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Don't Be Fooled

Dan Calandro - Wednesday, October 12, 2011

The fastest way to correct the course of the U.S. economy and add jobs is as follows:

1.     Cut Market Taxes (1):

a.      Consumer/Individual: 25% Highest Rate, 5% Lowest Rate(2)

b.      Business/Corporate: 15% Highest Rate, with deductions allowing rates as low as 5%

c.   Investor/Long Term Capital Gains & Dividend Income: 15%, with deductions allowing rates as low as 5%(2)

2.      Raise Interest Rates

3.      Tighten Monetary Policy & Regulatory Loopholes

4.      Drastically Cut Government Spending & Bogus Regulations

5.      Aggressively Pay Down National Debt

(1)       Look for future blogs discussing tax rates and recommendations.

(2)       Except for those below the poverty line.

All five must be done to fix the Market; otherwise we’ll remain twisting in the wind and gold will continue to outperform. 


PS: Any new tax, be it a Value Added Tax (VAT) or national sales tax, is a horrible idea.  Taxes always get abused and never go away.  Connecticut residents know this all too well.  No new taxes!!!

Fixing the Market: Unleashing American Ingenuity

Dan Calandro - Tuesday, October 11, 2011

Right now Wall Street and talking heads are speculating about the possibility of a "double-dip recession." This is semantics. The U.S. economy has been in recession for years now and has never truly recovered. A double-dip, therefore, is an impossibility.

To plug the gap in GDP caused by the "financial crisis" of 2008 the US government has gone on an unprecedented spending spree that has done nothing to correct the market’s problems but instead has pushed us closer to Europe. And as we all know, several European countries are on the brink of bankruptcy – and it’s reckless government spending that put them in that position. 

That can happen to us, too! 

Right now, the US has a $15 trillion economy and $15 trillion in national debt – that’s 100% leverage. Failing European countries like Greece have 120% national debt to GDP ratios. Not only are we heading in their direction – we’re in their neighborhood! 

The income statement for the U.S. government for fiscal year 2011 looks like this: 


                 U.S. Tax Receipts (Revenues)          $2.1  

                 Government Spending (Expenses)       -$3.8

                 Surplus/-Deficit                     -$1.7

Just like your personal situation, the only way to pay off debt is to spend less than you take in. That said, the US government must cut $2.0 trillion of spending this year in order to reduce its debt load. This must be done soon or we will run the same course as Greece, Spain, Portugal, Italy, and France – to name a few. 

For instance, if the annual US government deficit is removed (hence a balanced budget) from GDP our national debt would be 115% of GDP. In other words, we’re roaming around a bad neighborhood and nightfall will soon be upon us!

Such a drastic reduction in government spending would also return the US economy to recession, which would cause the stock market to correct and selloff.  Good.  As mentioned in my book, corrections are healthy sign of life and much required for inflated conditions such as the one we are in. (It sure beats pretending recession doesn’t exist while bankrupting our grandchildren.) 

So how do we plug the economic gap left by dramatically reduced government spending? 

Cut Market taxes! Flatten the tax code! And throw out all of this bogus regulation that doesn’t work and is clogging the arteries of American enterprise! (i.e. Sarbanes-Oxley, No Child Left Behind, Dodd-Frank, and ObamaCare, to name a few.)

What the government needs to do right now is incentivize economic growth and vitality. Lower taxes increase spending power for consumers and provide greater incentives for investors to invest and businesses and entrepreneurs to create and innovate. Thats what we need!

For instance, when taxes on rich people go down they’re more willing to take on more risks – in other words, they're more willing to invest in new businesses, new products, and new markets – the riskiest of all propositions. Why?  Because they stand to make more money on their success. 

Profit is the motivator of all markets. 

Lower taxes on investment (capital gains taxes) provide greater incentive for investors to invest in a fragile economy where risks are so high. They also provide more room for investors to offset losses which are sure to occur in the high risk times and high risk venues that propel markets upward -- like product and market innovations. This is the kind of investment that creates long-term job benefits. America needs that, too.

