Dan’s Blog

An Illness Called MDD

Dan Calandro - Monday, May 27, 2013

I diagnosed U.S central government with an illness I call Management Deficit Disorder (MDD) in February of last year. Since then they have shown no inkling of getting better. Instead the disease is getting worse, as widespread abuse is being uncovered everyday in Washington DC. It is a place gone mad.

In the face of widely available remedies, U.S. government continues to scorn recovery and turn a blind’s eye to history, fact, and logical reason. To them, somehow, a rotten basket of apples can make a fabulous pie. This derangement is a symptom of MDD. Others can be seen far and wide. 

This week a bridge collapsed in Washington state that sent two cars plunging into the still chilly waters of the Skagit River. In this latest example of government failure and incompetence, it is appropriate to thank God – not government – that no one perished in the failure. 

Built in 1955 on Interstate 5, the bridge was constructed with what is known as "fracture-critical" design. Somehow this bridge wasn’t included on the list of "shovel ready" projects funded by untold trillions of government stimulus spending. Get this…

The malfunction was caused by one tractor trailer, which bumped into one girder, which caused a chain reaction that collapsed an entire section of the bridge. Crazy I know, but hold on… 

This sort of chain reaction failure is common with fracture-critical design. Perhaps that is why state and federal engineers determined the I-5 bridge to be "functionally obsolete," and gave it a failing grade for operational safety (47 out of a possible 100). 

It’s hard to believe that sort of assessment can’t find any stimulus respect – especially when considering the economic impact at risk. Some 70,000 cars and trucks pass daily on the I-5 bridge; and they contribute approximately $100 million of economic activity every week. 

Traffic delays and re-routes cause the economy to slow down because products move slower and more costlier to markets – and at one hundred million dollars per week, billions of lost dollars will add up quickly in this one Washington market. 

But no, not one penny of trillions of dollars spent by government to improve the economy could find its way to protect a "functionally obsolete" main trading artery between the United States and her valued partner to the north, Canada. 

That’s your government working hard for you.  

And that’s why the return on investment with government always stinks. Their activity is not about markets and market activity, or profit and ROI.  It’s about politics – which always gets in the way of good management.  

The failed bridge in Washington is a fine example of fiscal mismanagement that hurts economic growth and vitality – but it is just one example. There are many more, and sadly, they all come in different shapes and sizes. Healthcare is a big one.

In an article entitled: Employers Eye Bare-Bones Health Plans Under New Law, the Wall Street Journal reports how companies are looking to trim healthcare coverage to comply with the Affordable Care Act (ACA). Did you hear that?  They’re reducing benefits to comply with the law.* Only in government can people keep their jobs when they create a healthcare law advertised to increase coverage and benefit while reducing costs and deliver the complete opposite. You and I would lose our jobs without notice.  

But as Nancy Pelosi predicted, we learned after it passed that the ACA really had nothing to do with healthcare. It’s about taxes and mandates of coverage. And as time is proving, companies are looking to trim healthcare benefits because government gave them incentive to reduce them. That's the easiest way to a single-payer system, after all.

The ACA uses tax policy to enforce mandates and regulations by charging taxes (penalties) to uncovered people and people with generous insurance plans, a.k.a. "Cadillac plans." In theory, the law then redistributes tax credits and/or coverage to people who "can’t" pay for it.  

In other words, the ACA penalizes people and companies who work hard to afford good healthcare coverage; taxes young people who don’t want or need it; taxes people who behave against their wishes; and rewards people who do nothing to help themselves. 

This is a major market problem. The ACA raises taxes, reduces market activity (see * above) and limits coverage and opportunity. 

And it’s going to get worse.

The reason the ACA is a landmark case is because it taxes behavior instead of activity. For instance, tobacco users will begin to pay a tax for using tobacco under the ACA. In this case the government is not taxing tobacco, but rather the behavior of using tobacco, as the amount of the tax isn’t related to the amount of tobacco used. The ACA, therefore, taxes choice, not activity. 

It also taxes inactivity. In other words, the ACA also taxes people for not doing something. In this case the government taxes people for not paying for healthcare insurance. Under this precedent, the government can tax any inaction – a tax for not serving in the military, a tax for not going to a state funded school, or a tax for not working in a union.  

