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Key Market Indicators

Rate Type Month Last Change
Fed Funds Rate September .25 0.0
Unemployment August 6.1% --%
Rate Type Month Last Change
Inflation (average) July 1.77% +.01%
Gold (oz) September $1,269 -$41
 
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Programmed Trading
Sep 07, 2014

Gold lost more than a point last week when news broke the U.S. dollar had hit fresh new highs against the Euro and Japanese Yen. That was on the first trading session of the week, a day when gold lost 1.8%. Remember, the U.S. is the world’s reserve currency, and when currency is strong gold is weak.

 

Adding to the false impression of a strong currency market was the "raft of improving U.S. economic data" many media outlets were reporting. They cited improving consumer confidence and a bettering condition for labor and employment. Again, this news broke on the first day back from the Labor Day holiday, Tuesday, September 2, 2014.

 

Institutional investors that are programmed to trade on the newest news place trades according to logarithmic formulae. When the value of the Yen and Euro fall against the dollar the trade goes in: buy the dollar and sell gold; sell bonds and buy stocks, because a stronger currency indicates economic strength and increasing profit for enterprise. That’s why yields reversed course and rose 5.2% last week. See below. 

 

9-5-14


Logarithmic trades are performed by machines without hearts, eyes or ears. Everything is a number, and every situation can be defined in a series of 0’s and 1’s. But the language of computers, binary code, is not intuitive. It must be fed information by people, and that’s where the corruption begins. 

 

Information inserted to trading platforms is an instruction to act. But if the data never gets there – say, if it isn’t entered into a system to be considered – trading goes on as if the condition doesn’t exist. The computer, without a free and intuitive mind of its own, simply doesn’t know a new fundamental has been made available, and so it conducts no trade to compensate for the new condition. 

 

At eight-thirty in the morning on Friday, September 5, 2014, just three days after news broke about the "strengthening" U.S. dollar, the Bureau of Labor Statistics released is most recent jobs report - and it was awful. Employers added just 142,000 jobs in August, and numbers for July were revised down by 28,000 jobs. Through July employers had averaged just 226,000 jobs per month, a pathetic amount by any account, and well below what is required to truly correct the course of economic output. One would think this negative employment fundamental, a reoccurring theme in this "recovery", would have been considered during trading hours on Friday, September 5.—But no, stocks ended higher on the day. 

 

Perhaps the Wall Street establishment cut the Friday workday to instead head to the Hamptons for a little more R&R; maybe they spent the day at the golf club; or maybe they arrived to work late only to skip out early to a liquid lunch that consumed the rest of their day – whatever the case, the newest employment data was never automatically fed into their trading system for the shortened week of September 5.

 

That’s hard to fathom, isn’t it? – especially when considering that Wall Street brokers are always the first to preach that a team of dedicated people monitoring every piece of information every second of the day is required to invest successfully.

 

They clearly don’t practice what they preach. Look at my shocked face. 

 

More sadly, however, is that the Wall Street establishment is just as robotic as their programmed trading logarithms; and like computers, they too don’t have a heart, clear eyes or keen ears.

 

Wall Street players select and direct what information is considered for daily trading, and when. Their motives are geared to fortify their agendas - not the true market narrative, or what's in the best interests of their clients. But there’s no reason to be confused or misled.

 

Employment gains during economic booms normally average 500,000 per month. America hasn’t come close to that during the whole "recovery" – even though the stock market is indicating a boom greater than that of the internet driven tech-boom. While 226,000 job additions per month is bad enough, a 35% drop from that in August should have certainly caused the stock market to reverse the course of "stronger dollar" gains reaped earlier in the week. It should have been automatic, or should I say, programmed to be automatic.  

 

Point number one: stock market trading is choreographed by Wall Street players and manipulated through large institutional investors; always has been, always will be.

 

Point number two: just because markets move on news doesn’t make the news, or the move, valid. Consider this…

 

The Euro Zone has been a chaotic mess that has been well chronicled in these blogs. Adding to its sordid history, European Central Bank chief, Mario Draghi, recently launched a QE effort and surprised the region by cutting lending rates again (to .05%) and placed a charge (.20%) on deposits. That is to say lenders won’t receive interest income as usual on deposits they hold; instead they will be charged interest expense for the cash they keep on hand. This is a move to encourage banks to lend, and to penalize them if they don’t.

