Dan’s Blog

The Shape They're In

Dan Calandro - Wednesday, October 30, 2013

Labor statistics were reported last week and they stunk again, as just 148,000 jobs were added. A number twice that amount is good, but three times is what we really need. Even so "the market" instantly traded up on the weak labor stats. Why?

Because a poor jobs market means continued quantitative easing (QE). Every time the prospect of more free money comes into play Wall Street applauds with higher stock prices. That shows you how greedy they are, and more importantly, how stock market bubbles are created.

"The market" is up 20% this year, and the 15-51 strength Indicator is in positive territory for the first time all year. It’s up 6%. Gold continues to run contrary to Market conditions and is down 20% in the same time. And since the QE taper appears to be long off into the future, yields have reversed course. See below.


Every month I receive many emails, phone calls, and text messages about gold’s lackluster performance. Some people think they missed the upside and only lower valuations are in its future.   

I couldn’t disagree more.  

Gold is a different beast, indeed. It’s difficult to value because there is no business behind it – no operating structure, net income, or CEO. It’s a commodity, where value is derived by the market forces of supply and demand. But the basic fundamentals of gold are firm and true: the demand for gold increases during times of monetary uncertainty. Its value also rises during periods of monetary devaluation.  

To be sure, the price of gold has corrected, down 29% since reaching its all-time two years ago (see below). And it is also true that monetary conditions for world currencies have only gotten worse since reaching that high. That is to say that both gold and currencies are traveling the same downward trend.  

This paradox is reflective of the stock market, where all-time highs are happening with a weak and fragile underlying economy. These inconsistencies are not new paradigms but rather asset bubbles (stocks) and buy points (gold) that naturally occur in free market trading – especially when affected by ill-conceived government programs like QE. 


As I say in my book, staying ahead of "the market" takes little more than taking your cues from actual Market conditions – not pricing anomalies of marketable securities that are misleading, manipulated, and corrupted.

And that’s the shape they’re in.  

Stay tuned…

Deal -- What Deal?

Dan Calandro - Sunday, October 20, 2013

In what many hoped would end with a long-term solution to our Nation’s fiscal woes, all the drama and fanfare surrounding Washington DC ended in a thud, again. Last week a "deal" was struck to end the government "shutdown," and for all the perceived relief it brought, details are sparse. 

What exactly was agreed to? – What problem was solved? – How will it affect the economy?—and, What will it cost American taxpayers?

Since particulars are in short supply in the mass media, I figured I’d be the first to opine.  

The most recent budget "deal" is really a legislative appropriation authorizing $1.2 trillion of government spending that will only carry the federal government until January 15th, 2014; it also suspends the debt ceiling until February 7, 2014 – at which time the Treasury will again "run out of money." 

That’s not a deal – it’s an expensive delay

The new Congressional pact, which trades three months for $1.2 trillion dollars, solved absolutely nothing and puts the annualized run rate for American central government at $4.8 trillion for the year – twice the amount of tax revenues it collects! 

This fiscal dynamic dictates that tax hikes (a.k.a. "increased revenue" to government people) will be a major ingredient in the next budget "crisis" to be fought early next year. You see, government is slowly and gradually creating a crisis – just like they did with the housing-boom – where generations of taxpayers will again have to bailout poor government policy. 

It is crucial to highlight that the next tax debate has nothing to do with fiscal responsibility and fair share payments by "rich people." Instead, the forthcoming "revenue debate" is just another way for America to get distracted while being divided by social class warfare. It’s a total ruse, for two reasons:

First, there is absolutely no way to raise taxes high enough to pay for this fiscal imbalance. American taxpayers simply cannot close a $2 trillion annual deficit. Higher taxes will only allow government to borrow more money, and waste more money, than it can reasonably afford. In the meantime it will also divide the country along Party lines, where those supporting higher taxes for the "rich" are pitted against small government proponents.  

Remember, the American economy is already 100% leveraged. At the new rate of spending national debt will soar to 139% of GDP by the time President Obama leaves office in just three years ($25 trillion in debt against an $18 trillion economy.) This is an American disaster in the making; political party and social class should have absolutely nothing to do with it. To support this spending level is not just insane – it’s stupid. 

This is not good for money and markets. 