This sets such a dangerous precedent that the Affordable Care Act should be repealed solely upon it. But the fact that it is producing a completely opposite result from its intended objective makes repeal justifiable more so.

Until then, however, it is important for taxpayers to acknowledge that the ACA is a tax law first and foremost, and as such, the Internal Revenue Service is the agency responsible for enforcing it. 

Yes, the same IRS brought in front of Congress last week to testify whether they illegally targeted conservative or republican groups, which they certainly did, will be in charge of enforcing Obama’s healthcare law. 

Is there any question that politics will drive medical decisions in the future?—and that those politics will flow through the IRS?  

And when that happens, we should expect much in the same as Lois Lerner who ran the IRS division currently in violation. She pled the 5th to the infraction and refused to answer any further questions. She was put on paid leave one day after she indicted herself.

Can you imagine pleading the 5th when the IRS shows up at your door?—let alone getting paid leave from work when they left?

It’s time to gut that pig. 

More chaos came to the tax cause when Congress hauled Apple CEO, Tim Cook, into Washington DC to testify about their tax practices. As you may recall, Apple recently raised $17 billion in a bond offering that paid approximately 3% interest to private sector investors. This pissed Congress off, as they wanted Apple to bring some of the $100 billion in cash they have in foreign bank accounts back to America. If they did so, Apple would have paid a 35% corporate income tax. 

Nothing to be confused about here: Why would anyone rather pay a 35% tax over a 3% interest rate?—And who walks among us trying to pay the most taxes they could possibly pay? 

Not even Obama poster child Warren Buffet does that – and in fact, he openly complains about not paying enough in taxes. But heck, not only could Buffet afford to pay more taxes but he is damn well free to do so. My advice to him: shut up and put your money where your mouth is, or go away.  

The main objective for every CEO is to maximize profit and shareholder value. Apple did that, and broke no laws in the process. And par for the political course, everyone on the Senate panel agreed to that. But this doesn’t change their motive: Congress badly wants idle corporate cash so they’re using cash rich Apple as a logo for their campaign to increase corporate taxes.  

That’s another symptom to the MDD illness. Spending four trillion dollars per year isn’t enough; Congress needs higher taxes to feed their insatiable addiction to spending. So they throw caution into the wind, ignore facts and logic, and do so knowing history will prove their policies incompetent. But they do it anyway.  

Those, too, are symptoms of MDD – which can easily be treated.  

For instance, someone once correctly stated, "If you want more of anything, tax it less." Want more growth, tax it less. Want more employment, tax it less. Want more prosperity, tax it less. 

It works because fewer taxes add incentive to profit.  

Here’s the problem again with taxes. Money is received through a central authority and then divvied out according to political agenda. Disbursements have nothing to do with profitability, return on investment, bettering markets, or protecting important trade routes like the I-5 bridge. Government spending is about politics, making things look nice and feel good, with other people’s money. 

Because modern day politicians throw around so much money, hundreds of billions are wasted or misappropriated every year. But instead of fixing their own operation, Congress clamors for more money and higher taxes while they neglect the real problems.

Take the repatriation tax issue that Apple faced this week. It could easily be remedied if Congress passed a new tax called the repatriation tax. The new tax would only apply to profits generated by American corporations overseas, and it would be taxed on capital returned to the U.S. The new tax rate could be 1% above the prime rate of interest, which is controlled by government. Government policy, therefore, would control the repatriation tax rate. 

That tax rate, today, would essentially be the effective interest rate of Apple’s new bonds.  

In such a case, central government would have received additional tax revenue based on the interest rates it creates, which is far less than the absurd corporate income tax rate. The move would encourage a stronger dollar and provide incentive for American companies to bring foreign earnings home. 

The market benefit is exponential.  

Figuring just the one company, the $100 billion Apple has in overseas accounts would now reside in American banks. This earned but new capital would increase bank reserves in America, make them stronger, and make it easier for them to provide more loans to other U.S. companies. This would make the American Market stronger, and best of all, it would drastically lessen the need for QE.