One story not being covered by the mass media is the fact that President G.W. Bush outraised President Obama. President Bush averaged $2.4 trillion in tax revenues during his last term in office, while President Obama is raising just $2.1 trillion. Both presidents were big spenders, though President Obama makes his predecessor look like a fiscal conservative. 

Lower taxes increase revenue – the key is not to spend those revenues (like President Bush did) but to payoff debt!  America needs more free-market investment and less government spending right now. Lower taxes are means to that end. 

And for those who believe that higher taxes will solve America’s problems – it’s time to think again. Just as increased debt ceilings result in more debt, higher taxes only translate into more reckless government spending. And that’s two things we don’t need right now.

America needs more ingenuity – lower taxes and less government are incentives enough. 


Dan Calandro - Tuesday, October 11, 2011

Two stories hit today that sent the Dow Jones Industrial Average soaring, ending up 339 points and almost 3%. A deal to restructure Greece’s debt was struck in Europe, and the US Bureau of Economic Analysis issued that Real GDP increased 2.5% – that’s growth from last quarter, not for the year. 

Here’s quarterly GDP growth for the year thus far:

                        Quarter           Growth

                        1Q’11               .4%

                        2Q’11              1.3%

                        3Q’11e            2.5%

                        Average           1.4%

First, this is an advance estimate for the third quarter. The advance estimate for the first quarter was revised down one full percentage point. Keep in mind that this estimate can change.   

Second, and should this third quarter estimate hold up, 1.4% annual GDP growth stinks. A number that low can never improve the employment situation – and that’s what “the market” really needs right now. Until that changes, days like these are a trader’s dream.

Here’s how the stock market action looks year to date. (DJIA +5.5%, 15-51i +12.9%.)


Over-hyped markets are the markets to sell in.  If you haven’t rebalanced your portfolio (both macro and micro) now is a good time to do it. Remember, it’s sell high – not sell at the highest.

PS: [10/29/2011]  There is relatively little to celebrate when Real growth is less than half the rate of inflation.  There's no reason to buy into the hype.


Dan Calandro - Tuesday, October 11, 2011

When you know how "the market" works it's much easier to predict than the weather.  That makes stormy days like today easy to see coming, which in turn makes them easier to handle and manage. 

Nothing has changed.  Recession isn't a real possibility -- it's a reality.  A global currency crisis still exists, and unlike the "financial crisis" in 2008 when we were talking about several large banks failing, this time we're talking about countries failing.  Did you hear that? 

Countries are failing!

That's why we're experiencing days like these.

Stay tuned...


Dan Calandro - Friday, October 07, 2011

Here's today's key Wall Street Journal headlines:

  • Stocks Retreat
  • Moody's Cuts U.K. Lenders (banks)
  • Fitch Cuts Spain, Italy
  • EU Steps Up Crisis Response
  • Payrolls Rise as Striking Workers Return

Even though mixed signals are part of the game, it's easy to see that investors are scared and Europe is in real trouble.  Nothing's changed.

XRef these blogs for more info:

Asset Allocation

Fixing the Market

Enjoy the weekend!



Dan Calandro - Thursday, October 06, 2011

Stock market hostilities won't subside until central governance stops throwing money around and starts fixing the Market’s problems. President Obama’s speech today was another desperate plea for more money; and he’s looking more like a subprime mortgage borrower did during the housing collapse – please, please, just one more re-finance – than a chief executive officer. And it’s hurting the Market.   

So far this year the Dow Jones Industrial Average is down 5.5% (indicating recession once again) and the 15-51 Indicator is up just 4% (well off its 18% per year historical average.) See the chart below. 


Often times “uncertainty” gets the blame for stock market volatility. But uncertainty always surrounds the stock market. Mixed signals are part of reality – and provide the room and fuel for speculation. Check out these Wall Street Journal headlines from today:

            U.S. Stocks Lose Steam (and the Dow ended up the past few days)

            September Retail Sales Are Solid Ahead of Holiday Push

Since no one knows exactly what will happen and when, uncertainty is omnipresent. Mixed signals are part of the game.  Always. 

So what’s driving the Dow down as illustrated in the above chart? 

