per year – an amount twice the 15-51 Indicator’s premium price performance, and 5 times greater than the Dow's average price increase. Take a look again.


Healthcare inflation is so far out of whack from everything else in the economy the Affordable Care Act should be repealed based solely on that condition. The chart above tells that story vividly, as the United Healthcare trend illustrates the jump in healthcare costs to consumers for premiums, co-pays, and deductibles, as a result of the disastrous Obamacare legislation.

But it gets worse.

In the year prior to the enactment of the Affordable Care Act (2009) United Healthcare’s net profit was $3 billion. Nine years later (2018) their bottom line quadrupled to $12+ billion. See chart below.


The Affordable Care Act did that.

And investors should have expected it.

My blog entitled, SUPREME LETDOWN, was posted after the Supreme Court’s first horrible decision to uphold the corrupt Affordable Care Act – corrupt because it had no choice but to defy its name and dramatically raise the price of healthcare to consumers (those who pay for insurance and care). It also had no choice but to stuff money into the pockets of insurance companies because besides lifting deductibles and co-pays for consumers the law also provided for greater government subsidizes of healthcare insurance to a greater number of persons.  

In other words, prices to consumers increased dramatically at the same time government contributions (subsidies) also skyrocketed. That dynamic flooded the system with an abnormal amount of profit (as can be seen in the charts above), which is what inspired me to close the aforementioned 2012 blog with, “The ‘healthcare boom’ starts today – and that includes price inflation.”

United Healthcare was added to the 15-51 Indicator™ in 2011, after it rose 57% in 2010.

Like LETDOWN, blogs like THE FARCE OF MEDICARE FOR ALL and AMERICA NEEDS TO WAKE UP are policy driven blogs. Understanding the connection of government action to stocks is the best way for investors to be ahead of “the market”, maximize opportunities and minimize risks. Party politics mean nothing to investors. Public policy matters greatly.

Free-market capitalism produces greater long-term investment results than any other market model. Policies that denigrate it corrupt markets and drain incentive, wealth, and individual liberty from the marketplace.

Many on the political Left erroneously paint all free-market capitalists as anarchists – those who advocate a total lassie faire government approach to enterprise. Nothing could be further from the truth, of course, as even the most ardent free-marketeers believe in the need for government involvement for veteran and senior citizen healthcare. The government must have a role in healthcare, but it must be measured and limited in scope (my recommendations start here.)

Those who stand against the Affordable Care Act now do so not for political reasons but because it has proven to be as fraudulent as much as a failure. It made healthcare more expensive to all and did little more than stuff more money into the pockets of administrators and insurance companies. It broke a broken system even worse, and by so doing fueled a movement for a complete government takeover of the entire industry, i.e. MEDICARE FOR ALL.

The healthcare and according insurance market are a failed socialist system and should be labeled as such. Calling it a capitalist or a free-market failure is blasphemy. There is nothing free about those two markets. Obamacare made certain of it.

The unmitigated success of United Healthcare in the Affordable Care Act era is the most glaring indictment of Obama’s deteriorating legacy. His law made insurance companies richer on the backs of the small business owner and middle class worker. 

The answer is not more government but less. United Healthcare is proof positive.

Stay tuned…

 The road to financial independence.

The Farce of Medicare For All

Dan Calandro - Tuesday, March 19, 2019

It’s a shame that the word stupid is no longer acceptable in America today. The unfortunate results, of course, are more stupidity and stupidity on a much grander scale. MEDICARE FOR ALL is a prime example. The GREEN NEW DEAL is another. The economics for both is so absurd they are impossible to initiate let alone sustain, and their ideological support is as fraudulent as it is corrupt. Ditto for their advocates, who are not the socialists they advertise to be. To prove this, let facts and honest assumptions be submitted to a candid audience…

According to industry data collector Medical Group Management, 84% of all Medicare payments made to healthcare providers fail to generate a profit for the facility – and 67% (or two-thirds) of all disbursements are below the providers’ actual cost for the services. In fact, it is estimated that Medicare payments average just 20 to 30 cents on the service dollar.—In other words, Medicare providers average just 25¢ for a healthcare service that retails for $1.

The most basic reason MEDICARE FOR ALL is doomed to failure is because it eliminates the single thing that allows Medicare to exist in the first place – the free-market.

Many Americans don’t appreciate that the current Medicare program is already a socialist system, because within it is a wealth redistribution scheme that favors certain people (Medicare recipients receiving retail-priced services at far less than market rates) over others (individuals paying more than market rates for their services to accommodate the shortfall in Medicare funding.) A lurch to the Left from here, i.e. MEDICARE FOR ALL, is to transform healthcare from its socialist form into a communist one – because it represents a complete and utter takeover of the healthcare industry by central government. It is the epitome of communist statism.

Americans should know better than anyone that nothing is as effective or efficient at satisfying consumer demand than the capitalist free-market system. Free-markets are driven by profit and return on investment (ROI), which is the overriding incentive for investors to place capital at risk to deliver quality, value, and adequate supply to markets. Care is better and more abundant when there is profit in it. Without profit potential quality is scarce and supply is limited. Only a communist would disagree.

Governments are cesspools of waste, fraud, and abuse because they are driven by politics and not profits. ROI means nothing to them because the word profit is nowhere in their vernacular. Governments spend money (as opposed to capitalists who invest it) and therefore have no profit incentive, and thus no reason to produce an abundance of great quality care. Efficiency, profit margins, and short lead-times don’t matter to them. The only thing that matters to governments is that all people receive the same level of mediocrity.

And that is why statism, which many now call socialism but is better described as communism, has always failed in the annals of history – because without the incentive of profit both quality and quantity (supply) shrink drastically. Investments in research and development for new cures and treatments are the first to go under bureaucratic spending constraints. Wait times increase in short order. And then care is rationed. MEDICARE FOR ALL is the best way to import Cuban healthcare into America.

The shift to communist takes time, in a move Marx described as a slow and methodical transition from the private ownership of industry (capitalism) to a shared arrangement between enterprise and government (socialism) before the State could finally take full control over industry and the entire means of production (communism). The conversion could take several generations to take root, as free people don’t give up their rights easily or quickly. Citizens had to be lured in…

LBJ started Medicare in 1966 and tied it directly to FDR’s Social Security Act. It began by covering only a small section of the populace: retired wage earners drawing Social Security – at the time 19 million people, or 10% of the population.

Today the program covers a wider demographic of people (not just Social Security recipients), more treatments, and serves a greater portion of the population – 58 million people, or 18% of the population.

MEDICARE FOR ALL – a huge part of the Democrats’ 2020 campaign platform – intends to add 267 million more people to the government roll.

Let’s examine just how asinine and corrupt the MEDICARE FOR ALL concept truly is. Asinine because it can’t work, and corrupt because those pitching it know it.

According to the Office of Budget and Management the U.S. central government disburses $1.1 trillion per year for Medicare and related healthcare programs. But we already know that is a deeply discounted value (20-30 cents on the dollar). In order for a self-righteous government to pay their “fair share” and entirely fund their expense obligations Medicare should actually be disbursing $5 to $6 trillion per year at the present time – this in order to maintain the same level of industry investment in quality and supply – otherwise both will suffer dramatically. That’s six trillion with a “T” dollars.

Right now the central government spends $3 trillion per year on all other non-healthcare programs, including defense. That amount, added to the true economic value of Medicare today, adjusts today’s government budget to $9 trillion per year – more than double where it stands today – and produces a massive $6 trillion annual budget deficit.—And that’s just for Medicare as it is today, covering just 58 million people.

