Today's Market
by Dr Invest

One of today's headlines read: "Why the heck are the markets tanking?". It is like they are surprised by a market downturn and that the what they heard in a recent State of the Union address was true that the economy is just fine and is robustly growing.

Listen, these are professionals. They are analysts, bankers, brokers, economists; they are your accountants and financial advisers and still they seem surprised? Everyone knew that the economy went onto life-support in 2012 with FED quantitative easing and bond buying, it was the only thing that would keep the U.S. from returning to a recession.

Yet, this bolstering of the economy at the tax payer's expense has promoted a false sense of economic well being, when without it the stock market would have collapsed. In all fairness, the economy did respond for a short period but by the fall of 2014 distortions were beginning to show in the economy and even with the bond buying and interest rates at zero, the market declined in 2015. Analysts predicted a 3% growth in the GDP in 2015, but the GDP was revised down to 1.8% by the end of the year. 

We heard throughout 2015 that the economy had almost reached escape velocity until October, when we were slapped with the reality of a failing economy. Still, we were told that this was a GOOD THING, a needed market adjustment leading into the robust recovery that had been promised by central bank intervention. All of the bring outlooks and predictions simply fell flat.

So here we are in 2016, looking the BEAR in the face and the BEAR ain't pretty. With us are the professionals who are asking, "Where did that bear come from?". Economic Cycle Research Institute has been predicting this for months, pointing to the slow down of economic indicators. (see businesscycle.com) People like Marc Faber, Jim Rogers, David Stockman, Robert Shiller, Carl Ichan, and even Donald Trump have warned of this impending downturn. A little research showed that Donald Trump was interviewed by David Rubenstein, a Philanthropist Co-Founder and Co-CEO of the Carlyle Group in December of 2014. Trump said that he was selling his stock and later sent a twitter message that read:

What does Donald Trump know that we don't. And most importantly, why was no one listening. Donald Trump escaped the down turn in 2015, while we believed the mantra of buy and hold that kept us little investors in a losing market. If Donald Trump is a WINNER, uh... what does that make us?  LOSER!

THE INTERVIEW WITH TRUMP

Economy is obviously not doing so well... the stock market is the one ray of hope. I've never been a stock market person. About three years ago I bought a tremendous amount of stock first time ever. I never believed in letting other people run my money.
 
The reason why I bought stock was because it's free money...interest rates are so low and CDs 1/4 of 1%, what do I have to lose?" "I feel like such a genius, up up up...
 
I sold my stocks a few months ago... everything because I'm not a great believer in the leadership of the country. Because interest rates were so low...at some point those rates are gonna go very high and that's gonna be a pretty difficult time I think for the country. I like to be invested in things that I run" "In a lot of cases, I don't have great respect for the people running some of these companies...
 

This is the dilemma for us as investors. We are gullible and believe whatever we are told. We expect that professionals have our best financial interest in mind, when the reality is that we are being fleeced. Years of hard work and savings become a resource upon which wall street can prey. They walk away with a gain for managing your portfolio, charging their 2% fee, while you have only a possibility of a gain of 0.7%. Even though the government claimed CPI (inflation at .02%) no one would argue that prices haven't gone up. Yes, gas prices down, but the bubble in real estate has driven the cost of a home or the rental of a home higher than two years ago. There are other considerations such as the value of the dollar rising, but salaries remaining virtually the same. Still, when all things are considered, you, the investor, are currently losing money if you are still invested in stocks.




Notice GDP is relatively steady, whereas the stock market value is a roller coaster. The further the blue line is compared to the Green line, the cheaper GDP is priced. These low areas correlated to good times to buy the stock market. At a current level way above the green line, the market is paying $21.6 trillion for $17 trillion in GDP. Does this indicate the market may be ready for another drop? The answer is YES! In 2000, in 2008, and now and even more so in 2016, the Wilshire Total Market has soared above the GDP. The beginning decline in the market in 2015 and continued decline into 2016 is totally predictable. The only question is why didn't the market decline in 2014?

This decline has been unraveling for a year or more, but without the slightest warning from those professional who we hired to protect us. David Stockton noted, "When was the last time the Federal Reserved warned American Citizens of a Recession?" When has your financial adviser warned you of an impending decline in the stock market? Banks, financial institutions, and brokers, have no responsibility to protect your investment and it is in their favor to keep your money invested with them or their associate firms.

WHAT IS NEXT?

Those of you who have followed my blog know that I look for a head and shoulders pattern. That seems to be unfolding and I would expect that a right shoulder would form in the current pattern.



