Dan’s Blog

Two Quarters and Half Left

Dan Calandro - Sunday, June 30, 2013

The second quarter of 2013 ended with a bit of trading turmoil. Stocks were down, up, and then down again. Gold was down, down, and then up. Market interest rates were down, up, and then even. 

Through six months the Dow Average is up 14%; 15-51 strength lost 11%; gold, along with all the talk about it, dropped 27% while the 10 year T-Note has quietly gotten clobbered; the yield has risen 41% so far this year. See chart below.


That’s the first two quarters of activity this year; and now that we're at the midpoint of the year, right around the corner is another earnings season. This is of great interest. 

Last time around there was general consensus among corporate executives that the second half of 2013 would be worse than the first. Now just one small step away from that second half, their projections should be more accurate this time around. This provides great insight into future stock market movements.

Years roll by in quarters, and since investors generally invest for an increased future value, the future is always at play in the stock pricing dynamic. Revisions are part of the game. For instance, the performance of a stock in any given year is determined, to some extent, by the activity and performance of the underlying company in that year. Once at the midpoint of the year, only six months are left to achieve the company’s annual objectives. As a result, estimates for the year are usually fine-tuned, enhanced, and/or adjusted around the midpoint of the year. 

That time is now.

The process of revision happens at every level of reporting. In fact, just this week, and as the second quarter of market activity officially ended, its predecessor, the fiscal 1st quarter of 2013, stole the news. GDP was revised down to 1.8% from the previous estimate of 2.4%. This is a significant adjustment for a third revision, no doubt, but it doesn’t change the economic picture in any major way. 

The problem with the economy from the very start and ever since has always been unemployment. Fractional adjustments to GDP are minor and of little consequence. The problem is that way too many people are still hurting badly and unable to find work. In a recent article entitled, Some Unemployed Keep Losing Ground, the Wall Street Journal reports that almost 12 million Americans remain unemployed – a stunning 4 million more people than when the recession officially began in late 2007. That, by itself, is enough to cause economic lethargy – let alone the trillions of dollars central government has wasted for this not to be the case at this stage of the game. 

Government waste is a drain on economic wealth and prosperity.    

Also in this week’s news, it was revealed that officials from all the largest banks in the U.S. presented restructuring plans to the Federal Reserve should another "crisis" occur. While indeed banker input is required to handle such a dilemma, this news sounds too much like the inmates running the asylum to me. I mean…

Why are banks planning for disaster instead of planning that disaster never again happens? – and wasn’t Dodd-Frank supposed to stop any such crisis from ever happening again? – and before that, wasn’t Sarbanes-Oxley supposed to avoid the very same disaster?  

There’s so much regulation on top of regulation that it is paralyzing American businesses, and more importantly, its financial system. Bankers are planning for disasters instead of charting courses of economic growth and prosperity. And as an FYI, planning for failure is not sound management – it’s cover your ass politics. 

To fully appreciate this and the poor state of governmental affairs one needs to look no further than the Vatican. Remember, newly elected Pope Francis came to office with a promise to clean up the scandal plagued theocracy and religious organization. His election was just a few months ago. And now, this short time later, three arrests have been made for money laundering connected to their sovereign bank.  

The poor state of money and market governance extends to every political corner. 

Let’s step back for a moment.

If banks are planning for another catastrophe then only one thing is certain: the possibility of another crash is likely. Banks by and large know all too well, as the Fed does, that options are extremely limited the next time shit hits the fan in the financial industry. Debt-to-GDP ratios are well over 100% all over the world, fiscal waste and corruption is prevalent everywhere. And with massive amounts of new currency already in the system, excessive additions to money and debt wouldn’t be tolerated during the next disaster without a severe rise in interest rates. This would cause calamity in world markets, most notably the Euro – and it scares the Dickens out of American bankers and world governors alike.

Money problems bring about societal problems, hence the increased number of revolutions occurring throughout the under-developed Nations of the world. Those places, where free and fair elections are in short supply, resort to violence to change policy because it seems like their only choice. Dictators simply don’t leave office easily. And so rebellions rise. 

