Dan’s Blog

Falling Behind

Dan Calandro - Wednesday, August 31, 2011

With no electric, no cable TV, and no internet service, Hurricane Irene disconnected me from the civilized world for a few days. Heck, I couldn’t even access the Wall Street Journal from my iPhone. In times of crisis (and Irene was exactly that) survival* is the primary focus. Everything else can wait.—And you shouldn’t be freaking out about what your investments are doing at the time. 

Your portfolio needs to be stronger than that, and you need to be more comfortable with your asset allocations. As mentioned in my book, in order to be successful with investing you must be comfortable with:

  • the Market you are investing in
  • your individual investments, and,
  • how they’re assembled throughout that market

This kind of comfort allows you to totally unplug from “the market” for an extended period of time with no fear of consequence. That’s the only way you can have a steady hand during volatile markets, and it's the only way to be comfortable when disasters like Irene hit. 

When you have confidence in your investments during a hurricane you wheel out your Honda generator and know it’ll start right up. Mine has been working double-time for a long-time and it still hasn’t grunted yet. With all the troubles in Japan and their supply lines, I still love Honda as an investment: Reliable performance – just like their products. 

Events like Irene demonstrate your portfolio in action. You should like what you see. This will help build the confidence I suggest you need to be a successful investor. And then, once the dust settles, you can reassess the Market from a national view. 

Since my last blog the Dow has risen a few hundred points to 11,600 and gold is back over $1,800. Neither is big news. But two recent government announcements are:

  • Thursday, August 18: US Department of Labor announced that consumer prices rose 3.6%
  • Monday, August 29: US Bureau of Economic Analysis announced that personal income rose a dismal .3% 

That’s a bad combination!  Prices are up 12 times the amount of income. That means Consumers are falling behind – which, needless to say, is bad for business, bad for investment, and bad for markets. 

Add to this pathetic market growth (GDP increased just .4% in the second quarter) and dreadful unemployment (9%) and what you have is the recipe for recession – just like the stock market has indicated. 

Stay tuned…

Apple Icon Steps Down

Dan Calandro - Thursday, August 25, 2011

In my opinion Steve Job’s decision to step down from the top spot at Apple is the most important news story in the investment world today. I don’t care about Warren Buffet investing $5 billion in Bank of America. BofA has $1 trillion in customer deposits -- which makes Buffet’s investment a drop of water in a very large bucket.  Who cares.  

Today Apple lost an icon. Steve Jobs turnaround of his company is more impressive than Lee Iacocca’s turnaround of Chrysler a few decades ago – which was also something very special. Steve Jobs accomplishments are legendary, and well documented. There’s no reason to recount them here. 

However, when a company loses an iconic leader like Jobs it’s never the same. It’s never an easy road. And it’s never business as usual – as General Electric shareholder’s experienced with the retirement of Jack Welch, and Microsoft’s with the resignation of Bill Gates. Visionaries like Steve Jobs are special. They don’t come around everyday. And they are, in fact, irreplaceable. 

This is not to say that Apple is headed for the same lifeless performance that GE and Microsoft experienced. I think Apple has a strong pipeline of products in development, an ingrained culture of innovation and creativity, and brand equity that can sustain above-average performance. 

But times change. Markets change. And investments change. Mr. Jobs replacement, Tim Cook, is a capable operator.  No one argues that. But is he an innovator? Is he a visionary?  Becasue that’s what they need to maintain Apple’s market dominance. 

Only time will tell. But if Apple is in your portfolio as it is in the 15-51 Indicator, you should reconsider its positioning and allocation. This is prudent.  

Apple is a different ballgame from here on out. 

On this very sad day in investment history, I send my best wishes and prayers to Steve Jobs, his health, and his family and friends.  Godspeed!

Gold Loses Ground - What Changed?

Dan Calandro - Wednesday, August 24, 2011

Today’s key headlines:

  • Gold Cedes $1,800
  • CBO: $1.3 Trillion Deficit for 2011
  • Stocks Move Higher

There’s lots of talk and speculation about whether or not the gold bubble is about to burst – and whether you should buy, sell, or hold it. 

Gold is a currency hedge, a place to make money when currencies – and economies, for that matter – are in trouble. Gold always has value, and more and more, that value is determined by stock market trading. The gold ETF is traded under the symbol GLD on the NYSE. Here is how gold tracked as compared to the Dow for the past year. 

Gold

Both trend lines tell the same exact story the way you’d expect them to tell it. Neither indicates strength in the US economy. So to believe that the gold bubble has burst, you must also believe that the Dow has hit rock bottom and will continue strongly on its upward turn. 

Don’t put me in that camp. 