Second, higher taxes aren’t what the American Market needs to correct course. Higher taxes will only prolong and/or expand easy money policies, like quantitative easing, that are hurting the fiscal standing of the USA. At the same time, higher taxes reduce the incentive to profit in the private sector – the free-market side of the economy, where long term growth and prosperity derives. 

This in no way helps the unemployment picture (which is still above 7% and way too high), corporate profits (a.k.a. return on investment), or the prospects of inflation and rising yields.  

And that’s not good for the Real value of stocks.  

In the near short-term, however, stocks prices will continue to benefit from a strong QE breeze at their backs. But that’s not the growing wind of free enterprise. It’s inflation. And that makes stock market investing much riskier and more volatile – a condition more ripe for correction and over-reaction. 

While some impetus will most likely be required for that correction to ensue, it can essentially be anything: another major terrorist attack, escalating turmoil in the Middle East or Europe, a poor holiday shopping season followed by bad fourth quarter earnings followed by the next budget "crisis" – whatever the trigger, one of many possibilities can cause "the market" to dramatically sell-off.

The size of that correction, as with all corrections, is primarily driven by the amount of inflation residing in the stock market at the time the impetus presents itself. For example, more of a correction will occur in current conditions if the Dow is trading at 17,000 versus 15,000. That is to say that the severity of the correction, how steep the cliff, and how low the bottom, will be determined by the inflationary base and the nature of the impetus. 

And since no one knows the actual motivation for the next stock market sell-off, it is impossible to predict its exact timing, behavior and trend-line movements. 

However, it might be helpful to know that the stock market is valued 10% higher than it was at the peak of the housing-boom in 2007. Quite remarkable, if you think about it – because there’s no boom going on!

In ’07, the economy was averaging 6% growth for five years running. Today’s economy doesn’t come close to that, averaging just 2% per year for several years running.  

There is absolutely no economic basis for the Dow’s escalated value. It’s purely inflationary; and as a result, inflation must be the first thing considered when determining the scope of the next correction. 

At the present time there is approximately 3,000 points of inflation in the DJIA. Indeed, the Dow has recently made stock moves to bolster its performance. On September 23, 2013, the poorly performing trio of Hewlett-Packard, Bank of America, and Alcoa, which together had an average 5 year loss of 19%, were replaced with Goldman Sachs, Visa, and Nike, who averaged a 198% gain over the same five years. Again, the Dow’s objective is to indicate Nominal GDP, a level it has been unable to achieve or maintain since the last market top.  See below.


The Dow needed to rearrange itself. Its performance has been too far below average for far too long (with Nominal GDP serving as the true market average in this context.) In the time period shown above, from October 2007 to current, Nominal GDP is up 14% compared to the Dow’s 9% advance – a pathetic return by any measure. 

Stronger components will certainly make the Dow’s performance better from here on out; and it will also affect "the market’s" trend-line during the next correction.  

But that doesn’t mean the Dow isn’t over-valued here. It is.

Below is a three-year chart showing the action zone ranges: irrational exuberance (high), fair value (where the Dow should be trading right now), and the hypothetical low (a safe entry point for investors.)  The action zone is a good gauge to valuation when making your investment decisions. See below.


Because the Dow is trading above its average historical high doesn’t mean that it won’t go higher before correction. Stock markets have a history of over-reacting – especially when Wall Street is drunk on easy money (like: the tech-boom, the housing-boom, or the QE-boom.) 

This also doesn’t mean that the Dow won’t bottom out much lower than the "low" indication noted by the blue line in the above chart. Free market trading is not finite. Inflation and speculation run wild during booms and busts. Average highs and lows are commonly breached. The action zone, therefore, should not be viewed as absolute, but rather a gauge based on average historical pricing multiples. 

Additionally, it is worthy to note that a rise in the DJIA doesn’t mean that the economy is getting better, or stronger. Remember, the Dow is just a stock portfolio – one that has been recently restructured to produce stronger performance and better returns. The stronger portfolio should fare better from here to the next correction – but maybe not. 

The stocks the Dow took out were already beaten up, and therefore low in valuation. The stocks it added were highly inflated. This dynamic could make the next correction very steep – and that might cause panic.  In any event, "the market" has sent a prudent message to investors – all-time highs are a great time to rethink your portfolio, its components and allocations.