Indeed, all regions and countries have their own way of turning things around. The Vatican has their way, and the Middle East has theirs; Europe has hers, and America has ours. How rarely, though, are these rebellions ever caused by something other than fiscal mismanagement and government corruption. 

The global condition for Markets remains under severe pressure. Economic activity remains stagnant or shrinking, debt is ballooning, and monetary value and interest rates are moving in opposite directions. 

Perhaps that's why some are planning for the next disaster. 


Stay tuned…

ShieldThe road to financial independence.™

As Good As Gold

Dan Calandro - Sunday, June 23, 2013

Almost a month ago I posted a blog about the sorry state of the Market’s management team. Towards the end of that blog which was titled, An Illness Called MDD, I say this:

"Of course, Bernanke knows what is all too plain to see: the moment he stops feeding the beast [with QE] 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." 

You saw a glimpse of that behavior this week.

Last week investment markets started to rattle from the moment Federal Reserve chairman Ben Bernanke mentioned his approach to terminating the quantitative easing (QE) program. The media portrayed the market as "confused" by the Fed’s statements.  I’m not sure how that could be; Bernanke’s statements couldn’t have been clearer.  

In my opinion, there’s only one thing to be confused about – and that’s the value of gold. In fact, gold best symbolizes the dysfunction in "the market." Currency is weak, debt is ballooning, and central governance continues to demonstrate corruption and incompetence. These conditions are ripe for gold – yet it continues to sell-off, dropping another 6.5% last week. But other than this anomaly, everything else is doing exactly what logic dictates.  

On Wednesday of last week Bernanke once again reiterated his intention to begin tapering QE activity in just a few months time. In two days of trading, Wednesday and Thursday, the Dow dropped 560 points. It ended the week down 2.5%. 

Stock market strength also suffered a setback, the 15-51 Indicator lost 4% in the trading week. Bond values also continued to fall, with yields making the most of the Fed's statement and spiking 18% in the week. Below is a chart of this year’s activity.


Why would yields (market interest rates) rise so dramatically upon news that QE will be ending?

As mentioned in last week’s blog, half of the $85 billion that the Fed prints every month via QE is used to purchase U.S. Treasuries. And as we know, foreign investors have recently sold a record amount of U.S. debt. Together they produce much less demand for U.S. government debt, a condition that causes values to fall and yields to rise.

Less Demand + Increasing Supply = Falling Bond Values (rising rates)

There’s absolutely no reason to be confused here – unless, of course, you are part of the Wall Street profit machine. They like chaos. It creates volatility and uncertainty – and they make money from it big time.

I caution you not to get caught up in their aim to gain.

In this high stakes monetary shell game, it is apparent that Ben Bernanke now sees the asset bubble being created in the stock market – and on his balance sheet. He seems now to know that the QE program has outlived its usefulness and is becoming a dangerous tactic leading to a dead end. He now sees what has been evident to outsiders for a long time. 

Nevertheless, there was great debate on CNBC following this week’s Fed comments with so many "experts" confused about the Fed stance, and actually arguing that a tapering of QE does not tighten the money supply. These people argue that any level of QE above a zero amount (even if it is less than the $85 billion of new money Wall Street currently gets) still adds to the money supply, and therefore, not a "tightening" event. 

That’s just silly. Those who argue that position have absolutely no concept of a household budget – something, by the way, not taught in college classrooms. 

Think of it this way: If your household income dropped 10% in one month – an equivalent to a QE move from $85 billion to $75 billion – would money be tighter in your household?  I mean, I just can’t buy into the opposing stance that money isn’t tighter because you’re still earning money. It doesn’t make sense to me – or the markets.  

Yields are rising because demand for bonds is weakening, and according to the Fed, money will get tighter from here on out (also a condition for rising rates.) There should be no confusion why bond values are falling.  

