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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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Data, Shell Game, Send Investments Lower
Jun 21, 2012
Goldman Sachs woke up and read the Wall Street Journal today; and it prompted them to recommend shorting the S&P 500 to their clients. The recommendation came amid another wave of negative Market fundamentals. 

A short sale is performed when an investor believes prices are going to move lower. Goldman, therfore, sees "the market" moving lower from here. Who could blame them.

The Dow Jones Industrial Average was around 12,800 when the Goldman short strategy hit the Street. It traded down more than 200 points an instant later, ending the day sharply lower at 12,573 (-2%). Stock market strength also moved lower, dropping 1.6%, and gold lost 2.5%. Here’s the year-to-date picture. (PS: If trading is your thing, shorting the S&P 500 is an easy bet when the Dow is near the action zone high.)  

6-21-12

The other piece of significant news this week was Federal Reserve chairman Ben Bernanke announced an extension of Operation Twist for another six months and $247 billion. This monetary technique is intended to lower long-term interest rates in hopes of luring corporations into making long-term investments. The hope here is that lower interest rates will increase lending that will reverse negative market trends and boost economic output and jobs. If this sort of thing worked, it would have worked the first time it was employed, last year and $400 billion ago.
 
Not.

Interest rates – short term, mid term, and long term rates – are already at historic low levels. They’re not the Market’s problem! – and dropping them another 1%, which isn’t even possible with the Twist operation, won’t increase lending, jobs, or economic output above fractional misgivings. History has proven this. 

This is also why Ben Bernanke left the door open for another round of quantitative easing (QE). QE is the process of buying bank assets like mortgage backed securities with newly printed money. The Fed does this to reduce bank stress and risk levels by purchasing a portion of their riskier assets, and to increase a bank’s cash position in hopes it will lend more money. 

But the first two QE programs didn’t work; so why should we believe a third one will? Someone once said, ‘the definition of insanity is doing the same things and expecting different outcomes.’ Insane, perhaps – desperate for sure.  

Here’s the point: Money games can’t fix the market economy! They’re a shell game, a temporary puff of life to make economic recovery appear like a real possibility, while only prolonging an agony that gets worse over time.  

Banks make money on money. Devaluing that currency by printing more of it is bad for their business. It increases inflation, the cost of money, and that’s bad for the money business – especially when interest rates have been persistently low. Artifically twisting rates lower will only give banks less incentive to lend – because there’s less room to profit and more risk in monetary loss.  

These monetary measures are counterproductive.  

That’s why bank CEO’s like Jamie Dimon look to capitalize on potentially higher returns from higher risk "synthetic" portfolios. Traditional lending, in a bad money environment with rock bottom rates, is simply not worth their time and effort. That’s why the housing market remains in total shamble (see: Home Resales Drop, Wall Street Journal on-line.) Banks aren’t lending money and it has nothing to do with interest rates being too high. 

Persistent monetary shell games are a sign of weakness and Fed desperation. The Market has systemic flaws that must be addressed before recovery can truly take hold (see my Fixing the Market series found on the right rail this blog area.) Perhaps this is Ben Bernanke’s biggest flaw. He’s an academic, and believes he can outsmart and outmaneuver less competent fiscal and regulatory governance. 

But he can’t. Only the President and Congress can effectuate the changes required to turnaround the Market condition. That is the only way to put an end to acadmeic monetary games that can’t possibly solve anything. Delay, yes. Fix, no.  

Until such a time, consider it a hostile environment for stocks and bonds.  

Stay tuned…and let me know if you need help
 
The Way It Works
Jun 16, 2012
For those of you who know how much I like to keep it Real, know this: it’s easy to get caught up in the daily mumble-jumble of every day life. Perspective is key during times like these. Now, more than ever, losing focus is a costly proposition.  

Stocks bounced around this week but gold was steady, another mixed signal offered up by "the market." The Dow gained 1.7% this week and gold ended up 2%; while stock market strength went nowhere, posting a small .2% loss for the five-day week. Here’s the year-to-date chart.  

6-18-12a

Don’t get lost in this picture. Gold has been moving with the Average for sometime now, while stock market strength has posted above-average returns. The above-average 15-51 Indicator has produced a 27% gain so far this year. The Dow and gold are deadlocked around 4%. 

This trend continues for the most recent twelve months. See below chart. 