MEDICARE FOR ALL would include covering the other 267 million people contained within America’s borders. The cost of covering 4½ times the amount of people, who in theory are younger and healthier, is at least equal to the cost of today’s Medicare due to the sheer size of the population. Add those costs to an already impossible to finance $6 trillion budget deficit and what you have is a government program impossible to fund and sustain.

And so Democrats have already begun calling for higher taxes. Alexandria Ocasio-Cortex – the Boston University economics graduate (which tells you something scary about modern American education and the worth of a $250,000 degree) – thinks a 70% income tax rate is enough to cover all government spending programs including her GREEN NEW DEAL. Bernie thinks a number closer to 90% would be enough to cover the nut. Me?  I don’t see a chance in hell that either rate could even come close.

Look at it this way…

The Trump tax cuts lowered the highest federal income tax rate to 37% from 39.6% . On top of that the “rich” also pay 2.4% Medicare tax on all of their wages. To make the math easy let’s round the sum of those two taxes to 40% for individuals. Trump also lowered corporate income tax rates to 21% from 35%. Under that scheme the central government received $3 trillion in tax revenue last year – not nearly enough to pay for Medicare today let alone MEDICARE FOR ALL.

So to cover the shortfall let’s say that central government doubled tax rates to 80% for individuals and 42% for corporations. Doing so would theoretically double tax revenue to $6 trillion – which still wouldn’t be enough to cover the retail cost of Medicare today. At twice the tax rate a $3 trillion annual deficit would still exist, each and every year.

So let’s say that government finds a way to actually triple tax rates to an impossible 120% of individuals’ earnings and 63% for businesses. Such a condition would in theory produce three times the tax revenue, or $9 trillion – and low and behold the federal government has finally balanced the budget – but that’s with Medicare as it stands today! MEDICARE FOR ALL places an additional 267 million Americans onto the Medicare rolls (not to mention all the asylum seekers flooding in from across the southern border looking for a free piece of the American pie), which represents an economic value worth at least another $6 trillion in funding per fiscal year. Where will that money come from?

“The problem with socialism is that sooner or later you run out of other people’s money.” – Margaret Thatcher

Certainly Bernie, AOC, and all other Democrats running for president understand this basic math and the obvious lessons in history and Venezuela.

Another thing many Americans don’t appreciate about socialism is that it is for the people, not the socialists. Socialists make laws that ordinary people must live by (Obamacare and Medicare) or be mandated to participate (i.e. Social Security) but they (Congress) are exempt from them all. Pedestrian social welfare programs are for ordinary people. Ruling class elites, the socialists, get something much better.

For example, I have been waiting six weeks to receive a cancer related treatment. Does anyone think former Senator John McCain, who voted against repealing Obamacare, ever waited more than a day for a cancer related service?

Of course not. The socialist gets the best of everything and ordinary working class folk get what they get – stiff premiums, huge deductibles and co-pays, smaller networks, and six week lead times. Again, socialism is for us, not them. Socialists live a very different, privileged life.

The greatest threat to modern day Americanism is that no one effectively communicates how the free-market works or how to make it work better in the healthcare industry. That conversation should begin with defining the appropriate role of government in healthcare. And to me that it is as obvious as it is logical.

1)    Until central government can adequately fund Medicare as it stands today they have no right trying to expand it.

2)    Ditto for the VA. Until government proves that they can clean up that mess and produce something affordable that every soldier wants, they have no standing to take on larger role in the Healthcare Market.

But we also know that Obamacare is a disaster and the condition prior to it was entirely unacceptable. The sad part of this whole story is that free-market proponents must rely on an inept Republican Party to beat back the communist movement. After failing to repeal and replace Obama’s treacherous healthcare law they have dropped the effort altogether, and once again are on their heels fighting against MEDICARE FOR ALL without a viable alternative. What an embarrassment.

The idea of MEDICARE FOR ALL is grand utopianism. It must be exposed as the pipedream it is (see above illustration) and then defeated with a legitimate free-market solution that will work, and that people can easily understand.

They need slogans and short one-liners that supporters can rally behind. The first item on the counter-agenda should be to gradually increase the amount Medicare payments contribute to their actual costs. In other words, Government should start paying their fair share.

Who can’t appreciate that?

Such a move would dramatically lower insurance premiums and retail costs for all other non-Medicare patients. Easing that burden would act like a tax cut and help boost other segments of the economy and tax revenues. But the effort can’t end there.

Pricing throughout the industry is in complete disarray. For instance, it is not uncommon for the same service, to the same person, performed by the same provider, to have many different prices. Put another way, today there is a different price for John Doe the individual, John Doe the union member, John Doe with insurance, John Doe without insurance, John Doe the government worker, John Doe the politician, Rich John Doe, Poor John Doe, etc. etc. For every John Doe there should be only one price for the same service by the same provider.

Fixing the pricing dilemma would go a long way to lowering healthcare costs for all – a key objective left unfulfilled by Obamacare – and another great rallying cry. Twelve more such policies are listed in my 2014 blog, Gruber Acknowledges Supreme Letdown, which are geared to expanding healthcare coverage, maintaining quality and lowering costs to consumers.

America needs to check a bearing.

“Those that fail to learn from history are doomed to repeat it.” – Winston Churchill

It is important to remember that Bill Clinton was the first to try nationalizing healthcare with his Universal Healthcare Plan in the 1990’s (some called it HillaryCare back then.) Obama got something done 14 years later with the Affordable Care Act (a.k.a. Obamacare). That was just another step forward in a Marxist movement now concealed under the label MEDICARE FOR ALL.

Self proclaimed Democrat “socialist” Alexandria Ocasio-Cortez (AOC) submitted another communist initiative to the U.S. House of Representatives earlier this year. The objective of her GREEN NEW DEAL is clear: to do away with fossil fuels in ten years and replace it with a “renewable” source of energy that U.S. federal government will own and control. It represents a takeover of the entire energy industry by central government.

AOC, defined by the policies she advocates, is a communist. Labeling her a socialist is fraudulent.

The GREEN NEW DEAL calls for every single building in America to be retrofitted to carbon neutral. Think of the amount of people it would take to achieve that feat in such a short amount of time (10 years.) Add to it the government personnel required to monitor, supervise, and inspect the massive project. Then think about how much it would all cost. Add that number to the $6 trillion deficit already incurred by MEDICARE FOR ALL after a 120% income tax rate has already been levied.

Pie in the sky policies like the GREEN NEW DEAL and MEDICARE FOR ALL sound too good to be true because they are. They have no possibility of achieving their stated objectives because government will run out of money long before. But then again those programs aren’t about achieving their stated objectives. They’re about the government taking full control over the entire U.S. economy. MEDICARE FOR ALL and the GREEN NEW DEAL are simply a means to that end.

The communist movement must defeated here and now starting with a repeal of Obamacare – because without it MEDICARE FOR ALL has no standing. If not a raw deal regarding energy is soon to follow.

The death of Liberty is not far behind.

Help spread the word. It’s our only chance.

Stay tuned…

 The road to financial independence.

America Needs to Wake Up

Dan Calandro - Tuesday, February 19, 2019

So it has been one year since the stock market first started acting crazy. Back then new Federal Reserve chairman, Jerome Powell, had yet to start his first day in office. And even though Powell was billed to arrive on the same long-term page as his predecessor, Janet Yellen, he has since ripped that page out and shredded it. In the fourth quarter of last year (2018) Powell completely reversed the Fed’s course in posture, policy, and rhetoric – and that is the big story in the investment markets today.

Powell came into office determined to implement a plan that Yellen devised but had no will to deploy. Advertised to be gradual and consistent, her plan called for a series of interest rate hikes over the course of years that were to be accompanied by an equally measured monetary tightening program to unravel the new currency injected into the system during the last crisis via quantitative easing (QE). Yellen, of course, never found the internal fortitude to unwind QE even though it was long overdue. And Wall Street loved her for it. (Bankers love easy money.)

