Dan’s Blog

On the Brink -- What to Do?

Dan Calandro - Sunday, September 30, 2012

Gas prices in my area have once again started rising and are now comfortably over $4 per gallon. With another northeast winter just around the corner, home heating oil is poised for $5 per gallon by first frost. Consumers and investors alike should expect a steady and rapid rise in price from these current levels. Sad to say…

For two reasons:

  1. A major increase in worldwide Money Supply, and
  2. Escalating turmoil in the Middle East, Africa, and Europe

Let’s take these items one by one before applying them to the stock market.  

Major Markets Ramp Up Printing Presses

America led from behind in this newest round of quantitative easing. After flirting with the idea for months, Ben Bernanke’s European counterpart fired the first salvo by announcing the European Central Bank’s first QE program. A few days later America’s central banker, Fed chairman Ben Bernanke, attempted to upstage the European effort by announcing the most aggressive QE program in American history – one with no time expiration or monetary limit. A few days later, Japan announced their first QE endeavor.

In a nutshell: more Money = more Inflation

We have seen this before. In fact, every time the Fed has dumped new cash into the system in this manner it has only produced short-term commodity and stock market inflation while the underlying economy remained weak. Monetary shell games solve nothing, and only make economic matters worse.  

People often forget the origins of recent African and Middle Eastern revolutions – extremely high food costs (a.k.a. inflation), excessive unemployment, and corrupt governance. Many of these countries import wheat from America, China, and/or Europe – all of whom have driven down the value of their currencies over prolonged periods of time. This, in effect, has made their exports more expensive to countries like Egypt and Libya.

Massive amounts of new world currency via QE will only make matters worse in politically challenged countries. Hostilities will likely rise, and force oil and other commodity prices higher. This dynamic will negatively affect world Markets that are already sliding into recession from here to the Far East. As a result, investors should expect to see more volatility in the investment markets – especially in commodities like oil and gas.  

Turmoil Overseas

Since the assassination of the United States Ambassador to a newly formed Libyan government, parts of the Middle East and Africa have turned into one big anti-American protest – with flags burning and unified chants of hatred, death, and destruction to the United States and Israel. As you may recall, the U.S. led from behind in Libya’s revolutionary cause and it was Francenot Israel, who was out in front. I have yet to see a French flag burning. Call me a cynic.  

At the United Nations last week, Iran look defiant, Israel looked ready, and America looked weak. The rest of the congregation looked lame. In such an environment, world peace is further than an arm’s length away and war is at the tip of a tongue. 

These are dangerous times.  

Investors shouldn’t be naïve. When oil is all you have, escalating oil prices is all you want. And when a country, or a collection of countries, can’t play the monetary game that the U.S., Europe, or China, can – some resort to wartime tactics, which sometimes leads to wars. No shock there.  

The uncertainty surrounding such a condition will cause increased volatility in the least case; and World War in the worst case scenario. None of which are good for consumers, business, and many investments.  

Poor monetary policy, brought upon by poor fiscal policy, has produced poor diplomatic relations and political unrest in many Markets – many of which are large Suppliers of worldwide oil Demand. This condition is ripe for stifling inflation. Investors must take note.  

# # #

Add to the above two recent economic releases by the U.S. government:

  1. Real GDP was revised down to a pitiful 1.3% (FYI, 3% can be considered good but at least 5% is required to get America out of its current financial mess) and,
  2. Personal income is growing at just .1%

In other words, American consumers also continue to fall behind by a wide margin. Prices are growing much faster than incomes, and according to these new government releases inflation stands at 1.7%, and with food and energy inflation greatly beyond that meager average, Consumers will soon feel a stronger pinch to their pocket books. Unemployment is still over 8%, and a "fiscal cliff" is in clear view. 

It’s really ugly out there.  

Yet despite these many negative circumstances, the stock market remains valued as if some sort of peaceful economic boom was underway. The year-to-date chart below shows the misleading picture.

9-28-12

"The market" average, as indicated by the Dow Jones Industrial Average, is up 10% in the face of this year’s lackluster economic performance. It once again ended the week above the action zone high, representing the Dow’s historical average high since 1995. The question of over-valuation need not be asked here.  