6-18-12b

Again, average stocks and gold are in a ballroom dance to mediocrity, while stock market strength has outperformed the average 40% to 6%. But this picture is not what prudence would logically expect.  

In times like these – with a global currency crisis, on debt overload, with impendent economic zealous – one would prudently expect gold to surge, strength to falter, and the average to underperform.—So not true in the above pictures.   

But so true in reality, which is best viewed in 20-20 hindsight. Recall the Market’s condition in the run-up to the crash of 2008 (see my book for details.) That Market condition was similar to today’s situation. 

In theory, bad money policy should cause a surge in gold and make it easy for above-average stock portfolios to outperform average ones. This can be demonstrated by the below chart, which starts from January 2007 and runs until current.  

6-18-12c

Just so you know, gold’s torrid run began before 2007. Cheap and easy money and lending policies that began in the late 1990’s ignited the run. But that’s not the point here: accuracy is.  

The above chart is the most accurate picture of the Market’s current condition. Gold has outperformed in this bad money period, stock market strength has produced above-average gains, and the Dow has underperformed Real GDP – indicating a long term recession that started in 2008 and has continued to this day. That’s more recessionary proof – and it makes total sense.

The most common mistake investors make is getting caught up in the mumble-jumble of daily reality. Days are numbered, indeed, but long-term trends are easy to read. Stay out of the moment and step into the year – or better yet, step into the decade.  

Market conditions have changed little in the past ten years, and for that reason gold remains the highest growth opportunity – with stock market strength continuing to run a close second. Expect average portfolios to continue sucking wind against a flat-lining GDP. 

That’s just the way it works.   

For those of you who missed other blogs from this week – here they are:
 
The European Irony
Jun 14, 2012
Negative Market fundamentals continue to pour in all over the world. Pick your crisis: Greece, Spain, Italy, Portugal, the slowdown in Asia, the United States – whatever the case – they’re all getting worse. 

The problems overseas, as we know, are both monetary and fiscal. Key elections are to take place in Greece this weekend, and like France’s recent campaign, there is little difference among the candidates and prior governance. All candidates are pro ECB (European Central Bank) yet some are "anti-bailout." I don’t know how such a position can be legitimate.  

To call a spade a shovel: too many countries in Europe lack the discipline to live within the boundaries of their own means. So in order to sustain their lifestyle, countries like Greece must rely on a redistribution of wealth from better managed countries like Germany. In Europe the wealth transfer largely runs through the ECB. To be pro-ECB and anti-bailout seems somewhat of a political oxymoron. 

And it doesn’t come without a cost.

Increasingly, European countries are agreeing to give up long-term sovereign rights in exchange for another short-term monetary bailout. To drive this point home: understand that Greek central governance is agreeing to a long-term subservient role in determining the social security of its citizens for a short-term monetary benefit. These are conditions that incubate revolutions. And why not?  

Europe is too big and diverse to be managed effectively by one body – just like American banks. In both markets, bailouts act like deodorant, covering up only the foul smell – not the foul itself. They fix nothing. They solve nothing. They’re too easy: print more money, spend it, and then worry about it later. Any benefit is temporary at best, political in the least. Solutions, on the other hand, are never easy. They require hard choices, sacrifices, and extreme effort. 

The solution to fixing the American banking system is to start with a broad based de-institutionalization (a break up of the financial industry) – and that includes making some hard decisions about Fannie and Freddie, who continue to artificially depress housing values. They do so to limit consumer debt and lending – to limit catastrophe – and to limit the need for bailouts.  

But this isn’t the way to solve the "too big to fail" problem. It stifles growth and inserts politics into home ownership. There’s no reason for that. But because Fannie and Freddie are government owned and guarantee the vast majority of all mortgages, they corrupt the mortgage market by politicizing it. That’s why hundreds of thousands of middle-class Americans can’t refinance their home mortgages while cash-buying foreign ownership is spiking (see: Foreigners Snap Up Properties in the U.S., Wall Street Journal on-line.) 
 
The government needs to get out of the housing market. It can’t begin to recover until then. Fannie and Freddie must be disbanded and/or entirely privatized. Again, the industry needs to get smaller, and freer.  

And like the U.S. banking system, Europe’s solution is independence (a break up of the monetary union) – a move to smaller, more competitive and responsible fiscal entities. Sadly, many countries in Europe prefer dependence, bailouts, and controlled markets, over freedom and independence – just like the American banking system.

