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Fed Funds Rate July .25 0.0
Unemployment June 6.1% -.2%
Rate Type Month Last Change
Inflation (average) May 1.66% +.12%
Gold (oz) July $1,317 +$44.00
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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.



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. 


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.



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.




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.




That’s what hyper-inflation looks like. 

Stay tuned…

ShieldThe road to financial independence.™

Out of Step
Jun 30, 2014

I tore a bicep muscle and have been unable to type and blog. Now that I’m out of a cast and into a splint, I’m back in action. 

Little has changed for the better since Records and Reality was posted more than a month ago. Global strife continues in the Middle East, Europe, and parts of Africa, and the specter of another major war engagement is omnipresent. This has forced the prices of oil and gas to move higher. These conditions – along with corrupt, incompetent, and inept U.S. leadership and management – will further pressure an already fragile world economy.

The biggest news since my last blog post is the substantial contraction of the world’s largest economy in the first quarter of the year. What was originally thought to be 1% first quarter U.S. growth, was later revised down to 1% shrinkage, and finally ended as a 3% drop in Real output. That’s a significant economic contraction! To put that malaise into perspective consider that the last time the market shrank at that pace was March 2009 – the quarter following the ’08 crash.

But again the stock market shrugged off the declining global picture. Below is a year-to-date comparison between the Dow average and 15-51 strength.  


The market average has gained 1.7% while stock market strength added 1.4% so far this year – stellar performances considering the 3% economic shortfall.

But hold on a second. Recall that bond yields rise during economic expansions and gold values fall. That’s the opposite of this year’s dynamic: gold is up and yields are down.  Below is a year-to-date picture including gold and yields.  


Here are a couple of things to take away from the above trends.

First, yields continue to fall despite the Fed’s QE tapering plan; they’re down 17% this year. Recall that QE is the process of printing new money and handing it to Wall Street banks who are then required to purchase U.S. Treasury securities with half of the new money. It should be noted that although there is less QE and mounting U.S. debt, the pace of debt has slowed. Instead of wracking up one-plus trillion of new debt every year the U.S. is now accumulating about $600 billion annually. So there is less QE and less debt, a condition that will continue to keep yields artificially low. But this is not the only condition for falling yields. Global strife and weakening economies push investors to the safety of U.S. bonds. That increased demand also puts downward pressure on yields.

And second, the next stock market correction will be spawned by a massive monetary and debt devaluation. That’s a condition ripe for gold; so every time stocks and money are threatened gold will rise. That said, it’s no big surprise to see gold rising when stocks are flattening and yields are falling.  

Both yields and gold indicate weakening economic and monetary conditions. That is to say that stock valuations are out of step with the global economic condition.

So how can stocks remain near all-time high valuations? 


Think of all the people that need interest income (a.k.a. yield) like senior citizens and/or retired people. These people can’t get it in the bond market because yields have been too low for too long. As a consequence, ultra conservative investors are extorted into finding income in the form of dividends in the ultra-risky stock market. These investors, compelled to find income in all the wrong places, will stay in the stock market until the consequence of correction forces them out. In other words, stocks will stay high until the seeds of correction begin bearing fruit.   

At the time of the next correction the world markets will again be in disarray, another crisis will exist, and the establishment will once again steal wealth and liberty from the innocent. As with the last crisis, the next will produce more regulation, more taxes, more wasteful government programs, and more individual loss. 

Panic selling during corrections ensures only one thing: a massive wealth transfer from individuals (including seniors and/or retired people) to the Wall Street establishment – those who make the Market for investments.

Exorbitant and prolonged QE programs have provided Wall Street banks with the clout to corrupt and inflate market indices to lure capital from wary investors. This inflation sets the stage for crisis; and when correction hits Wall Street market makers cash-in on the panic by buying low from investors desperate to get out – using capital reserves fortified by newly printed government cash accumulated from the extensive QE program.

Just because stocks are out of step with reality doesn’t mean you have to be.

Asset allocation and dry powder (cash) remain keys to long-term success.

