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Rate Type Month Last Change
Fed Funds Rate June .25 0.0
Unemployment May 5.5% +.1%
Rate Type Month Last Change
Inflation (average) March -.06% +.06%
Gold (oz) May $1,223 +$14
 
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Happy 4th!
Jul 04, 2015

It’s hard to believe that LOSE YOUR BROKER NOT YOUR MONEY was published four years ago today. Below are the results for the portfolio detailed on page 162 versus the major market indexes since publication.

 

4 Year Gain

15-51 portfolio        101%

DJIA                           39%

S&P 500                   55%

 

7-2-15a

 

Happy 4th!

 

ShieldThe road to financial independence.™

 

 

Stay tuned…

Stability or Storm?
Jun 14, 2015

The prices for stocks and gold continue to oscillate to nowhere. Both the Dow Jones Industrial Average and gold are flat for the year. While those two benchmarks haven’t produced any growth so far, stock market strength via the 15-51 Indicator has gained a respectable 5%. See below.

6-12-15a

Now that may not look like much, but 5% in a no growth market is five times better than the average. It also might not look like much because of the way the chart is scaled, starting at 15,000 and topping out at 23,000. That’s for a reason to be shown a little later. The point to takeaway here is that all stock market indicators appeared to have based at a top value, and seem unable to build higher valuations. That’s because the economy can in no way substantiate them.

In the same vein, gold has based at a bottom valuation and seems unwilling to move significantly lower than its current value (the GLD is at $113.) Gold’s low valuation base can be seen more clearly in a chart with a longer timeframe. See below.

6-12-15b

All of these trend lines have really flattened out over the past several months. Flattening trend-lines can be perceived two ways: as stability, or as the calm before the storm.

Stocks are indicating a no growth condition for the economy – or at best a growth rate that can’t substantiate higher stock valuations. Rightfully so. And while stock indices might appear stable, they are actually waiting for a trigger to move. Call it a calm before a storm. And where is that storm brewing? 

The bond market.

In an article entitled, Bond Yields Hit 2015 Highs Across Globe (June 10, 2015), the Wall Street Journal reported that Germany’s 10 Year yield has moved over 1% one percentThat’s big news, right?

Quietly, U.S. yields have also moved higher. Exactly two months ago the U.S. 10 year was at 1.85%. Today it’s at 2.4%. That upward move matches the 30% increase German yields have experienced. And though yields are rising, they still have a ton of room to go higher.

That’s that proverbial risk in bonds that has been mentioned in these blogs repeatedly, and most recently in, Just Ask the Greeks. Heck, you don’t have to be a rocket scientist to know that when global yields are just one point off their zero-percent bottom that they have no choice but to move higher.

When yields rise bond values fall.

And because yields have an infinite amount of space to move higher and just a point or two to move lower, bond values have and infinite amount of space to move lower and just a smidgeon of space to move higher. That’s what makes bonds such a high-risk proposition at this point in the cycle.

And why have yields moved so swiftly recently?

The world bond markets are reacting to the possibility of a major Greek default, again. And why hasn’t their problem gone away? Because the Greeks haven’t changed their operating model. They continue to burn bailout money without remedy. Every time a new agreement is reached between their creditors the problem temporarily goes away and global markets relax. Once the latest tranche of bailout money depletes, risk of default resurfaces and markets freak out – again.

A Greek default will most likely be followed by its departure from the Euro, and that will throw markets into a real tizzy.  Bond values, which run in an opposite direction of yields, are already erratic.  But investors haven’t seen anything yet. The chart below is on the same exact scale as the first one shown in this blog. This will help differentiate the perceived stability in stocks and gold versus the volatility in bonds. As stated previously, yields have been forced low via quantitative easing (QE). As a result of this prolonged artificial stimulus they have yet to find a natural base.

6-12-15c

So here is what you have right now in the markets. Stocks and gold are flat and bond values are plummeting. Even so, bonds are not low here; and even though they are correcting doesn’t mean it is a time to buy them. They are high. And the reason they are high is because yields remain at historic lows.

The concept of Buying Low and Selling High doesn’t purport to doing so blindly. Bonds are correcting, indeed, but they are still high with much room to move lower. The same is true with stocks; they are high and have more room to move lower than higher.

Commodities that run contrary to monetary value are still low. That is to say that gold is as much of a buy at these levels as bonds are a sell. But like all investments, decisions to invest now in those kinds of markets must be long term in nature.

To put it plainly, these are the worst types of Market conditions to make money in. Everything is high risk, be it short or long term. The reason for that is the combination of extremely high valuations and a fragile underlying economy. And that won’t change until Market conditions change.

For investment, investment profit comes much easier when it is easy to make money in the marketplace – when unemployment is decreasing, labor participation is increasing, and wage growth is robust. That’s the way it goes.