That’s the European irony.  

None of it is good for stocks, money, or land values.

Stay tuned…

See also:
 
Market Dysfunction & You
Jun 10, 2012
Benchmark investment indicators turnaround again this week, as the Dow Jones Industrial Average and gold continue to twist around breakeven for the year. Using gold as an indicator of money and the Dow as one for economic activity -- both look confused.  

In the current environment, with bad money policy and negative Market fundamentals, stock values should be falling and gold should be rising. Using the action zone midpoint as a gauge for the "fair value" of stocks, stocks are overvalued by at least 10% – perhaps twenty or thirty percent is more appropriate considering the whole picture – and gold is undervalued by at least that much.  

The 15-51 Indicator looks much less confused, remaining up 27% for the year, but like the Dow, is also over-valued at these levels. Here’s the picture. 

6-8-12

How the Dow and gold could look so confused about the condition of money, debt, and economic strength is beyond me. Here’s a sample of recent news headlines crossing the wire in the Wall Street Journal on-line:
Spain Warns Market Access Being Shut
China Readings Show Room for Stimulus
Big U.S. Banks Brace for Downgrades
UBS Gets Stung by Facebook IPO

In a nutshell, Spain doesn’t have money to circulate through its marketplaces, China’s economy needs stimulus because its also shrinking, and the weakness in large U.S. financial institutions called "banks" is about to be exposed through a forthcoming downgrade from Moody’s ratings service. To bother financial matters even more, foreign money center bank UBS reportedly lost $350 million on the facebook IPO. This corroborates my previous assessment that JP Morgan Chase wasn’t the only "bank" taking high-risk positions outside of traditional banking practices – which puts those banks at risk and brings future bailouts into play. They’re "too big to fail," after all.

There’s no reason to be confused about "the market's" dysfunction. 

Market conditions remain poor for money and debt, bad for stocks, and good for currency hedges like gold. Recent movements in stock prices and gold are indications of Market confusion and dysfunction. In times like these, play defense and make money too.   

Here’s an update to my 50-50 portfolio for the most recent 12 months, comprised like this:

Asset Class        Allocation
Stocks (15-51i)      25%
Gold (gld) 25%
Cash                 50%
Total                100%

6-8-12a

This 50-50 portfolio more than doubled the Dow’s gain with just half the risk (11% versus 5%) and a fraction of the volatility. With smart design and superior 15-51 construction it’s easy to achieve almost any reasonable investment objective.  

You can do it, too – even in environments like this. The only thing stopping you is someone telling you that you can’t do it. I say they’re wrong.  

What say you? 
 
ShieldThe road to financial independence.™
 
Over-Active Fed
Jun 08, 2012

While China is lowering interest rates and easing reserve requirements for banks, Federal Reserve chairman Ben Bernanke reinforced his wait-and-see approach before reassuring banks, and Wall Streeters, that he was ready to act if necessary. "We have a number of different options" he told a Congressional panel – should the cancer in Europe spread to

America

But hasn’t it already hit America? I’ve blogged about this several times previously, (see: Dimon is no Diamond, for example). It can’t miss America. It’s here now. There's no need to beat that drum again here. The purpose of this blog is to highlight the most popular "option" Mr. Bernanke is referring to, called quantitative easing.

Quantitative easing (QE) is when the Federal Reserve prints new money to purchase financial assets from banks (like subprime mortgage securities). They do this for three main reasons: to increase bank cash on hand (a.k.a. liquidity), to encourage bank lending (because they have more cash and less risky assets), and/or to manipulate interest rates for the underlying bonds (i.e. bundled mortgage debt.)

For the purpose of this blog, let’s forget about the third reason because interest rates aren’t the Market’s problem right now. In other words, another round of QE wouldn’t be employed to lower interest rates, as interest rates are already at historic lows. Instead, the next round of QE would be directed to loosen up bank lending by flooding them with more cash.

It is important to note that QE helps banks, Wall Streeters, and politicians alike – for as long as the monetary steward keeps printing easy money, twisting rates, and manipulating yields to unprofitable levels, fiscal governance has less incentive to fix the real fiscal problem that is causing lackluster economic output. (see my: Fixing the Market series, which can be found in the right rail.)

Step #1: Begin solving the obvious – the financial industry has become way too consolidated.—It’s too big, they do too much, and as such, operate under way too many regulatory burdens. They don’t know what to do; how to do it; and question everything in between. They look scared to refinance loans and mortgages, yet more than willing to make multi-billion dollars bets on "synthetic" European derivatives. Why?