But Powell appeared to be different. He spoke as if he was brave enough to actually do it. And so Wall Street sent him a huge message on his first day. You may recall that stocks tumbled a whopping 4.4% on that day, February 5, 2018. Wall Street's statement to the Fed’s new leader was clear – Back off with monetary tightening (QT).

But Powell didn’t flinch. In the months that followed he displayed the nerve that Yellen didn’t have. He raised interest rates four times and drained some $600 billion of QE money ($50 billion per month) from the system in 2018 – a sizeable amount by any measure. Even so, and if not for investment market volatility, the effects of this monetary tightening have been impossible to notice.

But now, just one year into a long and overdue tightening program, Powell slammed the brakes and ended the effort indefinitely. Why?

The Fed acts not because it makes sound economic sense or because it is good for America, but to advance the establishment’s big government agenda – because they are part of it. They benefit from it, and gain more power from it. Sure they have tons of great rank and file workers there. But the Brass are nothing short of lifetime establishment operators. They serve and protect the establishment, not We the People. Make no mistake.

For example, contrary to everything Powell said for the prior ten months he halted the quantitative tightening (QT) program and placed the Fed on a “neutral” bias, which he defined as a pause until future data dictates action, which suggests that most of the work has been done and that market fundamentals did not warrant further tightening, and that the Federal Reserve’s balance sheet had returned to normal.

Nothing could be further from the truth and reality.

First, unemployment is the lowest in modern history and labor participation is finally starting to increase. A normalized unemployment rate was an objective of QE, which was satisfied 7 years ago, and remains low today (4%).

Second, the economy has fully recovered from recession, returning to growth almost 9 years ago (2010). It has grown steadily since and is now pacing at 3% per annum. Objective satisfied.

Third, yields remain historically low (2.6%) – even after interest rates were raised four times in the most recent year and $600 billion of bond liquidity was removed from the market – without negatively affecting the economy one iota. Satisfied.

And fourth, inflation finally reached the Fed’s target two years ago and remains near 2%. Of course, if the Fed had raised rates earlier in the cycle inflation would have returned earlier in the cycle. That epitomizes the farce of keeping QE alive better than any. (More on that in a bit.) Nevertheless, QE’s inflation objective has been met.

If not now then when shall the Federal Reserve remove the remaining $3.5 trillion of excess liquidity and return its balance sheet to pre-crisis levels?

The answer is never. When every objective has been met, no further action is required. That’s where Powell now stands.

By halting QT the Fed has just announced the new normal size of its balance sheet is 4½ times larger than it was 10 years ago, representing an amount equal to 25% of the entire U.S. economy. In other words the Federal Reserve grew by 450% in 10 years, or 45% per year for a decade.

Am I the only one alarmed by that?

But here’s the real danger…

Several Federal Reserve governors including chairman Powell have recently advocated using QE for non-crisis purposes in non-crisis environments. In other words, QE is no longer a mechanism to save banks or the monetary system (their one and only job). But now the Fed can use it for any reason it deems “important.” This is not a new concept, of course, Yellen first mentioned it two years ago, but it’s starting to gain widespread traction.

Put another way, should the Federal Reserve decide to employ QE in order to fund the Green New Deal then that would be okay.

What gives them that kind of authority, that kind of power?

Quantitative easing (QE) is emblematic of how corrupt the U.S. establishment is these days. It was originally devised to bail the banks out after the subprime mortgage debacle (’08). Once through that (‘09) QE became about keeping interest rates low until the economy exited from recession. When that objective was satisfied (’10) the purpose for QE became about correcting unemployment. When that corrected (’12) QE was now charged with doing something that it could never actually do – raise the inflation rate in the economy.

In other words, the Fed kept changing QE’s objective to substantiate keeping the program alive. Not because the economy needed it but because they wanted it to serve a larger big government agenda. That’s the real danger with today’s Federal Reserve. Like central government the Fed is too big, too powerful, and now they’re getting too bold, too radical, and too corrupt.

Four things to know about quantitative easing (QE):

1)    QE was devised to keep yields low while the Federal Reserve funded central government deficits and Wall Street losses. Remember, banks were failing and the economy was shrinking when QE was invented. The Fed printed new money to bailout Wall Street banks and fund Obama’s big government agenda (the solution to the Great Recession). Keeping interest rates low was an objective to make it cheaper to fund trillions of the new debt that government deficit created. So the Federal Reserve printed trillions of new money and demanded Wall Street use 50% of if it to purchase U.S. Treasury securities (government debt & deficit). The Federal Reserve did this not because it was good for the American People, because it wasn’t, but instead to fund an irresponsible and feckless establishment government. Remember Solyndra?

2)    QE did not cause inflation in the economy because the money never got to the consumer. Instead the money stayed at the institutional level, with most of it caught up in the wasteful bureaucracies of banks, governments, and unions. With QE the Fed didn’t just fund government deficits but also trillions of Wall Street losses fueled by the subprime mortgage debacle. Funding prior losses does nothing to benefit a current economy. These explain the modest inflation rate during the entire QE era (1.5%).

3)   Wall Street had great leniency with the other half of QE money not earmarked for U.S. Treasuries, so it should be no surprise that a very nice chunk of it found its way into the stock market. That is where you can see the inflation that the new money created. The 15-51 Indicator gained 308% since economic recovery, while the economy gained just 22% in Real terms, and the 10-year yield fell 31%, from 3.9% to 2.7%. (Think about that for a moment: U.S. government issued $10 trillion of new bonds and rates actually went down by a-point-and-change.) See activity below.

4)   QE produced three things: a) a massive and global sovereign debt balloon; b) a highly inflated stock market bubble; and c) a weak and uneven economy.

The reason the effect of the $600 billion in QT (quantitative tightening) was barely perceptible in the economy is because the money was removed at the institutional level – from the Wall Street establishment. And let me tell you they weren’t very happy about it. So they sold stocks off at the institutional level and caused havoc in “the market” to make it look as though the world was coming to an end so that Powell would take notice and hopefully change course.

And the weak-kneed Fed chairman caved.

Powell’s either a coward or just another corrupt establishment politician, or both. But forget about that for a second and take it from someone much more eloquent than me. Brilliant economist Ludwig von Mises said it this way back in 1973,

“There is no means of avoiding the final collapse of a boom brought about by credit [debt] expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion [QT], or later as a final and total catastrophe of the currency system involved.”

In an interview Powell once said that there was a period in his life that he was “obsessed with currency.” Surely he must have read Mises at some point in his career. Powell knows a catastrophe is coming, and he knows that tighter U.S. money was pushing it along. And isn’t it only natural to want to blame someone else for it, and if you’re an establishment guy, who better to blame than Trump?

Wasn’t it truly breathtaking to see how vulnerable China’s economy actually is, and how fragile we all knew Europe was. Growth was coming to a swift halt over there and both have huge political issues to deal with – not to mention their own QE situation to deal with, which is much worse than ours. Overseas markets were trembling and on their way to crumbling when Wall Street sent Powell a few 4th quarter flares. Hey dude, look over there, it’s time to back off.

And so he did. After all, why put himself through this kind of aggravation? If the next disaster is sure to come, and in fact was fast approaching, then why not slow it down a bit? Trump was very vocal about his desire for the Fed to stop hiking rates so fast. Powell could say he simply accommodated the president. So why not serve the next meltdown to Trump on a silver platter as he stands for re-election, where a corrupt media is sure to blame the anti-establishment candidate over anyone else?