Ditto for the stock market. Stocks fell at decent clip this week for all the right reasons: stock prices are over-valued and can’t possibly be sustained without the current level of QE. Any drop-off in it will cause some level of correction – so stock values fell.

Monetary manipulation aside, the stock market drives off of Market growth. The economy, while somewhat stable, is not producing the growth needed to sustain legitimate recovery and lofty stock market values. Without such growth, escalating stock values are baseless. That’s what makes impending correction so obvious.  

Indeed, this week’s stock market activity could certainly be the beginning of a lengthy correction process. Second quarter earnings’ season is right around the corner, and based on the general consensus among large corporations after first quarter earnings were released, market activity for the second half of 2013 is expected to be considerably less than the first half. 

Slowing growth rates and profits, along with less money supply via QE, will continue to pressure stock prices down further. 

Gold, like stocks, is mis-valued; and both are due for major reversals. To get a better gauge on the value of gold, below is chart from the previous market top, October 2007, until now.  See below.


Gold is approaching its average trading value since October 2007, the last market top before major correction. It rightfully had a major run-up during this period because the money market crashed – the perfect condition for gold. Like the 15-51 Indicator, gold has been experiencing a correction that started in earnest late last year. 

People always ask me, Is it time to abandon gold?

Answer: No.

Long term investors fully understand the Market condition, its horizon, and fundamental dynamic. The global condition for currency and debt are abysmal and on a course to get worse. Corrections are part of the game – and they go both ways. As such, a gold resurgence should be expected as things worsen in the stock market. 

That’s the way it goes.--But we’re not there yet.  

My recommendation to you: put yourself in the investment cycle. Convince yourself that you have made money all the way up, in both stocks and gold. Position yourself, right now, for maximum opportunity when things go haywire – when stocks correct significantly to the downside, interest rates spike higher, and gold reverses course.  

In these conditions cash is king, bonds are a future opportunity, and gold is as good as gold.  

Stay tuned…

Money, and the Federal Hedge Fund

Dan Calandro - Tuesday, June 18, 2013

Foreign investors sold a record amount of U.S. government debt in April 2013. It was just $60 billion of U.S. Treasuries, but it was a record nonetheless. And when you consider that U.S. central government needs approximately $85 billion of new debt every month to cover its fiscal losses, the $60 billion dollar move is a big one.

The move was also enough to change market trends. Yields started to rise at the same time gold started to sell-off, also in April 2013. Rising yields are often associated with a strengthening currency, as the future value of a dollar is rising because more monetary interest is being paid. But so many other things factor into that equation.

Bond values and market interest rates (a.k.a. yields) have an inverse relationship. When bond yields rise, the underlying bond value falls. Excess supply, which can be caused by more selling activity than buying, can cause yields to rise (and bond values to fall). That has happened – and the record sell-off is at least partly to blame. See below.


The above chart clearly shows escalating yields based on the 10 year T-Note; a correction in gold followed by a stabilization in its value. The value of gold normally falls when currencies strengthen. But currencies aren’t strengthening. World currencies are weakening under cheap and easy monetary policies – the U.S., China, Europe, and Japan, have all implemented monetary devaluation techniques – yet the value of gold continues to be soft. 

What’s going on?  

A few things. 

First, there is now becoming an excessive supply of U.S. government debt on the market. Too much supply and not enough demand will cause prices (yields) to rise without a strengthening currency. That’s what’s happening right now.

The U.S. federal government is currently on pace to spend $3.5 trillion this year. Its revenues (tax receipts) are expected to be $2.5 trillion. The net of the two amounts to a $1 trillion annual deficit – an all too common occurrence. To cover this shortfall the U.S. Treasury must issue new debt. This new debt is on top of the existing outstanding balance of $17 trillion in debt. 

There’s a lot of U.S. debt out there, more and more supply with each passing day.

Second, and perhaps more importantly, the appetite for sovereign debt and bloated government spending budgets are starting to wane under persistently poor economic conditions. This environment fuels the fire for higher interest rates. You’re seeing that right now with the 10 year yield.