It’s a win, win, win.  

But no, instead our government wishes to penalize Apple’s success in order to fund more political shenanigans like "stimulus" and failed programs that continue to drain worth from the American monetary system. 

Misnomers like these are part of the MDD condition.  

And with the fiscal house is such disarray, persistent pressure on the monetary side is starting to wear on Federal Reserve chairman Ben Bernanke. He testified in front of Congress again this week and is looking increasingly more confused about the market dynamic he helped create. A few weeks ago he said QE efforts could either rise or fall; then a few weeks later he said he wanted to begin unwinding the program in June; and now he looks to be unwilling to move at all – but still open to dipping his toe in the water in the "next few meetings." 

He’s acting scared and unsure.

Of course, Bernanke knows what is all too plain to see: the moment he stops feeding the beast it will turn on him. In a matter of seconds Wall Street will begin acting like a bunch of spoiled brats looking for more candy. 

"The market" will undoubtedly sell off in dramatic fashion once Bernanke turns the printing presses off. Pressure will build immediately and a new focus will be placed on the deteriorating global condition. Democrats will blame Republicans, Republicans will look lost, and Bernanke will be under his desk until he is forced to face the music. And when that time comes, he will blame Congress, the President, and party politics for the disaster in front of him. 

Indeed, Bernanke will be right on that accord. But he was part of the team – a management team with an illness called MDD - that will have caused the next great correction.  

It’s time for the tough medicine. The monetary shell games must stop and stop right away. It’s the only way fiscal governance will find the courage to enter a corrective program and take the first step to recovery: acknowledgement of the affliction. 

A problem identified is 90% solved.  

But government isn't there yet. Investors should expect a rocky road from here.  

5-24-13

Stay tuned…

ShieldThe road to financial independence.™

Special Note: Hearts and prayers to our American brethren in Oklahoma who suffered a direct hit from another monstrous tornado. Stay Strong, Rebuild, and Be Safe. Godspeed!

 HalfFlag

Is Gold Dust?

Dan Calandro - Monday, May 20, 2013

Japan bucked the trend of bleak news this week by reporting GDP growth of 3.5% for the first quarter. While three-and-a-half percent growth cannot be considered a boom, it might feel like one in Japan. Their economy has never really recovered from the tsunami, and until this welcomed first quarter news, has contracted for six consecutive months.  

New Prime Minster Shinzo Abe won election on an easy money platform. He advocated that QE would make their currency more competitive in the global marketplace, and kick start an economy mired in recession. And he didn’t waste any time. Earlier this year Japan announced that they were jumping into the quantitative easing (QE) game.

As mentioned in On the Horizon, the debasing of the Japanese Yen caused the price of gold to rise there. This prompted many Japanese to cash-in their gold and buy things that they otherwise couldn’t or wouldn’t afford. The weaker Yen also made their goods (exports) cheaper to American consumers (importers.) This combination, more cash for Japanese consumers and higher demand for their exports, produced solid first quarter growth. 

But did QE fix their market?

There is much speculation about this. After all, lots of people want to believe QE is the answer for everything with no ill effects. Japan’s economy also has a long track record of stopping shortly after it starts. This makes modern day Japan an interesting case study. It shows how monetary policy affects consumer behavior and GDP while also proving two long lasting truths: when the value of currency goes down the price of gold rises; and inflation has nothing to do with it. 

So why does the price of gold continue to go down in a weak global currency market?

Gold is experiencing a correction: a normal readjustment of price to value based on mass market opinion. Indeed, there are some real shenanigans going on in the investment markets these days -- gold included. But there’s more to it than that. Gold is down 19% this year. That’s a big number, and it has prompted some people to describe the move as a bear market, an end to an era, or a definite signal that the dynamics of gold have changed forever. 

Those people can’t see the forest through the trees. 

Below is a chart that can easily be misread. It is a one year chart of the Dow and gold using daily data points.

5-17-13a

Those who have been following along know the true condition of this Market. They also know that the chart above is telling a different story. It looks to reflect a strong economy that is in expansion, with a stable underlying currency.

