Dan’s Blog

Growth Slows Significantly, Stocks Inch Up Anyway

Dan Calandro - Monday, July 30, 2012
Investment is about one thing – growth. Stocks perform best when economies are
growing briskly in Real terms. Real growth, as we know, is growth adjusted for inflation. For some reason it has gone largely unreported that Real growth dropped more than 20% from the first to second quarters’ of 2012. Here’s the table of comparison.

Annualized

Q1 2012

Q2 2012

Change

% Change

Real Growth

1.9%

1.5%

-0.4%

-21%

Inflation

2.2%

1.5%

-0.7%

-32%

Nominal growth

4.1%

3.0%

-1.1%

-27%


First of all, these numbers stink. Two percent Real growth – let alone 1.5% – should be considered nothing short of economic failure. The U.S. economy needs to grow much faster than this pathetic pace to afford the massive $15 trillion of national debt that continues to mount. Monetary and fiscal policies have been atrocious for far too long and an over-active Fed is threatening more easing once again. This is not good. For as long as the Fed’s money game continues to make irresponsible government easy, the more reckless government will get.  

A soft dollar and rock bottom interest rates are not indicative of a strong economy. Trillion dollar fiscal deficits are not a sign of intelligent fiscal management – especially when they produce such little positive result.  

The Dow’s performance indicates this weakness. Since the 2008 Crash, the Dow Jones Industrial Average has been unable to outperform Gross Domestic Product (GDP). During times of expansion, like the housing boom (see 2007 activity in the below chart), the Dow will have little trouble outperforming Nominal GDP. But in times of economic stress (like today) the Average barely produces any Real return. Note the "inflation gap" in the chart below. Remember, the spread between Nominal and Real GDP is inflation.  

7-27-12a

During this time the Dow is up 4% and inflation was 10% – in other words, the Dow has lost 6% to inflation since 2007. The Dow looks like it's up but it’s really down. That’s why inflation is called the "silent killer" – it kills your monetary value without announcement like a thief in the night. If your stock portfolio hasn’t outperformed the DJIA since 2007 then you have been losing money! 

It’s time to turn that around by positioning your portfolio in a way to outperform "the market" in any environment. That starts with superior 15-51 construction. Below is the same exact chart shown above but with the 15-51 Indicator inserted for comparison.

7-27-12b

That’s what I’m talking about. The 15-51 Indicator produced an amazing 135% return since the beginning of 2007 – a Real return of 125% (after inflation.) 

15-51 methodology is that good. It is the solution to uninspired portfolios that can’t outperform inflation or the market Averages. It also makes it easier to sell high – because "high" is easier to see, and more easily had. And that makes making more money easier. (Try saying that three times fast.)   

While long term trends are most important to grasp, it is always a good idea to know what the short term picture looks like. This provides the investor with a clearer overall view of the stock market cycle. Below is a year-to-date look.

7-27-12c


Both the Dow and Gold look confused, up 7% and 4% respectively, traveling almost in unison when they should be moving in opposite directions. The 15-51 Indicator had a huge, steep rise early in the year and has held onto most of its gain, up 20% for the year thus far. The 15-51 Indicator shows that recent stock market inflation is a strength driven "rally." Knowing that the long-term view of the economy is weak (see above charts), it’s easy to ascertain that stocks are overvalued at these levels. There’s simply no juice in the engine.  

In difficult market conditions such as these, investors lose tolerance for higher risk stocks by instinct and shift their focus to consistently strong performers. This propels strength far beyond the market averages. That’s why the 15-51 Indicator, a market portfolio designed with above-average construction and components, consistently outperforms the major Averages. Superior construction produces superior results. It's completely logical.

As mentioned in my book, the investment markets give investors many opportunities to take profitable action – especially if you know where you are in "the market" cycle. Roght now stocks are high, gold is poised for growth, bonds aren’t worth the trouble, and cash is king. You can’t buy low without it. 

Patience and discipline are always required; and an ounce of preparation will produce ten pounds of return.
 
An opportunity is on the horizon. Plan your work and work your plan.  And let me know if you need help.

Until then, stay tuned…

Strength is Flattening

Dan Calandro - Sunday, July 22, 2012

Stock market strength has been flat three weeks running while the Average continues to bounce around, looking soft in the process. Here’s a look at the most recent 12 months. 

7-20-12

Stock market strength looks scared to move higher, and with current Market conditions, who could blame it.

Looking at gold’s trend-line, especially the last few months, it appears to have taken its eye off the poor state of money circling the globe; and as seen in my Hang-Over blog, gold’s long term trend also looks to be flattening out. The Dow Average, with just a 2.9% gain for this period, is barely keeping pace with inflation. In other words, the Dow is just about breaking-even in the most recent year – its gain completely wiped-out from inflation.