Until then keep an ample amount of powder dry. It's cloudy out there and a storm is due.

Stay tuned…

 

ShieldThe road to financial independence.™

Just Ask the Greeks
May 18, 2015

There is a lot of confusion surrounding the bond market and yields, and there is one misnomer I feel compelled to address. A recent Wall Street Journal article entitled, U.S. Government Bonds Rise; Foreign Investors Pile into Auctions (May 14, 2015) highlights a common misconception about bonds. The author attempts to explain the recent pop in yields by citing strong demand for a recent 10 Year auction. They’re up 28% since their January low. See below.

5-15-15a

But strong demand doesn’t cause yields to rise – it causes them to fall.  Recall that quantitative easing (QE) created new and additional bond demand in order to keep yields low – which it did. If the premise that strong demand causes yields to rise were true, QE would have raised yields not lowered them.  

Bond values fall when yields rise.

The article’s author opines, "Many investors see the [bond] selloff as a correction…They don’t expect bond yields to rise sharply given the tepid economic growth outlook …" To qualify his stance the author quotes a senior portfolio manager at Invesco Ltd. who said, "We still believe there are structural headwinds to the global economy," then the author adds, "which would contain a rise in bond yields."—And that’s the great misnomer.

To believe that yields are tied directly to economic performance – that is, weak economies produce low yields – is complete and utter foolishness. Take Greece for example; their economy is weak, and in fact, is in recession. Low yields are extremely helpful during recessions – yet their 1o year yield is 10.5% and their two year yield is 21%. An inverted yield curve is when short term yields are higher than long term yields. That’s where Greece is today – it’s inverted – despite their economy experiencing "structural headwinds."

Instead, yields are tied directly to the associated risk of default. Greece can’t afford itself and there is little doubt that they will fink on a substantial portion of their debts – the only question is when. That’s why short term lenders are demanding more than 20% interest to lend them money. They’re weak and risk of default is high, and so are their yields. In their case, a stronger economy would lower yields, as their risk of default would lessen. Not the other way around.

To invest in bonds right now is a risky proposition at the very least. To chase higher yields from borrowers like Greece is a fool’s game – and so not worth the associated risks. And at just a couple of bips above inflation, a 2% U.S. bond is just as risky. Sure American yields can dip down lower. Heck, Germany’s 10 year yield is around .67%. Indeed, bets can be placed on lower near term yields and perhaps money can be made. But that doesn’t mean the odds favor such a position.

In fact, the opposite is true. The odds for bonds are in the house’s favor because there is more room for yields to move up than down. To put it another way, there’s more room for bond values to fall rather than rise because yields remain at historic lows. In markets such as these, investors don’t buy U.S. bonds to make money. They buy them for safety and security. They buy them to not lose everything should the world fall apart.

That’s why foreign money is flooding into U.S. bonds. The United States has the greatest system of government, the strongest middle class on the planet, and is the only country to never fink on a loan obligation. And even though the U.S. is more than 100% leveraged (that is, there is more debt than economic output) risk of default is nil. For that reason U.S. yields will remain low as long as the Federal Reserve wants them low, and inflationary pressure remains mute. The level of economic output has little to do with it. After all, yields have been low in America since the Great Recession.

It’s a different story around the world. Countries like Greece are having a hard time raising money even though they offer high interest rates. But let’s face it, twenty percent interest payments aren’t worth a hill of beans if the checks don’t clear.  Greece needs a stronger economy, not a weaker one, to attract capital at lower rates.

Indeed, economic strength would prompt central bankers to raise interest rates. Such a move would be in hopes to slow growth and thwart inflation. But that’s much different from the Wall Street Journal’s pronouncement, that a sluggish global economy will contain high yields. The only thing a sluggish economy contains is prosperity. 

Just ask the Greeks. 

Stay tuned…

Shield

The road to financial independence.™

The Fed's Misplaced Priority
Apr 29, 2015

While the markets have oscillated since my last blog their status remains unchanged. All stock markets, American or otherwise, remain near all-time highs. Here are a few Wall Street Journal headlines that can be tied to recent stock market volatility.

·        GDP Growth Estimates Tumble, Again (3.25.2015)

·        U.S. Stocks Down After Weak Economic Data (4.2.2015)

·        Fed’s Rate Decision Hangs on Dollar, Growth Concerns (4.22.2015)

·        European Stocks Tumble as Greece Crisis Roils Markets (4.17.2015)

Economic growth has been weak, uneven, and unreliable since the economy was leveraged out of recession in 2009. That’s because government stimulus programs and ballooning national debt are not ingredients to long-term growth and vitality. Instead, they are unsustainable band-aids that do little more than make things look better than they actually are.

Despite the fragile economic base stock valuations are 24% higher than they were at the peak of the housing-boom, when GDP growth was three times stronger than it is today. The word overinflated is an understatement in today’s stock markets. And how did that condition come to pass? 