Incompetent central governance. It’s not fixing problems like it should be (see my blog series: Fixing the Market for more details). Instead it’s playing shell games with money and manipulating GDP with reckless government spending. The only thing that’s doing is driving up national debt and depreciating the dollar. More of it, like President Obama’s new jobs bill proposal, will only continue those negative trends. 

What makes the matter even more daunting is when other countries follow our irresponsible lead, as can be seen in this WSJ headline:

Bank of England Expands Quantative Easing

This is all bad for money and markets.  That’s why the above chart looks like it does. And it’s also the reason for gold’s torrid run since the housing bust.


The dollar is too weak.

Rest in Peace Steve Jobs

Dan Calandro - Wednesday, October 05, 2011

Today is a very sad day.  Apple icon Steve Jobs died today. 

May God rest his soul and bless his family, friends, coworkers and employees – and every investor at every corner of the world.  Today we lost someone very special.  

And those in the iCloud got one legend richer.  Godspeed!


Fixing the Market: Strengthening the Dollar

Dan Calandro - Monday, October 03, 2011

First things first, it’s quite hypocritical for the US government to continually excoriate the Chinese for manipulating its currency by not allowing it to appreciate. I don’t understand the US stance. The Chinese currency has risen steadily and in dramatic fashion for more than a decade while at the same time the US government has been purposely urinating on the dollar.  What China does with its currency doesn’t amount to a hill of beans if US governance takes care of business with the US dollar. 

Because the US is the freest country in the world, it’s a major market problem when it’s not the strongest currency in the world.  This needs to be addressed quickly to avoid further demise. Like Rome, however, a strong dollar can’t be built in a day.  It will take time and a multi-faceted approach.  

First we must acknowledge the obvious: more of any one thing means less value for that particular thing.  For example, if diamonds could be found everywhere they’d never appear on an engagement ring.   They’d have no long-term value and women would find such a gesture insulting.  And who would blame them.

The same is true for stocks.  If Apple printed another trillion shares of its stock it wouldn’t be trading at $300+ per share.   The new abundance of shares would dramatically devalue existing share already in circulation. 

The same is true with money.  When central governance floods the market with currency like it has for the past several years, the dollar weakens.  A weak currency brings on inflation (the general rise in prices) because more dollars are required to purchase the same amount of goods. 

That’s why President Obama wants to raise taxes – to remove currency from circulation in an attempt to ward off inflation.  But that’s the wrong way to do it.

As we know, another major market problem is that banks aren’t lending money.  The reason for this is because there’s no money in money.  Interest rates are too low and inflation is heading right for us.  Banks are operating on such tight margins right now, and with inflationary pressures rising there’s very little room to take risks – so they’re not lending.  Instead, banks are trimming their workforces and getting paid by the Fed not to lend.  

We need to turn this around.

It’s time for the Fed to start raising interest rates. This will give banks more incentive to take risks and lend money. It will also raise the value of the dollar because there would be more interest in borrowed money – in other words, more value in US debt.

Higher interest rates will also give the Fed a mechanism to remove currency from the market without raising taxes. Bond values and interest rates have an inverse relationship, meaning as interest rates rise bond values fall.

Right now the Fed is trying to lower long-term rates (and raise short-term rates) with a stupid policy called, "Operation Twist." Instead, it should be raising short-term rates with new debt issues and using the proceeds to purchase existing debt at lower rates trading at discounted prices.  In such a case, $1 dollar of new debt will be able to purchase $1+ dollars of existing debt – thus removing currency from the market and warding off inflation. 

Would the government’s interest expense go up because of this? 


But banks would have more incentive to lend, taxes would not increase, excess currency would be removed, and the dollar would strengthen.  And that’s what we really need right now. 

Fixing the Market: Reinstate the Uptick Rule

Dan Calandro - Wednesday, September 28, 2011

Extreme stock market volatility often pushes the average investor into making bad investment decisions. "Panic selling" is a common term used to describe stock market selloffs. Rarely, however, is the term "panic buying" used to portray strong, triple-digit stock market rallies, as indicated by the DJIA. 

Panic goes both ways – in buys and sells – which explains why several days of bruising stock market losses are routinely followed by a couple of triple-digit market rallies.  Short selling is at the core of this extreme volatility. 