Fiscal deficits incurred by U.S. central government create the need for additional U.S. government debt – a.k.a. U.S. Treasury securities. These new bonds must be sold. And since the Federal Reserve is hell-bent on keeping rates artificially low into the foreseeable future, those bonds "go public" with rock bottom interest rates. After their issuance free market activity takes over and determines the value of those bonds and their effective yields.

If investors demand more return on their investment than the issued interest rate the value of the bond falls and the yield increases, thus offering more incentive to investors to buy bonds. That’s the theory of supply and demand at work. If governments don’t have a stable working market for their debt activity (like too much supply with too little demand), interest rates rise and become volatile. 

If this happens in America it will have major global impact. 

The U.S. sets the standard for worldwide interest rates – and rightfully so, as America is the only sovereign nation not to fink on a debt. Because of this track record of perfection, the interest rates on U.S. Treasury debt are considered to be the risk-free rates, and thus pay the lowest interest rates on the planet. All other global interest rates drive off of the U.S. interest rates. That’s what makes them so incredibly important throughout the world.

Interest rate management is a core task for the Federal Reserve, which many people don’t know isn’t a government agency. The Fed is a pseudo agency – private by design, but public by nature. It is a private entity to ensure "independence" in promoting a monetary policy that is free from political intrusion and corruption. Its mission is to ensure a stable, healthy, financial system. It serves, therefore, a "public" function, and because of its inherent powers provided by law, the Fed is required to periodically testify in front of Congress. 

But this oversight is moot. 

The Federal Reserve operates without scrutiny, fear of audit or financial disclosure – by law. In fact, Americans know more about what the CIA and U.S. military are doing than its central bank. This is a major problem knowing the history of "public-private" government partnerships in the financial industry (i.e. Fannie Mae and Freddie Mac.)  

I contest that if the Federal Reserve is the Nation’s Bank, and the Nation is We the People, then the Federal Reserve is the People’s bank. We should then know exactly what they’re doing – especially when they are taking on such great risks.

But we are not obliged.   

This kind of autonomy breaches every Constitutional tenet of our founding – and it corrupts Markets.  

Let’s take this point from a different angle. Central banks are run by central bankers, and among them there is a general consensus to continue cheap and easy money policies, QE, and Twist like operations. They condone and prolong their monetary position by citing that inflation is mute and no big problem, and the economy remains fragile. But let’s face it – they’re bankers; they want more money. Money is their business. And until inflation as they define it becomes a major issue, then they can keep printing new money in an unfettered fashion, and use it to take on any risk.

I have four quick points to make here.

First, any time world government leaders all agree on something, then that something usually turns out to be really bad for We the People. It never fails.

Second, central bankers do not include food and energy costs in their inflation calculus. Under this blinder, cost of living could easily reach 6% while "inflation" remains "mute." This limitation increases the propensity of the Fed making untimely moves, like waiting too long to raise interest rates like Alan Greenspan did during the housing boom. The Fed has a habit of doing this.  

Third, Wall Street investment banks serve as the clearinghouse for the Federal Reserve’s activity. It is they who sell the bonds and arrange for buyer markets. It is they who benefit most by the exchanging of "toxic" assets for freshly new printed cash – and with all that new money, Wall Street firms do exactly as they espouse: they invest it in "well diversified" portfolios. Asset allocations in commodities like, gold, corn, and oil, are part of that formula; and as such, the increased trade activity raises the prices of food and energy products. 

In a nutshell, excessive QE causes an escalation in food and energy prices as well as stock market values because new QE money creates additional demand for the same level of supply. 

More Demand + Same Supply = Rising Prices (a.k.a. inflation)

Inflation matters least to those receiving free money. (See: Food Stamps & QE). This helps the Wall Street establishment, who look to profit on rising prices; and hurts Main Street, who can only afford what their earnings will bear. This hurts Markets overall.