 

The EU needs banks to start lending so enterprise can grow and expand. But lower interest rates won’t do this, nor will a charge on deposits. No one wants to borrow money over there because enterprise doesn’t see a worthwhile return on investment. Monetary policy can’t fix that.

 

Levels of investment and lending are at all-time lows in Europe because the EU’s economy is dying a slow death due to massive government regulations, poor fiscal policy and incompetent management, and extraordinarily high taxes. As a result, their currency should be falling against the U.S. dollar.

 

Japanese Prime Minister Abe followed the U.S. lead and adopted easy money policies to make their currency more competitive in a devaluing world. The Yen was too strong, and their goods were too expensive in overseas markets like the U.S., the Euro Zone, and China. This, of course, was Abe’s intention when his government employed easy money policies. So it should be no surprise that the Yen is falling as compared to the U.S. dollar. That’s what Japan was trying to do. 

 

But this dynamic does not make for a strong currency market, or a strong U.S. dollar. Monetary strength cannot be derived from currency devaluation. Instead, monetary strength is derived from vibrant economies. And unfortunately there aren’t many of those in today’s world market.

 

News of a strengthening U.S. dollar is misplaced. Ditto to last weeks moves in gold and yields.

 

In fact, the only way investors can mistake a monetary race to the bottom as strength is to be blindly programmed like the binary code of an unseeing, unhearing, heartless machine.

 

Conditions remain ripe for gold and a significant correction in stocks.

 

Stay tuned…

 

 ShieldThe road to financial independence.™

Their Side
Sep 01, 2014

The S&P 500 closed the month at another all-time high, ending over 2,000 points for the first time in its history. The Dow Jones Industrial Average and the 15-51 strength indicator also remain extremely elevated, though a shade off their respective all-time highs. Stocks are still hot, no doubt – and so are bonds.

 

Yields continue to fall. The ten year U.S. Treasury is now at just 2.34%; and in a recent auction across the pond Germany sold $5 billion of two year bonds at zero percent. This dynamic (falling yields and rising bond values) indicates economic weakness. That’s a different picture from the stock market, where its high and rising stock prices are indicating economic strength.

 

Which is telling the right story?

 

Truth be told, the global economy is flat. The entire Euro Zone (a collection of markets that place it as the world’s second largest economy) reported zero growth in the most recent quarter; and Germany, its largest economic component, contracted in the quarter.

 

While it is true that the world’s largest economy posted a "strong" second quarter (4% annualized growth), America’s first quarter performance was dismal (-3% annualized contraction). This is not to mention that early indications for third quarter market activity aren’t so good: July retail sales were flat and consumer spending declined. All of this puts the U.S. economy on pace to grow at best 1% for this year – a no-growth condition.

 

And then there is escalating global strife. Russia stepped up its aggression in the Ukraine and according to President Obama the U.S. has "no plan" to counter global terror threat, ISIS, who is destabilizing the entire Middle Eastern region – you know, where much of the world’s oil supply resides. Those two aggressions, Russia and ISIS, threaten the top two economies through energy price and supply instability.

 

Bonds indicate this peril (yields are down 15% in the most recent twelve months) but stocks seem not to care. The Dow Average is up 15% in the same time and 15-51 Strength has gained 18%. See below.

 

8-29a

 

Among other things, falling yields signify an increase in demand for them. With rates as low as these, and by lending money to "safe" governments like Germany and the U.S., the message investors are sending is that their appetite for risk is mute and principal protection is more important than return on investment. Why else would investors flock to the safety of low yield bonds while the stock market has been gaining 15% per year for three years running?  See below.

 

8-29b

 

The stock market looks strong, but as the bond market shows, many investors have little confidence in it. The reason for that is simple.

 

Massive regulations and taxes strangle an economy. Global strife closes some markets, threatens others, and extorts still more. All of this leads to a higher tax environment and minimizes room for free-markets to operate and profit – which is a goal, of course, of central government planners and social justice advocates. To them, and to terrorists, the free-market is a common enemy.