There is no guarantee that a right shoulder would form, but by next week we will know if there is a short-lived rebound/bounce or whether this bear market is strong enough to carry stocks even lower. If there is a bounce, you will have only a short period of time to get your house in order. By April or May you could see a continued decline in stock fortunes.

THE FED, THE FED

In 2012, we were sliding into a recession. Bernanke managed to buy us out of a recession. Yellen has told the markets not to worry, that she too will intervene in a declining economy. She has already telegraphed that she will raise interest rates, but we don't really know when she will add the sugar or how much sugar she will add...(stimulus)

Others on the Federal Reserve Board have warned that stimulus has become less and less effective, and that stimulus has distorted the market. This doesn't assure us that Yellen will not try to do something to save the legacy of the Obama administration, but interest rates are already at all time lows and stimulus seems to be less and less effective. The only other option to Yellen is let the market take its natural course. Perhaps that is what should have happened two years ago.

(Note: the above information is for entertainment purposes only and not to be used in anyway as investment advice.)

Today's Market
by Dr Invest

Massive confusion continues in the markets with proclamations that our economy is "taking-off" to "collapse is eminent". The truth is that our economy has been on a "quantitative fix" since 2012. No one would argue that the market has continued to rise since 2012, but it is merely smoke and mirrors. When this business cycle completes, you will be worse off than when you began.

There must be some basis for measurable economic growth. Let me explain it this way, "Real economic growth originates from two things, jobs and productivity." You might point out that job growth is rocketing, but it is not! The jobs being recorded are low pay and low hours. Furthermore, more people have dropped out of jobs, so total jobs held in 2015 are less than were held in 2000. Even worse, there are more people on social services in 2015, than in 2000. Our economy is in trouble.

Ken Goldberg points out in his article, "Why the Dow Jones Industrial could begin a 70% decline in the next few Weeks", that fundamentals are pointing to a collapse. Goldberg writes:

There is a rare bull market pattern that, once it ends, is one of the worst formations that can occur. It has two names. Some call it the megaphone pattern, as its shape resembles what many know as the voice amplifier that coaches and referees use to get large groups of people to pay attention.

Those who know its implication for the financial markets refer to it as the Jaws of Death pattern. In fact, both names have meaning for this ominous indicator of egregious crowd bullishness. Its megaphone analogy reminds us that when this pattern appears, investors need to pay attention that the party attitude of recent memory is on it's "last call." The Jaws of Death descriptor is clear. When the pattern ends, the jaws snap shut like those of an alligator chomping down on hapless prey that got too close to the water.

Goldberg tells us that a DOW at 6,000 is within the realm of possibility.  

I agree with his assessment. Though the market has risen dramatically because of stimulus, this rise is not economic. What I mean is that GDP continues at 1.9, when the historical average has been 3.2. We are in a RECESSION because we are not even reaching historical averages for the GDP which is the measure of economic growth. Even the most bullish of economists don't see us reaching the 3.2 average for GDP anytime soon and the most positive words they can find is malaise and stagnant. The are hardly encouraging words

Look at the BOTTOM RED LINE in the graph. That is where we are headed unless there is more Q.E. I can't imagine the FED increasing interest rates, but even if there is a temporary increase in interest rates, I could see them lowered again in 2016 in yet another attempt by the FED to stop a faltering economy. There are still some tools in the FED's toolbox, but you can understand how 0% rates put the FED at a disadvantage. 

There is a belief that one can quickly sell their stocks and get out of the market before they get really hurt. Many of the people who contacted me in October didn't even know that their was a problem until they had lost thousands. I don't believe that there will be another bounce when the market turns down again. The second issues is the rapidity at which the markets can fall. There are two reasons for this. First, is that trading is done by computer algorithms. And second, you need buyers to sell. When algorithms are initiated, markets move with such rapidity that no one is interested in buying your stocks until a bottom is reached. Only the very earliest sellers are successful keeping their profits. Those early sellers typically have T-1 internet access and dedicated lines to brokerages so the success of their trades are measured in milliseconds. The average Joe will not have that kind of access, even if you have your stop-sells in place. 

SO WHAT CAN I DO

Recognize that we are at the end of a business cycle. It might be six weeks or six months, but this business cycle is over. Brokers, financial advisers, the Federal Reserve, the White House, bankers, wall street.... all of them have an interest in keeping the chump (investor) in the game. Wisdom would be to get out of the game before you get hurt. 

One individual asked, "Do I need to get out of my bonds?". I found out that he had purchased the bonds years ago returning 5% a year until maturity. When you can only get .82% interest, 5% interest seems like a huge return. Get rid of the stocks that are going to injure you. 