This reminds me of the run-up to the 2008 crash, when stock market participants chose to overlook basic Market fundamentals and speculate “the market” up on a positive dream that was just that – a dream. Back then they forgot that the “subprime crisis” was there, that it never went away, and that it didn’t fix itself. The same is true now.   

Today central government policy is no different than it was back then – except it is exponentially worse. President Obama campaigned on “change” but has turned into Bush on steroids. He spends and borrows way more money than Bush. In fact, the Congressional Budget Office also projects a $1 trillion deficit for next year, 2012. Add this to the troubles in Europe and Mideast turmoil and you have to be crazy to sell out of gold and parlay it into the stock market.

The Dow closed just above the midpoint of the action zone today, and sits at 11,321. Gold was down almost $100, to $1,764. No big deal on either front. 

Today was just another day and the story hasn’t changed. Market fundamentals remain negative and a currency crisis still persists. Traders could forget. You shouldn’t. 

By now you should’ve made your investment moves and be totally comfortable with your asset allocations. If not, it’s never too late to get comfortable.  

If you need help submit a question to Contact Dan

Talk soon,

dan- 

Contradiction

Dan Calandro - Tuesday, August 23, 2011

This is about as messy of a market as you’re going to see. Headlining today’s Wall Street Journal are these notables:

            Manufacturing Reports Reflect Slowdown

            UBS to Cut 3,500 Jobs

            Markets Remain Unkind to BofA

This, not to mention, that a small earthquake rattled the northeast today, possibly to be followed by a Hurricane named Irene. Everywhere you turn you bump into negative market news – and then you look up and see the DJIA up almost 3% and 322 points. How could that be? 

So I search around looking for an answer and find an article written by Steven Russolillo, entitled, Stocks Jump on Hopes for Fed Action, also in today's WSJ.

The article quotes a person named, Michael Church, president of Addison Capital, who had this to say about Federal Chairman Ben Bernanke, "There's definitely a tint of optimism that he'll pull a rabbit out of his hat… He did it last summer…"

Umm, excuse me.  

Last year Ben Bernanke flooded the banks with cash by monetizing debt – that is, to print money and buy your own debt back. While most of us regular people would like to do that, it’s not sound monetary policy. It’s inflationary. Besides, more cash won’t make banks lend more money to you or me – and that’s the real problem. Banks have plenty of cash. They aren’t lending it. 

Add that to the currency crisis going on in the world right now and it’s hard to imagine how markets could be kind to any bank – let alone Bank of America (which did lose almost $6 billion over the past two years.) Right now the financial industry is a high risk market. Keep that in mind when you’re building and managing your 15-51 portfolio.

That’s why I don’t think Bernanke will flinch on Friday. Another round of “quantitative easing” won’t help anything but inflation. Besides, the second round of “easing,” known as QE2, didn’t work.—But it did force a lot of cash through Wall Street coffers. 

Maybe it was the smell of green that bid “the market” up today. 

It certainly wasn’t Market fundamentals. 

That’s the contradiction. 

Stocks Settle - But for How Long?

Dan Calandro - Monday, August 22, 2011

Those of you who have read my book know that I like to view market activity through multiple perspectives. Most of my previous charts begin at year ended 2002, which in my opinion provides the truest economic view because it begins at the approximate date of the last recessionary bottom. And because I don’t believe we’ve hit rock bottom in this corrective cycle, I believe that to be the best point at which to start.

However, if you’ve been reading my blogs you know the difference between Real and Nominal GDP is inflation. Reported by the government, Real GDP is determined by using a prior year’s dollar to value economic activity. Currently the government uses 2005 dollars to determine Real GDP. For this reason we can use 2005 as an alternative starting point. Here’s that view. 

2005Djia


This chart isn’t much different from the prior ones: inflation is easy to see and investor skepticism is just as apparent. 

However, on this chart the Dow broke below Real GDP on August 10, 2011 (when it was at 10,720) which indicates recession. That’s why you hear pundits say that recession is already "priced into the market."

I hate it when they say stuff like that. 

Clearly investors are indicating recession (because the Dow is trading below GDP) but to say the stock market won’t sell-off when the government finally releases recession data is just crazy. That’s what happens. That’s what they do. How could it be "priced in" then? 

My advice: don’t worry about pricing negative stimuli into "the market." Instead keep your eyes on Market fundamentals. Market conditions are negative, inflation makes recessions worse, and both are on the horizon. Europe is in real trouble and revolution is in the air all across the globe. 

So on a day when the DJIA struggled to breakeven, gold set another record (now at $1,898 and ounce.) It all makes perfect sense. 

Keep the conversation going -- POST A COMMENT to this blog!

The Problem with "the market"

Eugene Ball - Saturday, August 20, 2011

There is a lot of debate right now directed at the state of the economy: Are we going to experience a "double-dip recession"? or, Can this "recovery" hold up?  