And fourth, the Fed sets unilateral market limits on its self imposed "dual mandate" of low inflation and minimal unemployment. Unemployment is a relative term to them, but with inflation the Fed sets a hard target. Right now it’s 2%. The problem with this is managerial.

Targets always move in Washington DC – they’re notorious for it, in fact. If the economy and job market still show signs of fragility when the 2% inflation target has been reached there is little doubt that the Fed will raise its inflation target to 3%. I mean, three percent inflation isn’t all that bad, right?— excluding food and energy prices, of course.  

These four conditions are troublesome enough, but they are not the worst of the problem. Repeating failed history is.  

Just like Fannie Mae and Freddie Mac did during the run-up to the ’08 crash, the Federal Reserve has turned itself into a titanic hedge fund destined to hit an iceberg. Indeed, their inherent powers make it a much different case than Fannie and Freddie. Unlike them the Fed could print as much money as they’d like to stay solvent, and to "invest" in whatever they choose without fear of reprisal, audit, or financial disclosure. They could be in worse shape than Fannie and Freddie were when they failed and we’d never know it.

Those who have been following these blogs know that quantitative easing (QE) has been used to purchase "toxic" bank assets in the aftermath of the crash to the tune of several trillions of dollars over the past five years. They also are the largest purchaser of U.S. government debt. 

In other words, the Fed purchases more of the fiscal losses created by U.S. government than any other investor. Accumulating massive amounts of losses and toxic assets just doesn’t sound like good business to me. Of course, it’s only feasible if you control the printing presses – like the Fed does.  This action enables irresponsible fiscal governance to persist. It creates a debt balloon and puts currency in crisis.  

Stealing from Peter to pay Paul is not sound economic policy; it’s not sound monetary policy, and it’s bad for Markets. To think otherwise is to believe that these actions, purchasing toxic bank assets and toxic government deficits, actually strengthen the Federal Reserve and the U.S. dollar. 

This defies logic. 

The Federal Reserve and all other central bankers must quit their addiction to printing new money to cover the fiscal losses and toxic assets created by incompetent governors. The Federal Reserve is a bank – not a hedge fund. It’s only a matter of time until their actions cause inflation and interest rates to rise. And it will have cataclysmic world effect.

As market interest rates continue rise in America, it’s only a matter of time until yields rise in Greece, who can’t afford themselves at their current 7% interest rate. If interest rates rise to 10%, 12%, or even worse 15%, Greece has no chance to remain solvent. Weaker countries like Cyprus will fall sooner, and later the Euro will either collapse or be restructured. This will bring about a major reset in money and debt (the bursting of the debt balloon) that will pressure world markets, increase investment volatility, and expose market dysfunction.  

For instance, gold should in theory be tracking the trend line of interest rates presented herein, as a devaluing currency will cause a rise in interest rates and gold alike. To put it another way, gold and yields should travel accordingly because currency devaluation is prominent. But that’s not happening right now. See below.


Gold and yields are clearly moving in opposite directions. Such a controversy, along with the dichotomy in stocks, signals a dysfunctional Market. Investors who know this can appropriately plan to capitalize on it. 

Investors who don’t know this are sure to get blindsided again.

Spread the word, stay tuned, and let me know if you need help.

ShieldThe road to financial independence.™

The Lose Your Broker Solution

Dan Calandro - Thursday, June 13, 2013

Since there was little change in the news this week I’m going to take this blog in a slightly different direction. I was struck by a recent Wall Street Journal article entitled, The Weekend Investor: 100% Stock Solution. The article reported that 9% of all mutual fund investors are "all-in" on the stock market. What a huge mistake for 8 million American mutual fund owners. 

There is no such thing as a 100% stock solution – ever! 

I’m one of those people who believe investors should never be all-in, or all-out, of any stock market. But that’s beside a very important point – a multiple asset class portfolio makes decision making easier, earns profit more efficiently, and when combined with superior 15-51 construction, produces more reward with substantially less risk.  