Halting QE was purely a political move. Again, it had nothing to do with the domestic U.S. economy, which had long since recovered, and would have benefited greatly by higher yields and interest rates.

Foreign nation priority has long been a problem with Federal Reserve policy. They continued to employ QE and not reverse it because it was serving a bigger government global interest above any American interest. It wasn’t good for the American citizen or the cause of Liberty. It was globalism – socialism on a global scale.

Ronald Reagan once said, “Freedom is never more than a generation from extinction. We didn’t pass it to our children in the bloodstream. It must be fought for, protected, and handed to them to do the same.”

That fight is in full force right now. America needs to wake up because We the People are losing the battle.

Think of how corrupt the government and Deep State are today. What Obama and the FBI did to Trump during the 2016 campaign is much worse than anything Nixon did with Watergate. We should all reject that.

Fast and Furious would have sunk a Republican president but Obama and Holder didn’t even get a slap on the wrist. We all should reject that.

The real conspiracy with the Russians is with the Clintons but the FBI is falsely trying to use it to remove a duly elected president from an opposite Party. We all should reject that.

And now the Federal Reserve is using monetary policy to sink that same president, while destroying the American ideal in the process. We all should reject that.

Think about it this way… Banks were essentially nationalized when they were bailed-out in ’08. At the same time U.S. central government took title control of over $6 trillion of American land via the takeover of Fannie Mae and Freddie Mac. Obama began the takeover of the healthcare industry with the Affordable Care Act in 2010, and the next subprime mortgage disaster is brewing now with student loan debt, which now exceeds $1.5 trillion. It’s only a matter of time until defaults rise to a level that requires taxpayer-funded bailouts. And then it’s game, set, and match.

Any good communist will tell you that the easiest way to control people is by controlling money, housing, healthcare, and education. Their demise usually begins in earnest once they take control of energy, i.e. Russia and Venezuela. (hello, Green New Deal).

The cause for Freedom is losing because too many Americans are caught in a tizzy between Haters and Deplorables, and the politics of walls and tax cuts. Distracted by nonsense the American people fail to tackle important issues that greatly affect the future, like addressing the gross level of reckless spending that exists at every level of government, defining the appropriate role of government and how to reel in a runaway Federal Reserve, and addressing the failure of the U.S. educational system, which Alexandria Ocasio-Cortez (AOC) symbolizes so well.

Divide and conquer is an often used political tactic. The Two Party System employs it daily in America, and they use it effectively to divide the populous by incubating hatred between two schools of thought. And so we argue about a $5 billion wall when we have a $5 trillion problem with the Federal Reserve.

The establishment is winning because corrupt central governance is getting bigger and more economically domineering, and more powerful. Consider that Congress spends $4 trillion per year and the Federal Reserve’s net asset value is $5 trillion, together worth near 50% of the entire U.S. economy. 

Scary.

Investors need to be patient and aware. The free market is shrinking and stocks and bonds are still high. There will be an opportunity to invest big in them but the Federal Reserve has just delayed it. Gold is getting into position to run.

Stay tuned...

 The road to financial independence.

If It Walks Like a Duck

Dan Calandro - Monday, December 17, 2018

Trade war. No trade war.

Trade war. Truce.

Brexit is on. Brexit is off.

Theresa May’s government looks to be falling apart. Wait a minute, she held on.—But now what?

This just in…newly released data shows economic weakness in China is accelerating – and in Europe too. Oh my God – what happened?

First things first, none of this is new news. Economic problems overseas have existed for a long time and have appeared many, many times in these blogs. The earliest they appeared here this year was in February’s feature, LURKING IN THE WOODS, followed by ECONOMIC WAR in August, and then again in TOMORROW’S LEHMAN BROTHERS in September, not to mention last month’s piece AGITA.

Of course we can go back even further to THE MILLION DOLLAR QUESTION (posted in January 2017) that highlighted problems overseas and connected them to government policies that were projected to be in effect today (and which are). That piece also quoted my whitepaper SURVIVING THE NEXT CRASH which was posted in January 2015. —And who didn’t know from the jump that Brexit negotiations were going to be extremely messy in a long and drawn out process? KUDOS TO THE BRITS! was posted at the time the British vote was cast in June 2016.

You may also remember it was back in August 2017 (THE BEGINNING OF THE BEGINNING) that I first declared we have entered the next corrective cycle. It was at that time the Federal Reserve announced it was set to begin unwinding quantitative easing (QE). In other words, the easy money era was ending. That, in my opinion, was “a game changer” that would soon be reflected in the stock market. And while it took a while to transpire evidence began to appear few months later, in January 2018. Below is a chart that shows stock market activity since that blog was posted.

Those who appreciate the global Market condition and how it impacts “the market” and their investments rarely get shaken with sudden bursts of stock market volatility. This affords the knowledgeable investor ample time and plenty of opportunity to make portfolio adjustments at reasonable valuations long before calamity strikes. It’s still not too late.

The next major correction will make the last one look like child’s play. We are at the end of the economic cycle and into the next corrective cycle – and we are moving closer and closer to the day of reckoning, a global reset that will send world investment markets into a frantic devaluation and selloff. The stock market at these levels will be seen as extremely high.

And while Trump’s trade policy may be igniting the firestorm it is not the culprit to the looming disaster. The true cause was a decade of atrocious fiscal and monetary policies initiated by America that spread to all four corners of the globe, where corrupt big government central planners sold-out generations of their people and consolidated power through leveraged shams and ponzi schemes like QE. These only exacerbated the problems with U.S. trade policy and according trade deficits.

There is no other way to put it; global trade policy has been unfairly biased against American interests for way too long. China has benefited greatly, and because of it, has become a global power looking to take control of cyberspace and the high seas on the backs of U.S. producers and taxpayers. Europe has also taken advantage, but to a lesser extent. Heck it’s high time that someone leveled the playing field. And Trump is doing that. Good. A global reset is long overdue and cannot be avoided -- tough stance on trade or not.

One more thing…

There has once again been a lot of talk about “corrections” and “Bear Markets,” inverted yield curves and what they possibly mean, so I’ll reiterate this final point…If you believe the stock market is a leading indicator of economic activity – like all on Wall Street who routinely refer to the Dow Jones Industrial Average as “the market” – then you have no choice but to believe that a recession is on the horizon – because that is what “the market” is indicating.

Below is a chart of returns on investment (ROI) by industry for the year. Five of the seven industries are negative (signaling contraction) and the only two that are positive are Consumer Staples and Services – things people need in all markets, booms and recessions. See below.

If it walks like a duck…

Stay tuned.

 The road to financial independence.    

Agita

Dan Calandro - Sunday, November 04, 2018

Volatility returned to the stock market in January 2018 and it hasn’t left, nor should it be expected to leave. It’s a function of the times and conditions. It is election year, after all. So if market instability makes you nauseous then maybe it’s time to reduce your exposure to the stock market – because it’s not going away.

Investing is not about buying at the lowest and selling at the highest. That’s a speculative view. Instead successful investment is about buying low and selling high – to profit, according to your objectives and risk tolerances. So forget about trying to pick the tops and bottoms; market timing is gambling.

The greatest opportunity to make the most money in stocks is buying low during major corrections, when everything is on sale and selling at discount prices. This is impossible to do if your portfolio is fully invested, meaning it has no dry powder. It’s easy to have that burning sensation in your stomach when fully invested in markets like these.

So if you’re feeling that way trust your gut and review your investment plan and how your portfolio’s structure relates to current Market conditions. (Remember: buying low requires cash. To not have a stockpile now is a major blunder.) The conversation about Market conditions begins with yields, not stocks.