Bad monetary policy.

Remember when the Federal Reserve engaged in its low interest rate policy in the wake of the ‘o8 crash? Back then easy money policies were implemented to return the American economy to growth from recession, and to lower the unemployment rate to pre-recession levels. But isn’t that where we are?—The economy has averaged 2%+ growth for more than 5 years and the unemployment rate has averaged 6.5% for more than two years – it’s currently at 5.5%.

Why hasn’t the Fed increased rates? 

Well, according to the WSJ article noted above, "the strong U.S. dollar and unsteady global economy" are the primary concerns for the Fed’s interest rate decision.

So let me get this right, America has to wait for the economies in Europe and Asia to correct before U.S. monetary policy can be normalized.—Really???

Let’s correct the record to begin the discussion. The U.S. dollar isn’t getting stronger; the Euro and Yen are getting weaker, as both the European Central Bank and the Bank of Japan are in the midst of quantitative easing programs. The dollar appears stronger because the U.S. has concluded its devaluing effort via QE. Again, the only reason the dollar appears to be getting stronger is because other major currencies are getting weaker. Dollar strength is via smoke and mirror. 

And while it is true that higher interest rates will "strengthen" the dollar to some degree, and that that event will most probably hurt U.S. exports, those aren’t the Fed’s true concerns.—Instead, they’re worried about the "global economy." There is a reason for this.

Just as the former Soviet Union proved communism a bankrupt ideology, Europe is on its way to do doing the same for socialism – and Greece is the face of it.  That’s why news regarding the financial condition of Greece "roils" the markets.

Consider that the highest individual tax rate in Greece is 45% – which kicks in at just $100,000. On top of that individuals pay a social security tax of 16% and a Value-Added Tax (VAT) of up to 23%.  (A VAT is like a sales tax and excise tax rolled into one.) That is to say high earners can pay up to 84% of their earned income to their central government. Local taxes and fees would be on top of that high central rate. 

Greek Corporations are a bit luckier. They pay an income tax of 26% and a social security tax of 28% – totaling 54% to the central government – plus various other fees, licenses, and local taxes.

Because of the high tax rates Greek unemployment is a repressive 26%, and the economy has been in recession since 2009. And despite the high tax rates 20% of all Greeks live below the poverty line and the government still can’t afford them. Their national debt is 175% of Gross Domestic Product and they can’t borrow any more money.

As Margaret Thatcher once said, "The problem with socialism is that eventually you run out of other people’s money."

The central problem with socialism is that it doesn’t incentivize high output and performance. The tax structure encourages minimal effort and greater dependence on government. How could it not? When people pay an 84 % tax rate they have no incentive to earn at high levels and every bit of incentive to demand more from their government – regardless of their income level.

That’s what inspired the most recent Greek election results. 

Radical left-wing socialist Alexis Tsipras was recently sworn in as the new prime minister of Greece. Tsipras ran as the "anti-austerity" candidate, promising to eliminate EU mandated budget cuts if elected. That’s code word for higher taxes and more government spending.

High tax rates do not make a State solvent. In fact, the opposite is true.  As the population drawing off of the welfare system increases and high earners decrease a budget deficit has no choice but to ensue. Socialist governors like those in Greece then raise taxes higher, borrow more money from other nations, and make greater promises to unhappy constituents who are paying too much and getting too little. But sooner or later the spigot runs dry.

And that’s where Greece is today.

The EU is the chief financier of Greek budget deficits, and they imposed the budget-cut demands in exchange for increased funding. Lenders have that legitimate right. So it should be no surprise that a stand-off quickly followed Tsipras taking office: Greece won’t cut government entitlement spending – and because of that, the EU won’t lend them any more money. And why should they? Greece doesn’t have the money to payback what it already owes. 

Even so, there is little doubt that Greece would have benefited from the ECB’s quantitative easing effort if they played ball and moved towards fiscal responsibility – the policy of affording oneself. But no, Greece isn’t interested in that. They believe they are entitled to more – and that other nations should pay. 

Greece is proving Margaret Thatcher correct – but the proof doesn’t end there. Several countries over there are in major trouble, Portugal, Cypress, Ireland, and Italy, to name a few.

So if the United States has to wait for Greece and the rest of socialist Europe to get healthy before interest rates are intentionally increased then monetary policy may never be normalized here. And that’s the real shame; America desperately needs higher interest rates to incentivize lenders to lend – especially to small businesses. That, along with the boost in purchasing power a stronger dollar provides American consumers, would greatly help strengthen the domestic economy.

But no, the Fed’s priorities are elsewhere -- and their logic is misplaced.