Consider this. 

The job of all corporate CEO’s is to maximize shareholder value through growth and profit. Profit, as we know, is the return on investment earned by corporate management. And in today’s banking system, the bank CEO is faced with the dilemma:

  • Do I lend QE money received from the Fed to John Q. Public to refinance their mortgages at 4.25% -- because that’s what I do, I’m a bank; or,
  • Do I seek higher profits in high risk derivatives to make the most money possible – because that’s what I do, I’m an investment company. Besides, that's where the big money is, and the best return on investment. That’s the CEO’s job.

Add to this confusion that a bank CEO must then consider Dodd-Frank, the Volker Rule, Sarbanes-Oxley, etc. etc. – and then, of course, there’s the Dimon Rule. End result: there’s too much confusion and too many conflicts of interest to operate efficiently and effectively. The system is log-jammed and misguided. That’s a big part of the money problem. 

Until systemic Market problems are addressed and major fiscal problems with central government are corrected, the U.S. economy can never recover (see: Management Deficit Disorder.) More monetary games won’t do anything but prolong the agony and escalate future debt and deficits. QE is a band-aid – but one that banks and Wall Streeters love. It's easy money for them.  

But not for us, We the People. It's hard time for us.

Dow in Red for Year, 15-51i Not
Jun 02, 2012
The Dow Jones Industrial Average continued its correction this week ending June 1, 2012. The Average lost 339 points, or 2.7%, of its value in this four-day trading week; and is now down 1% for the year.

The 15-51 strength Indicator was also down for the week, shedding 1.3% of its value. Despite poor Market fundamentals, the Indicator remains up 22.7% for the year. That’s the 15-51 difference. Here’s the picture.

6-1-12a

Wall Street and its propaganda machine spent most of the week in a tizzy about the Dow’s losses, recent news headlines, and gold’s reversal compared to other commodity selloffs (oil the most notable.) Here’s a sample of Wall Street Journal headlines appearing in the last few days:
  1. U.S. Jobs Slowdown Adds to Global Mire (U.S. unemployment again 8.2%)
  2. Sharp Slowdown in Asia Sounds Warning
  3. Euro-Zone Jobless Rate Is at 11%
It’s bad news, yes. But it’s not new news.  

Those who have been following these blogs know the reason for the Dow’s volatility this week. It had no right being valued at the top of the action zone and a correction had no choice but to occur. These early season fluff-and-puffs are becoming quite the pattern (see: Discipline). In fact, stocks shouldn’t be trading above the action zone midpoint considering the negative stimuli facing world Markets. 

In the most recent 12 months, the Dow Jones Industrial Average is down 4%. Fundamentally that makes sense. The 15-51 Indicator is up 29% in the most recent year – and as mentioned, 23% points of that gain happened in the first five months of 2012. That’s an indication that stocks are still over-valued at this time. See chart below. 

6-1-12b

Corrections happen all the time (see: Correction or Bear Market?) and as demonstrated in my book, it’s extremely easy to stay ahead of the stock market game if you know how everything works and what to look for. Stock market corrections should be expected. 

And just like bad money policy causes gold to correct upward, other commodities like oil move and correct for their own reasons. In poor economic conditions and the realization of recession, less goods get produced. Dictated by high unemployment, and with less goods made and consumed, less products travel to markets, and thus, less oil is required to move products into markets. The drop in oil prices stands to reason – just like gold’s turnabout and the Dow’s recent retreat from the action zone high.  

As chronicled in the archives of these blogs, Market fundamentals have remained persistently negative for far too long – unemployment is painfully high, monetary and fiscal polices are blasphemous, and the world is slipping further into recession. This didn’t happen yesterday – or this week. The Wall Street establishment and its propaganda arm simply woke up and read the news this week. Let’s be fair, both Wall Street and the media make big money by stoking stock market volatility. There are news cycles, after all.  

I caution independent investors to not get caught up in the hype. Investing is about making money with money – to buy marketable investments low and to sell them high. 

Independent investors must stay focused on the most important Market fundamentals so they don’t get fooled into buying high and selling low because of pressure from Wall Street propaganda and stock market volatility (see: Jump in or Stay Put). 

Until then -- be patient. And let me know if you need help
 
 

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