Dan’s Blog

Strength Crosses Under Average

Dan Calandro - Sunday, January 27, 2013

The Bizarro World continued in money and finance this week with the Dow Jones Industrial Average posting another 2% gain. The Average is up 8% so for this year while Strength continued to slide. The 15-51 Indicator, a portfolio built with superior 15-51 construction and designed to produce above-average market returns, once again moved in an opposite direction as "the market" and lost another 6% in the shortened trading week. In a rare move, the 15-51 Indicator crossed under the Dow Average in a one year scaled chart. See below.

1-25a

And why not?  

Premium businesses continue to show signs of operating pressure. In the most recent week Apple not only reported flat growth for the holiday quarter but also announced plans of launching lower priced iPhones to compete with aggressive smart phone rival, Samsung. Margins are under pressure everywhere. And like Best Buy previously, premium handbag company Coach announced meager 1.5% growth during what they billed as a "challenging" holiday season. 

The worst performing "market" component in the last year is Caterpillar, which is down 14% in the last 52 weeks. Boeing, likes its new Dreamliner, hasn’t gone anywhere in the trading year – its price hasn’t moved since the above chart began. The point here is simple: stock market strength outperforms broader market averages more times than not – but not always. 

For instance, the 15-51 Indicator portfolio began on the first trading day of 1996. In the subsequent 17 year period the Dow outperformed the 15-51 Indicator six times, or 35% of the time. In those six years, the Dow’s average percentage point differential was 2.5% better than the Indicator. When the Average wins the performance year it is by a slim margin. It happens sometimes -- in up markets and down.  

However, when strength wins the battle it does so in convincing fashion. In the eleven years that the 15-51 Indicator was superior, it outperformed the Dow by 18.3% points per year, on average. In upward trending markets above-average 15-51 portfolios greatly outperform. In downward markets, above-average companies generally have more room to correct because they have experienced the greatest inflation on the way up. So they do; and sometimes underperform borader market averages. Nevertheless, this point is equally clear -- strong 15-51 portfolios produce far superior results over the long term.  

This can be seen in the seventeen-year returns of the major indices, which isn’t a close contest: the Dow gained a mere 156% in the long run compared to a robust 1,101% gain for the 15-51 Indicator – that’s 7 times better than average!

In a nutshell: Success does not require your stock portfolio to be better than "the market" every single year. Smarter and stronger always produces more over the long run. That should always be your focus. 

As demonstrated in my book, market performance is best viewed from multiple perspectives. The last time the 15-51 Indicator failed to beat the Dow was the tumultuous year of 2008. The DJIA outpaced the Indicator by a mere .5% in ‘08. Below is a comparative chart since that time.

1-25b

The tortoise beats the hare every time in investment.

That’s because investment is a long-term proposition; and while buying and selling need not occur all the time or with constant regularity – prudent rebalancing as explained in chapters 6 and 7 of my book should be performed to maximize profit.

It is important to note, however, that profit trends shown in these charts have not been maximized and are instead shown in the form of a strict buy-and-hold methodology. That’s the way market indexes are measured. Your returns should outperform them, more and more as time goes by.  

To stretch this example out further, the next time before 2008 that the Dow Average out-performed stock market strength was 2006, when the Dow beat the 15-51 Indicator by a solid 5.6% points. The run-rate since then once again shows that a few strange years (in this case two: 2006 & 2008) cannot diminish superior long-term returns. See below.

1-25c

Sure the Dow started this period off stronger than the 15-51 Indicator – but which one won the war? That’s the point here: Caution to investors who get caught up in anomalies like the current market dynamics of the Bizarro World of finance and economics – Markets remain under severe pressure and stock prices are inflated and vulnerable. 

Several strategic investment themes continued in earnest this week, as Spain’s recession was reported to have worsened; the U.K. announced that their economy shrank in the most recent quarter; and Japan has officially joined the world’s easy money makers to increase currency supply and inflation. Sooner or later the inflation monster being fostered right now will turn into a real beast. And when inflation forces interest rates up – all hell will break loose. Investors should not only keep a keen eye on this but consider it a second immediate threat to their stock market base.