The correlation between risk and reward isn’t how the Wall Street establishment portrays it to be. In my book I show investors how to build a high-powered portfolio using my award winning 15-51 method, which is designed to consistently deliver superior performance results with less risk. The long-term track record of the 15-51 Indicator is proof positive it works (a complete listing of stocks and their according allocations is detailed at the end of chapter 5).

The purpose of building a better mousetrap is to make more money with less portfolio risk. This dynamic affords the investor the opportunity to carry a cash balance and not feel guilty about "missing" stock market gains. A cash balance promotes efficient investing because capital is always available to buy stocks low during stock market sell-offs. Without cash on hand, an investor must sell something low in order to buy something else low during a sell-off. And that’s not efficient or effective.

I’m going to show you a series of charts to illustrate the benefits of a multiple asset class portfolio. The first chart compares "the market" (DJIA) to the 15-51 Indicator (15-51i). See below.


In the two year period since LOSE YOUR BROKER NOT YOUR MONEY was published, the 15-51 Indicator advanced 30% compared to the Dow’s 20% gain. Be reminded that both of these portfolios are comprised entirely of stocks, and as such, are "all-in" on the stock market. Also recall that the 15-51 Indicator has been in correction mode since September of last year. The Dow, lagging behind, has yet to correct. 

The best thing about creating your own portfolio like I did with the 15-51 Indicator is that you totally understand its personality and behavior. As shown above, superior 15-51 construction makes it easier to manage your portfolio because "high and low" are plain to see. And since the 15-51 Indicator has half the market risk as the Dow, the 15-51 method produces more money with significantly less risk. That is a great combination, indeed, but it still doesn’t make the "100% stock solution" a good investment strategy.

Illustrating that point is the purpose of this blog.

Besides, maintaining a 100% investment allocation in stocks is to blindly follow the "buy and hold" method of investment. This is nothing short of laziness or ignorance. (Sorry, but it’s true.)  Profit requires action, to buy something low and sell it higher. A multiple asset class portfolio makes that action easy.

The next chart compares the DJIA to a portfolio comprised of 50% in cash and 50% in stocks. The 15-51 Indicator will serve as the stock allocation in the 50-50 portfolio, and all portfolios will begin at the Dow’s value at the beginning of the period ($12,583) to minimize scaling. See how the 50-50 portfolio fared in the chart below.


The 50-50 portfolio had a good run but fell short of "market returns" by the end of the two year period, gaining 17% compared to the Dow’s 20%. They ended the period just $375 apart but their risk profiles were substantially different. 

When you have multiple asset classes and legitimate targets that mean something, market activity tells you when you to do something – when to sell something high or buy something low. This can’t happen with a one asset class portfolio. There is no reference point to act; no boundary or risk limitation.  

On April 5, 2012, stock market gains sent the 50-50 portfolio asset allocations out of whack by 10% points. That allocation variance is a trigger to do something, especially when considering the Market conditions at the time. As a result, the portfolio was rebalanced at that time. Note that April 5, 2012 was not a "perfect" time to rebalance as the portfolio peaked five months later in September.

Because the 50-50 portfolio was rebalanced, profits were locked in and added to its cash balance. This, along with a correcting stock portfolio, caused it to end the period with just 47% of its assets at risk and just $375 less in value compared to the Dow. The DJIA, of course, remained 100% in stocks with all of its 15,116 ending value still at risk. 

To put it another way, the Dow needed an additional $8,000 of capital at risk in the stock market to earn just 375 more dollars of return (reward). That’s a lot of risk for a few additional bucks. 

However, and by way of rebalancing between two asset classes, the 50-50 portfolio actually incurred a risk reduction. The rebalancing effort locked 75% of the 50-50 portfolio’s earned profit into cash. Those profits can’t be lost, and are no longer at risk to the whims of a stock market correction. 

Even so, the 50-50 portfolio did not achieve an inherent Lose Your Broker objective: to outperform "market returns." To do that a 60-40 stock-to-cash split was required. 

