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Rate Type Month Last Change
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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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.™

Messages Stock-Splits Send
Apr 27, 2014

Two companies have recently made drastic changes to their corporate identities via stock splits. On April 3, 2014, Google issued its first stock split, a 2 for 1 affair that saw the creation of a new class of stock and symbol. Google will now trade under two symbols: GOOG and GOOGL, both around $525 dollars per share. Before the split Google’s share price was over $1,000 – but even at half the post-split price, it’s still a high priced stock. And there’s a message in that. 


Google has been on an investment tare for quite a while. Like many companies, Google uses its stock as cash to invest, acquire new businesses, and compensate employees. As a result, equity positions for the founding members (Larry Page and Sergey Brin) got diluted every time a transaction like those took place. So to avoid losing control of their company, and while continuing to aggressively pursue and invest in growth opportunities, Page and Brin created a new class of stock (which will be traded under the original symbol GOOG) that will have no voting rights. Needless to say, new acquisitions and investments will be financed with GOOG stock, thus maintaining the sanctity and stability of ownership under the GOOGL symbol. 


Here’s how the two Google symbols performed since the split.

As you can see, stock with voting rights has more value than non-voting shares do.  This is generally true with all companies. But the point to take away is this: Google made its stock split decision solely to maintain corporate ownership control by founding members, Page and Brin. The slim 2 for 1 split was a tactic employed to do simply that. 


This is much to the contrary of Apple’s decision to split. Just a few days ago on April 24, 2014, Apple made a startling announcement of a 7 to 1 stock-split to become effective on June 9, 2014. There will be no new class of share issued, which is to say that maintaining current ownership control had absolutely nothing to do with Apple’s decision.


Instead, the decision was made to "make Apple stock more accessible to a larger number of investors." In other words, their stock split decision was made primarily to increase demand for Apple stock, to thus raise the share price and produce a more robust return on investment to investors than otherwise would be had.


Apple’s stock climbed $43 to $567 per share, or 8%, on the announcement. News of the stock split was accompanied by a commitment to increase Apple’s dividend and stock buyback program. Positive earnings were also reported – all of which contributed to the upward move. If Apple stock were to split today its share price would be around $80 per share. 


The 7 to 1 split ratio is an interesting rate of change. Late last year MasterCard executed a 10 to 1 stock split that also brought its per share price down to $80 – about half the price of Visa, the most widely used card. A 10 to 1 split would make Apple stock even more accessible (around $55 per share) and, in theory, would create even more investor demand.


But creating demand wasn’t the only factor in Apple’s stock-split decision.


It is quite clear that Tim Cook doesn’t want Apple’s stock price to be anywhere near Google’s – they are two different companies, in two different modes. Cook wanted no part of an Apple–Google comparison.  They’re too different.


Instead, Apple took a page from MasterCard’s book and split to a ratio placing it properly to their nearest competitor. Microsoft, which is now trading around $40 per share, is half the amount Apple will be trading post-split. That’s where Tim Cook places Apple in the technology food-chain.


There is little doubt that Tim Cook doesn’t want to be the next Steve Ballmer (Bill Gates’ successor). Ballmer failed to innovate or successfully invest during his tenure at Microsoft’s helm, and investor ROI was pathetic – especially when considering Microsoft’s obnoxious cash balance and net worth during the time. Cook won’t make that same mistake. Aggressive stock buybacks, increased dividends, and a lower stock price are tactics employed to combat that specific case.


Decision points like IPO’s and stock splits send important positioning messages from management. It is the only place corporations can provide a starting price for its stock to trade. Free markets, of course, determine value once trading commences. 


That said, logic can only surmise that Cook is positioning Apple for pedestrian operating growth to be offset by strong stock performance via higher dividends and stock buybacks, and hopefully new demand driven by a lower priced stock. 


Google, on the other hand, is positioning itself to continue aggressively investing in future growth under the same ownership structure, while maintaining a premium image with a double dose of higher priced stocks.


Google has sent the stronger message; and is a component of the 15-51 strength indicator. 

The market message remains the same: stocks are high, strength is higher, and gold is about fair. 


Stay tuned…



ShieldThe road to financial independence.™



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