Some investors have already made their moves and have been defensive for a long time, and who could blame them, with just 5% - 15% in stocks. It is natural for them to feel as if they’ve missed something, especially if the Dow continues to move higher. Of course, that’s only true if objectives are not being met. If objectives are being achieved nothing is lost. 

However, if more money must be made through investment than what is currently being made, more risk must be taken, i.e. a larger stock allocation. Only you can decide how much is right for you. But to invest now one must be convinced that "the market" will go higher from here and a safe and profitable exit can be reasonably had. It must be worth the risk of investing at all-time high valuations.  

That said, I can easily see the DJIA moving higher from here (15,400), especially with all the QE money being handed out these days. For the Dow to achieve its Nominal GDP objective (and with a new, stronger portfolio that possibility has increased) it would have to trade at 16,168, a 5% lift from today. I can certainly see it getting there. 

More government debt will breed more QE, and thus more money for the Wall Street establishment – those drooling to push the Dow higher.  And should the Dow continue on and reach 17,000, defensive investors should care less. Let others play with fire. Stick to your plan.

My book, LOSE YOUR BROKER NOT YOUR MONEY, is a total guide to investing. Those who have read it understand these blogs better, and appreciate the superiority of 15-51 design. My market portfolio, the 15-51 Indicator, is a portfolio designed and constructed to indicate stock market strength. Its objective is to produce above-average stock market returns (where the DJIA indicates average performance) and it reliably does so.

The 15-51i portfolio has gained 87% since the ’07 top (compared to a 9% Dow gain) – and unlike the Dow, its stock components haven’t changed since its inception (January 2, 1996.) The complete portfolio layout can be found on page 162 of my book. Its complete performance track record can be seen by clicking the shield below.

Superior construction. Superior performance. 

ShieldThe road to financial independence.™

Compromising the Debt Limit

Dan Calandro - Saturday, October 05, 2013

A little sanity needs to be inserted to the conversation regarding the government shutdown and the debt limit. Let’s begin by eliminating one easy distraction: the government shutdown is not an actual "shutdown." It’s a temporary minimization of government. The people furloughed (or temporarily laid-off) during this time will be paid their full salary for missed time (a benefit only enjoyed by those working in government.) The farce of a shutdown begins with the facts that government still operates and that it still has plenty of resources to appropriate funding to satisfy all necessary U.S. obligations.

That is to say that the "shutdown" is purely a symbolic gesture. 

The big issue, and the larger fight to be had by any measure is regarding the debt limit – Whether or not Congress will raise it, and if so by how much? According to most people connected to the issue the U.S. Treasury is expected to "run out of money" by October 17, 2013. 

To put it truthfully, the U.S. government will not "run out of money" if the debt limit is not raised. Tax revenues will continue to arrive at the Treasury almost everyday; and the total tax collections for the year are expected to be between 2.5 and 2.7 trillion dollars. That money can be spent without raising the debt limit. So it is utter nonsense to think that the Treasury will go broke without adding more debt. 

However, not raising the debt limit will force Congress and the President to spend less money than Barrack Obama’s most recent budget proposed (note: this budget, along with every other Obama budget, has not been approved by Congress). Not raising the debt limit will force a balanced U.S. budget, which represents a decrease in spending of about $700 billion to $1 trillion per fiscal year. In such an instance, (a central government that lives within its means), there is no reason for the Treasury to issue additional new debt. 

Here’s the heart of the problem: the U.S. government is big, fat, and so sloppy that it can’t run on a balanced budget even without the Affordable Care Act. Not raising the debt limit will automatically defund the ACA, along with a lot of other pork barrel spending programs. 

This is exactly what America needs. (See: The Fiscal Cliff We Need for more information.) But again, the problem in Congress is that courage is a rare commodity, and that doesn’t go over well with a leader that is a tyrant.  

Now I don’t know about you, but I vividly remember the government shutdown during the Clinton years (Reagan had a record eight government shutdowns during his tenure.) In any of these cases, and specifically with the Clinton shutdown, our national monuments were not barricaded.—And by the way, who paid those people to barricade the monuments if the government has no money? 

Also recall the last time President Obama didn’t get what he wanted (he wanted to avoid spending cuts known as "sequester" that took effect earlier this year) his justice department released criminals and illegal immigrants with violent criminal records because they "couldn’t afford detainment and processing." 

When Obama loses politically – he punishes the population. That is not the definition of a leader. It’s the definition of a tyrant, the likes of which we haven’t seen since Woodrow Wilson.  