But that’s not the case in today’s economy.

As explained in my book, the 15-51 Indicator is an above-average portfolio designed and constructed to indicate how stock market strength is performing. It does this reliably – and as of now, is free from establishment manipulation. For that reason it tells a truer picture of stock market reality. The chart below is the same as the one above except the 15-51 Indicator is shown.  

5-17-13b

As you can see, stock market strength is also experiencing a correction. Since their peaks last September 2012, gold is down 24% and the 15-51 Indicator is off 20%. The Dow Average has yet to correct. It’s up a scary 17% for the year.

But twelve months does not make a track record. Below is a three year look of these three market gauges.

5-17-13c

Investing successfully is about achieving objectives, making money, and sleeping well at night. And the easiest way to do that is to build a better portfolio, have a long-term perspective, and stay in tune with "the market." That's the purpose of these blogs.

Corrections occur because marketable securities become either over-valued or under-valued. It’s normal behavior. And yes, each security and portfolio has their own unique personality. 

To make investment decisions in the moment for the moment is a decision made for all the wrong reasons in an untimely manner. Better decisions are made when investors look longer term with a wider view. The three charts shown above are for one and three years’ time. The first two charts used daily data points, the third used weekly points, and the one below is a five year chart using monthly data points. GDP trend lines are also inserted.

5-17-13d

Indeed, monthly data points smooth out the trend lines even more than weekly’s do. Here gold looks like it’s falling off a cliff and stock market strength looks to be building a base at this level. It’s also easy to see how average the Dow has performed since the crash. That is, of course, its goal. It looks to indicate the market (a.k.a. GDP).  

To be sure, monetary tricks like QE and Operation Twist can alter certain anomalies in the modern global market. But if they actually fixed the market, 16 out of 17 Euro Zone countries wouldn’t be in recession, American growth would be strong, and China wouldn’t be sliding into recession. 

To believe that the dynamic for gold has changed is to already have forgotten what was recently proven again in Japan: when currency depreciates the value of gold rises. To relegate gold’s value to dust is then to believe that the global currency market is stable, the global economy is strong, central governments are fiscally responsible, and the stock market is under-valued.

So not the case.

Corrections happen all the time. Monetary shell games don’t fix markets. And currency devaluation isn’t the way to prosperity. 

Stay tuned…

ShieldThe road to financial independence.™

One False Move

Dan Calandro - Monday, May 13, 2013

This week the Dow Jones Industrial Average did what it couldn’t do last week – it found the courage to close over 15,000 points for the first time in history. The chart below compares the Dow’s performance to Real and Nominal GDP; a discussion follows. 

5-10-13a

In terms of today’s dollar, the DJIA has 500 more points to go before reaching its 2007 high-water mark, and then another 400 points to regain its core objective – Nominal GDP. 

That brings an interesting question to light: Is it possible for the DJIA to be over-valued, and in fact irrationally exuberant, when it has not yet reached its objective (Nominal GDP)?

The short answer is: Yes, it is very possible. One quick reason is massive government spending programs that aren’t part of the stock market, like green energy "investments." While some of this activity is indeed reflected in GDP, companies like Solyndra and A123 battery aren’t likely to be included in the DJIA or S&P 500 any time soon. And when you consider the trillions being thrown around by governments these days, it’s easy to figure that GDP will never correlate exactly to major stock market indexes.

Reality is a lot of things – exactness isn’t one of them.  

But that doesn’t mean there aren’t legitimate correlations to stock values. I have written many times about the value of stocks, economic reality, and manipulation of major market indexes (see: Market Manipulation). The action zone is an excellent technique to illustrate the current status of the Dow’s value based on its historical trading multiples. 

The chart below is the same as the one shown above. The only difference is the entire action zone, the average range the DJIA has traded in the last 20 years, is shown. It includes three lines: a high (red), middle (yellow), and low (blue). See below.

5-10-13b

A few things are easy to see. First, the Dow clearly trades above and below its historical averages all the time. The action zone lines, therefore, are not absolute limits, but a range of reason used to gauge whether "the market's" value is high or low. Such a view can also help investors identifiy appropriate points to buy and sell. 