And then there is the effect of more new taxes – the great impediment of growth. As we know the U.S. Congress raised taxes on 80% of all American workers in early January 2013 in a law named the American Taxpayer Relief Act of 2012. According to Congress the bill was to avoid automatic tax increases and spending cuts labeled as the "fiscal cliff." And isn’t it ironic that although taxes have already increased the U.S. Senate is taking up yet another new tax bill while announcing that "sequester cuts" are most likely part of the deal.

But isn’t this the so called "fiscal cliff"? – and wasn’t this the "crisis" that had to be "averted" at year-end 2012 – and supposedly was with the aforementioned law? 

A perennial problem with the U.S. government is that they have kept the American Market in a state of persistent "crisis" since the Bush-Gore election in 2000, where the great issue of "hanging chads" made it to the Supreme Court. Then there was September 11th (a legitimate crisis), followed by a weapons of mass destruction crisis in Iraq; then a subprime mortgage crisis that was turned into a major Market crash (another legitimate crisis), which was then followed by the manmade crisis called the "fiscal cliff", which is sure to be followed by a gun crisis, a budget crisis, only to be replaced by a debt crisis, a healthcare crisis, and/or some other crisis to be named later.   

More and more the U.S. government is promulgating "crisis" to bamboozle the American populous into poor monetary and fiscal policy. This will bankrupt social welfare programs, strain business owners and seniors, and stifle an economy already struggling to survive.  

This is not good for Investment, Markets, or People.  

What most people don’t realize about crisis-mania is that it is used to raise taxes, prices, and the cost of capital. This lowers the value of the dollar and decreases the quality of life.

First case in point: several medical suppliers have recently warned of price increases to specialty medical devices to cover new taxes imposed by the Affordable Care Act – a law advertised to stop the "crisis" of closed health-markets and rising healthcare prices (see: Supreme Letdown). Increasing demand and not supply has no choice but to raise prices and ration care. And as explained in my book, companies do not pay taxes – they collect them. Taxes simply become part of the product’s price that consumers ultimately pay. Higher taxes raise prices, and thus cause inflation. Short supply and a weakening dollar have no chance of making healthcare "affordable."

Second case in point: taxes stop companies from doing what they do best – invest to expand markets and productivity.  Much to the contrary of taxes, business investments ultimately lowers costs, prices, and unemployment. Another Wall Street Journal article entitled: Firms Keep Stockpiles of ‘Foreign’ Cash in US, reports that American companies are sitting on $1.7 trillion of idle cash residing in the accounts of "foreign" subsidiaries – even though many of those accounts reside in America or in U.S. Treasury securities. In other words, those companies don’t move that money into a "U.S." account dedicated to U.S. investment because they don’t want to pay the 35% federal income tax – not to mention state taxes that can easily add-on another 15% penalty. So this investment doesn't happen, and the cash just sits there. 

There’s simply too little incentive to bring that money back into Market. Heck, in order for a company to make such a move they must be sure they can triple their money in a relatively short period of time to make it worthwhile. Otherwise, bringing the money back is a bad investment – and that’s not good for careers. Ask Jamie Dimon

If this country is serious about growth then the government needs to encourage it. If the endeavor to invest remains so costly, growth and prosperity, above all else, will suffer most. And without robust long-term growth forecasted, the future becomes bleak and stock prices suffer.  

Ask Apple. Here's their one year chart.

1-25d

The worst thing you can do is fall in love with a stock market run – to feel you must stay put at all cost for the rest of time, or that you must jump in or out at an inopportune time so not to miss the next great something; or to feel that just because a certain thing reached a particular price, say $700, that it is entitled to do so again. 

Reality doesn’t work that way.

Times change, things changes, Markets change – and it’s never easy to lose an icon.  

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

Stronger, Smarter

Dan Calandro - Sunday, January 20, 2013

The stock market Average added more fluff to its value again this week, posting a triple digit gain and raising its year-to-date advance to 4.2%. The Dow, now at its 52 week high and peeking above the action-zone high, has officially re-entered the dangerous territory called "irrational exuberance." Investors take note. 