Yields are up 34% so far this year and have been on an upward move since Trump won the election, and they’re not going to quit that trajectory any time soon. Key Federal Reserve rates still remain at historic lows, and strong employment and solid economic growth provide Chairman Powell all the ammunition needed to maintain his planned course of rate increases. Accelerated inflation will give him firepower to hasten the hikes if he so chooses. Below is a chart that spans the two years since Trump’s victory.

Yields are up 80% in the two years since the election, indicating a stronger dollar and tighter money. Gold is down fractionally (6%) in the same time, which is really a muted move compared to the increase in monetary value. It has been beaten down for years because inflation was non-existent. But that dynamic has changed, making gold low at these levels. If there is a safe place to invest outside of the U.S. dollar it is in gold.

The pace of inflation slowed a bit in the 3rd quarter versus the 2nd (from 4.1% to 3.5%) but it is poised to move higher. On October 31, 2018 the Wall Street Journal posted an article detailing how producers of things from “plane tickets to paint” are experiencing higher broad line costs and are readying to pass those increases onto consumers – who now have more money to absorb those higher prices. Wages increased by 3.1% year-over-year in October, the biggest gain since 2009.

Such a dynamic, higher prices and wages, could prompt the Federal Reserve to expedite interest rate hikes to corral inflation to support economic stability. Whatever the case, be it controlled or not, higher inflation is a major threat to stock valuations, bonds, and international economies.

Of course, inflation will push yields higher than central banks intend. The entire inflationary effect, however, is almost a complete unknown. Institutional investors hate that uncertainty. They’d much rather measured changes in rates controlled by central banks. Inflation throws a wrench into that stability, and with it comes the possibility of runaway yields – and that’s what has institutional investors so anxious.

Anxiety breeds volatility.

Interest rates run in an opposite direction as bond values. When rates rise bond values fall – and we are in a higher interest rate environment. Even though yields are up sharply in two years they are still really low. The 10-year yield is just 3.2%. It should be 6% by now. So they have a lot of room to move higher, and they will. That makes bonds richly valued at the current time.

And so are stocks – even after the most recent pullback.

Stocks have been on an absolute tear since the economy recovered from recession in 2010, with stock market strength via the 15-51 Indicator gaining 303% (or 35% per year) versus a 133% advance (or 16% per year) for the Market Averages. Real economic growth was just 2.5% per year during that time. In other words, stock market gains have been inconsistent with underlying economic output for many consecutive years. That put a ton of inflation into current stock market values, which is best seen through the untainted trend-line of the 15-51 Indicator. See below.

Further proof can be seen through “the market’s” multiple to GDP, which is still valued 3% higher than the tech-boom at its peak, and 33% higher than the top of the housing boom. That’s nuts. See below.

 Wild swings in price do not indicate stability or consensus – two traits present in the stock market during year one of Trump’s tenure but non-existent in the second. Investors, of course, are reacting to higher interest rates and yields with the threat of higher inflation, not to mention the Trade War and the deteriorating condition overseas.

And despite President Trump’s declaration that this is the best economy in American history, the numbers don’t corroborate that. At the peak of the tech-boom the economy was growing 4.7% in Real terms and unemployment was 3.8% – levels sustained for more than four years. Third quarter 2018 posted solid results, Real economic growth was 3.5% and unemployment was 3.7% – but the Trump economy has just started to hum and it’s already the end of the cycle. There’s no way it can continue like this for three more years. The world is already starting to fall apart. Speaking of which…

Have you heard that Alibaba (China’s amazon.com) cut its growth forecast by six points to 4%?  That’s the world’s second largest economy. Not good. And things are much worse in weaker nations.

These conditions, highly inflationary valuations and anxiety about the future, are certainly those that foreshadow severe stock market corrections. But I still think that’s a ways away. Significant downturns are usually led by mini-corrections like the ones we are experiencing that produce lower highs and lower lows. But that’s not the case right now; in fact, the opposite is playing out. Stocks keep reaching higher highs and fail to dip below prior lows. See below.

Most economists, including the Federal Reserve chairman, don’t see a U.S. recession until late 2019 or during the 2020 election year. Nevertheless, trouble overseas can migrate to American shores at any time – and that could be enough to push the U.S. into recession. And that’s when the shit really hits the fan.

Until then Plan Your Work and Work Your Plan – and keep those antacids close by because markets like this are certain to cause a prolonged case of agita.

Stay tuned…

 The road to financial independence.™

Gone Baby Gone

Dan Calandro - Monday, October 08, 2018

Investing is more of a discipline than anything else. And while I promised myself to not make any portfolio moves until the next major correction, inspiration to make a move now arrived from a most unusual place – Colin Kaepernick.

Once a diehard football fan, I drifted away when those bastards started disrespecting my flag and national anthem. Hey, if they can’t stand for my flag I can’t sit and watch their stupid game. If they have “free speech” I have freedom of choice. The significant drop in television ratings for the NFL over that last few years shows that I am not alone.

United We Stand.

One of the great rights that come with a free country is the right to be stupid. Stupidity like the kind Kaepernick and his ilk demonstrate to our flag would have them killed in many countries around the world – countries that Kaepernick idolizes. Recall that Kaepernick once arrived to an interview wearing a T-shirt of oppressive Cuban leader Fidel Castro. Who wouldn’t love to see Kaepernick kneeling at the Cuban anthem in Havana? He’d never be seen or heard from again.

The flag stands for one thing – unity. It is the only thing that all Americans have in common. Indeed, Americanism means different things to different people. The Left has a completely different set of ideals than the Right. Independents, too, have their own blend of standards. All things considered there is plenty that divide us – but the flag should never be one of them. Because once that is gone there is nothing everyone can agree to, nothing to bind us, no standard of unification.   

Divided We Fall.

Those who follow the game of football as I did know that Kaepernick was in jeopardy of losing his job long before he ever knelt at the anthem and flag. Cynics like me thought he did so to create a controversy so great that it would force the San Francisco 49ers into keeping him on the roster against their rightful mind and free will. Well it didn’t work out that way; Kaepernick was cut shortly after the kneeling began.

Kaepernick is big, strong and fast, and has a cannon for an arm – yet he is still not an active player in the National Football League. The reason for that is simple: he can’t read a defense or make the appropriate adjustments in the short amount of allotted time. He makes too many poor decisions, and is easily deceived by intellectually superior defenders and strategic Defensive Coordinators.

In short, it is Kaepernick’s lack of intelligence that is keeping him out of the NFL – and he is leader of the kneeling movement, which should tell you everything you need to know about it.

The reason no one has said such things is because the intolerant Left would automatically label that person as a “racist” in this highly charged and oversensitive world – even though race has absolutely nothing to do with the assessment.

Plenty of white players have fallen short of the NFL’s intellectual grade – Matt Leinart and Johnny Maziel are two that quickly come to mind. They surely don’t share the same total package of physical gifts as Kaepernick, but like the 49er they too lack the intelligence and internal fortitude to overcome their glaring weakness. All three quarterbacks are misguided in their own way -- and once again, race has nothing to do with the evaluation.

Nike was added to the 15-51 Indicator™ as “the market” underwent dramatic changes in the aftermath of the 2008 crash. It was added to maintain a connection to the Dow Jones Industrial Average and to properly cover similar market segments. And it has done very well for the 15-51i portfolio. But the decision to feature Kaepernick in a national (and perhaps global) marketing effort is too confounding for me to overcome – especially after witnessing the dramatic drop in NFL ratings as a result of the anthem kneeling epidemic.

I’m not interested investing in management that makes those kinds of irrational decisions.

When upper management does something you hate, like Elon Musk’s ridiculous behavior of late, it’s time to liquidate and move on. They’re like a cheating partner; after the dirty deed is done it’s impossible to trust them again, or to look at them the same way. It’s time to go separate ways at the earliest convenience. Heck, there are plenty of fish in the sea. No sense in staying with one that stinks to you.