First of all, isn’t it hard to believe we’re in "recovery" when so many people remain unemployed,  still above above 9%?  I’ve heard people talk about a "jobless recovery" – but what does that mean?  How can you recover without consumers returning to work?  It just doesn’t make any sense. And quite frankly, I don’t know who makes up these rules and defitintions. 

It is true, indeed, that interest rates are low – but who can get the money?  It’s impossible to get a loan right now unless your name is Corporate America.  Does that sound like recovery?

Regarding this nonsense about a double-dip recession – it’s just propaganda, something to make you believe reality doesn’t exist. We’ve never moved out of recession. We have never recovered. A double-dip recession, therefore, is impossible to transpire.

Conventional wisdom defines recession as two consecutive quarters of GDP contraction – a condition where the entire market economy shrinks for six consecutive months. So by conventional wisdom, the U.S. doesn’t qualify as recession. 

But, man, does it feels like one! 

Why?

Because, my friends, we are in recession – and have been for some time. 

From 1995 through 2007, free-market activity accounted for 80% of GDP. Ever since the market crashed in 2008 free-market activity has been in decline, now accounting for just 74% of GDP. Here’s how that looks (scaled.) 

Disparity

 

 

The Problem with the Market is that it’s Upside Down!!! And that’s why the stock market is acting crazy!

 

Think about it. During the heyday of the 1990’s, President Bill Clinton, and the internet boom, U.S. government spending averaged just $1.5 trillion per year. And for the last several years of his presidency, Clinton produced multi-billion dollar budget surpluses – not deficits.

But today, and after eight long years of free spending under President G.W. Bush, our government now spends $3.8 trillion per year, while generating unsustainable trillion dollar budget deficits

Yet GDP remains relatively stable. Why? 

Because our federal government is artificially inflating our economy to make it look like the market hasn’t shrunk – when it has!  Actual free-market activity has lost six percentage points in the last few years leaving reckless government spending, poor fiscal management, and sloppy monetary policy to replace it.  What’s wrong with this picture?   

We the People are in recession. They the Government are in expansion

That’s assbackwards. 

Until these conditions are corrected, we will remain in recession and the stock market will continue to portray irrational behavior and extreme volatility. 

It feels like a recession because it is a recession.

Hold on to your socks… 

Days Like These

Dan Calandro - Thursday, August 18, 2011

Days like these (the DJIA was down 400+ points again today) the most popular question I hear is: Where’s the bottom? When is the best time to get in? 

First of all, the best time to increase your stock allocation is when Market fundamentals turn positive. They’re all negative right now: there is a currency crisis going on and inflation is threatening to throw gasoline on the fire.  These are ripe market conditions for gold – not stocks. (scroll down and read my previous blogs for more information.)

When it comes to stocks, there’s no sense jumping into volatility when the Dow currently sits at 10,990. That’s just 300 points off the midpoint of the action zone. There will be a much better opportunity to buy low at the bottom of the action zone – or better yet, below it. That’s what you should be awaiting for. 

Until then look to gold for growth because market conditions are good for it to keep moving upward. 

The economy is weak, the currency market is a mess, and the government is way too active in the marketplace. Look at these Wall Street Journal headlines from today:

            Justice Department Joins Probe of S&P, Rivals Over Crisis-Era Ratings

            Exxon, U.S. Government Duel Over Huge Oil Find

            Fed Eyes European Banks *

Ok, so the Federal Government is angry because S&P downgraded them – so you investigate them over rating actions from 2008? Maybe the S&P didn’t downgrade certain financial firms during that time because the government (via Fannie and Freddie) guaranteed subprime mortgage debt. Why should’ve the S&P downgraded financial firms holding debt that was guaranteed not to fail? 

So Exxon finds a big oil reserve and the government now wants to claim it on a technicality?  Is that how the government expects to increase energy exploration? Is that how they expect to bring down the price of energy? 

And now, with major problems with our own currency and banking industry, the government now wants to look into European banks? What about our own banks? What about our own central bank (the Federal Reserve)? 

According to the Wall Street Journal article noted by an ‘*’ above, (written by David Enrich and Carrick Mollenkamp), “Thanks partly to the Federal Reserve’s so-called quantitative easing program, huge amounts of dollars have been sloshing around the financial system, and much of it has landed at international banks…”

Are you kidding me?  Why has our Federal Reserve given foreign banks our money without our consent?

This is a major problem in the Market today.  We the People don't know what's being done with our money!!!  That's bad for the Market.  Bad for all Americans.

Investors be aware!!!