Stock market Strength continued to show a more accurate portrayal of the economic situation by falling 2.1% in the trading week. It is down that same 2% for the year thus far, as the correction that began in September 2012 has continued early into this New Year.  Unlike the Dow, the 15-51 Indicator is down 17% since reaching its high watermark late last year. Gold, by any measure, has continued to look lost during this same time and is up only fractionally this year. The chart below paints the picture.

1-18a

This is a world where strength is steadily falling and average is rising. It is the Bizarro World of finance and economics – where Wall Street takes negative cues from Washington DC and turns them into short-term trading gains. This is a world built for shysters and money launderers.

Let’s begin the conversation by calling a spade a shovel – as long as Wall Street keeps receiving billions of dollars of new freshly printed cash they will keep applauding poor monetary policy and higher taxes. If the stock market is, indeed, the capital markets for the free-market then it ought to be trading in that direction. But that’s not what is happening right now.

All too often the Street applauds government corruption at the expense of free-market principle and sound financial acumen. They do so because it is they who receive the new money, which they then invest and drive up the valuations of stock market indexes. They then use these inflated valuations to lure money out of the hands of apprehensive investors – against all good and sound advice. They do so just to make a few extra bucks at the expense of their consumers.  

With each passing day the Wall Street establishment becomes a bigger and bigger part of the problem.

These last seven days amounted to a week where the same old story was in full effect but was yet again ignored by the Wall Street establishment. Several reoccurring themes posing a major threat to the world economic system have once again shown their ugly heads only to be totally discounted in the value of investments. This is a world where stock prices soar and reality is completely disregarded. Here’s a sample of recent news to reinforce that point: 

Due to a continued display of managerial incompetence in Washington DC, Fitch Ratings firm warned this week of another U.S. downgrade. This is a rude awakening for those thinking the "fiscal cliff has been averted" like many news installations have reported. As mentioned before, nothing has been resolved with recent congressional action and the boys and girls in Washington continue to neglect their fiduciary responsibility.  The financial status of the U.S. is in trouble – and our enemies know it.  

From a foreign policy perspective it is the 1970’s all over again – a U.S. Ambassador was assassinated late last year and several hundred hostages were recently taken in Algeria. Governments are under siege all throughout Africa and the Middle East – the oil hotbed of the world. They see the American Market as vulnerable, her government weak.  

And who could blame them?

Best Buy signaled a flat holiday shopping season while massive U.S. layoffs continue to continue, with American Express announcing an 8.5% cut in staffing while Morgan Stanley sliced another 1,600 jobs.  The U.S. economy is slowing, unemployment remains a stiff burden, and profit margins are shrinking.  Add to this that the strongest economy in Europe, Germany, drastically shrunk in the most recent quarter while the region’s joblessness hit another all-time high. They’re still in major trouble over there. And then there’s Africa.

Am I crazy? – or do these conditions not add up to a 52 week high stock market valuation?  

The Dow Average is at a yearly high but Strength is weak. In other words, current markets are not operating as normal!—And that’s a risky proposition. Investors should take special note.   

Times like these highlight a great difference between Average construction and the superior nature of the LYB method and 15-51 construction.  In the chart below, let me ask: Which portfolio is easier to buy low and sell high? – Which is easier to identify "high" and "low"?

1-18b

When it’s easier to see "high" it’s easier to sell high. The same is true with buying "low." That makes it easier to make money and achieve your financial objectives. 

This makes the Lose Your Broker method and 15-51 construction not only stronger but smarter than conventional thinking.

Be part of it.  

And stay tuned…

ShieldThe road to financial independence.™

Government Taxing, Wall Street Applauding

Dan Calandro - Saturday, January 05, 2013

First things first – absolutely nothing has been solved with recent Congressional action regarding the farce called the "fiscal cliff." The so called cliff has not been averted, the fiscal standing of the United States has not improved, and the Market is not better off.—Fact.

To demonstrate one of the great hypocrisies of our time, Congress raised taxes on nearly 80% of all working individuals and named the new law the American Taxpayer Relief Act of 2012 – and then Wall Street applauded the Congressional fleecing by sending stocks higher: the Dow Average jumped 2.5% in the first four days of the New Year. The 15-51 strength Indicator showed more sanity, improving by a paltry .5%.  