"Market strength," as indicated by the 15-51 Indicator, remains up a stunning 43% in the nine months thus far even though it has fallen nearly 6% since reaching its all-time just a couple of weeks ago. It looks like it wants to go lower. And who could blame it.  

"Gold" continues to rebound from its annual low, up 15% since its May 16 bottom and 13% for year. It looks to be signaling trouble in the currency markets, and poised for growth.

And while things look very clear to me, the most asked question I hear in my travels is: How do I make money in this market?

I tell long-term investors: Markets are on the brink of correction, so:

  • Have a stockpile of cash on hand;
  • Buy gold because the market is ripe for it;
  • Short the S&P 500 because stocks are over-valued; and to make more money –
  • Get a third job…
  • How much of each is totally up to you.

When doing so, consider Cash your long-term investment allocation. It’s the money you don’t need to touch for five, ten, or even fifteen years. A significant portion should be used to buy low when Stocks correct and go on sale. In this allocation, too, should be the amount of cash reserve you always intend to keep – a safety net, if you will. 

The Commodity you choose – be it gold, silver, oil or copper, etc. – should be your interim growth component until Market dynamics change. Be comfortable with locking this allocation up for one to five years, and be willing to sell at any time you achieve your objective or must rebalance.  

To hedge these investment tactics, I say Short the S&P 500 because stocks are so over-valued at these levels. Again, world economies are shrinking, Europe is a disaster, and parts of the Middle East and Africa are on the brink of civil war – and all of them seem to have a major league gripe with the U.S. and her Israeli ally. All of this will greatly affect gas and oil prices and further pinch the pocketbooks of middle class Consumers everywhere. And "market" valuations are boom-like high. So not the case.

And while free markets don’t like war, acknowledge that war is part of "the market." As such, defense stocks should see increasing demand and higher prices in times like these. Food, energy, and healthcare should remain expensive and volatile. This will squeeze companies supplying consumer discretionary products, those things that most middle classers and young adults can easily do without. Consequently, these Stocks should experience the most significant price deflation and are the greatest short opportunities.

That’s all I have for now – but please, let me know if I missed something.  

PS: One recommendation for the third job: make it your passion and it will always pay dividends, in either fun or money. Both are well worth the investment.  

Stay tuned…

Food for Healthcare

Dan Calandro - Friday, September 21, 2012

The other day I was talking to my friend Billy about the recent move Dow Jones made to the Industrial Average – a move, no doubt, prompted by the Supreme Court’s decision regarding the Affordable Care Act. That decision changed the Market significantly. Shortly thereafter, on July 7, 2012, I concluded in Supreme Letdown:

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

More than two months after that posting, on September 14, 2012, Dow Jones announced that is was replacing Kraft Foods with United Healthcare. I mentioned the move as it happened last week in Strength Sets All-Time High, Again – but only in the context of performance. In that blog I said,

"the Dow has been unable to produce market returns – as GDP has consistently outperformed it. That might be one reason Dow Jones announced that they are replacing Kraft Foods with United Healthcare in its Industrial Average."

While that may be one reason for the move, and I suspect that it was, I neglected to discuss the Dow’s move in the Market context – as my friend Billy pointed out.

Dumping Kraft Foods for United Healthcare was a strategic portfolio move. As explained thoroughly in chapter 2 of my book, the Dow’s purpose and design objective is to indicate the market (GDP) in current dollars – a.k.a. Nominal GDP. But as shown in the chart below the DJIA has been consistently underperforming it. The portfolio needs more zest to achieve its objective – and what better place than an industry poised for rapid inflationary growth: Healthcare.  

9-20-12

While I believe the Dow’s long-term trend shown here is a more accurate reading of the Market environment than Nominal GDP does, (See: Recessionary Proof for more info), Dow Jones had little choice but to adjust its portfolio to the changing Market – to more accurately indicate it. That’s its ultimate goal, after all.

As for the 15-51 Indicator, its long-term trend continues to do what it’s supposed to do – to produce above-average market returns through superior 15-51 construction; and when considering the poor conditions of Markets and money, even stock market strength should be underperforming gold – which the Indicator also continues to do. No changes to it are necessary to achieve its stated objective.   