As the "risk-free" rate the U.S. drives world interest rates. Higher rates in America will cause Greek interest rates to move much higher. That will make it harder for Greece to borrow additional funds (a good thing) and most certainly expedite their exit from the Euro. And Greece wouldn’t be the only one -- just the first one. So yes, higher U.S. interest rates would be good for us and bad for them.

Sadly, Europe and their failed socialist cause matters more to our Federal Reserve than the prosperity of American free-market capitalism.

And we let them get away with it. 

 ShieldThe road to financial independence.™

Killing the Markets, All by Myself
Mar 29, 2015

One of the most paralyzing conditions for investors is when they’re scared of making a move – afraid of what might unexpectedly happen. How often things don’t go as planned -- and so they sometimes decide to leave well enough alone and hope issues magically disappear and/or correct, and that robust gains will automatically incubate out of thin air. Indecisiveness – that is, not taking action when a different outcome is desired – is an ingredient to failure.

 

Another tenant to failure is making changes to your portfolio simply for the sake of change. This will only produce change – and it will be luck that determines the outcome, be it good or bad. Gambling requires good luck. Investment requires no such thing.

 

Positive, long-lasting change comes most easily from logical, calculated reasoning, and superior 15-51 construction.

 

Confidence begins with an understanding of how your portfolio is built.

 

As you know, the Dow Jones Industrial Average recently made a component change, replacing perennial underperformer AT&T with consummate highflier Apple. The change was announced on March 6, 2015, two weeks prior to the move taking effect. The announcement, on March 6, caused me to reconsider my portfolio.

 

Because I know the Dow Jones Industrial Average and the 15-51 strength indicator like the backs of my hands, I instantly knew the impact the Apple change would have on both portfolios. This isn’t because I’m so smart, but because both portfolios are so easy to understand.

 

For instance, you don’t have to be a rocket scientist to figure that replacing a dog with a dynamo has no choice but to bolster performance. The Dow is comprised of just 30 stocks, after all. A one stock change represents 3% of the entire bunch – until you consider price. 

 

The Dow is a price weighted average. So at $120 per share, Apple will have about four times the weight as the stock it replaced, AT&T, which is currently trading around $30 per share. That puts Apple at fifth position from the top in Dow Jones ranking – a significant move from AT&T.   

 

The Apple change has no choice but to dramatically affect the trajectory of the Dow Jones Average.

 

Knowing this, and that one of my core objectives for the 15-51 strength indicator is to move in a market-like way as defined by the Dow, I knew instantly that the 15-51 indicator had to change when Dow Jones made their announcement. (For more information see: Today’s Paradox: Success with Less Money).

 

The objective for my 15-51 move was to keep that portfolio on the same trajectory as the Dow Jones Average.

 

Below is a one month chart of the Dow and 15-51. The dates changes were made to the portfolios are signified with diamonds on their according trend lines.
 
 
3-27-15
 

As you can see, 15-51 continues to move in a "market-like" way. It is also plain to see that it operates in an above-average way. That, by definition, is what it is supposed to do. In other words, my 15-51 portfolio does reliably what it is expected to do. 

 

Nothing breeds confidence and comfort more than executing objectives.

 

That’s a key benefit of the 15-51 system. Because it’s so easy to understand and use, desired results are more easily achieved.

 

Smaller portfolios are easier to understand, manage, and predict.

 

To prove that point, let’s once again turn to the S&P 500. The S&P is a much larger and more complex portfolio than the two previously mentioned, and because of that, has to change more to achieve its market objective. For instance, the S&P 500 has changed eight times so far this year – and six of those changes were made in the month of March 2015, with four coming on March 23 alone. The chart below includes S&P 500 activity (March 23 is noted with a black diamond on its trend line.)
 
 
3-27-15a
 

Remember, both the Dow and S&P have the same exact objective – to indicate the market average of stock market activity. The 15-51 objective is to indicate stock market strength. All three portfolios should move in a similar "market-like" way.

 

As you can see, the S&P 500 is struggling to achieve this core objective with its most recent moves. But that’s not because the people who manage it aren’t smart investment managers, or because they are trying to make the portfolio move in a contradictory way as the Dow. That’s not it at all. It’s because the portfolio is too big.

 

Managing a portfolio the size of the S&P 500 or bigger is so much harder than tending to the Dow or 15-51. That’s the reason S&P trends sometimes get away from what their management team wants. Its size makes it too easy to fall short of expectations. 

 

Smaller portfolios also produce greater investment returns.

 

This is also the reason teams of skilled fund managers consistently fail to achieve market returns while I routinely kill every mutual fund and market index from here to Shanghai, all by myself. 

 

And you can do it too.

 

Easy to understand. Simple to use. Superior results.

 

ShieldThe road to financial independence.™

IBAWinnerSealJPEG

Reviews:

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"Proven, understandable and sensible..." -- Lightword Publishing

"As convincing as it is successful." -- CBS Connecticut

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