So at the end of business on Friday, October 5, 2018, Nike has been removed from the 15-51 strength indicator and replaced with German sportswear supplier Adidas. Adidas is a well-managed company that is growing strongly. In addition, I have purchased several Adidas products over the last several years (mostly golf shirts and shorts, golf shoes and sneakers) and they are superior to Nike’s not only in fit and finish but also quality; and their products can be easily found in all the establishments I frequent. The same can’t be said for Nike or UnderArmour.

Kneeling during the anthem and/or at the flag are direct messages I do not endorse and cannot condone. So I am eliminating Nike now, before the next big one as originally intended, because the decision to glorify someone so wrong, disrespectful, and misguided is insulting to me and every other proud citizen, not to mention every veteran who put everything on the line to serve this great nation, its flag, and the honor of its anthem.

Like there is no good reason to hesitate dealing with a cheating partner, the same is true when addressing poor management decisions by one of your investments. Nothing good comes from delay.

So I say let those who Nike is trying to attract with the Kaepernick ad campaign to also buy their stock, because this investor – and consumer – is gone baby gone.

Stay tuned…

 The road to financial independence.

Tomorrow's Lehman Brothers

Dan Calandro - Tuesday, September 18, 2018

Ever since Trump took the reins of the stock market it has exuded many of the qualities of the man himself – bold, optimistic, arrogant, and erratic. And now another adjective can be added – resilient.

While it has taken longer than a blink of an eye almost every major stock market index has regained its January 26th high. Only the lowly Dow Jones Industrial Average remains shy of its 2018 peak. It’s still two points short. See below.


It should not be overlooked that while stocks are up strongly in the nine months of 2018 (averaging +8%) they have averaged an 18% gain in the most recent 12 months – and 46% since Trump won the election (almost 2 years). That’s a blistering pace for any market economy – an indication that a full-fledged economic boom is underway. See two-year trend below.


Indeed economic progress is stronger, averaging 3% per year, but growth remains unreliable and uneven. Labor is tight but wages aren’t increasing in kind. That’s because inflation is back and interest rates are on the rise. So what is actually going here is a modest economic expansion, not a boom – regardless of what the stock market is trying to tell us.

In fact, the only way stock prices can be justified at these levels is if you only consider positive U.S. fundamentals. Forget about all the negatives – and forget about the rest of the world. Everything is great – S&P 3,000 here we come!

The build-up to this correction is so reminiscent of the last. Back then IndyMac and Washington Mutual were just a few “isolated” cases and “not systemic” of the financial industry as a whole. The reason no one on Wall Street saw disaster coming is because they were enthralled with all the positive fundamentals – spending, growth, and the mighty advance of stocks. And then boom! Surprise, surprise.

The only way to get blindsided by stock market corrections is to be blind to a whole side of the market equation. Wall Street and Washington DC fall victim to this shortsightedness all the time.

Banks don’t just fail all of the sudden. Crisis conditions exist long before collapse. For instance, only 3 banks failed in 2007, in what can be considered a “normal” level. Ten times that number failed in 2008 (30 banks) before 148 fell in 2009, and then another 157 more in 2010. In all some 520 banks went belly-up over a 7-year period before failures returned to “normal” levels – and somehow no one on Wall Street (financial market participants and analysts) or in government (those who regulate and supervise the financial markets) saw such a cataclysmic epidemic coming.

Only corruption can be so blind.

The same conditions are present today.

Today institutional investors are again enamored with only economic positives – growth, spending, low unemployment, and a raging stock market Bull Run. How easy it is for them to shrug off the Trade War, tariffs, rising inflation and interest rates, while a second round of  debt crisis looms.

The next major correction will be much larger than the last two because there is more currency in the system, more inflation, more debt, and more corruption present in this market than the last. These conditions are holdovers from Obama’s QE-boom, from which the world market has never corrected. Remember, the U.S. invented QE but the world bought in. That’s how emerging markets got in such deep hot water.

But as of today Argentina and Portugal are just “isolated” cases; Venezuela and Turkey, too. Ditto for most of Europe including Greece, Italy, Spain, France, and Russia – not to mention troubles in Iran, Cuba, North Korea, and China. The world market is in shambles – built on too much debt carried by borrowers with little or no chance of repaying.

That said, the only way to value stocks up this high is to neglect to see the world as one huge interconnected market, to only see certain positives, and to turn a blinds eye to the negatives staring us all in the face.

The housing-boom was a lot like the tech-boom in that millions of individuals and every sector of the economy participated in the run. Wealth was being created everywhere, wages were rising swiftly, unemployment was low, and inflation was in check. Consumer demand was the main driver of growth for both. Their major difference was in the way they corrected.

During the tech-boom-correction economic recession coincided with a receding pace of technological innovation and growth. Hey, it happens. All cycles come to an end. 

The housing-boom, much to the contrary, ended when subprime borrowers were unable to pay the unfeasible debts they incurred during economic expansion (thanks to easy money for individuals with poor credit), and were unable to borrow more to continue their pace of spending. This caused recession, and ultimately the collapse of the money and credit markets.

The same thing will happen in the next correction, with one small difference.

Today’s subprime mortgage borrower is not John Q. Public but instead Greece, Argentina, and Portugal, etc. etc., who accumulated unfeasible amounts of debt during the QE-boom (easy money for sovereign nations with poor credit). And when they default it will not be just sovereign nations that will fail but also central banks, their underlying currencies and debt instruments. All will lose tremendous value that will hamper global trade and zap investor portfolios at every corner of the globe.

In other words, tomorrow’s Lehman Brothers will have a flag instead of a corporate charter.

Sad to say that same condition will occur within U.S. borders, as highlighted by this WSJ headline from August 23, 2018: Chicago’s New Idea to Fix its Pension Deficit: Take On More Debt. How stupid is that?

It is impossible to borrow your way into prosperity. That’s a lesson we should have learned in the aftermath of the ‘08 disaster.

Chicago is the modern day version of a U.S. subprime mortgage borrower, and yet another example of how some of the great Empires in world history failed to see failure coming. Ruling elitists thought they were too smart to fail, or too clever. And they were foolishly wrong.

Those who cannot afford themselves today will collapse under tomorrow's conditions.

Did I mention that inflation and interest rates are on the rise?

That environment will only make borrowing and debt servicing harder.

Many economists, including the Federal Reserve, are projecting the next recession to occur in late 2019 or 2020. That seems about right, and perfect timing to throw a wrench into Trump’s re-election campaign – just as the establishment so badly wants. Until then this expansion, and a blind stock market, should continue their trends until emerging markets begin to fail in epidemic proportions.

Stay tuned…

 The road to financial independence.

Economic War

Dan Calandro - Monday, August 13, 2018

Certain things are taboo in politics, like members of the same Party criticizing one another; unless, of course, they are engaged in an electoral primary. Other actions are not only forbidden but also never seen, like a sitting president criticizing a cabinet member or senior administration official.

And then came Trump.

Trump is no politician indeed and that’s exactly why he was elected. Millions of Americans feel disenfranchised by, and disenchanted with, both political parties. Trump is the antithesis of them, and completely different from anything ever seen before in Washington DC. And knowing Trump as we all do, it’s really no surprise to see him chastise Federal Reserve policy and his chosen leader for it, Jerome Powell, as he did the week of July 15, 2018.

Good for him. Every tentacle of the establishment government bureaucracy is working against him and the success of his agenda. There is no time for him to be timid. Besides, it was a brilliant political move.