That’s another benefit to 15-51 construction; it’s more durable and requires less maintenance. That’s the stability your portfolio needs!

Nevertheless, market changes are always good times to review your asset allocations and portfolio plan – especially when stock valuations are so high.

Stay tuned -- and let me know if you need help.

Strength Sets All-Time High, Again

Dan Calandro - Sunday, September 16, 2012

As mentioned previously, QE announcements in Europe and America sent stock prices soaring. The 15-51 strength Indicator posted another new all-time high, closing over 70,000 points for the first time in its history. The same news pushed the Dow Jones Industrial Average over the action zone high, and officially into a territory known as irrational exuberance. The Average ended the week at 13,594, some 600 points off its all-time high of 14,165; a value it hasn’t seen since October 9, 2007.

Remember back then, there was a bona fide boom going on (the housing boom) and was on its way to going bust. Today, no such boom exists – unless, of course, one considers the rise in national debt, the expansion of the money supply, and "market" prices.

And that, my friends, is the problem. This "market rally" we are experiencing is called an inflation driven rally – a national boom in debt, along with a fiscal and monetary crisis. That’s why so many people don’t feel the "recovery" – because they’re not involved in it. Real recovery, simply, hasn’t yet happened.  

Once again, the Dow hit its all-time high on October 9, 2007 – at 14,165 points. How can real recovery occur without first attaining this prior milestone?  And further, doesn’t the term recovery insinuate that prior high-water marks are not only attained – but held and built upon?

There are some pundits calling this Dow rally as "the greatest 100% gain in market history." These people, I assure you, are too smart for their own good.  Look at the chart below.

9-14-12a

The beginning scaling point of this chart is the DJIA’s all-time high. From there each indicator runs it own course. As you can see since then, the Dow has been unable to produce market returns – as GDP has consistently outperformed it. That might be one reason Dow Jones announced that they are replacing Kraft Foods with United Healthcare in its Industrial Average. (It represents just another great Market move by them, in a long and illustrious career.)

However, with or without that change, the Dow continues to provide accurate market indication. In the chart above, the Dow has been indicating recession since the 2008 Crash and confirms what many of us feel there has been no recovery.  

Call me crazy, but recovery can only be confirmed once the Dow leads GDP up, which in Nominal terms, is a valuation greater than 15,638 (shown above). Again, during an economic expansion the Dow should reach its prior high and then consistently build upon it. But the above chart illustrates anything but that case. In fact, the Dow looks scared to approach that level – unlike stock market strength and gold.  

The reason for this is simple: worldwide Market conditions stink. 

During inflationary times, like these, commodities (i.e. food, oil, and gold) rise in price at abnormal rates and steal spending dollars from other parts of the economy. That’s why tepid economic growth usually accompanies inflationary periods – because volatile prices stunt Real growth. And sooner or later, "the market" catches up with reality and corrections occur, and sometimes, markets crash like in 2008.  

Now is a time for vigilance.  

I would be remiss without mentioning the assassinations of four American patriots, including U.S. Ambassador Christopher Stevens, in Libya this week. My condolences to the family and friends of the fallen, in what has turned out to be a clash between civilization and barbaria. 

HalfFlag

War and political unrest is not good for markets, morale, and prosperity – and right now the Middle East is rife with it. These crashing markets will further pressure currencies, oil, and other commodity prices. Global economies are sliding into recession, and Europe’s financial condition is worsening. Don’t be misled. 

During hostile markets investors reduce their risk tolerances by nature, even if the move is subconscious. A flight to quality (increased demand) in stronger stocks causes abnormal inflation in those stocks (due to their shortening supply), which can be seen in every chart with the 15-51i in it.  

QE driven irrational exuberance is one thing. Real Market growth is entirely another.  

There’s no reason to be confused what the stock market is telling us right now. In the last twelve months, the Average is up 22%, strength has gained 58%, and gold is down – yes, down – 6%. Here’s the year-to-date picture.  

9-14-12c

At these levels stocks are extremely over-valued, "the market" is hopeful, and gold is waiting for the other shoe to drop.  