And that’s why your portfolio must travel on a trend-line above it! You can’t make enough money otherwise (especially when considering the future effects of recent Supreme LetDowns.

It’s always a good time to reassess your plans and allocations when Market conditions change, strength is flat, and both GDP and the DJIA look soft. And with the Dow just 500 points from its historical high point, now is a great time to move things around before the "fiscal cliff" comes to pass – because when that happens, stocks will trade well-below "fair value" and gold will rise sharply. Remember, it’s buy low sell high.  

See these blogs for more information, or contact me directly.  

Action Zone Update: 2012

Asset Allocation: 2012

Market Dysfunction & You

Stay tuned...

Hang-Over

Dan Calandro - Monday, July 16, 2012
Still hung-over by recent Supreme Court missteps, the stock market reflected my blahaissez-faire sentiment in a mish-mash of trading. After losing almost 400 points in six consecutive down sessions, the Dow Jones Industrial Average got half of it back on Friday, ending up 204 points. The Average eked out a 1% gain for the week while stock market strength adjusted down by a fraction. 

In the news, the world continues to move upside down. Economies in the Euro Zone posted their fifth consecutive month of business contraction and France is following cues from Spain and Italy – drastically cutting government healthcare and education programs for the poor while raising taxes on the rich. Market conditions in Syria are down-right ugly and the U.S. is building a stronger presence in that region. And more evidence came to light that China’s economy, the world’s second largest, is increasingly moving towards recession. 

As if things weren’t bad enough, the global financial crisis hasn’t gone away. After cutting ratings on five of the six largest U.S. banks, Moody’s Investor Service cut the scores of 28 Spanish banks. With skyrocketing interest rates already, Spain can ill afford another rate hike – which is right around the corner.  

In a sharp turnaround, the European Central Bank (ECB) announced that they would impose losses on senior bondholders of sovereign banks in the region. Senior bondholders are the most significant class and are usually the last to take losses. But when that time comes, as it has in Spain, bondholders lose money and interest rates rise even further. Investors who own high yield fixed income mutual funds ought to take special note.      

Here at home market fundamentals continue to be negative: unemployment is still 8.2%, government welfare programs are growing at unsustainable levels, and it seems like banks are making news everyday. From the probes and settlements at Barclay’s and Goldman Sachs to the debacle at JP Morgan Chase (where trading losses now amount to $6 billion) the financial market looks completely undisciplined and dysfunctional. This, of course, is not to mention that a few U.S. municipalities have gone the European way by recently filing for bankruptcy. There will be more to come, sad to say.

The below chart is indicative of times like these. In the past five years, Gross Domestic Product has shown absolutely no signs of life; the Dow continues to indicate recession, and gold is consistent with a weak currency environment. Here’s the picture. 


7-13-12

As the 15-51 Indicator clearly shows, stocks remain over-valued at these levels. Remember, the stock market has not yet realized recession has arrived in America. When it finally does – valuations will swiftly correct.  

Stay tuned…
 

Supreme LetDown

Dan Calandro - Saturday, July 07, 2012

Let me begin by saying that I’m not a lawyer and I have a plaque on my desk to prove it. But I can read, and have an independent mind. My goal in this blog area, as always, is to provide you – the independent investor – with all the tools and analysis required to invest successfully on your own. That is part of my chapter 8 guarantee.    

For those of you who do not yet know, LOSE YOUR BROKER NOT YOUR MONEY won the 2012 International Book Awards for Investing. It did so for a reason. In the book I demonstrate how to identify changes in Market condition long before stock markets react to them. This allows you to stay way ahead of the trading curve. (It makes making money so much easier.)

As we know, governments control Markets. The American system of government has three branches: Executive, Legislative, and Judiciary – governors, regulators, and judges. Policy and legislative changes from any branch of government are major Market indications. Supreme Court decisions, while not permanent, are very close to it. 

Red alert!

Recent Supreme Court decisions are poised to dramatically affect the American Market and stock market valuations going forward.Independent investors must take note: These rulings signify major changes in Market condition and direction.   

In two incredibly important issues facing the U.S. economy (immigration and healthcare), the Supreme Court dealt the American cause a severe blow in two specific cases: 

Arizona v. the United States (a.k.a. ARIZONA), and 

National Federation of Independent Business v. Sebelius, Secretary of Health and Human Services (re: Affordable Care Act, ACA). 

After reading the Opinions in their entirety, I am left with two profound questions:

1. At what point in American history did individual States cede their right to protect and defend their citizens as defined by federal statute – should the Federal Government choose not to enforce their own laws?  