Stay tuned…

Shield The road to financial independence.™

Records and Reality
May 25, 2014
Trading volume is generally light leading into holiday weekends and that was the case again last week. On the lightest trading volume so far this year the S&P 500 ended the week at a new all-time high, closing over 1,900 for the first time in its history. But even with recent achievement the S&P 500 has continued to underperform the Dow Jones Industrial Average since the internet appeared on the scene. Below is a chart showing the performance comparison between the two market averages since year ended 1995 when the tech boom essentially took root.
In the eighteen year period shown above the S&P 500 rose 207% and the Dow gained 223%. The S&P 500 averaged 11% per year and the Dow added 12% per. Both are respectable returns, indeed – but they are average nonetheless. 
Stock markets overreact in both directions, up and down. In other words, they trade well above fair value in up markets and well below fair value during down markets. So the move from the March ’09 bottom to fair value in April ’11 was a totally expected move. The ’08 crash was indeed a serious condition; but there was little doubt that the event would cut the economy back to the levels of the 1980’s. That was in fact how it was valued at the March ’09 bottom. It was simply an over-reaction to the downside. It happens.
Today’s stock market is the opposite condition. Economic growth is stagnant, labor participation is at historic lows and declining, and according to FactSet earnings growth for the S&P 500 companies was just 2.1% in the first quarter – not a strong showing by any standard. Perhaps that is why stocks have only oscillated this year. But because stocks ended 2013 at historic highs, they continue to trade well-above fair value.
Stock market inflation and over-valuation can easily be misunderstood, misinterpreted, and miscalculated. The action zone helps clarify those ambiguities. Remember, the action zone is a range the Dow historically trades around. It is the average high, low, and mid point (fair value) the Dow trades as related to Nominal and Real GDP. Below is the same chart as the one shown prior except that includes the action zone and GDP. 
Stock market portfolios like the Dow and S&P should always outperform the economy over the long-term. They’re smaller and more nimble, and are comprised of more powerful parts. But how much they outperform the economy, and why they are outperforming it, are the most important issues to consider. 
An unprecedented amount of monetary stimulus has forced Nominal GDP and stocks higher simultaneously; making it look like an economic boom is underway. But that’s not the case. This is a smoke and mirrors stock market rally.
Real growth, that is growth adjusted for monetary inflation, has essentially flat-lined since the ’08 crash. In fact, the Dow is now trading at a higher multiple to Real GDP than ever before. The QE inspired money-boom caused that, as proven by the widening spread between Nominal and Real GDP.  
In Market conditions such as these the stock market averages should be trading around fair value. The economy simply isn’t strong enough to qualify irrationally exuberant stock valuations. But these anomalies happen all the time, and as mentioned in my book, corrections usually follow prolonged periods of hyper inflation – and that’s what’s going on right now.
Sometimes it’s hard to see hyper inflation in the stock market averages because they’re so grossly manipulated by the Wall Street establishment. Perhaps the best illustration of this dynamic is with stock market strength – because that is where dollars flow most heavily when things get shaky. Below is the same chart as the one shown above except that it includes the 15-51 strength indicator, an above-average stock portfolio.  
During this 18 year period 15-51 strength posted an amazing 1,352% return, or 74% per year – more than 6 times the rate of the Dow and S&P. Its amazing performance placed the chart on a completely different scale and pushed the stock averages down to their rightful place – close to Nominal GDP, the true market average.
So forgive me for not getting too excited about the S&P 500’s most recent record achievement; it is a valuation level the 15-51si first reached fifteen years ago. 
And while the Dow and S&P may appear as “reasonable” or “slightly” elevated in this chart, don’t let that mislead you. The 15-51 portfolio highlights the incredible amount of inflation in the stock market – and like the market averages, is also over-valued.
Because the Wall Street establishment portrays “the market” as an impossible investment benchmark to reach many investors succumb to believing that they’re doing good because their portfolio is going up and not down. They cave to the mindset that beating the market is impossible and that earning less is good so long as they’re not losing. But that’s a false assumption. It is impossible to make money in the stock market long-term without consistently outperforming the market averages. Inflation, along with corruption and poor management from the Wall Street establishment, will steal what little profit is made. That’s the reality of the Wall Street proposition.
That’s why I say, Lose Your Broker Not Your Money.
It’s time to stop making them rich and yourself wealthy. 
The road to financial independence.™
The Smoke & Mirrors Rally
May 18, 2014

As the stock market continues to bounce around record highs a few things remain clear: the global economy remains fragile, growth is weak and uneven, and the job market isn’t getting any healthier – despite the falling unemployment rate, which recently dropped to 6.3% from 6.7%.


In a healthy and functional market, unemployment falls while labor participation rises. But that’s not happening in today’s market. In the recent employment report, labor participation dropped by the same fraction as the unemployment rate did. Both went down. That’s a contradictory condition to the norm. It’s a sign of illness.


Labor participation is currently 62.8%, and it hasn’t been this low since the Carter years of the 1970’s. As a basis of comparison, labor participation averaged 67% during the Clinton ‘90’s. This lower production makes it impossible for the economy to expand in any meaningful way. Too many people have simply left the labor force.


That’s a terrible economic fundamental. 


A few weeks ago the U.S. reported anemic growth in the weather-torn first quarter, just .1%. Not long after, the European Union also reported dismal GDP performance. The Euro-Zone economy posted a slightly better .2% increase in market activity. This weakness prompted EU central banker, Mario Draghi, to strongly reaffirm his readiness to act – and act aggressively – to bolster the E-Zone economy and fight deflation (a general decrease in prices).


One problem: Draghi will be employing the same kind of stimulus programs that haven’t worked here in the U.S. And it won’t work there either. 


The trouble with the global economy isn’t that central bankers haven’t printed enough money; it’s that they put the money into the wrong hands – and then tied all the wrong strings to it. For instance, by handing the new money to Wall Street banks and forcing them to buy a certain amount of Treasury securities with it, the Federal Reserve has facilitated an unprecedented amount of government spending and waste by way of historically low yields.


That doesn’t do the mom-and-pop shop, or you and me, any good – and that’s the reason deflation continues to be a macro economic threat.


Consumer demand and wage growth are weak, and because the new money hasn’t reached people and small businesses, the new money hasn’t circulated through the economy to expand employment and push prices higher. Instead, the spare new money (that is, new money not used to purchase Treasury securities) has remained under the control of the investment banks on Wall Street.


And what do they do with it?  


They invest it – and that’s the reason the stock market is near all-time highs (a.k.a. inflation). In fact, the stock market is valued almost 10% higher than it was during the tech-boom – when the economy was growing 6% per year, unemployment was 4%, and labor participation was 67%.     


This continues to be a smoke and mirrors stock market rally. See below. 



Since regaining fair value in 2011, the Dow Average has gained 35% and 15-51 strength added 50% – under a flat-lining economy, unprecedented government debt and corruption, and the worst job market since the 1970’s.


In short, stocks have risen dramatically without any economic foundation – and the higher they go, the harder they’ll fall.


The next correction will be an extremely ugly one. 


Stay tuned…


ShieldThe road to financial independence.™




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