What about taxes? Taxes are kind of a relative thing, but are regularly used by financial advisers to threaten their clients. Again, every situation is different and requires some analysis, but losing 70% of your stocks value seems much worse than paying 20% capital gains. Furthermore, you will have a NEW TAX BASIS when you buy back into the market. 

First scenario: XYZ Stock cost you $100 in 2008 and has doubled in value to $200 in 2015. The market collapses 70% leaving the value of your XYZ Stock at $60. 

Second scenario: You purchased XYZ Stock at $100 in 2008 and it doubles in value to $200 in 2015. You sell XYZ Stock at $200. Your COST BASIS is $100, and you pay 20% in capital gains. You now have a total, after taxes, of $180. 

Which of these scenarios left you in a better position at the end of the business cycle? Let me extend these scenarios a bit further. As the market moves out of a decline in 2018, you purchase ABC Stock.

First scenario: ABC Stock is purchased with the $60 you had left over from your losses in 2016, but ABC Stock rises 100% and the value of your ABC Stock is now $120.

Second scenario: ABC Stock is purchased with the $180 you had after selling XYZ Stock and paying capital gains taxes in 2016. ABC Stock rises 100% and the value of your ABC Stock is now $360.

Which of these scenarios left you in a better position?

Yeah but what if I bought XYZ Stock at $1 and it was worth $200 in 2015, and now if I sell it I will have to pay 20% capital gains taxes on $199. Listen, even then you're only paying $40 in capital gains, leaving you with $160.  But even then, that is better than just having only $60 left over after the market falling 70%. (which was the original argument)

The brokers, financial advisers, and banking system want to put you into their system and hold you there. A Buy and Hold mentality ends in entrapment by the system. Do your own mathematics and you will likely see that things are not as dark as your financial adviser has presented it. 

(Note: the above information is for entertainment purposes only and not to be used in anyway as investment advice.)

Today's Market
by Dr Invest

I have never heard so much enthusiasm for stocks after the market took such a beating only two months ago. Once again smooth throated brokers and advisers are harping their products. The promise is that the economy is on solid ground and can go no where but up. They admittedly accept that fundamentals are pointed downward, but that such facts are only temporary anomalies and that soon positive fundamentals will support the rapid rise in the stock market.

What they don't seem to realize is that the temporary rise in the stock market comes from overly enthusiastic speculators and that stocks remain over-valued. John Bogle, the founder of Vanguard has always been in love with the market and built an industry around the idea of BUY AND HOLD. Listen to what he recently said:

Investors can look forward to stock-market gains of 4 percent a year for the next decade.

He says that investors will be unwilling to overpay for earnings and dividends from publicly traded companies, making gains hard to come by. By comparison, the S&P 500 has tripled in value since bottoming in March 2009 as the U.S. struggled to recover from the worst recession in 80 years.

In an interview with Morningstar’s personal finance editor Christine Benz, he says his assumption is based on a 2 percent dividend yield for the S&P 500 and earnings growth of 5 percent.

Cutting into that 7 percent return will be a 3 percent loss from “multiple compression,” meaning investors will buy stocks at a lower price-to-earnings ratio. The market’s P/E multiple is likely to fall to a longer-term average of 15 times from about 20 now.

“We've got a 4 percent return for stocks — maybe a little bearish, but we just don't know — and a 3 percent return for bonds. That's a 3.5 percent return on a balanced 50-50 portfolio,” Bogle says. Unfortunately, investors need to consider fund-management fees that will also cut into returns.

Despite the subdued forecast, Bogle says, “Invest we must,” because inflationary forces will eat away at savings.

“The biggest lesson is that investors must save more to meet their goals. The markets are unlikely to do the heavy lifting that they’ve done in the past with prodigious returns,” he writes. “As for pensions, which continue to plug the customary 7.5 percent returns in their forecasts for balanced allocations, investors should disregard their forecasts completely.”

In this new forecast, Bogle joins the ranks of notable value investors and market observers Jeremy Grantham, Robert Arnott, and Robert Shiller , whose dim views of stock valuations and future returns are well-documented.

Bogle’s new forecast amounts to a tacit admission that the “equity risk premium” (the supposed amount of excess return that stock are supposed to deliver over bonds) isn’t static. Rather, it can change over time. Stocks are not always guaranteed to deliver, say, 10% annualized returns on a nominal basis, even over decade-long periods.

Academic studies have shown that the Shiller PE has greater statistical validity than a conventional PE at forecasting future returns. One year’s worth of earnings can be misleading. Nevertheless, Bogle and the value mavens are now in agreement about likely future returns.