2. Exactly what clause in the U.S. Constitution gives the Supreme Court the power and authority to impose a tax on the American People against the clear intent of Congress and popular sentiment?  

In a nutshell, States and People lost big-time with these two Supreme Court miscues.  And that’s not good for Markets, People, and Stocks. Here’s how I see it.  

# # #

What happened in ARIZONA?

Arizona citizens, under a duly authorized elected government, enacted three laws that identically mimic Federal Statutes. They did so to enforce laws that the Federal government was not was enforcing in the same manner as in neighboring states, California, New Mexico, and Texas. Arizona claims that such a policy makes their state a "gateway" for illegal immigration – a real problem in the State, as the data proves.  

The Fed cited "limited resources" for not enforcing border controls in Arizona but asserted that the Arizona laws were unconstitutional because border issues were restricted for Federal enforcement only. States had to stand down regardless of federal policy. 

And the Court agreed.   

# End of Summary #


ARIZONA highlights the burden of failed immigration policy. Crime is up, jailhouses are full, and Arizona’s education and healthcare systems are greatly strained. The Arizona government contends that the fiscal cost of an open border is vastly greater than responsible border enforcement. The data overwhelming corroborates their position. Illegal entrants have imposed a severe cost to their State and they wanted to employ their resources to stop the incursion.   

But the Court ruled against them, and as such, provided all future presidents with the ability to use immigration policy – and border security – to sway elections and coerce States into following their national and political agendas. 

How could any right-minded American believe that the Colonies gave sole control over their security to one man named, President? Something seems truly un-American about this type of individual federal power.

All fifty states lost in ARIZONA. Today all States are less free, less stable, less profitable, and more vulnerable. And since States are just Markets, it’s safe to say that all Markets also lost with this decision. Remember, dollars spent on the costs associated to illegal immigration come at the expense of free market activity, and are thus bad for investments, markets, and taxpayers (a.k.a. Consumers.)  

Not good.  

# # #

What is the issue with the AFFORDABLE CARE ACT (ACA)?

Two central themes of the Act were contested: the Individual Mandate and the Expansion of the Medicaid program. In the ACA, all able persons are required to purchase "minimum essential" healthcare insurance.  It’s commonly known as the Individual Mandate. It assesses penalties to certain people for non-compliance of the Mandate.  

The ACA also requires all States to participate in the program. Congress achieves this by stripping a State from all of its Medicaid funding should it not participate in the ACA. 

In a nutshell, Congress makes it quite clear that the only way the ACA program could work was if all the People in all the States participated.  

The questions before the Court are simply these: 

1. Can Congress compel people to purchase a product against their free-will?

2. Can Government force all States to comply with the ACA by withholding all Medicaid funding – Or is this extortion? 

In the end, the Court found the Individual Mandate constitutional under Congress’s taxing authority and struck down the Congressional effort to withhold all Medicaid funding for non-participating States. The Court held that States foregoing ACA participation can only lose new Medicaid funding under the expansion plan.  

# End of Summary #

Somewhere along the line the Supreme Court lost its way – they, too, serve the cause to support liberty and protect the rights of the American People (a.k.a. Consumers) under our founding principles. The Affordable Care Act (ACA) was rammed through Congress against popular demand, with many polls showing more than 60% of Americans against the bill at the time of passage – a sentiment that still rings true today.    

Most of the Justices forgot that the Individual Mandate was sold to the American public specifically as a "penalty" and definitely "not a tax." While admittedly, the ACA is laden with taxes and duties, the Individual Mandate was specifically labeled a penalty numerous times in the areas defining it. The Supreme Court, against the Chief Justice’s pledge in his confirmation hearings, legislated from the bench, re-wrote the law and made liars out of Congress – and by so doing, levied a huge tax on the American People.  

That’s not the way our system was intended to work.  

And because the intent of the law was changed from a penalty to a tax, the Court in effect changed the character of the government’s role in the healthcare market from penalizer to insurer.—And that’s where the big problem is. 

In the ACA, government looked to penalize certain groups of people, i.e. those who do not buy medial insurance. Ok, fair enough. The only way Congress could "finance" the ACA was if every able person purchased health insurance. It’s a Mandate, punishable by a monetary penalty for non-compliance.  

To be clear: a penalty is a punishment for breaking a rule. A tax, on the other hand, is something entirely different. A tax is a required contribution to the government levied on income, profit, or certain goods and services.  In other words, all active People pay taxes; while only Violators pay penalties.  

By transforming the penalty into a tax, the Supreme Court’s decision creates more confusion – What will this new tax be called, and how will Congress impose it? 