Look at it this way…

Trump is in a trade war and both China and the European Union are devaluing their currencies, which make their products cheaper and ours more expensive. At the same time the U.S. Federal Reserve is raising interest rates and unwinding QE (quantitative easing) – which is now being referred to as Quantitative Tightening, or QT. All of those efforts make American products more expensive, and thus counteract Trump’s foreign policy initiatives and tariff plan. And he’s pissed-off about it.

But Trump’s ire doesn’t end there. After all, the entire establishment (and especially the Federal Reserve) did everything and anything possible to support the Obama agenda – economically sound or not, constitutional or not, sane or not. Of course, Obama was one-of-their-own, an establishment guy to the nth degree. Trump is not. And so there was no reason for the establishment to rush to protect and support him as with Obama.

There can be little doubt that before going public Trump asked Powell for a more accommodative monetary policy to support his foreign policy agenda. Obama surely did the same during his years. The only difference was that Obama got a yes and Trump got a no. So he called Powell out for not getting the same grace. Fair enough.

But the strategic importance of the move goes far beyond simply highlighting the hypocrisy of the Fed’s actions under Obama (a Democrat) versus Trump (a Republican), to something directly connected to the next major crisis and the thereafter. Fact: there is always a cause to crisis, and therefore, always someone responsible, and always someone to blame. Make no mistake; Trump is in the game. He knows he’s the target.

Consider that the economy is in the late stages of expansion, taxes have just been cut and interest rates are finally on the rise. The initial estimate for 2nd quarter Gross Domestic Product (GDP) was recently released and no one is talking about the big news in that report – which was not the 4% Real rate of growth (more on growth in a bit.) Instead the big news was inflation has finally returned to the U.S. market; it reached 3.2% in Q2, above the Fed’s 2% target. (Side notes: The last time U.S. inflation was greater than three-percent was 3rd quarter 2008…Inflation drives interest rates higher.)

Trump is opportunistic and so he is using strong economic growth as leverage in his foreign trade negotiations. He is certainly making more of it than it is. That’s how he is, and what he does. Investors need to see through his gamesmanship. Q2 is only one quarter.

To take an economic bearing recall that 1st quarter 2018 growth was just 2.2%, so the average rate for the year is only 3.1%. Also consider that former CNBS anchor Larry Kudlow, who now works in the Trump administration is already talking the pace of growth down, forecasting Q3 gains to be in the 3% range.

It’s a three-percent economy, not four.

In addition, quarterly GDP has been at this level before only to fall flat for the year. For instance, the middle two quarters of 2014 averaged 4.9% growth. But the first quarter shrank by -1% and the last quarter posted a paltry 1.9% gain. The year ended with an uneven 2.7% advance.

In 2015 the economy started the year with two solid quarters of 3.3% growth but fell flat in the final six months, posting gains in those quarters of just 1% and .4%. It was a weak and uneven 2% for the year.

Be careful not to read too much into this initial estimate of 2nd quarter GDP. Growth is stronger but still uneven.

The reason for the uneven growth pattern since the Great Recession is because government spending, not consumer demand, was the main driver of growth during the time. Growth dependent on government spending is economically unreliable and fiscally unsustainable, and therefore carries little political weight in the global arena. A robust economy driven by a free people produces more wealth, prosperity, and ingenuity than any other economic model, which produces more vibrant and longer-lasting economic expansions.—And Trump knows it.

That’s the reason for his multi-pronged tax cut plan. Personal tax rates were reduced to increase the individuals’ share of market spending, something that always boosts growth and places the economic trend on a much more reliable and sustainable footing. Corporate income taxes were reduced to make it easier for businesses to profit and re-invest, incentivize employees and expand. Both tax category reductions help ease the transition to a higher tariff environment.

The Trump agenda is measured and well planned.

His position to impose higher tariffs on foreign nation states is so that U.S. taxpayers and enterprise can choose whether or not to pay higher taxes or tariff. In other words, buy American or pay a tax (tariff). The choice is for Americans to make.

Trump places America and Americans first, damn the consequences.

Another great piece of the Trump tax law was the provision for U.S. multinationals to repatriate foreign profits back to American shores at a much-reduced tax rate. This brought hundreds of billions of dollars back to America making U.S. banks stronger and more capable of withstanding the high pressure certain to arrive during the next crisis.

Trump policies place America on stronger footing.

This is purposeful, as he is preparing the country for a full-blown economic war – a trade war, currency war, and political war – that is brewing now and sure to arrive at the most inopportune time. Trump sees it coming and he is leading the charge. Those not with him are against him, calling Powell out just another example of him willing to fight on any front, whomever they are, foreign or domestic.

Good for us.

Those criticizing Trump for his public exchange with Powell do so not just because it has never been done before, but because any sane person knows that the Fed should have moved rates higher and tightened money six or seven years ago. Tightening is way overdue. If not now, when?—During the next crisis?

Powell knows he can’t do that. It would be cataclysmic to inject trillions of new QE dollars on top of what is already there during the next crisis (and clearly he is planning to use the technique again, otherwise he would acquiesce to Trump’s request for continued lower rates). So he must get as much of the old QE money out of the system as fast as he can and before the next crisis hits – without causing world panic in “the market” – and that’s the real trick. Again, the economy is in the late stages of expansion and rates have only begun to move higher.

In a nutshell, Powell has a job to do and is going to do it his way. Trump can go it alone, his own anti-establishment way.

And Trump has little concern with that. He will continue doing what he plans because he believes it is right. There is no quit in him. No let up. No fear.

Good for him.

Think of how fast the Trump policies have changed the global dynamic. The Trade War just got started and many countries and emerging markets are already feeling the pinch – China, Turkey, much of Europe, not to mention countries like Venezuela, Iran, Syria, and North Korea, are all experiencing some pain. And not only is Trump not letting up but he continues to add more foreign trade pressure. America is finally flexing her muscles!

It’s about time.

And while American economics and money are doing fine, foreign currencies are devaluing everywhere and interest rates are spiking. The recent drop in the Turkish lira, for example, sent their interest rates to 22% from 12% in a blink of an eye. Venezuela is experiencing 1,000% inflation and capital is dry. Those few conditions will only spread and get worse as American policy moves forward with higher tariffs, higher inflation, and much higher yields (the 10-year yield is still below 3%; there is long way for the U.S. to move higher).

Investors must take note: We have entered the next cycle of correction. (See: SURVINING THE NEXT CRASH for more information.)

During the heat of the next crisis, like the rest of the world, Trump will blame the U.S. establishment, namely the Federal Reserve, for lighting the fuse of global disaster with higher interest rates. Democrats and foreign governors will also blame Trump’s trade and tariff policies, and perhaps his tax cuts, for the economic explosion. But the street fighter will counter.

Trump will attack the corrupt Federal Reserve, pinpointing the unconstitutionality of the QE Hedge Fund they created during the Obama years, and then highlighting how the Fed, like the FBI and IRS, have turned themselves into a political arm of the Democrat Party. It is Us versus them, and high-time to reel in a runaway Federal Reserve and every other rogue big-government agency. 

That’s where the true wisdom of the President's exchange with Powell resides. Trump will have been on record against the rate hikes for more than a year before disaster. They will have no doubt made matters worse. And so Powell will be considered wrong at every corner and an inferior replacement for Janet Yellen. He will become a logo for the new crisis. 

And why not? 

What the Federal Reserve has done over the last two decades is nothing short of criminal. The next crisis will be the right time to fight that fight -- and it will be ugly.

That said, perhaps the best way to close this blog is with a few excerpts from my whitepaper, SURVIVING THE NEXT CRASH posted in January 2015, which are still relevant today.

“And while another act of war on the homeland can obviously begin the next major corrective cycle, I still believe the impetus will be money related: inflation, spiking yields, widespread currency and debt devaluations, the collapse of the Euro, or something along those lines.”