A 60-40 portfolio also had to be rebalanced, but not until August 2012. Again, the rebalancing point was selected when 60-40’s asset allocation targets were sent 10% points out of whack by stock market gains. Timing again wasn’t perfect, as the stock portfolio peaked one month after rebalancing.

The next chart compares all three portfolios: the Dow, 50-50, and 60-40. See below.


The 60-40 portfolio ended the two year stint fractionally above the DJIA, up 20.3% versus 20.1%, respectively. Here the Dow had to put $6,600 more capital at risk to earn $16 less – so not worth the risk – and again ended the period all-in on the stock market. 

The 60-40 portfolio ended the period with just 57% of its capital at risk. It produced more reward, and because it was rebalanced, 62% of its total gain had been locked into cash and was no longer at risk in the stock market.  

Efficient, effective, and superior performance – multiple asset class portfolios and 15-51 construction are the only way to go.

That’s the Lose Your Broker Solution. 

I have one more point to add before signing out this week. One of the most frequently asked questions I get is: What is a good return percentage to target or accept?  

That’s a hard question to answer generically but I put it this way:

From the monetary side, a portfolio breaks-even when it returns the inflation rate. Performance three times the inflation rate can be considered "decent" money, and five times better is "solid."  

From the economic side, a portfolio that doesn’t keep pace with the growth rate of Gross Domestic Product (GDP) is missing an opportunity. Portfolio performance three times GDP growth can be considered a "decent" return, and five times better is "solid."

Right now, for instance, inflation and GDP growth are about the same, roughly 2%. That said, most investors should be looking for between 6% to 10% annual performance gains. 

Above that the best advice I have for investors is to maintain a long term perspective and trade not on whims of the day but on changes in key fundamentals, like Market condition, stock market valuation, and asset allocation. Take one of these out of the investment equation and the job gets a lot harder. There’s no good reason to do that.  

Going all-in on the stock market isn’t worth the risk. And trust me: nothing is more reassuring than knowing you’re not all-in a finicky stock market. 

We’re on the cusp of one right now.  

Stay tuned…

Unplugging, Value, and Approach

Dan Calandro - Monday, June 10, 2013

I cringe every time I hear someone say that they don’t have the time to invest on their own. There’s plenty of time in the day, week, or month, to do what is required to invest successfully on your own.—You just need to know what you’re doing. 

All of the steps required and techniques needed to invest successfully are explained thoroughly in LOSE YOUR BROKER NOT YOUR MONEY. And as promised in the final chapter of that book, the objective for this blog commentary is to give investors Market updates in a clear, concise and understandable form. It is intended to plug investors into current market dynamics – especially when time is limited.

Contrary to popular belief, the act of successful investment can easily be worked into any busy schedule. The Wall Street establishment puts forth the notion that teams of "seasoned professionals," with extensive "market experience," and "24 hours" monitoring, are all required elements to investment success. So not the case. In fact, the complete opposite is true. 

Unplugging from the daily grind of news and information is essential to success and sanity alike. I have unplugged for months at a time and never lost a step. I did so again last week.  

Business took me out of town last week and I almost completely unplugged from "the market." In that time I didn’t read one news story, watch one news program, or tap into one internet source. I did, however, keep tabs on the Dow’s movements (today’s smartphones make that easy) – because if I know what that portfolio is doing then I know what mine is doing. 

Those following along with these blogs know that I expect to see a major stock market correction in the near future, some 20-25% down. The reason quite simply is over-valuation (more on that in a moment.) So I must say that Wednesday’s 217 point (1.4%) Dow drop caught my attention. I wondered if the drop was the beginning of said correction.

The next day, Thursday and day six of my unplugging, I checked "the market" three times: morning, noon, and night. In a sloppy day of trading the Dow ended up 80 points. That ended my wonder – "the market" wasn’t ready to correct. And since there was only one trading day left in the week, it wasn’t able to begin correction in earnest. At that moment I disconnected totally. It wasn’t until preparing this blog on Sunday that I reconnected.  