While these are legal barriers that a sly Legislature will surely overcome, I can see an easy Congressional remedy on the immediate horizon: They will raise the Medicare tax to pay for the Medicaid Expansion under the ACA, because under its definition, all Violators already pay taxes. This incubates a single payer system. 

And just like with Medicare the government will end up calling all the healthcare shots – who gets what care, when, what it will cost the patient, and what the provider will get paid for it. After all, they will be the single largest payer of it all. This makes government the primary insurer and ultimate price fixer in national healthcare – a power born by Congress’s taxing authority, so this High Court says.

Unlike the Court, elected officials are driven by political motivations and spend money for reasons other than return on investment. It’s strictly political. That’s why they waste so much money – and why the American system was founded on three separate and equal branches of government. Our Framers knew all too well the natural tendency of government to expand power in order to gain domineering control. The Supreme Court, by design, is supposed to be liberty’s last defense against overzealous Executives and Legislatures. On that front, We the People have lost big with these two Court opinions.  

And that’s not good for consumers.

When governments become too intrusive in markets corruption is not far behind and calamity is right around the corner. Recall the subprime mortgage debacle as explained in my book. What started in the 1990’s fell into ruin in the fall of 2008.  It was too easy – and money was too cheap for far too long.  Sound familiar?  

The Affordable Care Act (ACA) is positioned to do the same thing to the healthcare market that the Community Reinvestment Act (CRA) did to the financial markets – it caused calamity. Not overnight, for sure. But in due course.

And for those of you who think this Supreme Court ruling is a great sign to a great new American Way – think again.  Medicare is government run healthcare – and it’s broke. Medicaid – a State and Federal joint program – is collectively broke. Social Security, a nationalized retirement program, is bankrupt by any reasonable account – regardless of the amount of taxes levied over its many decades of existence. 

Do you see a pattern here?—If not, look to Greece and Spain for the end game (who, by the way, are drastically cutting education and healthcare programs at the present time.)

If you are middle-aged and are investing for retirement you must put your portfolio into high gear! Expect the cost of living to rise dramatically. No longer can you afford the establishment’s offerings (mutual funds and Social Security) to finance for your retirement well being. They will fall way short.  

The "healthcare boom" begins today – and that includes price inflation – and will continue until another major fiscal crisis erupts. Sorry to say.  

Prepare your portfolio now.  

And let me if you need help.  

ShieldThe road to financial independence.™

One Year In

Dan Calandro - Thursday, July 05, 2012

It has been one year since the 15-51 Indicator was published via LOSE YOUR BROKER NOT YOUR MONEY. Since then, stock market strength has produced an amazing 44% return on investment in ugly market conditions. Average stock market returns, as indicated by the Dow Jones Industrial Average, produced a measly 3% gain in the most recent twelve months. Gold is up 9%. See chart below.  

7-3-12


While my Market opinion on recent Supreme Court rulings is not yet complete, one thing is clear: If your investment portfolio is not greatly outpacing market averages you are in for a very unpleasant surprise when you reach the Golden Age of retirement. The prices for healthcare services and other essential health products have no choice but to rise steadily – and at times sharply – under increasingly shortened supplies. 

Now more than ever, it’s time to LOSE YOUR BROKER NOT YOUR MONEY.

You'll need the money. 

ShieldThe road to financial independence.™ 

Market Alert

Dan Calandro - Sunday, July 01, 2012

In a week where the Supreme Court ruled that it is constitutional to tax economic inactivity – both gold and the stock market ended higher by 2%. Here’s the year-to-date picture.  

6-29-12

The upward move in stock prices makes absolutely no sense. The free-market was dealt a severe one-two punch by the U.S. Supreme Court this week. Two specific cases on healthcare and immigration are likely to affect the course of the American Market in dramatic fashion for years to come.(—Remember what happened to the financial industry when government made it too easy for 20 million "Americans" to get low cost mortgages. What started in the 1990’s fell into ruin in 2008.) 

Why should we believe a different outcome will come from the government’s intrusion into the healthcare industry?   

Have you heard how hard it is to get a mortgage these days? Think about the dreaded outcomes possible with a market crash in healthcare – one where consumers are unable or unwilling to pay for health services, health insurers are broke, and hospitals and doctors are not capable of supplying demand (a.k.a. saving anonymous lives.) Think about that disaster.  

It’ll take me a little more time to sort out this week’s court rulings. I will deliver that analysis, of course, right here as soon as I get it.

Until then, know that it’s always a good time to reevaluate your financial plan and objectives when things drastically change in Markets. If you are unsure what to do, play defense until you have the situation fully evaluated. If you can’t wait and must move right now, sell your positions and move the proceeds into cash. The dry powder won’t burn a hole in your pocket. Should you have no idea what to do, don’t hesitate to contact me.  

Stay tuned…


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