Successful investing is traditionally defined as Buying Low and then Selling High.  Short selling works in reverse order: Sell High and then Buy Low. Short selling is the act of selling first, and then buying low at some later point in time.   

In order to "sell short," an investor must borrow shares of stock they wish to immediately sell. An investment bank – such as Goldman Sachs, Merrill Lynch, and Morgan Stanley – "broker" the transaction between investors, both borrowers and lenders of stock. 

For example, the short seller borrows stock X from an investment bank and immediately sells stock X for $50. Three days later the stock market sells off and the price of A stock drops to $30. The short seller then buys stock X and uses it to repay the investment bank – keeping the $20 difference as profit (less the fees owed to the investment bank, of course.) 

Even today most people know of the vast Kennedy fortune. Joe Kennedy, father of John F. Kennedy, was famous for his stock market prowess. This is the reason President Roosevelt appointed him to be the Commissioner of the Securities and Exchange Commission (SEC). In 1938, as SEC Commissioner, Kennedy instituted what is known as the "Uptick Rule." 

The Uptick Rule limited short selling to stocks that have moved up in price – even if by just a tick. In other words, an investor couldn’t short sell a stock that was dropping in price. Only owners of stock could sell during market meltdowns. 

That’s the way it should be. 

Joe Kennedy knew the abuse that unbridled short selling could inflict upon the stock market. He made a king’s ransom doing it. But the roaring ‘20’s were over, and now he was working for FDR. Kennedy’s aim with the Uptick Rule was to minimize stock market volatility. The Uptick Rule does just that. 

The Uptick Rule reduces the number of speculators looking to exploit hostile conditions and/or fragile investors. By so doing, stock prices are under less downward pressure and volatility is reduced.  For some irrational reason, the Uptick Rule was repealed in 2007 under the Bush administration. 

This kind of crazy volatility that the stock market is currently experiencing is only good for Wall Street’s business and hedge fund traders. Wild swings in price create panic and increase transactions (to buy and sell). Panic can cause average or fragile investors to Sell Low during market meltdowns because they’re scared. It can also prompt these same investors into Buying High after the stock market "recovered" because they don’t want to miss a chance for big gains. 

Short sellers are once again at the epicenter of volatility – this time upward volatility. Since short sellers lose money if stock prices go up, they place cat-like focus on "the market" and wait for it to stop falling. Once it does, they all start buying to cover their short positions (to thus repay the stock that they borrowed.) This forces stock prices to move higher – like we’ve seen the past two days. 

Each time this happens, when investors panic and Buy High and Sell Low, they lose a piece of their wealth and Wall Street gets richer. Extreme volatility facilitates this.

Fix "the market": Reinstate the Uptick Rule!  

Until then, Volatility -- Get used to it!

Calm before the Storm

Dan Calandro - Friday, September 23, 2011

Stock market trading was insignificant today. What can we learn from it?

We can debate when the rocky road began for the stock market this year, but to me it began in late July. The Dow dropped 200 points on July 27, 2011. Let’s call that a flare. Why not? America was on a disastrous course for a long time, long before late July, but that’s when the stock market started to freak out.

Traditionally, the stock market is always more euphoric during the first half of calendar years. Reason: there is more to speculate about – 2, 3, or even 4 quarters are yet to be lived. There is plenty of room to speculate. The year has just begun.

But late in the third quarter (where we are now) and into the fourth quarter, there are fewer things to speculate about. Just a few months remain. The year’s almost over. And by now, everybody on Wall Street pretty much knows the score.

That’s why most severe stock market corrections occur in September and October. Fair valuation is most easily ascertained. Overzealous speculation can be swiftly corrected with just one quarter remaining. And so it happens. Consider the midpoint of the action zone to be "fair valuation" as shown in the picture below.


As you can see, the Average can’t hold the mid point – fair value, as defined by current and historic economic valuations. That’s the stock market predicting recession.

Now, recession is not new news if you’ve been following my blogs. Instead, this picture is another piece to the puzzle – another market fundamental pointing towards recession – another indicator of lower stock prices.

The weekend is a great time to take a breather and plan your next move. Prepare your assets for a rough road. If you need help, feel free to contact me.

Enjoy the weekend!


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