 

The problem with fiscal "stimulus" and burgeoning social welfare is that they’re short-term in nature and do nothing to expand the Market, freedom, and prosperity. For instance, when roads are repaired the economy temporarily expands by the amount of labor and materials used during the process. However, once the project is completed the economy shrinks by the same amount. Indeed, the process can be repeated again and again to artificially inflate an economy; but the results will always be the same: a short-term burst of economic activity.

 

The same can be said for irresponsible expansions of social welfare programs like food stamps, subsidized housing, healthcare, and unemployment. Indeed, this may increase money available to circulate in the economy; but it creates dependence, minimizes the market to need-based spending, corrupts pricing, and lasts only as long as the next congressional budget. Social welfare programs take hard earned dollars from free people against their will and places it in the hands of others according to the political agenda of central government planners. These actions control, manipulate, and corrupt free markets while incubating an environment of higher taxes and tariffs.

 

By taxing producers to benefit takers (i.e. central government planners and social welfare recipients), the government limits the amount of capital available to expand Markets. This diminishes the free-market and expands the authority of central government planners with corrupt agendas. (PS: Approximately 40% of Americans are now on some form of social welfare.)    

 

Terrorists like ISIS take control of markets through force. They seize oil fields, airports and rights of passage, and private property; then through a central hierarchy of government dictate what products can be produced, sold, and distributed – to whom, when, and in what quantity. They excessively tax the populous under their control and dictate market growth and wealth redistribution according to their political agenda – a complete diversion from free market principles.

 

Central government planning, in any form, is too corrupt, political, and inefficient to have a dominant role in a robust economy. For proof of this follow the money…

 

The Federal Reserve’s quantitative easing (QE) program, for instance, was a multi-trillion dollar effort – a dominant position in the financial marketplace. Its purpose was to keep interest rates at historic lows to incentivize borrowing and robust market expansion (a demand-side approach). As usual, success again eluded them.

 

Simply put: the Fed printed new money and handed it to Wall Street banks under the condition that half the money had to be used to finance central government deficit (U.S. Treasury securities); the other half could be used any-which-way.

 

In practice we have seen the central government get their dominant share (the national deficit is now $9+ trillion higher and the economy hasn’t moved), and the other half went God knows where. However, one thing is for sure: it never got down to small U.S. businesses and entrepreneurs (see: Small Business Lending is Slow to Recover, Wall Street Journal on-line, 8/17/2014).

 

Free markets are where prosperity resides. Long-term growth is derived from new businesses, new products and service lines, and a vibrant consumer base – all of which require money (capital) and freedom. Entrepreneurs, free from government intervention, are the most effective and efficient investors in new ventures that add long term employment. But they haven’t been able to get the money during this "recovery." Why?

 

Interest rates were too low and provided too little incentive for Wall Street banks to supply debt to small American businesses; so they looked overseas for higher yields (see: Your Money and Argentina). Fortification of this point arrived just today, September 1, 2014, as news broke that Goldman Sachs lent $835 million to Portuguese lender, Banco Espirito Santo, just one month before it failed (see: Too Little Room). It was a desperate attempt at realizing higher yields, which is what happens when central planners look at only one side of the market equation (in this case, the demand side.)

 

The Fed’s low yield policy hasn’t helped American business, the American people, or the American market. One can only wonder: What are they really trying to do?   

 

Consider that Wall Street banks are currently lobbying the Federal Reserve to delay a portion of the Dodd-Frank financial regulation called the Volker Rule, which limits the amount of money Wall Street banks can invest in high-risk private equity ventures. This portion of Dodd-Frank is good. Why should Wall Street banks have the freedom to invest in high risk ventures when they can get bailed-out by taxpayers should those investment go bad? – And let’s face it, much of that money came from the Federal Reserve via QE. That’s not their money, it’s ours: We the People.

 

Shame on the Fed if they cave. 

 

But the chess match of corruption between the government and Wall Street runs much deeper than misplaced money. On August 12, 2014, two stories crossed the Wall Street Journal wires: SEC Launches Examination of Alternative Mutual Funds, and Banks Retreat from Market That Keeps Cash Flowing. Isn’t that interesting? One government agency is investigating "alternative" mutual funds sold by Wall Street for possible criminal action, and in retaliation thereof, the Wall Street establishment is abandoning another government agency’s "alternative" investment tool to keep interest rates low – the Federal Reserve’s reverse repo (see: QE Forcing Fed’s Hand).