Stay tuned…

ShieldThe road to financial independence.™

September 11, 2012

Dan Calandro - Tuesday, September 11, 2012

9-11-lights

Central Banks' Gamble

Dan Calandro - Saturday, September 08, 2012

Just a few days after posting Where There’s a Boom…, European Central Bank president Mario Draghi announced that he was ready to follow America’s lead and implement a Euro Zone version of quantitative easing (QE) – this in an attempt to soften its deepening economic crisis -- and it sent stocks flying.  

Like in the U.S., Europe’s monetary authority is placing a bet that it can outmaneuver irresponsible fiscal governance by printing more money.

If they win, economic stagnation is their prize. If they lose, a most undesirable inflationary condition that will cripple world markets and bring about major devaluations in equity, money, debt, and profit will be the award. 

Indeed, the stakes are high.  

For this, and knowing that matters will soon be made worse by QE3 in America, Wall Street applauded this week, pushing prices for both stocks and gold up. Here’s the year-to-date picture.  

9-7-12

As shown, gold is up 11% for the year, the DJIA has added 9%, and the 15-51 Indicator has gained 43%. For stocks these are annual highs – this while U.S. economic growth is declining, job growth is weakening, and Europe’s recession is projected to be "deeper" than anyone previously predicted. And let’s not forget that Asia’s economy is also contracting. 

As mentioned many times previously, monetary games cannot correct systemic fiscal and economic problems. (See my Fixing the Market series located in the right rail.)  They can, however, puff short breaths of life into a deflating balloon. That said, be certain that the stock market’s move this year is driven by one thing – inflation. Growth and fundamentals have nothing to do with it.  

In my book I warn investors not to get caught up in stock market hype – the overzealous speculation driven by Wall Street propaganda, media pundits, expert guests, and inside traders. Many of these people, of course, will get blindsided by the next correction in which they will bill as "impossible to predict;" and then leave the event with their pockets stuffed with newly printed million dollar bills, courtesy of bad bets placed by the Central Governments everywhere.

These kinds of things incubate higher tax environments with slower growth. Needless to say, that’s not good for people, Markets, and investment. Investors be aware.

Stay tuned…

PS: I would like to specially thank CBS Connecticut local affiliate, WTIC 1080, for the recognition and respect in a recent article (found by clicking their logo below). Thank you very much for the honor!

CBS-Logo

Sincerely,

dan-

Where There's a Boom...

Dan Calandro - Sunday, September 02, 2012
As the Federal Reserve inches closer to implementing another round of monetary smoke and mirrors, gold has once again taken over the Dow Jones Industrial Average for the year. Gold is up 8%, the Dow added 7%, while the 15-51 Indicator has gained a stunning 40% so far this year. It is, in fact, performing as if an economic boom is underway. Here's the picture.

8-31-12a

Even though strength normally outperforms average – it doesn’t usually outpace it by this much. In fact, 2012 has been the largest runaway the 15-51i has ever imposed on the DJIA. The reason for this, I can only surmise, is the consistent flight to quality (a.k.a. strong stocks) since the 2008 crash. In other words, investors have continued to concentrate on stock market strength because of persistently poor economic conditions; and by so doing, the increased demand has driven the 15-51 Indicator to extremely inflated levels. 

Stock market valuations should be consistent with Market fundamentals. When they stray too far in either direction, up or down, a correction must ensue – to correct valuations. That’s what a correction is, that’s what it does – it corrects prices.  

Let’s take a look at this from a different angle. The chart below is from the March 2009 bottom through today (August 31, 2012). It shows that "the market" essentially reached fair value in November 2010; that can be considered correction from the over sold condition stemming from the ’08 crash. But notice the Indicator's sizable jump in value since January 2012. You’d think a boom was going on.   

8-31-12b

By posting such a burst in 2012, when market conditions can be considered nothing short of miserable, the 15-51 Indicator clearly shows what the Dow Average cannot – how inflated stock prices are at these levels. 

And where there’s a boom -- there’s a bust.  

While it is true that another round of QE will add to stock market inflation, there is still no fundamental reason for stocks (strength included) to be valued this high (see: Dog Days of Summer.) It is for this basic reason that stocks sell off when the Dow approaches the action zone high (13,425); and because the monetary situation continues to be so glum, gold stands to benefit.  

Stay tuned…

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