Earnings Up -- Costs Too

Dan Calandro - Wednesday, August 17, 2011

As you know, there are lots of negative market stimuli out there. Yet corporate earnings continue to show strength. Today, Staples posted a bold 36% year over year increase in earnings, John Deere’s grew at a 15% clip, and the profits for discount retailer Target grew 4% in a tough market. 

And for a time the Dow responded positively, advancing more the 120 points before throwing it all away. Why did this happen? 

Put succinctly by one Wall Street Journal headline: Wholesale Prices Increase

Depreciating currencies create inflationary pressures like higher costs of goods and wholesale prices. Higher wholesale prices translate into higher retail prices for consumers. That’s inflation, the general rise in retail prices. 

Retail inflation will force interest rates higher. Higher interest rates will cause even higher prices and increase duress on an already fragile consumer base. That’s not good for the market, business, or consumers.

Inflation is the cost of money. When the cost of money increases, so does the cost of borrowing – for businesses and consumers. That’s why banks aren’t lending. They’re waiting for the cost of money to increase (a condition the government seems hell-bent on producing) so they can add a premium to it and start lending at 10% interest rates or more. (Today long-term rates are around 4%).

Inflation, in tandem with higher interest rates, will threaten a lot of people trying to hold onto their homes and mortgages. This will threaten banks. That’s the point of yesterday’s blog

There is a currency crisis going on right now and inflation will only make it worse. Inflation will shrink the economy even more, and more importantly, will force interest rates higher. When that happens, the government loses one its most powerful tools in its arsenal to manage monetary policy – interest rates - and it will be inflation that takes it away.

That’s why banks led the DJIA down yesterday and why gold keeps rolling. And that’s why the Dow couldn’t hang on to her gains today. 

Keep your eyes open…and stay tuned…

Today's Word

Dan Calandro - Tuesday, August 16, 2011

It seems like only yesterday that people were saying, What downgrade?—the market is back!  And then today’s headlines came along (from The Wall Street Journal):

  • Europe Moves to Halt Crisis
  • Banks Lead Stocks’ Fall
  • Gold Rises on Growth Fears
  •  

The Dow opened lower today and struggled all day to make it above water before ending down 76 points. Why? 

Currency.  That’s the word of the day. 

There is a real problem in Europe. Seventeen countries participate in the euro but only a handful contribute to the region’s growth and stability. Germany, the largest and most vibrant market in the area, grew a pitiful .1% in the second quarter. With lackluster growth like that: How long can Germany continue to bail out the rest of the Union?

Or better yet: How long will German taxpayers continue to fund irresponsible governments (Italy, Spain, Portugal, and Greece) that entitle beyond their means? 

The word “crisis” in the first WSJ article mentioned today refers to a crisis in currency, a crisis in central governance and monetary policy. 

Today in America, and in the face of breakout earnings from Wal-Mart and Home Depot, banks led the Dow down.  Why? 

Currency is their product of trade. 

Lenders are skittish, the economy is soft, and banks are sitting on stockpiles of cash. They’re scared to lend it, and with the signs of inflation appearing on the horizon, only the likes of Johnson & Johnson, Google, and Texas Instruments can get their hands on it. This limits market potential -- and bank profits. 

This, not to mention, that it’s extremely difficult to make money when your main product of trade consistently depreciates. Bad monetary policy is what caused banks to lead the Dow down.  There’s simply no money in money right now. 

And that’s why gold continues to soar, now trading around $1,790 and ounce. It’s a money hedge. So as long as monetary policy remains irresponsible, expect gold to keep rolling. 

Sunday Call: Buy, Sell, or Hold?

Dan Calandro - Sunday, August 14, 2011

The Sunday Call is the most important point I think you should consider before hitting the streets in the new week. This week it’s: Buy, Sell, or Hold?—How you should approach your investments this week.

Here’s my two cents.

First and foremost: Be comfortable with your asset allocations! You need a steady hand during these times and the only way to have one is to be comfortable with your investments and how they’re assembled. If you're comfortable with them, then hold. If not, read chapters 3, 7, and 8 of my book again, pick your spot, and then make a move. If you’re not sure what to do then come to one of my workshops and we’ll work it out together. (They're free.)

Second: Have a plan of action and execute it! Remember, we are at the midpoint of the action zone right now. Investment success is about achieving long term objectives, which can always be realized by maneuvering around this point. It’s so much easier to buy low than it is to sell at the highest.  

In other words, don’t think about "selling high" right now, that’s too hard in such a messy market. Instead think about positioning yourself to "buy low." To do that you’ll need cash. So if that means selling off a piece of your mutual funds around here to build a cash reserve then so be it.  Buying low is where the real money is to be made.

And you can’t do that without cash.  

Hostility requires versatility. Prepare now and be ready later.  

PS: I'm hosting a forum Monday night at 8pm eastern.  Here's the info if you're interested.  Hope to see you there! 


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