 

In any event, the Federal Reserve won’t be happy about Wall Street’s stance on the repo; they feel they need the repo market to unwind QE.

 

In a similar vein, and because QE is ending, the Wall Street establishment feels they need to sidestep the Volker Rule to unwind more high risk investments. Remember, under QE the Wall Street establishment sold "toxic" investments to the Federal Reserve in exchange for the newly printed money.

 

So a deal between the two villains will most likely be struck. They need each other. And it doesn’t matter if their action goes against the best interests of the American People, again. 

 

That’s how big government central planning is bad for We the People. They only look at one side of the equation.

 

Theirs.

 

Stay tuned...   

 

ShieldThe road to financial independence.™

Your Money and Argentina
Aug 06, 2014

When the topic of wealth redistribution surfaces most people think about taxes. While it is true that taxes are the most visible form of involuntary wealth redistribution, it is not the most egregious form of the practice. No. That high crime is free-market fraud with the intent to pillage – and Wall Street is notorious for it.

 

Taxes take earnings from individuals and place them in the hands of governments. The essence of government spending is to fund things that individuals or enterprises can’t do – or to a further extent, won’t do.

 

For instance, individuals and enterprise can never defend these United States as effectively and efficiently as a centralized effort can. Taxes are required to coordinate a cohesive force and united front to thwart an enemy attack. That security is a totally legitimate basis for taxation, and most people have absolutely no problem paying for it.

 

Much to the contrary, however, many taxpayers would never direct their hard earned profits to subsidize an unsustainable amount of welfare, food stamps, free housing, and free non-essential healthcare services, to able-bodied individuals without the ambition to help themselves in the first place. This unfounded level of charity has become commonplace in American government today, and it breeds a culture of dependence. 

 

Government funded social programs have made it too easy for people not to participate in the labor force. That runs contrary to our founding principles, the cause of individualism, and everything that made this country great.

 

Irresponsible social programs increase the national debt and place a much higher tax burden on the working class – the middle class. Excessive taxes, whether under the guise of social equality or military defense, is a complete bastardization of the American system. It bankrupts the middle class, zaps incentives from small businesses, and crashes the free market.

 

Elections are about selecting fiscal managers to balance the budgets of tax revenues and appropriate expenses. And for the last twenty years both Democrats and Republicans have proven inept at the job. Even so, it is impossible to fire them all – however grand the idea. They perform functions that individuals and enterprise can’t do: and as a result, central governments and their according taxes will forever be a necessary evil in a civilized society. 

 

That said, taxpayers must come to grips that a large portion of their taxes paid will be misappropriated and produce little to no return on investment. That makes gains on private investments all the more important.  

 

Just one week after this news headline appeared in the Wall Street Journal on-line: Wall Street Takes Shine to Argentine Bonds – Argentina defaulted on all of its outstanding debts. That’s right, large U.S. financial institutions like Bank of America, Goldman Sachs, and JP Morgan Chase have been aggressively seeking to lend more money to the failed Argentinean government just moments before they defaulted on all their debts. And if you own a mutual fund in fixed income investments – that money is yours.

 

According to some estimates the Argentinean default will cost American investors more than $30 billion, and that’s a great shame.

 

Let me ask rhetorically: What do governments do with the money in their control, whether the monies are derived from taxes or borrowings?

 

Governments spend money according to their political agenda – infrastructure, education, defense, or social welfare. Social programs have increased dramatically in Argentina since 2007 and the government has produced multi-billion dollar deficits ever since. Billion dollar deficits might not seem like a lot of cabbage here in America where trillion dollar annual deficits have become commonplace, but billion dollar deficits are a really big deal in a Market like Argentina. Consider this…

 

Total economic output (GDP) in Argentina is just $475 billion; America’s economy is $17 trillion. Argentina’s debt to GDP is an extremely low 46% (or $215 billion) while America is 100% leveraged ($17 trillion in debt.)  By the looks of these numbers it appears that Argentina should have an easier time paying its debt than America. But that’s not true.