It is also clear that the Dow spends little time trading at the action zone mid-point. The yellow line indicates "fair value" in a stable economy. It is a point that the Dow should be trading around in an economy like this one - not a boom and not yet a bust.       

Investing success is most easily had if the bulk of transactions are made within the range of reason that is the action zone. It defines the Dow’s current value based upon the historical averages it experienced during times of economic expansion, stability, and recession. The action zone is a tool to help investors make their own decisions consistent with their objectives.  

So it's easy to see that the Dow is high here. But can it be considered irrationally exuberant when it is still 1,000 points away from the market average (Nominal GDP)?  

That should be more clear in a moment, but first a reminder: Investment is not about buying at the lowest and selling at the highest. That’s speculative trading. Investing is about buying low and selling high. Investing is long-term, and trading is short-term.

The advice and commentary in these blogs are directed from a long-term investment perspective to long-term investors. 

That said, few things are for certain: 1) Everyone is different, and each has their own risk tolerances, objectives, and timelines; 2) It’s easy to buy low and sell high if you can see them; 3) Patience is a virtue with success; 4) and most importantly, the best decisions to buy, sell, or hold are not inside some big box financial advisor or stock broker. They’re inside you.

No one cares more for your money than you do, and no one will do a better job managing you money than you will. This, of course, is not to mention that the Wall Street establishment is way too devious to play it straight. That's why they're always the last ones to tell you that the bottom will fall out of this stock market the first moment it can.

How can I be sure? 

Because "the market" has no foundation, no fundamental basis for its current valuation. Again, the Dow is currently valued above the pinnacle of the tech boom when Real GDP growth was 6%. The current economy has no Real growth, no boom, and unlike in the Clinton ‘90s, fiscal governance is on a chartered course to bankruptcy.

Fiscal and monetary mismanagement do not make the economy and/or stock market stronger. And that’s what we have.

In fact, just this week Federal Reserve chairman Ben Bernanke said this, "Even if we can’t indentify, and I’m fully willing to admit that there will be times when we can’t identify a bubble or some other mis-evaluation, our hope is to make sure the system is sufficiently robust."

In other words, according to Bernanke the Fed might not see an asset bubble being created in the stock market, but that doesn’t matter. As long as he keeps pumping trillions of dollars of new cash into financial institutions, well, then he’s doing his job. It doesn’t matter that he’s handing that money to those who are creating the stock market bubble. No. The only thing that matters is keeping them "sufficiently robust." 

I wonder how much Wall Street is paying him.  

Of course Bernanke pointed out several of the obvious – that free money makes banks less efficient, more risky, and more prone to huge loss and bailout. For those reasons Bernanke established higher capital reserves for major banking institutions, and is looking for help in Congress to expand the Dodd-Frank financial regulation to impose even higher capital reserves for, as he says, "the largest, and most complex Wall Street firms." This effort is to make institutions that are too big to fail, "safer." 

This from a guy who can’t see the asset bubble going on in the stock market right now; perhaps that is the "mis-evaluation" he was willing to admit to.  

Not me. Stock market inflation is easy to see. The Dow Jones Industrial Average is up 15.4% so far this year, some 25% over "fair value", and the economy (GDP) has barely grown. 

How is this possible?

Money – and to be specific, the money Bernanke is printing via quantitative easing and handing to the Wall Street establishment in order to make them "sufficiently robust."

And what do Wall Streeters do with that new money? 

They invest it in well diversified portfolios (sound familiar?), which besides making them more money, enhances their capital reserves at the Fed’s request. This action artificially forces the DJIA and S&P 500 to inexplicable heights. New record highs are then used as advertisements by the Wall Street establishment to entice idle capital off the sidelines from skeptical investors. It’s their version of dangling a carrot in front of a horse. 

Sadly, more evidence appeared this week that their campaign seems to be working. The Wall Street Journal reported that "small investors" are rediscovering margin debt to buy marketable securities that they don’t have the money to buy outright – "reaching levels not seen since the financial crisis." (See: Investors Rediscovering Margin Debt, May 9, 2013.) 

And guess where Wall Street gets that money to lend investors?   