Balanced portfolios under siege

On bonds, Bogle thinks investors can squeeze 3% from a fixed-income portfolio with an average maturity that’s a little longer than 10 years and ia somewhat heavy in corporate bonds. The 10-year Treasury TMUBMUSD10Y, +4.08% currently yields slightly more than 2%.

Overall, the implications for a standard balanced portfolio are grim.

Bogle predicts that a balanced portfolio (roughly half in stocks and half in bonds) should return around 3.5% for the next decade. Adjusted for inflation or in “real” terms, Bogle thinks a balanced portfolio will return 1.5%, barely increasing purchasing power.

Fees may destroy paltry returns

Bogle then asserted that fund fees of, say, 1%, will destroy much of that balanced portfolio’s real return. Combined with advisor fees of 0.50% (a conservative number), investors may be left with nothing after adjusting for inflation.

Moreover, taxes and well-documented investor bad behavior (buying funds at high points and selling them lower) will likely erode investor returns further.

Benz raised the question of whether investors should invest at all given this forecast, and Bogle said, “Invest we must.” The reason for that is cash is yielding virtually nothing, which means it’s producing a negative return in real or inflation-adjusted returns.

Given Bogle’s grim view, however, it isn’t clear why investing really is better since it can also produce negative real returns.

Only yield is certain

Bogle also stressed that the only certain part of his stock forecast is the starting dividend yield of stocks. Earnings growth and multiple changes are always guesses, and he could be wrong about both.

Both advisers and investors can plug other numbers in for earnings growth and multiple changes. Still, they should be careful not to veer far from historical precedent. For example 10% earnings growth would be “beyond precedent.”

Save more and ignore pension forecasts

Investors should take serious note of Bogle’s forecast.

The biggest lesson is that investors must save more to meet their goals. The markets are unlikely to do the heavy lifting that they’ve done in the past with prodigious returns.

As for pensions, which continue to plug the customary 7.5% returns in their forecasts for balanced allocations, investors should disregard their forecasts completely.

Amongst the enthusiastic voices declaring a "new age" has come of continued and everlasting market conditions due to a vigilant central bank are long-time perma-bulls warning that the party is over. Louise Yamada, a highly regarded technical analyst who heads Louise Yamada Technical Research Advisors, contends that distress had been building throughout the third quarter. In the September edition of her monthly newsletter, Technical Perspectives, she pointed to data from the Investment Company Institute, a fund industry group, showing that owners of stock and bond mutual funds alike made net withdrawals in July and the first three weeks of August.

"Their observation is that usually stock withdrawals move into bond funds," Yamada wrote, "but withdrawals from both [are] a sign of nervous investors. This pattern has not been seen since the fall of 2008, a statistic worth noting."

Morningstar found six months over the last decade when investors had net withdrawals from stock mutual funds and ETFs combined and from bond funds, too, with August being the sixth. Two of the other five, August 2013 and June 2006, coincided with minor blips in long bull markets.

The other three -- June 2015, August 2011 and October 2008, the latter period being the one Yamada alluded to -- occurred just before or in the middle of corrections or bear markets. Anyone who saw fund investors' none-of-the-above attitude as a contrarian "buy" signal for stocks turned out to have jumped in too early.

Buyers who jumped into stocks at the start of October enjoyed an excellent month that could be the start of a long rally. But if the history of those three months repeats, it could turn out to be the calm between two storms.

Concluding Thoughts

We may see one of the greatest rallies in the U.S. ever seen since the beginning of this nation; although, a rally is not very likely in the current economic environment. Perma-bears have been giving a warning since 2012 when Q.E. began along with bond purchases by the FED. But now many perma-bulls are warning that valuations are too rich and fundamentals are too weak. 

I mentioned that six weeks ago some of my friends were very worried. They believed that a the bull market had abruptly ended. I encouraged them by suggesting a "dead-cat bounce" was in order and to hold on until the market rebounded, then take profits. 

I now thing that the fear has waned and the bears have been converted to bulls again. The next decline will not be so kind. I suspect that a HEAD AND SHOULDERS PATTERN will be unfolding over the next few months. Best guess is a head forming into January with the right shoulder completing in March or April of 2016. 

If you don't know what I am talking about, do a WIKI search for  HEAD AND SHOULDERS PATTERN. Keep your eye on the S&P 500 and when you begin to seen a slow decline in January, run, don't walk to your nearest broker. We could see a decline that was even worse than in 2008. 

(note: the above information is for entertainment purposes only and in no way should be used as investment advice.)

Today's Market
by Dr Invest

How high can you go? What has changed? What fundamentals are you looking at that shows a new strong economic environment? In 2012, the economy began to falter and thanks to Bernanke's bond buying and quantitative easing, we escaped the hard cold truth that our economy was failing. It has never stopped failing since 2012. We have just kicked the can down the road by borrowing and stimulating. Fundamentally, nothing has changed.