 

The Argentine Market is in much worse shape than its American counterpart: Argentina’s economy is steadily shrinking, their inflation is 26%, and their tax rates are crazy: corporate income taxes are 35% (like in America), but their personal income taxes are 35%, sales tax is 21%, and their social security tax rate is 44% (27% paid by corporations and 17% paid by individuals) – and, as you might expect, their labor participation is a dismal 49%; which is to say that one out of every two Argentineans don’t work.

 

In short, the Argentinean government has bankrupted their Consumers, zapped incentive to profit from Enterprise, and crashed their bond Market.—Yet the Wall Street establishment was looking to lend that Market billions more of new money.

 

But that isn’t their money. It’s your money – if you own a fixed income or high yield mutual fund, that is.

 

By creating the perception that ‘you’re too stupid to invest on your own’ Wall Street creates a Captive Market: You need them, because you can’t do it yourself. They advance the false impression that investing is too complicated, too difficult, and requires too much time that ordinary folks can’t muster. Investment is not a one person job, they say, it requires a team of skilled and experienced professionals. So they say, Give us your money because we know what to do with it. We’re the experts. You’re not. Trust us. We’re the best money can buy. You’re just you: incapable. You need us.

 

Under this false guise Wall Street snatches money from American middle class clients who have worked hard and saved judiciously– and then directs that money into the failed Argentinean Market. Does that sound smarter than you?—And one should note: this isn’t Argentina’s first rodeo. Not too long ago in 2001 they defaulted on $100 billion, which was the latest notch on their long and lengthening rap sheet. Yet Wall Street was looking to lend them even more money – more of your money, if you own a leverage fund, that is.

 

Why would they do this? 

 

Money and Control.

 

First, Wall Street banks receive a sizable fee to sell Argentinean debt to their American customers – you know, the "rich." The risk is sizable, but heck, it’s not Wall Street’s money – it’s yours. And just like lending money to a heroine addict, the next fix for Argentina wouldn’t solve anything. More debt would only prolong the agony of self-destruction, just like an addict. 

 

Prolonging the default provides Wall Street with the opportunity to earn high rates of interest (Argentina recently sold short-term bonds at 26% interest) for their clients, who then pay the Wall Street establishment management fees and performance bonuses – without risk of loss, of course. Remember, Wall Street doesn’t loan their money to Argentina; they lend your money. Fees, underwriting, and commissions for connecting you with Argentina is how Wall Street makes money. In other words, placing bad investments overseas is a money maker for the Wall Street establishment. And they do it all for you.

 

Aren’t they nice?

 

Second, the ugliest way to make money is to control people. Both the government and Wall Street do this.

 

The government does this through taxation and social program spending like Social Security. They take more of your money through taxes and thus make it harder for you to save and invest, which bolsters the need for a nationalized retirement plan. 

 

Wall Street does this by convincing their customers that they need their product (investments) and their services (mind and management.) They create product demand by pointing out the obvious: Social Security is bankrupt, and supplementing it is vital. Then they create service demand by corrupting markets and confusing customers with complicated rhetoric and onerous explanations. If they are successful, then you are their Captive Market. They control you, your money, and your net worth.

 

Independent wealth is the greatest liberator. Think about it. If you become a savvy investor and have enough money so that you don’t have to work, don’t have to worry about retirement and the rising costs of senior citizen healthcare, then who would need Wall Street? Who would need Social Security?

 

Social Security is a domestic means of wealth re-distribution. That is, a redistribution of wealth that occurs within U.S. borders. Okay, fair enough, let’s assume we want that: domestic redistribution of wealth.

 

That is much different from an American transfer of wealth to foreign countries.

 

When the government taxes your earnings and then sends a multi-billion dollar aid package to the Palestinian territory – they send your money there. It’s a transfer of wealth from one country to another. 

 

The Wall Street establishment does the same thing but in a different way. 

 

When Wall Street solicits your capital and places it with Argentina they temporarily transfer your money to that country. When the country defaults on its obligation to repay the monetary transfer becomes permanent – like a tax. In other words, by way of Wall Street's control over the capital of American investors, Wall Street forces Americans to pay for social welfare programs in Argentina – without the ability to vote that government out of office or change its policies.