*

“ Inflation all by itself can cause world havoc…Inflation is the cost of money. When the cost of money increases so does the cost of debt, because debt is simply borrowed money. When interest rates rise in America they rise everywhere else. Greece, for example, will see their interest rates rise from 7% to 12%, 15%, or even 20%, depending on the level of inflation. Heck, Greece can’t afford itself at these historically low rates; higher rates will only push them further down the hill faster. And it’s not just Greece…”

*

“The QE-boom has injected too much money and a lot of risk, manipulation, and corruption into this stock market. And like all booms, it too will undue itself.

“When the QE-boom goes bust currencies and debt will experience widespread devaluation and default; yields will spike and countries will go broke; inflation will be a cancer, and banks will be in trouble again – especially foreign banks. The specter of an expanding world war will loom, DC will look lost, and Wall Street will again be surprised.

“And stocks will dramatically sell-off.”

*

I still see it that way.

Prepare your portfolios now.

Stay tuned…

 The road to financial independence.

Walgreens - Seriously?

Dan Calandro - Wednesday, July 04, 2018

It was recently announced that the last remaining original member of the Dow Jones Industrial Average, General Electric (GE), would finally be eliminated from the iconic stock market index.

It’s about time.

Market junkies like me have been calling for a Dow makeover for years. In fact, WHAT’S WRONG WITH THE DOW – AND HOW TO FIX IT was posted way back in 2015. That blog cited structural deficiencies that were causing the Dow to consistently underperform the S&P 500 – and there is no good reason for that. A 500 stock portfolio should never outperform one comprised of just 30 stocks on a regular basis. In that blog I highlighted the reason for the Dow’s misfortune this way, The Dow has become a pitiful collection of mediocrity, and the proverbial cherry on top is General Electric, the only original Dow component still remaining in the portfolio, which hasn’t sniffed a reasonable return since Jeff Immelt took office. He is clearly no Jack Welch.”

Few things in life are that obvious. Here’s another…

Small things are easier to manage than large ones.

One of the best characteristics of small portfolios like the Dow Average is that they’re easy to fix (see the aforementioned blog.)  Below is a chart that compares the two market averages since the last market bottom (March 2009).


It’s been nine years since the stock market bottomed after the “financial crisis.” During that time the S&P has outperformed the Dow by 30 points, 297% versus 267%, or just over 3% per year. This dynamic (500 stocks outperforming 30) should never persist for this long of a duration – especially when the period begins at the pricing bottom, where it’s so much easier for smaller portfolios to rebound with a faster pace of growth. The 15-51 strength indicator proves this fact consistently over the very long-term. Below is another example.


Again, the Dow’s performance should be somewhere between the S&P 500 and the 15-51 Indicator. Its sub-par long-term performance trend is a complete and utter breakdown of basic investment fundamentals and logic.  It is an outright embarrassment, and the guardians of the legendary portfolio should be ashamed of themselves.

In fact, it is becoming increasingly more difficult to see any kind of reason or sense in what the managers are doing with the most followed portfolio. They look incompetent or corrupt – and those with long-held respect and admiration for what the Dow Average is and stands for have every right to be offended by what they have done to it. The caretakers of the DJIA, like GE, should be replaced.

But not with a selection as stupid as the Walgreens choice.

Consider the move in this light…replacing GE with Walgreens reduces the number of Industrial stocks in the Average to one: 3M (Minnesota Mining & Manufacturing), or just 5% of the total portfolio. We’re talking about the Dow Jones Industrial Average here. One stock out of 30 is way too few.

Consider also that the S&P 500 and the economy (GDP) have an allocation triple that (15%), and the 15-51 Indicator has twice the amount (10%.)

What’s the Dow trying to indicate with a 5% Industrial allocation that relates to nothing --- not the economy, not the S&P 500?

Adding Walgreens to the portfolio is just as perplexing as having one industrial stock in the  Industrial Average. Take a look at the Dow’s allocation for the Consumer Service and Staple industries after the international pharmacy was added to the equation. See below.

Services

Staples

UnitedHealth Group

Johnson & Johnson

The Home Depot

Procter & Gamble

McDonald's

Nike

Walt Disney

Merck

Wal-Mart

Coca-Cola

Walgreens

Pfizer

Verizon

So let’s talk about the Dow’s drug allocation…UnitedHealth provides drug insurance coverage; Walgreens sell drugs and Wal-Mart has a pharmacy too – and then there’s the drug makers JNJ, Merck, and Pfizer. That’s a lot of exposure to drugs, too much in fact – especially when considering how light the portfolio’s allocation is in the Industrial industry.

The move just doesn’t make any sense.

And even though the Dow’s allocation to Financials (19%) is close to the economy’s (20%), the portfolio still has too many financial stocks that cover the industry too narrowly. See below.

Financial

Goldman Sachs

Travelers

Visa

JPMorgan Chase

American Express

To have five financial stocks and only one industrial stock in a portfolio of 30 named the Dow Jones Industrial Average is misleading. To have an Industrial allocation one-third the size of the economy’s allocation is malpractice. And to consistently underperform a 500 stock index is blasphemy.

Replacing GE with Walgreens is idiotic.

Coincidentally, in Walgreens’ first week of trading in the Dow Average online retailer amazon.com announced they were getting into pharmaceutical retail with the purchase of pillpack.com. Walgreens swiftly lost 12% of its value.

I have always been a skeptic but have become increasingly so with age. I hate the fact that the guardian of the Dow Jones portfolio is S&P Global. Hate it.—And by the way, the amazon purchase of pillpack had been rumored for more than a year’s time, maybe two – yet the announcement arrives within days of Walgreens being added to the world’s most famous stock market index. It’s like S&P management is sabotaging the Dow brand in order to elevate the S&P 500 – to make it “the market” – and to aid Wall Street’s mantra that more is better, bigger is better, and that more stocks bring about more profit.

So not true.

Proof of this can be seen in the 7 years since my award winning book LOSE YOUR BROKER NOT YOUR MONEY hit the streets. In that time my 15-51 portfolio has produced a league-leading 191% gain, or 27% per year. The S&P 500 posted a 103% advance, or 15% per year. The below-average Dow Jones Average added 91% in the same time, or 13% per year. See below.


My 15-51 method is designed and constructed to produce above-average investment returns using just 15 stocks. It does so consistently and reliably, over any long-term timeframe compared to any sized portfolio, be it the Dow’s 30, the S&P’s 500, or any mutual funds' 1,000+. 

So why invest in anything different?

Happy 4th of July!

 The road to financial independence.


Recent Posts


Archive

Besides receiving periodic updates and alerts, subscribe to our email list and gain direct access to Dan Calandro, award winning author and inventor of the 15-51 system.™ Dan is the ultimate investment coach, and because he provides this service free of charge to his following, you can count on the most honest and unbiased investment advice offered in the industry.

  • Learn
  • Lose Your Broker
  • Knowledge is the foundation of success. Dan’s method is grounded in basic logic and common sense, and is backed by history, fact, and mathematic. It’s easy to understand, simple to use, and consistently produces superior results. Guaranteed.
  • Plan
  • Surviving the Next Crash
  • Having an action plan at the ready is a vital ingredient to transforming the next major correction into the greatest investment opportunity of your life. This captivating new piece is a great addendum to the book. Get it now for FREE!
  • Achieve
  • See the performance you can expect with the 15-51™ system! Dan’s portfolio routinely outperforms the markets by more than 600% over the long-term – and you can do it too! Click on the image to see the proof.
  • Support
  • Dan makes good on his chapter 8 guarantee by personally connecting with his readership to answer questions and coach members through the investment process.