Yes, the money from quantitative easing (QE) is being used to make banks and bankers rich, to inflate stock market indexes, and to entice "small" investors to bite off more than they should reasonably chew. This only adds more fuel (money) to the fire (an already inflated stock market.) 

It’s like the Fed and Wall Street are working together to fleece the investment public. And even though Bernanke may think he’s smarter than to let that happen, no one knows how to manipulate the market and jibe the system more than the Wall Street establishment. 

Caution to investors who trade patience for risk in this market.  

To be "all-in" on this market – let alone 125% or 150% with margin debt – is nothing short of crazy, and that includes people 25 years of age. No age is a good time to buy into over-valued and fragile markets; certainly not without first acknowledging a few fair minded considerations.  

Consider that the Dow sits 3,000 points above its normal average trade in a lackluster and slowing economy (a.k.a. asset bubble.) Consider also that central government spending must decrease by at least $1 trillion per year to be "balanced," a point in which revenues and expense are equal. Break-even government, or better yet surplus government, would reduce GDP and immediately shine a bright light on the fact that this stock market is extremely over-valued. Consider further that global Market conditions are deteriorating and the world seems ever close to another nasty warfront. And finally consider that it took the Dow almost 6 years to get back to where it was the last time irrational exuberance was in vogue. 

To buy in here is an extremely risky proposition. Here’s the chart again.

5-10-13b

Now, if you ask me if the Dow can keep going to 16,000 - I'd say yes, absolutely. But the higher it goes the faster it will drop when correction ensues.

And all that takes is one false move. Stay tuned for that.

In times like this asset allocation is key, cash is king, and 15-51 portfolios are better than anything Wall Street has to offer.

5-10-13c


ShieldThe road to financial independence.™

Real Shenanigans

Dan Calandro - Sunday, May 05, 2013

If the Wall Street establishment had any guts the Dow Jones Industrial Average would have blown past the 15,000 mark and ended the week comfortably above it, say 15.3 or 15.5. That would have made a huge statement that this Bull Run is legitimate and worth investing in, and not just another fluff and puff advertising campaign choreographed by the Street. But no, they didn't make that statement this week - even with a news cycle beneficial to their pitch.  

Bull Market advertisers see this stock market move as totally justifiable. They read recent headlines in the Wall Street Journal and say, consumer spending is beating expectations, housing in finally rebounding, the jobs situation is improving – and the Fed stands ready to help even more. Below are samples of those WSJ headlines this week.

Consumer Spending Rises

Home Prices Score Highest Annual Gain Since 2006

Job Gains Calm Slump Worries

JP Morgan Under Regulatory Fire

Fed Says Bond Purchases Could Rise or Fall

ECB’s Draghi Opens Door to More Easing

With these promising headlines and the prospect of a seemingly endless supply of free new money, one would think that the Wall Street establishment would have gotten drunk on the Fed’s tab and belched the Dow passed the 15,000 mark. You’d think.  

But no, that didn’t happen. Why?

Well, the consumer spending increase was just .2% in the most recently reported month. Economists (the "experts" in this story) were expecting zero change in consumer spending (a.k.a. no growth and no shrinkage). So to put it plainly, consumer spending is beating expectations, but only barely. It is growing, but only barely.  

This kind of fractional move adds up to 2.4% annual growth for the largest segment of the market (GDP). Take inflation out of the equation and the economy is almost standing still. 

Maybe it was this weakness that made Wall Street traders skittish about holding the Dow’s intraday high of 15,010 this week. 

Just maybe.  

There are so many people on and around Wall Street that believe housing is the key to economic turnaround – that somehow housing, or when people are comfortable "moving around" again, will remedy every Market woe.

So you’d think the recently reported 9% year over year advance in housing would be enough to propel the Dow up another measly 25 points by day’s end to symbolically close the week at 15,000.

But no, that didn’t happen either. Why?  

First and foremost, the notion that housing will fix everything is just silly. Banks – the institutions – must be fixed before housing can correct (see: De-Institutionalize); and as JP Morgan Chase and former rock star CEO, Jamie Dimon, can attest: major systemic concerns remain deeply rooted in America’s biggest banks. 