The American Market is in complete disarray under the management of a paralyzed, corrupt, and punitive government. If the Republicans had any guts or conviction they would hold tight and not raise the debt limit without a complete budget overhaul that puts pro-growth policies and fiscal responsibility above all else.  

It’s time to gut the pig that Washington DC is, and trim the fat of a bloated central government. 

Let’s put this debate into proper context…

Just five years into Barack Obama’s eight year presidential term he has spent the total of America’s GDP, a whopping 17 trillion dollars – approximately 10 trillion dollars from tax revenues collected plus an additional 7 trillion dollars from an increase in national debt. If the White House’s budget forecast is correct, 8 trillion dollars of tax revenues will be collected by the Treasury in his final three years as president. That is to say without any additional new debt Barack Obama will have spent 25 trillion dollars in his two term presidential tenure, an extraordinary amount in the very least.  

So I ask: How much is enough? How much more shall he get to spend as president with nothing to show for it but meager results and failed promises? 

It’s time to call a spade a shovel.

Obama is a below average performer, a below average investor in the American economy. Let his green energy program serve as proof positive of that. Add to it, if you will, the extremely poor and amateurish launch of the healthcare exchanges. It was a bona-fide failure, an embarrassment by any professional measure – especially when considering the amount of time and resources at the president’s disposal prior to launch.

The question is not whether or not Obama will have more money to blow for the remainder of his presidency; it’s about how much more debt does he deserve? 

As mentioned, no less than $8 trillion more will flow into the Treasury’s coffers during the rest of the Obama administration. That’s our money!—and we should demand a better return on investment than his track record has produced.

We the Taxpayers of America are government’s largest investors. And while yes, for some reason that government cannot live within its means, it must borrow a trillion dollars per year to cover numerous failed programs it has employed. The lenders, like China and Japan, will indeed get their money back plus interest. 

But what about us – What do We the People get for our substantial investment?

Social Security is bankrupt and Medicare is failing, and nothing has been done to fix them. The collapse of the financial markets in 2008 was a government driven disaster, bred and fed by Congress, Fannie Mae and Freddie Mac, and misguided presidents. Like the aforementioned social programs, even the affordable housing Act (CRA) got off to a good start before it completely collapsed the financial markets some thirty years later. 

If the launch of the government healthcare exchanges is any indication of the ACA’s long-term future (which I truly believe it is) America is in big trouble unless that program can be drastically altered before its tentacles get too deep. Government programs don’t get better or more solvent over time. History has proven this time and again.

That said, the opposition should be proposing major and legitimate changes and eliminations to the healthcare law in exchange for extremely limited funding. Zero funding appears to be a losing cause. There simply isn’t enough leadership and support for it in Congress. Add to this that President Obama has already acknowledged several problems with the law, one can only deduce there is plenty of room to compromise.

For instance, the best item that can be found in the new healthcare law is coverage for preexisting conditions. Everyone in America likes that option. So how about we crawl before we walk and fund that portion of the ACA. In other words, fund persons with preexisting conditions in dire need of healthcare services. The tax penalties received from young people who don’t buy healthcare insurance can be used to pay for preexisting subsidies. This would give time to the exchanges to get their act together, and it will also provide time and history to measure the success of the program before jumping into the whole thing head first.  

In exchange for that healthcare integration, and drastic revisions and eliminations to the ACA, Republicans should then raise the debt limit by some defined number, let’s say, another $1 trillion. But it would be capped there. That would give President Obama a $333 billion deficit each year for the remaining years of his presidency (not to mention the right to spend the $8 trillion he receives in tax revenues.)  

Hey, there’s no such thing as a free lunch. Nobody is 100% satisfied in a world with compromise. But it’s necessary to move ahead.  

Besides, if Republicans can get something really good for the additional debt they give up then they won’t look like such losers in the eyes of their base and peripheral independents. Democrats would get a budget with initial ACA funding, and for the most part, could claim victory for that.  

Now more than ever it’s about minimizing the downside and protecting your flank – with government and investing.  

More drama will follow and it will surely affect markets. 

Stay tuned…

ShieldThe road to financial independence.™

PS: When I tried to pull actual numbers from the White House website to report in this blog here’s what I found.  


It’s amazing how little freedom $2.5 trillion buys these days while barricades are plentiful.

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