There is the promise that our economy is soaring but a careful look at the fundamentals show something very troubling. Many wall street brokers continue their mantra, "Keep that balanced portfolio and hold-on, things will only get better." This encouragement comes in the face of a business cycle that is already long-of-tooth and likely to collapse at any moment. Furthermore, the FED has pumped up the economy, increasing our debt and limiting future potential growth. So let's look at some of the fundamentals that your financial adviser is not showing you.



Durable Goods has fallen - 5.3% in the past year. This is a precursor of a recession. Look at 1990, 2000, 2009, and note 2012 that was only saved by Quantitative Easing.




The ISM Manufacturing PMI has declined -13.5% over the past year. Is this a precursor to recession?- note the dotted red lines representing recessionary periods. Again, look at 2012, where we were saved by QE. Now, in 2015, the decline is below that of 2012 when Bernanke acted to save us slipping into recession. This slide is a precursor of recession.



Capacity Utilization has declined -1.9% over the past year. We are interested in the yellow line. Note: Capacity Utilization touched zero in 2012 and would have advanced further excepting QE. Over the past year, a strong decline has pushed CU below zero into the negative envelope, a strong sign of potential recession.



The GDP chart is the most troubling of all. There has been a steady decline in the GDP with no real expansion occurring since 1982. Think of GDP like an unwinding music box, with the music getting slower and slower; likewise, since 2000, our economy has slowed to a crawl. Even looking from 2009 until now, the GDP has continued its decline with the GDP likely falling to 1.8% in 2015.

Closing Thoughts

Can the economy be robust and vibrant at a GDP of 1.8%? No one I know would think so. Dr. Shiller is warning that stocks are over valued in the U.S. market. Dr. Faber is warning that stocks are rising on only a narrow few stocks that are reporting profits, while the majority are reporting missed projections; Bill Gross and George Soros both warn of a waning economy and a recessionary environment. Still, the S&P, DOW, and Nasdeq continue their rise while investors have become blind to the impending risks.

A month ago, when the investors were smarting from a downturn in the market, I comforted them and reassured them that there would be a bounce. I warned, you will see a bounce but don't interpret it as a rebounding economy. I fear my advice was not taken. Relieved that the market was returning to an all-time high, many have decided to stay-in and ride out the ups and downs. They will see again, the sudden and unnerving fall that comes at the end of a business cycle, only this time there will not be a bounce.

(note: the above information is for entertainment purposes only and not to be used in anyway as investment advice.)

Today's Market
by Dr Invest

No, there is really nothing new to report. Everything we are seeing is, well, predictable. Look, go to GUARDIAN and look at this link: Guardian Indicator   Here are a few things they mention:

MARKET SECTORS

As many of you know, I warned of a market collapse in 2012. Only quantitative easing stopped the plummet. Trillions kept the market afloat, but was the same as money printing. New reports show that QE did little in improving the economy, but elevated the price of stocks. 

Despite glowing reports by the Federal Reserve of economic strength and president Obama's claim that his policies had saved the economy, data seems to show something a bit different. as early as the end of 2013, a number of sectors had already began to decline. It is just because the BUBBLE had risen so high from QE, that the effects of a declining economy had not yet become a reality. Surely the FED and the White House had this same data. My opinion is that the FED made an attempt to raise interest rates, so it would have more wiggle room for the coming reality of an economic decline. 

Christine Lagarde, IMF managing director, gave warning that emerging nations were facing a fifth consecutive year of slowing growth, adding that an increase in US interest rates could exacerbate conditions in some leading economies. (International Monetary Fund)

Conclusion

Clearly, the market is trending lower and set strongly into the market by 2015. The problem was there before 2015, but the economy had distance to fall before we felt it. Now, investors are faced with major losses, after major gains. 

Major risks did pay-off in major gains. But when you see $25,000, $50,000, or $100,000 losses in a month for some individual investors, it becomes a very threatening event. When these events occur once, followed by a bounce after the initial loss, there is hope that new gains will return. But after two events and the mounting losses almost doubling, any investor is reluctant to continue in the market. 

AAII is showing a rising negativity among members who believe the market is now trending downward. This simply means that more and more individual investors are reluctant to continue in the market. This trend will likely magnify the market trend downward.

We may see the market trend higher, but even the most devoted bears are expecting the S&P 500 to advance no further than 2000. My feeling is that we will see something less than 2000 and maybe with a great deal of volatility.

(note: the above article is for entertainment purposes only and not to be used as investment advice.)