 

Talk about taxation without representation. 

 

Wall Street profits from your money to procure bond transactions and then spreads the remains throughout the world to nefarious recipients. Wall Street and the U.S. government steal wealth from middle class Americans (92 million Americans own mutual funds, one out of three people) and create a higher degree of dependency and control over American consumers and investors by so doing. This expands the role of government and Wall Street banks, as the loss of capital ensures consumer/taxpayer reliance on them for generations to come. 

 

Taxes are forever, no doubt, as are government corruption and mismanagement. But that’s not the case with your investments. You can lose your Wall Street broker, keep your money in America, and bolster your independence by investing successfully on your own. My 15-51 method is easy to understand, simple to use, and produces superior long term performance. See below.
 

8-1-14a

 

The objective of the Dow Jones Industrial Average is to indicate the market, Nominal GDP, which it reliably does. The DJIA, therefore, indicates average returns. Since the last market top (October 2007) the Dow has gained just 16% – which is a tough pill to swallow if you just lost your luggage in Argentina. 

 

The objective of my 15-51 method is to produce above-average returns – without taking the extraordinary risks associated with foreign investments in poor markets like Argentina. In the time period shown above my 15-51 portfolio more than doubled; it gained 118% since the last market top – which is more than seven times the Dow’s return.

 

It’s never a bad time to take control of your investment capital. No one cares more about it than you do, and no one will do a better job managing than you will. And let’s face it: it doesn’t take a rocket scientist to figure that there is absolutely no reason to lend Argentina money until they get their house in order, and they’re a long way away from that.

 

Argentina was a bad bet.

 

The sad thing is that Wall Street was too stupid figure it out or too corrupt to admit it.

 

And the travesty is that they did it all with your money. 

 

 LYB_Plate

The road to financial independence.™

 
Too Little Room
Jul 27, 2014

So, the world’s largest economy shrank 3% in the first quarter and stocks everywhere rose in value; yet just one week later a single troubled Portuguese bank sent stocks reeling when news surfaced that it delayed interest payments on a portion of its short-term debt. That’s right, one struggling bank in Portugal caused bank stocks in Germany, France, and the U.K. to drop by more than two percent, and Spanish bank Popular to fall 5%, while prompting it to delay a bond offering.

 

Really?—one Portuguese bank did all that?

 

Of course not.

 

The world economy is approximately $75 trillion dollars; Portugal’s economy is just $250 billion.  The fact of the matter is quite simple: Portugal is simply too small to cause world financial havoc. That is to say that the problem in Portugal isn’t an isolated condition. Europe is rife with government corruption and fiscal mismanagement. In fact, several Euro Zone members are teetering on the brink of collapse, like Greece, Italy, Cyprus, and Ireland – and by the way, larger member states like France and Spain aren’t in much better shape. The reason world markets shook on the Portugal news is because the Portugal condition is emblematic of the entire region. Plain and simple.

 

This was affirmed by the European central bank (ECB), who just one day before Portugal stole the news headlines, announced that it would begin a quantitative easing (QE) program for the entire Euro Zone. Remember, the goal of QE is to strengthen banks by injecting newly printed cash in exchange for toxic assets that were procured by banks. But as one senior European economist pointed out: just because "a banking system has been recapitalized, doesn’t necessarily mean that it doesn’t face problems." That’s a clever way to say that QE is not a permanent long-term solution, but instead a temporary band-aid. 

 

QE is another kind of cancer, not a cure.

 

The world financial system has been persistently inflated by central bankers since the ’08 crash. QE devalues the monetary base, forces yields lower, encourages irresponsible government spending, and inflates stock market indices beyond economic substantiation. That is why monetary threats like potential bank failures (like in Portugal) that can ultimately affect an underlying currency (like the Euro) negatively affect stock market values across the globe. 

 

But like most other negative economic news of the modern day the stock markets quickly shrugged off the news of this failing Portuguese bank, Espirito Santo, after a good night’s sleep – even though accounting irregularities had been found which prompted them to file for creditor protection to make it easier for them to raise additional capital to remain solvent. In short, the Espirito Santo bank is in real trouble and is desperate to raise capital. But that seems to be yesterday’s news, and no longer a consideration for today’s stock markets.