The point with this front section is simple: when you follow my method it’s easy to stay way ahead of "the market." As a result, one day, one week, or one month, cannot and will not, dramatically affect your investment performance. This makes unplugging easy.

To begin the demonstration, below is a chart of how each portfolio (the DJIA and my 15-51 Indicator) moved last week.


The Dow ended slightly up and the 15-51 Indicator ended slightly down for the trading week. My expectation before unplugging was that the 15-51 Indicator would continue its sideways move until the Dow commences its correction. While it might look like the 15-51 Indicator is trending down in the context of this one week, a year-to-date picture proves otherwise. See below.


With just over five months of activity, this chart purports a notion of "market stability" as both portfolios appear to be building bases at their current levels – albeit at very different valuations. The 15-51 Indicator is running a tighter base because it has already corrected. The Dow remains over-valued because it hasn’t corrected yet, and is therefore running a wider spread from its average trading value. This can be seen clearer in the chart below. 


In this chart the action zone has been replaced with the average trading range for each portfolio during this period (just five months.) Once again the 15-51 Indicator looks scared to move away from its base while the Dow continues to tip-toe away from its average, now sitting 6 percentage points above it. Again, the Dow looks over-valued and the 15-51 Indicator looks fairly valued. But this five month span is just a short-term trend. More validation of valuation status is needed.

The next two pictures are one year charts that corroborate the same findings as noted above: the Dow is overvalued and the 15-51i is fairly valued. See below.


The action zone is a calculative multiple of stock market activity as it relates to GDP. In other words, the action zone is the Dow’s average price relationship to GDP. So from a price-to-GDP perspective, the Dow is overvalued and the 15-51i is fairly valued in the context of one year, as shown above.

The same findings hold true when these portfolios are compared solely to their recent stock market activity. The next chart compares these portfolios to their average annual trading values. See below. 


Here the Dow is far beyond its average norm, and in a Market like this, can be considered nothing short of irrationally exuberant. After its correction, the 15-51 Indicator is on the low-side of its average, which is where it should be based on actual Market dynamics. That makes it fairly valued.  

The same findings again hold true if the time period is stretched out over two years.  See the series of two charts below: the first compares current values to action zone benchmarks and the second compares them to their average stock market self.



We could keep going but the facts don’t change: the Dow is overvalued and while the 15-51 Indicator is still a little high, it is much closer to its fair value. Remember, the action zones are defined by Dow to GDP multiples. The 15-51 Indicator is a better portfolio than the Dow and usually trades above it. As a result its "fair value" is closer to the action zone high than the mid point. 

The second point to this blog is this: If you understand your portfolio as well as I know mine you’ll always understand your portfolio’s behavior and proper valuation. This kind of familiarity promotes comfortable investing, makes profiting easier, and affords the investor many opportunities to unplug without fear of financial disaster. Consequently, no single day, week, or month of unplugging can negate the benefits gained by a long-term approach using my method. 

For instance, by now long-term investors should have already taken the vast majority of their stock market profits, rebalanced their portfolios, and positioned it to capitalize on the next major stock market sell-off that is sure to come – because, once again, "the market" is overvalued. 

This brings the most popular question I hear to mind: When will that next correction arrive? 

Of course, no one knows for sure. Fundamentally speaking the correction should have already commenced. But never before in history has "the market" been manipulated by such extreme monetary and fiscal positions. These are unchartered waters, indeed, and they are historic by proportion. That dictates the next correction to be a significant one; and the next crash even more dramatic. Events like these do not happen over night, in a single day, week, or even month. They develop over a period of time, with many ups and downs (a.k.a. volatility.) There is no better illustration of this than the 15-51 Indicator’s recent performance. Here it is again, but with gold activity and key dates shown. 


As you can see, Friday, last week, or last month, had little impact on the 15-51 Indicator’s long-term performance. It can be said, then, that a long term approach produces not only superior performance but more free time.  

Approach is key and unplugging is necessary – and both add value.

ShieldThe road to financial independence.™ 

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