Housing remains ill because banks are still broken. Perhaps it was this grim reality that held Wall Street big-wigs from inflating the pot any more. 

Or maybe it was basic mathematics. After all, the gains experienced in housing in 2006 came at the tail end of a housing boom that began in the late 1990’s – with 2000 through 2005 being huge years of rapid price increases (a.k.a. inflation.) The ‘06 gain bettered an already very high ’05 value. 

But that’s not the case now. Housing gains realized this year are adding to a still very depressed 2012 value. In other words, this week’s housing news is no big deal.

Maybe it was this simple math that stifled the Dow from reaching 15,000 this week. 

Perhaps.  

But as we know, housing can’t possibly improve without an improving condition of employment. The unemployment rate ticked down ever so slightly this week, standing now at 7.5%. It has moved down .1% in three consecutive months recently. And while it might sound good that the unemployment rate is moving in the right direction, the broader employment gauge known as underemployment (U6) increased by an ironic .1% this month – and now stands at 13.9%. (see: Broader Unemployment Rate Ticks Up, WSJ online, May 3, 2013) 

To translate that large percentage into people, consider that there are currently 20 million Americans looking for better work (i.e. they are working part-time and want full-time work) or they can’t find a job at all. Twenty million, that’s a lot of people. 

Maybe it was the fact that so many consumers remain underemployed that scared the Street away from Dow 15,000 this week. 

Or perhaps it was a hindsight tally of first quarter earnings that shows growth to be just 2.5% over last year, and according to corporate reports and announcements, the rest of fiscal year 2013 looks weaker than that. This news alone could have scared off some big time speculators this week.  

But who knows for sure. Whether it was one of these specific reasons or combination of them all, the Dow Jones Industrial Average ended the week coyly at 14,975, up 1.8%. Stock market strength continued to bounce with the 15-51 Indicator adding 5% in the week. It looks to be building a base where it is now. Technical traders call this a "triple-top." See the chart below.

5-3-13a

That’s one year of activity using weekly data points, and there is little question that the Dow and the S&P 500 (not shown) are high at these levels. They are at all-time highs, after all. This is not uncommon. Stock values leap over fundamentals all the time. That’s not really the important point here. What is important to successful investing is to understand the nature and extent of stock market inflation when it occurs. 

The action zone is a mechanism I use to illustrate those points. The action zone high can be considered the line of "irrational exuberance." The Dow is clearly trading there. The 15-51 Indicator was up there in September but has corrected, and now resides around "fair value" (the action zone midpoint) – according to this chart’s timeframe. More on that in a second.    

Using history as a guide, right now the DJIA is trading at a market multiple higher than any point in the last 20 years. In fact, the last time the Dow was even close to this valuation was 1999 – the pinnacle of the tech-boom.  

This economy is nothing like that one. There is no bona fide boom, unemployment is too high, consumers are stressed, and fiscal governance is in major deficit. That economy was growing 5% in Real terms. This one is standing still.  

I have one more chart to show you. It begins in 2010, which is about time the broader stock markets reached "fair value." It has a little more than three years of activity with weekly data points. Take a look.

5-3-13b

From this view it’s easy to see that the 15-51 strength Indicator is still "irrationally exuberant." So when a broader market correction ensues the 15-51i will again slip in value. That’s the time to buy it. This buying opportunity will be just as easy to identify as the high selling point was in September (see: Strength Hits All-Time High, Again).   

That’s the best thing about the 15-51 method. When you know exactly how your portfolio is built, you know when it is high (time to sell) and when it is low (time to buy). Add this to an understanding of Market conditions and where broader market stock values are in their cycle, and what you have is a winning recipe for investment success. 

That’s the Lose Your Broker way.  

The pertinent question to ask yourself when making investment decisions right now is this: Is stock market activity based on economic expansion and vitality, or Wall Street shenanigans – is it Real, or is it irrational exuberance? 

Answer: To price today’s "market" above the tech-boom’s climax can be called nothing short of shenanigans -- in Real terms.

Stay tuned…

ShieldThe road to financial independence.™


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