 

U.S. corporate earnings have now stolen the news headlines and results have been mixed so far. Apple’s new iPhone delivered better than expected results; but Microsoft fell way short, prompting it to announce 18,000 job cuts. Harley Davidson disappointed – but Polaris surprised to the upside. McDonald’s is struggling, and gas prices are once again on the rise. But if anything is consistent with this quarter’s earnings season it is the performance of U.S. banks, who have led the markets higher. Of course, QE has made those profits happen – not economic vibrancy, and certainly not Dodd-Frank.

 

An excellent piece appeared recently in the Wall Street Journal on-line, entitled: Four Years of Dodd-Frank Damage. I have always said that this law was ill-conceived from the start, and those who have read my book know the true culprit of the ’08 crash. It was massive government intrusion into the lending marketplace that forced banks to take-on irresponsible and unnecessary risks that were facilitated by Fannie Mae and Freddie Mac – two government agencies omitted by Dodd-Frank regulation. Excluding Fannie and Freddie from responsibility and regulation is a travesty, and lays the groundwork for an incompetent and impotent law.

 

According to the aforementioned article, Dodd-Frank "has already overwhelmed the regulatory system, stifled the financial industry and impaired economic growth." That can be validated by Wall Street darling, Jamie Dimon’s JP Morgan Chase, who in the last 18 months have hired 10,000 compliance officers and laid-off 5,000 loan officers. In other words, banks are replacing revenue generating employees in favor of regulatory administrators. 

 

That’s not efficient or productive – but then again, major stock market participants have chosen to ignore this reality as well.

 

In fact, that’s how the stock market is choreographed to blindside investors. The Wall Street establishment, with its chief investment strategists and economists, often turn "the market" into its own being – an impossible to predict, irrational and independent actor. Comments like this one, made by chief European economist Riccardo Barbieri Hermitte, makes the point clear. When discussing the market sell-off in response to the troubled Portuguese bank, he said, "this shows that assumptions that the market was making were incorrect." 

 

Really – the market makes assumptions?

 

Markets are about people. Investment markets are about investors. Investors make assumptions, and investment markets reflect them. And when investors – especially those greedy institutional investors with the collateral power to manipulate markets – get so drunk on upward momentum and the possibility of maximum profit they forget to listen, look, and act rationally. That’s when Wall Street’s deaf ears produce the shocking sights of major market corrections.

 

You see, by transforming "the market" into some kind of third party beast, Wall Street players can blame it when disaster strikes. They do so to maximize their profits, secure their bonuses, and sidestep penalties and fiduciary responsibility when this unknown, unpredictable being called "the market" steals their customers’ wealth. They purport that their assumptions weren’t wrong, the market was. Their tactics weren’t faulty; the market did something it wasn’t supposed to do. That’s the mantra of the Wall Street establishment in a nutshell.

 

Successful investors need to be smarter than that. They must see the world dynamic for what it actually is, and make portfolio adjustments based on them – not hyped-up market indexes.   

 

And for the record, "the market", a.k.a. the Dow Jones Industrial Average, is easy to understand, easy to value, and easy to manipulate. It’s just 30 stocks, after all – and those same 30 stocks also drive the S&P 500. With the assistance of the Federal Reserve via QE, the Wall Street establishment is armed with the capital to inflate those values well beyond fair value.  That’s what’s going on right now.

 

The question to independent investors is simple: Do you believe this is an economic boom or a choreographed rally?

 

Before you answer, look at these recent news headlines from the Wall Street Journal on-line: U.S. Corn Farmers Face Cash Crunch for the First Time in a Decade, New Home Slowdown Pressures Recovery, Ex-Banco Espirito Head Detained, Wall Street Takes a Shine to Argentine Bonds, and Options Show Rising Concern Over High-Yield Bond ETFs.

 

Food and energy prices are up, the housing market is still in a shambles, bank irregularities still exist to disastrous proportions, and sovereign debt is being accumulated way too fast, at ungodly levels, while sectors of the investment markets are showing signs of concern.

 

If you believe an economic boom is ongoing, albeit with no economic qualification, then cautiously invest in it – keeping in mind that stocks remain near all-time highs and unprecedented valuation in Real terms.