The largest tax hike in American history was named the Affordable Care Act, which after Supreme Court approval in June 2012, begins in large effect in 2014. The new taxes provided in the Tax Relief Act are  layered on top of it. In short: the earnings of American taxpayers – Consumers one and all – are under siege! And that’s not good for Markets. 

Add to this mass layoffs that continue to plague the environment, most recently troubled Citigroup announced the layoff of another 11,000 employees. Job growth remains dismal, and the employment rate persists stubbornly at 7.8% – with 20 million people still unable to find work. Pressure to Consumer income has no choice but to negatively affect Markets and stock prices over the next several years. Despite this, stock valuations continue to rise.  

By all indications the 2012 holiday shopping season was weaker than expected. But "the market" has not considered the data.  After all, it has been distracted by the nonsense surrounding the "fiscal cliff." This, not to mention, that earnings season is still a few weeks away. Ditto for the release of 4th quarter GDP figures. As is usually the case with Wall Street, out of sight is out of mind. They live in the moment – and try to profit from every second of it. That’s their game. That’s the business of investment banking.  

Speaking of banks, they can expect to continue receiving extraordinary amounts of newly printed cash via quantitative easing (QE) from the Fed for the foreseeable future. Lower prices, driven mostly by lower fuel costs, have provided Ben Bernanke and his easy money allies plenty of room to keep printing new money. They give this new currency to banks for distribution – nowadays, these banks are all investment banks. (See: De-Institutionalize) In other words, QE provides investment banks with fresh new cash every month from the nation’s central bank (a.k.a. Federal Reserve.) 

And what do you think they do with it? 

That’s right, they invest it. That increased demand helps raise stock prices. That’s called stock market inflation, not growth! And that’s what you’re seeing right now in the stock market.   

Again, the economy isn’t growing nearly what it needs to in order to support its massively expanding government debt and obligations. To value the Dow this high up in the action zone is to value it as if some kind of economic boom is underway. So not the case. This is a new money rally with a blinds eye toward reality. It’s not Real. It’s inflation. 

By all accounts the tax raise called the American Taxpayer Relief Act of 2012 will generate less than $40 billion of annual tax revenue. Currently, and well into the foreseeable future, the federal government has an annual deficit of approximately $1.5 trillion.  In that regard, forty billion of additional tax revenue doesn’t amount to a pimple on an elephant’s ass. Pardon my French.  

And don’t you find it ironic that both Parties are looking to cut Medicare and Medicaid one year before the Affordable Care Act (ACA) takes effect? Remember, the ACA drastically expands Medicaid. Today’s budget cuts shrink a government program that has yet to begin. 

That’s your government working hard for you.

And that’s what Wall Street is applauding.  

The new money rally is not sustainable – just like unprecedented government spending and mounting national debt. A fiscal cliff is inevitable and unavoidable. When is the only question. 

That debate, and an effort focused on correcting the real problems of government spending and national debt, should begin in Congress on Monday, January 7, 2013 at the very latest. President Obama has already started it, willing to exchange dollar-for-dollar spending cuts for every new tax imposed on wealthy individuals and small business.—But wasn’t the tax issue just resolved!?!

The fiscal cliff is alive and well – and so is government incompetence.  

Caution to investors that think the critical fiscal issue has been resolved – and to those that buy into these stock market valuations.  

Stay tuned…

Coming Soon:
Asset Allocation: 2013 
Action Zone Update: 2013 

ShieldThe road to financial independence.™

Year Ended: 2012

Dan Calandro - Tuesday, January 01, 2013
Stocks ended the year on an up-note and didn’t look at all worried about going over the "fiscal cliff." The Dow Average rose 166 points on the last day of trading and ended up 7.3% for the year. The 15-51 strength Indicator added 3.1% on the last day of 2012 action and finished the year ahead by 24.3% – more than three times better than the Average. Gold, still entangled with the Dow’s trend-line, gained 6.6% for the year. See the chart below.
 

12-31

Stock valuations should still be considered high, or over-valued, in the midst of a slowing global economy, higher taxes, a depreciating dollar, and chronic political tomfoolery in Washington DC.

Make no mistake – Market conditions remain hostile!
 
These are good times to review your portfolio and asset allocations. 

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

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