 

But if you see things as they actually are and believe this is a make-believe rally built on newly printed money with a blinds-eye towards reality – then wait for the correction to happen before you buy in and get aggressive. There’s much more money to be had (with less risk) by buying low than by chasing the next inflated record – especially with 15-51 strength. The chart below makes that point clear.

 

7-25-14


Since the bottom of the last correction (February 2009) the Dow Jones Average has gained 140%, or about 25% per year. Stock market strength nearly doubled that performance by gaining 276% in the five-plus year period, or 50% per annum. And you can see that the growth has slowed over the last year or so.

 

That’s what makes making money in the stock market so hard right now, and so risky. Valuations are too high – and there’s simply too little room for big-time growth. 

 

That said, I have one more point to make before signing off. As you know the action zone is a dynamic range with a myriad of variables. One important array is the economy, Real and Nominal GDP, and their according growth ratios.  If the economy was in a full-fledged boom – meaning inflation, taxes, and interest rates were moderately low while labor participation was rising (and the world wasn’t falling apart) – the action zone high would be 18,438. That’s just 1,500 points from where the Dow stands today. 

 

Stock market values are grossly out of whack to the underlying economy. 

 

Discretion is the better part of valor. 



Shield

The road to financial independence.™

Two Trends One Outcome
Jul 07, 2014
It has been three years since LOSE YOUR BROKER NOT YOUR MONEY was published. In that time the original 15-51 Indicator portfolio that is detailed in the book has produced a 67% gain, compared to a 42% increase for the Dow Jones Industrial Average. Those following along with these blogs know that the 15-51 strength indicator was changed and rebalanced at the end of 2011 (signified by a pink diamond in the below chart). This, of course, was a move made to bring the portfolio more into line with changes in "the market" that were inspired by the 2008 crash. The two 15-51 portfolios, though very different in make-up, have taken two completely different paths to ironically the same outcome: both have produced a 67% gain. Below is a chart showing the trend-line comparisons.
 

7-3-14a

 

The red line shown above is the portfolio detailed in my book that has never been changed or rebalanced. It has fully recovered from its 2012 correction and is within inches of the updated and rebalanced 15-51 strength indicator. The turnaround of the original portfolio (and its correction for that matter) is basically due to the performance of Apple, which became a dominant part of the portfolio. Due to this imbalance the portfolio started to track Apple more than "the market" – and that wasn’t its objective. That’s the reason a rebalancing was required.

 

The 15-51 strength indicator is a portfolio designed and constructed to indicate stock market strength. It should, in theory and by design, produce above-average returns in a trend-line that closely mimics "the market." Clearly the rebalanced portfolio produces returns greater than the DJIA, and in a manner more in tune with "the market," as signified by the blue line in the above chart. The Dow, of course, is an actively managed portfolio that is routinely reconfigured and rebalanced. In fact, it has been changed several times since the 2008 market crash. Below is a look at just those two trend lines, the DJIA and 15-51 strength indicator.

 

7-3-14b

 

It was just one month ago that the S&P 500 set a record high milestone by closing over 1,900 for the first time in its history. This month it’s the Dow turn; it closed over 17,000 for the first time in its storied career. And while that’s all fine and dandy, the 15-51 strength indicator also closed at a new all-time high, 77,270 – that’s 604% better than the Dow average since year ended 1995.

 

Pundits credited a "strong" jobs report for the 1+% surge in stock values last week. Approximately 288,000 jobs were added in June and the unemployment rate dropped to 6.1%, from 6.3% – yet the more accurate employment gauge, labor participation, remained unchanged for the third consecutive month. It’s still stuck at thirty year lows (62.8%).


Again, the employment picture hasn’t changed and won’t change until labor participation and wages begin to grow significantly. Such moves would produce steady economic growth – and that’s something we haven’t seen yet. That is to say the most recent stock market run-up is once again overblown and purely inflationary.


Nothing communicates this better than the eye-popping ascent of the 15-51 strength indicator since the ’08 crash. Take a look below.

 

7-3-14c

 

That’s what hyper-inflation looks like. 

Stay tuned…


ShieldThe road to financial independence.™

 

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